Pitcher Partners and Mergermarket: Mid-market M&A to rebound

M&A activity in Australia’s mid-market is set to rebound over the course of the next months, with some in-demand sectors forecasted to reach pre-Covid-19 levels next year, according to a new report by Pitcher Partners and Mergermarket.

The pair released a mid-year report with the intention of measuring Covid-19’s impact on the dealmaking scene in Australia. More than 90% of the respondent pool overlapped with the sample from an earlier report published in December, giving the study some realistic continuity of sentiment.

What Pitcher Partners and Mergermarket found is that investors have faith in Australia’s deal market, at least more so than in the global environment. 90% of respondents expect a global recession to unfold, while less than 60% expect a recession to hit Australia. Not to say that the market will not be further affected by the global economic outlook – in fact, the number of companies expecting to close an acquisition in Australia this year has fallen by more than 20% since December.

Most of those who were on the fence back in December have also fallen on the side of caution, with nearly half stating that they will refrain from making deals in Australia. “Covid-19 is almost certainly to blame for this shift,” said the report.

However, most of this caution stems from concerns about a global panic, rather than the situation in Australia itself. As mentioned, Australia is considered less likely to face a recession according to local investors, and less than 40% of respondents position a significant downward trend in the country as inevitable.

Reasons for this optimism include the country’s prompt and effective response to the virus, as well as the government’s economic stimulus packages that have charted the course to recovery. Respondents also pointed to the relative stability in Australia during the crisis when compared to the rest of the world, marking a promising indicator for the investor market.

The result is that most investors who have backed out for this year plan to re-enter the market some time in the next twelve months. “There is an expectation that the uncertainty created by Covid-19 will be a brief stumbling block and most dealmakers will consider returning to the market within the next 12 months, depending on how the pandemic plays out,” said James Beaumont, a partner in the Corporate Finance arm of Pitcher Partners.

Where will deals take place?

So the money is likely to flow back in, and the question remains of where the cash is likely to go. According to the authors, the technology, media and telecommunications sector will see the most mid-market deals in the coming 12 months.

This is not a dramatic shift from the pre-Covid scenario, where tech was already expected to draw the majority of investments. However, the report points out that the crisis has only advanced the sector’s predominance in the broader economic context.

“Appetite for tech businesses has two key drivers; Tech businesses have the advantage of being able to conduct due diligence in a locked-down environment and while borders are closed, as the technology can be inspected remotely, unlike other businesses where site visits and inspections are critical. And, technology has been one of the key differentiators of how businesses have survived Covid-19, with those embracing tech faring better than those that haven’t,” said the authors.

No doubt, remote and virtual working has been in sharp focus during the pandemic, leading many businesses to see the arrangement as a potentially long-term arrangement. This will drive demand across a range of tech segments, including technology implementation for getting systems up and running, software licences on solutions, and managed services and cybersecurity.

Other sectors expected to dominate the mid-market deal landscape are pharmaceuticals, consumer goods, industrials & chemicals and financial services. At the other end of the spectrum, sectors such as construction, energy, mining, utilities, government and defence find themselves at the bottom of the priority list for mid-market investors.

The big picture is that investors are biding their time when it comes to investing in Australia, but have a clear idea of what they want to achieve when on firmer ground.

“While dealmakers look likely to take a wait-and-see approach in the short term, sentiment over the medium to long term reinforces that Australia is a robust place to invest, and quality businesses will continue to attract strong domestic and global interest,” said Warwick Face, another corporate finance partner at Pitcher Partners.

According to the report, most of these funds are likely to flow in from the private equity space. 95% of respondents said private equity will be a key participant driving mid-market dealmaking in 2020. On top of that, private equity deals are also one of the few transaction types where M&A levels are expected to rise in the year ahead (12% expect increases) or at least remain unchanged from current levels.

Other perceived drivers of mid-market deal activity include valuation alignment between sellers and buyers, as well as succession planning and foreign investments – all of which play a much bigger role in mid-market deals than they do in the broader M&A landscape. On the other hand, factors such as interest rates, insolvencies and divestitures of non-core assets that drive the overall M&A market have less of an effect on mid-market activity.

Related news: The state of M&A as Australia emerges from the coronacrisis.