Australian corporates’ appetite for deal making has bounced back from a COVID-induced hibernation, as they look to revive spending plans and fill gaps in their portfolios and capabilities with good quality assets.
Releasing the fourth edition of Deloitte’s annual survey of Australian corporate heads of M&A – The deal in focus – the firm’s National M&A Leader, Ian Turner, said: “What a difference a year makes. This fourth instalment in our annual survey of Australian corporate heads of M&A paints a completely different picture to last year’s survey.
“Most businesses navigated 2020’s turmoil by deploying defensive strategies and cutting down on spending and investment. That helped company balance sheets emerge stronger over the last 12 months. Aided by greater certainty of the economic outlook, companies are now looking to revive spending plans.”
Key survey report points include:
- 95% of respondents expect the number of deals they pursue to increase or remain stable in 2021
- 100% are confident that credit will be available at favourable rates
- 98% are confident that balance sheets will be strong with adequate cash reserves in 2021
- 58% do not see border closures as a barrier to cross-border M&A
- 30% are willing to pay a premium if the target has positive environmental, social and governance (ESG) attributes.
The report also looks at a range of key M&A issues – from the growing importance of environmental, social and governance issues (ESG), to the outlook for the private and IPO markets.
The here and now
Deloitte M&A program leader, Jamie Irving, said: “Australian businesses battened down the hatches last year, and into 2021, but they’re now dusting off plans they had paused, or even creating new ones. They have a greater degree of certainty about the economic outlook, company balance sheets have emerged stronger over the last 12 months, and credit is readily and cheaply available.
“Last year, around 60% of our survey respondents expected M&A activity to be negatively affected by COVID-19. This year, not a single respondent expects deal activity to decrease.
“Many are seeking to expand in their existing markets or move into new markets, others are looking at mergers or acquisitions to accelerate post-pandemic growth. On the sell-side, others again are considering hiving off non-core assets in order to focus on the growth of their core operations.
“Private equity firms, in particular, are emerging as key players, fuelled by unprecedented levels of dry powder, and are leading aggressive bids for well-managed Australian businesses.
“The supply of high-quality assets is now the best it has been in recent years, but it’s also still not enough to match ballooning demand.”
ESG’s importance continues to grow
“Environmental, social and governance issues continue to gain prominence as shareholders, institutional investors and private equity holders demand that companies put ESG at the forefront of their investment decision-making processes,” Irving said.
“Accordingly, those companies are reflecting on where to invest in a post-pandemic world. More than half of our deal-maker respondents are already incorporating ESG impacts into their regular M&A due diligence and decision making, and 30% would be willing to pay a premium if a target had positive ESG attributes.
“Conversely, if a target had negative ESG attributes, more than 40% of respondents would apply a discount, and 40% wouldn’t even bid.”
COVID a catalyst for private and IPO markets
“High asset prices, combined with the pandemic has directly contributed to the rising momentum in Australia’s private and IPO markets,” Irving said.
“The stars have aligned for the private market in Australia. The COVID-19 induced stimulus and strong recovery of the Australian economy have buoyed the private M&A market and IPO capital markets.”
And the outlook?
“The sharp recovery in the Australian and global economies is very clearly transforming the backdrop for M&A activity in FY22,” Irving said.
“COVID put the brakes on, but things are now ready to accelerate. That doesn’t mean, however, that there are no risks to the outlook.
“The COVID shadow remains, and issues like potential mutations of the virus, issues with vaccine rollouts and the timing of the re-opening of international borders could all have an impact.”