The state of M&A as Australia emerges from the coronacrisis

The global and Australia’s sharp turn in economic outlook is transforming the backdrop for mergers & acquisitions this year, according to a new study by Deloitte. While it is slowing down deal appetite, unique times also create unique opportunities. 

To gain insight in the state of Australia’s mergers & acquisitions market, Deloitte’s authors – led by the quartet of Stephen Smith, Wouter Timmer, Cathryn Lee and Kate O’Brien – surveyed dealmakers and sat down with 60 corporate heads of M&A to discuss deal activity in the face of the current Covid-19 crisis. 

Not surprisingly, the analysis found that the majority of experts (58%) expect the pandemic-induced downturn to negatively impact deal activity in 2020. As a recession kicks in, companies are scrambling to save costs and solidify their financial position and cash reserves, in the process pausing or delaying much of their M&A endeavours. 

Meanwhile, the spread of Covid-19 has led to widespread job losses in Australia and this is dampening consumer confidence. Last month alone, over 600,000 jobs were lost, cutting a swathe through the labour market and lifting the country’s jobless rate to its highest level since September 2015. 

“The slowdown in the Australian economy is placing pressure on company earnings. Organisations are focussing on portfolio optimisation and transformation initiatives as defensive responses to market conditions,” state the authors. So, despite solid long term fundamentals for M&A, “deal volumes are likely to be down for some months.” 

The bright spots

But it’s not all gloomy news. A small group of M&A leaders, particularly those working at cashed up corporates and private equity sitting on piles of ‘dry powder’, expects their company’s deal activity to increase during the outbreak. Most of this activity will be triggered by a rapidly growing selling appetite.

58% of the surveyed M&A leaders confirmed they are currently preparing for or considering a divestiture. The key motivator continues to be streamlining and the sale of non-core assets, which is likely to be exacerbated by companies reviewing current operations to assess whether the capabilities required have changed as a result of Covid-19. 

Notably, a group of respondents said to Deloitte that the need to raise additional funds was an important motivator for divestiture. Indeed, deal data reveals that debt and equity raisings are already undergoing a spike as companies look to bolster balance sheets.

Other significant drivers for a divesture are a change in the regulatory environment, a change in market landscape or an opportunistic approach from an interested party. 

On the offensive

At the other side of the table, there are genuine buyers in a strong position that take a long term lens and offensive strategy to dealmaking. They are seeking to capitalise on the opportunity to buy distressed corporates, or buy ‘cheaply’ to bolster their digital and innovation capabilities. “Valuations will be impacted by Covid-19, so sellers will need to have sensible and achievable expectations.”

From a functional viewpoint, deals in the supply chain arena are expected to increase, as organisations are likely to restructure their supply chains and key logistical nodes. Technology will also increasingly be considered against the backdrop of an accelerating digital transformation landscape. 

Types of deals

The Covid-19 environment is further changing the types of deals being executed. “More than three quarters of deals are typically valued at less than $500 million, and there may be a greater focus on these small and medium sized deals in the year ahead. Companies are likely to be more cautious around larger, complex deals as valuation and execution becomes harder in a world of economic uncertainty.”

In addition, the proportion of domestic deals is expected to increase as Covid-19 further curtails cross-border activity.