M&A takes centre stage in the hunt for growth has been saved
M&A takes centre stage in the hunt for growth
What do Australia’s Heads of M&A think are the key trends and triggers driving M&A activity?
21 September 2017: ASX companies are increasingly turning to mergers & acquisitions in their pursuit of growth, and building dedicated teams to do so, according to a new survey report from Deloitte. M&A Leadership Series: Clear Views from the Top also highlights the key concerns Heads of M&A have around achieving successful transactions and identifies that potentially 50% of ASX100 companies are not using data analytics in any part of their M&A transactions.
The research found that in their hunt for growth most M&A leaders are increasingly considering cross-border investments (with South East Asia and North America seen as the most attractive regions), alternative structures, such as joint ventures, and partnering with private equity firms.
Deloitte interviewed Heads of M&A from predominately ASX100 companies* and over half (57%) said they expect an increase in the number of deals pursued over the next 12 months. This echoes the Deloitte M&A Index 2017 report finding that 71% of corporates expected an increase in transactions in 2017.
Three quarters of M&A Heads surveyed (73%) agree that M&A is critical for them to deliver on their corporate strategy and growth ambitions. Inorganic growth is increasingly challenging: average industry income growth decreased from 7.7% in 2010 to 2.5% over the last five years, hardly surpassing inflation.
“We are seeing Australian companies build dedicated M&A teams to help shape their business for future growth and remain competitive in rapidly evolving markets,” said Deloitte Financial Advisory Managing Partner, Clare Harding. “Facing the reality of a slow growth economy and increasing technological disruption, companies are becoming more strategic about divesting of non-core assets, potentially enabling them to invest in disruptive technologies such as artificial intelligence, robotics and fintech.”
Deloitte’s M&A Index 2017 report highlighted that M&A spend on disruptive innovation-related sectors reached $291 billion globally in 2016, four times the $72 billion spent in 2012.
Two thirds (66%) of Clear Views from the Top survey respondents consider a divestiture of non-core assets likely to happen in the next 12 months. This echoes overseas trends, with 73% of US companies+ planning to sell units or assets in the next year (up from 48% in 2016 and 31% in 2015).
Jamie Irving, Deloitte M&A Transaction Services partner, said: “We’re seeing companies move from reactionary, necessary divestitures where the primary purpose was balance sheet repair, to strategic and planned ones. In turn, this should mean that Australian corporate balance sheets are in a much healthier position and companies can look for opportunities.
“On the acquisition side, it seems the ‘cash paradox’ continues to linger. Despite Deloitte analysis showing companies who use their cash reserves to pursue inorganic growth perform three times better than those who hoard their cash, reserves remain high in ASX companies.
“Why? Companies tell us that primarily, it’s the lack of availability of desired targets. Another factor is risk appetite – boards have in many cases been very cautious given the volatility in the markets. Which leads to the third factor – lack of speed and quick decision-making. M&A is a competitive process and often corporates are outmanoeuvred by private equity firms who can move fast and respond more quickly.”
Partnering with private equity (PE) firms is seen as increasingly attractive. 70% of survey respondents expect an increase of private equity interest in their industry. When exploring growth opportunities, 83% of companies said they were approached by private equity firms and 77% would consider a partnership with a PE firm, particularly where the PE firm can bring greater change management capability, provide an alternative funding source (on larger transactions), or offer a geographic or industry capability that complements the corporate.
Key concerns in achieving a successful transaction
The inability to deliver anticipated value is the top concern for heads of M&A in achieving a successful deal (60%), but this is closely followed by cultural/people issues (53%). Despite this post-merger integration capabilities are the least represented skillset in M&A teams (63% of respondents say they are represented, versus 90% for execution and 87% for due diligence).
“As mergers become more complicated, companies become more complex and cross-border deals become more common, people and culture issues will continue to hinder post-deal integrations, said Jamie Irving. “Our research shows the costs of integration can be 1.75% to 3.35% of enterprise deal value in Australia. Ahead of day one, it’s critical to plan the workforce transition well and manage critical cultural norms.”
Data Analytics Opportunity
50% of survey respondents do not use data analytics in any part of their transaction approach. Comparatively, in the US++, two thirds of corporate leaders use data analytics and 64% say they have increased their use of analytics significantly or somewhat in the past year.
When Australian companies do use data analytics in M&A, they are doing so predominantly in due diligence (25%) and strategy development (25%), with a lesser focus on integration, execution and synergy validation (all 14%).
“The number one reason that up to half of Australian companies are not using data analytics to enhance their M&A transactions, is that they presume any request to access data will be refused,” said Jamie Irving. “However, that’s an outdated assumption. Most companies have sophisticated enough systems in place to allow easy access to de-identified data.
“Getting data analytics right in a deal can give an invaluable edge and mean that acquirers can continue to receive real-time data and insightful analysis post-deal, to track if a deal is performing close to expectations.”
The Deloitte research identifies three key opportunities for companies to achieve a successful M&A transaction:
- Increasing the level of investigation by using analytics during a transaction to further inform decisions and confidence
- Adequately addressing culture and people issues
- Undertaking early and detailed functional planning to effectively integrate and deliver value.
For further information, the M&A Leadership Series: Clear Views from the Top report is available here.
*31 heads of M&A from predominately ASX100 companies were interviewed in person by Deloitte. 70% of those interviewed had pursued five or more successful transactions in calendar year 2016.
+Deloitte US: M&A Trends
++Deloitte US: Utilising data analytics in post-deal integration