Issues such as a perceived lack of targets, and increasing and complex regulations might be holding people back from M&A, but with a different approach they can all be turned into opportunities.
While the environment for Mergers & Acquisitions (M&A) looks positive in the year ahead, respondents to KPMG's Evolving Deals Landscape 2018 survey have indicated a number of barriers to M&A success.
Among them, a lack of suitable targets was notable at 61 percent, up from 40 percent in 2017, and assets being too expensive at 56 percent, up from 36 percent. Another barrier was the impact of legal and regulatory constraints on M&A, which has risen significantly from 13 percent last year to 37 percent this year.
David Morris, Head of Mergers & Acquisitions, KPMG Law, says the regulatory landscape is becoming increasingly complicated, with heightened scrutiny of foreign acquirers by the Foreign Investment Review Board (FIRB), greater involvement by the Australian Taxation Office (ATO), and the Australian Competition and Consumer Commission (ACCC) increasing the rigour of its assessment of mergers that raise significant competition issues.
Of the respondents who expected that M&A activity would decrease in year ahead, 16 percent cited legal and regulatory constraints as the reason.
Here we explore these barriers to M&A in more detail, and uncover how organisations can instead turn them into fresh opportunities.
Perceiving a lack of suitable targets for M&A makes sense in some industries more than others.
For example, in Financial Services, with a Royal Commission shaking up the landscape, there could be a perception of fewer opportunities explains Astrid Raetze, Partner, Financial Services, KPMG Law, KPMG.
“However, once the Commission’s recommendations come through and the industry reshapes as a result, there will be an increase in targets,” she says. “There will be divestment and acquisition.”
In infrastructure, this perception could reflect a shift from a good pipeline of opportunities to a more difficult environment, explains Brendon Lamers, National Leader, Deal Advisory – Tax, KPMG.
“There was a large pipeline of government privatisations, of infrastructure spend, of infrastructure transactions, and that has shrunken,” he says. “It is area that is proving difficult for foreign investors to come in and find the right targets.”
The answer to the question could also reflect a perception of quality, not just quantity, in some sectors, says Morris.
“There is a significant pool of funds available for deployment on quality assets, but there is a feeling that there are not enough quality assets in the market,” he says.
The jump up on legal and regulatory issues as a barrier was particularly notable in the Financial Services sector, at 52 percent of respondents.
Again the Royal Commission could be a reason, along with the fact the industry is already highly regulated, Raetze says.
“If you are buying an existing business, you need the ability and the resources to maintain existing authorisations. That is increasingly difficult in a marketplace where the resources with that expertise are becoming scarce. The second problem is that there are existing and latent issues in financial services businesses.”
Legal and regulatory issues were also high on the agenda of those in the Health, Ageing and Human Services sectors at 48 percent.
“It’s in superannuation, in insurance, in derivatives – it is thick and fast,” Raetze says.
Tax compliance was seen as a barrier by a number of respondents, with the challenge of technical compliance top of mind for 57 percent, and Sovereign Risk (i.e. changing tax laws altering deal outcomes in a subsequent year) at 50 percent.
Lamers says there have been significant changes to the ATO’s approach to regulation, leading some investments to appear good at first, yet poorer following tax changes.
“It is a lack of certainty – investors are not confident things won't change in a month’s time or 3 years’ time,” Lamers says.
In the year ahead, with the Financial Services Royal Commission to wrap up, the Banking Executive Accountability Regime (BEAR) underway, and other regulators getting stricter, Raetze thinks regulation will continue to be perceived as a barrier.
“A lot of the issues in Financial Services are equally applicable to utilities and communications and infrastructure. The new insuretech technologies will start to disrupt and have an ongoing regulatory impact,” she says.
However, where there are challenges, there are always opportunities, such as getting involved in shaping regulation.
Lamers says: “We encourage our clients to raise their heads above the parapet and to get involved in shaping regulation, they can't just wait for it to happen to them. We deal with the regulators and submissions, and what the regulators are looking for is for organisations to engage with so that they understand what is happening in the real world.”
Using regulatory hurdles as a chance to rethink how you do business could lead to more efficiencies or growth.
Raetze says: “There is an enormous amount of technology, data innovation and Artificial Intelligence (AI) coming through which will fast track a lot of regulatory requirements and make them easier to meet.”
She says to look outwards to where the global flow of funds is flowing to see the potential.
“There is a stream of funds into agriculture in Australia and South America, lots flowing into areas like insuretech and fintech and agtech, and cybersecurity is another massively emerging market.”
In summary, Morris says where there is the most regulation, innovative, confident businesses may find the best opportunities for M&A.
“Those acquirers that are smart and nimble and use the disrupted market to their advantage will position themselves for strong growth, particularly if they take the time to proactively identify the regulatory issues early in the acquisition cycle, and use the right advisors to help them navigate those issues to gain a competitive advantage,” he says.
From barriers to success, 67 percent of survey respondents agreed that strategic fit or having a clear strategy for value creation post deal was most important for a deal to be successful. Find out more of the importance of post-deal value creation strategy, and how considering company culture as part of this is vital.