A stronger than expected economic recovery has seen Australian M&A activity on the rise. M&A leaders are looking for the right deal and want it executed well to inspire confidence.
In the fourth instalment of our annual Heads of M&A survey, we interviewed more than 60 Australian corporate Heads of M&A to discuss deal activity in the current climate, and how to realise greater value across the M&A lifecycle.
M&A activity is rising, as are valuations
- 58% of respondents expect to pursue more deals of the next 12 months than they did last year.
- Only 5% of those surveyed expect their organisation to pursue fewer deals this year.
- The largest gain has been in respondents expecting deal activity to remain stable, suggesting that most COVID related disruptions to M&A deal activity have been temporary.
Australian businesses battened down the hatches during the COVID-19 downturn largely by adopting defensive strategies. Now, as the Australian economy recovers from its steepest recession in a generation, companies are dusting off plans they paused in 2020 – or creating new ones..
ESG’s importance continues to grow
- Almost ¾ of respondents are factoring in environmental, social and governance (ESG) impacts into their decision-making at least some of the time.
- 35% of those surveyed always consider ESG impacts in their decision-making, while only 18% do not think about ESG impacts.
- Half of those surveyed described ESG evaluation as a high priority or must have, with this share expected to reach 76% within the next 3-5 years.
ESG issues continue to gain prominence as companies reflect on where to invest in a post-pandemic world and how to drive maximum value from their existing portfolios. Companies are now seeing big opportunities to create value by taking advantage of changing expectations and new markets that are evolving in response to ESG trends – including the transition to a low carbon economy and support for ethical and sustainable brands.
Strategic transformation becomes key to recovery
- ¾ of respondents have considered utilising analytics capabilities in a deal.
- 69% of those who have considered analytics capabilities have sought to embed them in transaction execution.
- 27% consider analytics capabilities to be integral in strategy development, with 4% in integration.
Australian businesses are managing the disruptions and challenges of COVID-19 in different ways, but most involve some form of strategic transformation. For many companies, the disruptions have highlighted gaps in their technology, infrastructure, digital channels, engagement and other capabilities. There is an increasing trend of large corporates to acquire technology, teams and platforms rather than building their own capabilities, enabling them to quickly enhance their products, processes and services.
Domestic targets continue to be the focus
- Australia remains the most attractive destination for M&A activity, with 85% of respondents identifying domestic companies as attractive targets, compared with 80% a year earlier.
- The impact of COVID-19 appears muted, with only 23% of respondents citing uncertainty as an obstacle.
- ½ respondents listed simplified foreign ownership rules and stronger domestic growth prospects as highly important for attracting more foreign investment into Australia.
Australia’s economy has rebounded from the pandemic-driven recession much faster than other developed countries. Measures of business confidence have since rebounded to record levels and consumer sentiment is now hovering near a decade high, thanks to Australia’s success in handling the pandemic, as well as the massive fiscal and monetary stimulus measures.
COVID-19 has been a catalyst for private and IPO markets
- 77% of respondents are confident that strong balance sheets and adequate cash reserves will influence M&A decision-making in Australia.
- 63% of respondents agree that the equity hurdle rate has remained the same in the last 12 months.
- 58% of respondents listed growth opportunities in their sector as contributing factors to accelerated M&A activity.
The Australian economy and response to COVID-19 has provided the perfect backdrop for a boom in M&A within the private markets. This buoyed economy, coupled with strong corporate governance in the local market, has lead to low volatility and low interest rates, providing strong confidence for the private market to consider their M&A opportunities – whether that be a sale or an IPO.
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