M&A boom means it’s time to prepare

M&A boom means it’s time to prepare

With a buoyant outlook for M&A across many sectors in Australia, there are opportunities to be seized, markets to watch, and potential to find in less obvious places.

Huskies pulling a sled along in the snow

Merger and acquisition (M&A) activity in Australia is likely to increase, or at least remain steady in the next 12 months, according to 93 percent of respondents to KPMG’s Evolving Deals Landscape 2018 survey – sparking opportunity for those looking to merge, buy or sell. The respondents showed a marked rise in overall positive sentiment for increasing M&A, at 47 percent, up from 38 percent in 2017.

“There has been a reasonable increase in the number of buyers in the marketplace from private equity (PE) or financial investors, who have been able to raise new funds or recapitalise their funds, so there is a lot of money out there looking for homes,” says Peter Turner, National Lead Partner, Mergers & Acquisitions, KPMG.

This is leading to momentum across various industries, particularly in Energy and Natural Resources (ENR), with 74 percent of respondents expecting activity to increase.

“The overall economy is growing at core 2 percent and corporates have aspirations of double digit growth. So they’re looking to grow through M&A,” Turner says.

Here we explore where the opportunities for M&A sit, why Australia holds appeal, and the potential for companies that wish to sell or divest.

Seizing opportunity

Amid continuing disruption and competition, companies need to increase their capabilities and think of new ways to grow – and one way to do this is through M&A. The survey showed that 40 percent of M&A activity is being driven by companies seeking to grab market share, and 38 percent through industry consolidation.

Nick Harridge, Partner, ENR Transaction Services, KPMG, says: “Corporates with confidence are being more aggressive in building M&A capability to make sure they are ready to pounce on opportunistic assets. This is particularly evident in resources companies and holds true for private equity also.”

Harridge says that there are significant investments going into the renewables space, both from offshore financial investors and offshore energy players for the Asian markets.

“That brings with it M&A to source funding for those projects. Domestic energy companies are also looking to grow with technology and infrastructure acquisitions as well,” he says.

In addition to ENR, Financial Services looks positive for activity, with 48 percent of survey respondents expecting an increase, and the broader corporate sector (consumer, retail, business services etc.). While this sector is so broad, Harridge says interest is held in companies such as strongly branded food, health and wellness (particularly vitamins), and beauty.

Mid-size success

While big companies were once the apple of buyers’ eyes, now emerging and mid-sized enterprises have a strong look in. Helen Sutherland, Partner, Mergers & Acquisitions, KPMG, says acquiring new technology or capabilities to enable a business to move into new areas of service delivery or new markets is high on agendas.

“We are increasingly seeing large, global players that are interested in exploring acquisitions of businesses at an earlier stage of their life cycle as they provide access to IP that can then be leveraged across a larger platform,” she says.

Corporates are generally much more disciplined about their acquisition agenda now, and need to believe they can add strategic and operational value to a target, Sutherland says.

“High growth businesses that operate in markets with favourable industry trends are highly sought after assets and can command premium valuations.”

Australian appeal

Australian and New Zealand businesses hold M&A appeal, with 62 percent of respondents stating these are their top investment destinations. While the figure is down significantly from the previous year’s 91 percent, Turner says local acquisitions still make sense.

“It can be hard to be a large company in Australia and a small company in overseas markets, it comes with risk and challenge,” Turner explains.

Sutherland adds that it is wise to scour the local market for opportunities before looking overseas. Understanding local market dynamics, having a recognised brand, and on-the-ground management and operations offer an advantage.

“We’ve seen a lot of corporate failures with companies that have tried to go offshore, replicate their business model, and it hasn’t worked. However it can be successful when there is a strong strategic fit and an investment in understanding the market,” she says.

When Australian businesses seek international M&A, they are looking to the USA (14 percent), followed by Asia (9 percent down from 29 percent last year, excluding China) and Europe (5 percent). China was 24 percent last year and is now at just 3 percent. Sutherland thinks this could be due to the challenges of different regulatory frameworks (link to regulatory article), business and cultural factors, and the complexity of channels to market.

“China is not one market, it is a number of markets. Companies that don't have people on the ground and a strong management team, expats as well as local people, can find it challenging to break into the Chinese market. Being able to access local networks and relationships is critical to success,” she says.

Looking ahead, the US will remain a strong corridor for M&A, with interest coming both ways, and technology a key theme.

“We have seen foreign companies looking to established Australian companies for IP that they can then replicate in their own market, particularly in the healthcare and technology sectors,” Sutherland says.

Companies focused on developing Ethical Artificial Intelligence (AI) are also likely to become more sought after, suspects David Morris, Head of Mergers & Acquisitions, KPMG Law. However any technology-rich companies looking to sell need to ensure that they have clear ownership of their key Intellectual Property (IP) assets.

“Make sure that you can clearly evidence ownership of your IP assets,” he says. “That is one of the main stumbling blocks around sale transactions, particularly for companies that have grown quickly, and haven't properly addressed this core issue.”

Power to the sellers

Only 21 percent of respondents indicated a plan to sell or divest, on par with last year, however Turner suspects that many more are “quietly interested” and would leap at a suitable offer. Of those that are thinking of selling, the ability to negotiate a fair price was the biggest concern at 65 percent.

A primary reason for selling is because the business or asset is deemed non-core (50 percent). This is occurring a lot in Financial Services with divestment of non-core services, and the auto industry, which is now very focused on electric cars and new technologies, Turner explains.

Get prepared

In today’s disruptive market, a business could be surprised at where interest comes from, as it may not be from the company’s primary sector. With broader sets of buyers looking to grow, it’s a positive time to be open and active in the market.

“If a business owner has any inclination to explore their options with respect to a sale, JV or bringing in a growth partner, even if it’s 12 to 24 months down the track, they should seek advice early to understand what’s involved. That way they can be prepared for opportunistic approaches and also ensure their objectives are met,” Sutherland says.

Debt financing is necessary for M&A, but the big 4 banks aren’t necessary the first place to look any more.

Find out what’s on the horizon in Debt markets beyond the big four.

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