When the mergers and acquisitions market stalls — as it seemed to do last year — there is a tendency to focus on the negatives of tough economic conditions, low-risk appetite and rising interest rates, writes Pitcher Partners Melbourne corporate finance partner James Beaumont.
Just 897 deals were recorded in 2023, as volumes collapsed to about 60% of 2016 highs, falling even further than the lows recorded in the tumultuous year of 2020 with the onset of COVID-19.
Yet at the start of 2023, it could have been a different story.
When Pitcher Partners asked dealmakers late in 2022 what they expected for the year just run, a remarkable 87% of respondents had been planning to invest. Two out of three said they would be increasing investments.
That bullishness quickly evaporated, leaving a few people scratching their heads about why deals were not being done.
Undoubtedly economic factors contributed to a challenging year for corporate dealmaking, and an uncertain economic and geopolitical landscape left dealmakers risk-averse and hesitant.
But as the year wound to a close, more deals concluded — in other words, there was activity, but it was just a lot slower than market watchers had come to expect.
It seems strategic dealmaking has replaced the frenzied rush to secure targets in 2021 and 2022, where fear of missing out (FOMO) drove a lot of the action.
The prices that sellers sought at the start of last year were a hangover from those heady days and while the buyers were as keen to make a deal as they had signalled, it was not going to be at any price.
Instead, they spent more time examining targets, drew out negotiations, took longer to finalise valuations and offers and spent their time ticking through a growing list of due diligence requests.
The dealmaking dip of the past year probably felt like a gulf for those on the selling side of the table, but the good news is that dealmakers are confident the gap is now closing.
By the end of 2023, there are signs of sustained interest in deals that help address unmet customer demand, along with buying a bolt-on or innovative business that can support digital transformation.
Australia in a choice position
That focus on strategy goes beyond Australian shores.
Foreign buyers reference the stability that Australia offers, both geopolitically and in our economy, because M&A in Australia is increasingly driven by those long-term strategic objectives.
More than half of recent deals (55%) are described by dealmakers as strategic acquisitions in planning for 12-24 months, which goes some way to explaining the drop off in volumes.
How will that shape the outlook of 2024?
Once again, Australia is in a choice position, with four out of five corporate dealmakers saying they believe Australia’s mid-market investment opportunities are better than those in other regional and global markets.
While the outlook is strong for domestic deals and outbound M&A, it is foreign investment into Australia that will determine the strength of the upcoming year.
Foreign corporate interest in Australia is growing, as evidenced in deals that closed in late 2023 such as US-based Newmont’s purchase of Newcrest, and London-listed veterinary services company CVS Group entering the Australian market in Sydney and Brisbane.
With China’s long run of GDP growth slowing, Australia stands out as one of the most attractive alternative options for investors seeking exposure to the Asia Pacific region.
Australia’s legal system and financial markets have proven especially appealing to US and European dealmakers, where M&A frameworks are similar, and not all APAC markets offer the same degree of familiarity and transparency.
But dealmakers also expect those foreign buyers to have competition.
Australian Investment Council research shows that there is A$21.6 billion of undeployed cash available to PE, venture capital and private credit funds for investment in Australia.
This is critical, given securing finance for deals remains a key impediment for success.
Deal financing remains the main concern for M&A investors, with more than half expecting that securing financing will be a primary challenge in 2024, compared to 40% in 2023.
Borrowing costs remain high, while dealmakers are still adjusting their models to account for how higher debt payments will affect their debt ratios and payment capabilities.
Debt markets are expected to be more accessible in 2024, but financing conditions will remain more challenging than in the bull market of 2021.
The challenges that caused deals to dry up in 2023 have not evaporated but an Australian market ripe for investment opportunities is bringing optimism that 2024 will be a strong year for corporate dealmaking.
Whether that optimism translates into swift and successful dealmaking is yet to be seen.
Author James Beaumont is Corporate Finance partner at accounting and business advisory firm Pitcher Partners Melbourne.