Australia's mid-market to lead M&A market rebound in 2021

14 February 2021 Consultancy.com.au 6 min. read

After a tough year for Australian mergers & acquisitions amid the Covid-19 induced downturn, there is cautious optimism about the outlook for the year ahead, particularly in the mid-market according to a new report by Pitcher Partners in collaboration with Mergermarket.

As the Covid-19 pandemic wreaked havoc on markets around the world, Australian M&A took an expected hit in 2020. A total of 963 deals closed successfully, a 20% decline compared to figures for 2019 (1,204 transactions). The decline was not quite so precipitous in value terms, slipping 4% to $94.3 billion from AU$97.7bn in 2019, though this was still a significant decline.

The second half of the year did see the beginnings of a recovery. Deal volumes increased sharply during the third quarter, with deal values bouncing back especially strongly during the final three months of the year. Indeed, Q4 saw $55.7 billion in deals, a large swing in deal value from Q1 ($11.5 billion) and comparatively better in value terms than Q4 in 2019 ($25.7 billion). 

Australian M&A

Yet, whilst overall deal activity has declined, there is now widespread confidence that M&A will bounce back strongly over the next 12 months. Amongst dealmakers surveyed by Pitcher Partners by Mergermarket, 84% plan to conduct M&A in Australia in 2021, more than any other market in the Asia-Pacific region.

Three-quarters of respondents tip Australia to make one of the quickest economic recoveries in the region, a view shared by the International Monetary Fund. It expects Australia’s economy to have shrunk by 4.2% during 2020, a smaller decline than other advanced economies in the region, and to rebound 3% in 2021.

More than a third of respondents (38%) expect Australian M&A to bounce back to its pre-Covid-19 level by the end of the first half of 2021 – and a further 23% expect the rebound to have been completed by the end of the year. Still, the researchers note that significant minorities expect the recovery to take longer, with 23% warning that activity may remain depressed in 2022 and beyond. 

M&A opportunities

The mid-market opportunity

Australia’s mid-market (deals valued between $10 million and $250 million) stands out as an area regarded as particularly fruitful by dealmakers. Overall, enthusiasm for the quality of mid-market opportunities in Australia compared to other locations is even higher than for the rest of the market. 

Many of these respondents have already sought to capitalise on such opportunities: the majority have completed at least one or two such deals over the past 24 months. Now the pace of dealmaking is set to accelerate, with 58% of respondents planning to undertake still further transactions in 2021. 

According to James Beaumont, Corporate Finance partner at Pitcher Partners, there are four key drivers for M&A in the coming period “These are: (1) a likely return to normal deal levels driven by succession and other related factors; (2) deals put on hold due to Covid-19 will now move forward; (3) an acceleration in capital markets prompting owners to potentially test the waters; and (4) potential increasing distressed M&A as government stimulus pacakges end.”

Are you currently considering an acquisition into the Australian mid-market in the year ahead?

Private equity’s push

With private equity continuing to sit on record amounts of dry powder – more than US$1.5 trillion according to one estimate by Bain & Company – the researcher highlight the sector as one of the leadings driver of M&A in Australia’s mid-market over 2020. Beaumont: “Investors will be looking to take advantage of the lower valuations and distressed deal opportunities.” 

Some 78% of respondents point to this driver. Looking forward, private equity activity in Australia’s mid-market is set to be sustained – and to increase – during 2021. Most respondents (84%) expect private equity deals to increase over the next 12 months, including 37% who expect a significant increase. “Investors firms are more stable financially,” points out one respondent. “They will capitalise on the increase in distressed debt opportunities.”

Investors will in particular be geared at tech targets, an opportunity that “cannot be overlooked” said Beaumont. Having already accounted for 34% of all mid-market deals (67 deals) in 2020, up 16% on the year previous, “98% say deals in the technology, media and telecom space will increase in the year ahead, an increase from 85% who said the same in 2020.” 

What do you expect will happen to the level of mid-market deal activity for the following types of deals over the next 12 months?

However, the evolution of valuations and deal multiples will be a key factor for private equity. Warwick Face, a Corporate Finance Partner at Pitcher Partners said: “Valuations may pose the greatest challenge to dealmakers in the year ahead, with half of respondents (50%) saying the gap between buyers and sellers could prevent deals from moving forward.” 

Mid-market’s attractiveness

In the survey, Pitcher Partners asked respondents to identify what they believe are the main ingredients of Australia’s Mid-market. For starters, Australia’s stable political and regulatory climate ranks as the country’s most significant in terms of M&A. Large numbers of respondents also praise Australia’s transparent and well-understood legal system.

“These fundamental attributes will continue to drive a competitive advantage in a world where volatility and unpredictability are prevalent,” said Beaumont.

What makes Australia an attractive market for M&A?

Shared on first spot is a strong technology backbone. For dealmakers, Australian businesses often represent an opportunity to acquire significant tech-based intellectual property assets. Mid-market companies are particularly attractive in this regard. “New and advanced technology standards have been very high,” said one respondent. 

Similarly, Australia offers attractive opportunities to source good deals at competitive prices. Some 28% of respondents picked this out as an important attraction in the current environment. Allied to this point, 31% of respondents see valuations as attractive. In particular, “deal sourcing opportunities in the mid-market segment are higher in comparison to other regions in the Asia-Pacific region,” according to Pitcher Partners’ analysis.

Concluding, the researchers noted, “The evidence of this research is that dealmakers in Australia are beginning to think about putting the Covid-19 pandemic behind them, with the mid-market leading the way.”