The world, let alone the M&A environment, on the other side of COVID-19 is going to look different, but unique times create unique opportunities.
In the third installment of our annual survey, we sat down with almost 60 Australian corporate heads of M&A to discuss deal activity in the face of an economic and health crisis.
COVID-19: Deal making and opportunities for M&A
What do deals looks like in a world of social distancing and low confidence?
- 58% of respondents expect COVID-19 to negatively impact deal activity in 2020
- 49% of respondents said that diligence and transaction modelling most needed technology to improve efficiency
- Two thirds of respondents are considering cross-border M&A activity in 2020
COVID-19 has dampened confidence, particularly for large deals. However, the outlook for deal volumes remains positive, with the crisis potentially leading to an increase in acquisitions of distressed firms.
Leading firms are likely to respond strategically to COVID-19, embracing disruptive trends such as data analytics, technology/IP capabilities and artificial intelligence.
Deals will be executed in new ways in a world of social distancing, with cross-border deals becoming more challenging and the proportion of domestic deals likely to increase.
Already, Australia is seen as the most attractive market for acquisitions, especially as Asia is due for another turbulent year.
The International Monetary Fund (IMF) is now forecasting that the “severe and unprecedented” impact of COVID-19 will lead to no economic growth across the region. Yet China remains one bright light of hope. Its GDP is forecast to remain positive (albeit at a modest 1.2%). And we are already seeing early signs that M&A activity is on the radar of many Chinese corporates.
COVID-19: Capital raisings and defensive strategies
We’ve seen a spike in debt and equity raisings as firms look to bolster balance sheets.
- Only 20% of respondents reported ‘difficulty securing funding’ as a key factor affecting the ability to successfully execute deals in 2019
- This grew from 7% in 2017
- There are likely to be further increases in 2020
We have seen a spike in capital raisings as companies look to bolster balance sheets in response to pressures on earnings resulting from COVID-19.
A focus on portfolio optimisation and divestments of non-core assets is another defensive strategy likely to be a key focus in 2020. Recent deals will be revisited to ensure that synergy potential is fully captured and post-deal returns maximised.
Companies looking to raise new debt are finding it increasingly difficult. For borrowers looking for a new lending relationship this means going early and approaching multiple parties to allow time and options.
Valuation and pricing are key factors for successful deals
Valuations have seen a double-whammy decline.
- Three quarters of respondents listed valuation and pricing as a key factor affecting the ability to successfully execute deals
- 71% reported no change in equity hurdle rates in the last year.
Even before COVID-19, there was a sense that there was only one way the market could go – down.
Low interest rates and high growth expectations led to high asset valuations so, it wasn’t going to take much for markets to get the jitters. And with the dramatic falls in the equity capital markets when the crisis hit, came a substantial repricing of assets.
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.
As business value lies mostly in its long-term prospects, the uncertainty around ongoing impacts of the crisis has increased the level of risk and is also driving down valuations.
Divestments and consolidation of portfolios are key in 2020
Leaders are currently preparing for or considering a divestiture.
- More than 50% of respondents completed a divestiture in 2019
- 77% of respondents reported valuations in line or above expectations for their most recent divestiture
- In the Australian market 58% of surveyed M&A leaders confirmed they are currently preparing for or considering a divestiture.
While appetite for divestment is in line with the levels seen over the previous two years, it remains below the global average. Deloitte’s M&A Trends 2020, which surveyed 1,000 companies in the United States, found that 75% of corporate respondents expect to pursue divestitures in 2020 – the second highest level seen in the past four years.
The key motivator continues to be streamlining and the sale of non-core assets that are not, or won’t be, profitable amid the slowdown in economic activity.
Private Equity and cash-rich domestic corporates are well positioned as possible buyers and sellers need to engage with them well in advance to smooth the sale process.
Transform while transacting
Leading companies are increasingly carrying out digital transformations while acquiring a company.
- 56% of respondents indicated they seek to embed technology and analytics in the transaction execution stage of the M&A
Traditionally, companies facing M&A focused first on integration—then, in some cases, on transformation. Today, leading companies are increasingly taking the approach to tackle both at once to transform while transacting.
This approach can be deployed more rapidly and accelerate synergy delivery, reduce transaction risk and significantly reduce transaction costs by shortening timelines for transitional services arrangements.
COVID-19 has highlighted the need for businesses to digitise their systems and streamline processes through digitisation and by developing scenarios, we show how bringing the transformational work forward, will mean spending less money for the best outcome.
Global and Australian economies are facing a recession as a result of COVID-19.
The spread of COVID-19 has led to widespread job losses in Australia and low consumer confidence. Virtually every industry is being, or will be, affected and this will flow through to M&A activity.
However, Government spending, low interest rates and the lower Australian dollar are expected to soften the impact somewhat and new trends will emerge as businesses respond strategically by improving technology capabilities or by taking advantage of opportunities in a changed environment.
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