The deal in focus: M&A today, and in a post-COVID world has been saved
The deal in focus: M&A today, and in a post-COVID world
13 May 2020: As Australian corporates struggle with COVD-19 impacts on multiple fronts, a new Deloitte report shows that that M&A appetite still remains positive – for 2020 and beyond.
Releasing the third edition of Deloitte’s annual survey of Australian corporate heads of M&A – The deal in focus – the firm’s National M&A Leader, Ian
Turner, said: “COVID-19 has influenced appetite for deal-making, but not to
the extent many might expect.
“It has certainly turned economies and business confidence upside-down, and while the ASX-100 heads of M&A we spoke to believe deal activity will be negatively impacted, more than half also believe the number of opportunities they pursue this year will still increase.”
Key survey report points include:
- 54% of respondents expect the number of deals they pursue to increase in 2020
- 58% expect COVID-19 will negatively affect deal activity
- 58% are currently preparing for or considering a divestiture
- 68% are considering cross-border M&A in 2020
- 41% see building in-house capability as the main priority
to address disruptive technology trends.
Providing an outlook for the rest of 2020, the report also focuses on a range of other key local and global M&A issues, including perspectives on valuation expectations, capital raisings, divestitures and deal-making with China.
Deloitte M&A program leader, Jamie Irving, said: “When we began talking
to corporate M&A leaders in mid-February, the emergence of COVID-19 was a
health and economic crisis happening elsewhere in the world. But by the second half of March, when our survey and face-to-face conversations had largely concluded, things had changed dramatically. And the impacts are, of course, still playing out.
“So, at the time this survey was conducted, COVID-19 and its expected impacts on sentiment around deal activity was certainly an issue worth investigating, but not necessarily one that would define the short to medium term future for M&A.
“With Australia, and the world ,now facing a recession, and with M&A activity across the lifecycle so influenced by macroeconomic factors, financial conditions and business sentiment, the uncertainty delivered by COVID-19 is going to dominate deal appetite across every sector for some time.
“We expect to see transactions that for some will be defensive, safeguarding market positions or to realise cash, and offensive where companies in a strong financial position are looking at transformational transactions.
“Not surprisingly, nearly 60% of survey respondents expect the virus will negatively affect M&A activity in the next 12 months. Deal volumes are likely to be down as businesses respond to the crisis, we expect a greater focus on small and medium sized deals, and there will likely be a move away from cross-border towards domestic activity.
"Of those expecting to transact, two-thirds are prioritising acquisitions, while just under half are planning on establishing partnerships or joint ventures, which have emerged as a way of investing in new technologies and IP without having to take full ownership.
“There will certainly be a realignment of strategy, priorities, timing, expectations, and focus, but also a natural level of underlying activity, with good businesses selling for good numbers, particularly to cashed up corporates and private equity.
“We also see M&A being executed in new, innovative ways, navigated
with technology across areas such as diligence and transaction modelling. The leaders here are those embracing disruptive trends such as data analytics, technology/IP capabilities and AI, and building in-house capability accordingly.”
“Chinese M&A interest in Australia was subdued in 2019, and Australia’s relationship with China will often have its challenges,” Irving said.
“But COVID-19 can be a catalyst for changing the way in which we engage with foreign pools of capital. We are already seeing early signs that M&A activity is on the radar of many Chinese corporates, and there should be continued impetus for Chinese cross-border transactions.
“Australia still has the resources and consumer goods China needs, and China has the foreign capital that Australia needs. Hopefully prevailing tariff and investment restrictions will pivot toward a more balanced approach in a post-COVID world.”
“With the uncertainty on earnings due to the virus, valuations have, not surprisingly, declined. Even before COVID-19, there was a sense that there was only one way the market could go, and that was down,” Irving said.
“Low interest rates and high growth expectations had led to high asset valuations, so it wasn’t going to take much for markets to get the jitters. Business disruption, and the impact this has had on cashflow and earnings, and the unwinding of high growth expectations that had been priced into valuations, has brought about a double-whammy decline to business values.
"When there's more certainty around the implications of COVID-19, we should see some of that volatility decrease, with a commensurate decrease in the risk priced into valuations.
“Although risk appetites have changed, lower valuations and pricing will create opportunities for buyers with liquidity, who can now realise greater value in good quality businesses that might not be faring so well in the short term.”
Capital raisings and defensive strategies
“When it comes to capital raisings and defensive strategies, we’ve seen a spike as companies look to bolster balance sheets in response to pressures on earnings caused by COVID-19,” he said.
“Portfolio optimisation and divestments of non-core assets is another defensive strategy likely to be a key focus, as will be revisiting recent deals to ensure that synergy potential is fully captured, and post-deal returns are maximised.”
“Divestments and consolidation of portfolios will also continue to be a key theme in 2020. Nearly 60% of our respondents confirmed they are currently preparing for, or considering, a divestiture, with the key motivator still streamlining and the sale of non-core, and unprofitable assets,” Irving said.
“Ongoing economic pressures will likely lead to divestment of both non-core and highly sought-after assets that don’t typically come to the market.
“Private equity and cash-rich domestic corporates are well positioned as possible buyers, and sellers should be cautious divestments don’t result in transaction prices substantially below their fundamental values.”
Strategy and timing
“Corporates need to reassess their strategies and priorities to ensure they still align, and consider what the mission critical parts of their business are and what they need to invest in to meet future growth objectives,” Irving said.
“These are unique times, but times that can also create unique opportunities, and deliver real value creation potential.”
NB: See our media releases and research at deloitte.com.au