The state of Australia's mergers & acquisition market (in 5 charts)

24 April 2022 Consultancy.com.au 5 min. read
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Global accounting and consulting firm Grant Thornton has released the latest edition of its Dealtracker report, providing deep insights into the state of Australia’s mergers & acquisition (M&A) market. A round-up of the report’s key findings in five charts.

In 2021, deal volumes in Australia reached levels not seen since 2010 despite the pandemic being a constant feature of the period. In fact, the third quarter of 2021 was the busiest quarter for deals on record, with a total of 320 deals occurring during the quarter.

M&A – Annual trends

“This increase in deal activity for 2021 is aligned with the global economic upturn observed in the post-Covid-19 world recovering from the global pandemic and its consequences on economic, mobility and, accordingly, deal activity – and prior to the onset of the Omicron variant in late 2021,” explained Paul Gooley, Partner & National Head of Corporate Finance at Grant Thornton.

Australia’s deal boom aligns with the global trend. According to data from Bain & Company, worldwide deal value hit US$5.9 trillion last year, smashing the previous record of US$4.6 trillion set in 2015 and 2007.

M&A – Deal composition by sector

Lifted by the pandemic-driven disruption, technology and technology-enabled businesses were most in demand. Grant Thornton’s report found that technology and IT now take the largest chunk of the deals pie (by deal volume), at 28% of the total.

According to Gooley, “high M&A volumes in the information technology sector are predicted to remain in 2022 as the importance of investing in technology is a key driver to maintain competitiveness, serve post-pandemic customer preferences, and to deploy new growth strategies across the wider business landscape.”

The second largest sector, industrial, has over the past 1-2 years seen its share of the total from 30% to 27%, with likewise other materials and manufacturing related segments seen their stakes shrink. “The Australian economy’s movement from a resources-led economy to a knowledge-based service economy has been accelerated throughout the pandemic period,” said Gooley.

Corporate deals by sector

Deals by corporates, or strategic buyers, continued to focus on the Industrials and IT sectors. Financial buyers (private equity or other investment managers) focused in 2021 on the Industrials, Information Technology and Consumer Staples sectors.

Not surprisingly, the Healthcare and FinTech sector were among the fastest growers in deal flow, both in the corporate as well as private equity segments. “Both sectors have benefited from the pandemic trading conditions, and are expected to experience strong mid-term growth,” said Gooley.

Australia’s most active financial buyers include Quadrant Private Equity, Five V Capital, Pemba Capital Partners, BGH Capital, Envest, and Livingbridge.

Further reading: Global private equity deal value hits $1.1 trillion, smashing previous record.

Cross-border deals

International investment into Australia represented 30% of total deal flow, with US and Canadian buyers holding the largest share of offshore acquirers, at 50% of deals. 30% of transactions were closed by European companies, while Asia Pacific based enterprises accounted for 12% of the total.

Domestic vs Cross Border Transaction (current period) + Inbound acquirer regions

Gooley: “Given Australia’s geographical advantages in terms of pandemic management and the associated strong measures that were put in place, the economy has outperformed most developed nations and, accordingly, was seen as an attractive place to invest from a growth and stability perspective. The continued robust trend of foreign investment into Australia was also assisted by the relaxation of certain foreign investment rules that were introduced at the start of the pandemic.”

According to Grant Thornton’s analysis, the SME sectors continue to be the engine room of deal volumes with 33% of deals completed under $100 million in transaction value. This represented 77% of disclosed deals in 2021.

At what price?

The overall EV/EBITDA multiple (the ‘deal multiple’) stood at around 7.7x (median) across sectors last year, in line with recent years. The media was driven by growth in the Financials and Consumers Staples sectors and offset by declines in the Consumer Discretionary and Industrials sectors.

EV/EBITDA multiples by sector

Notably, foreign buyers were interested in larger targets and were willing to pay more than their domestic counterparts. This was exemplified through a median target enterprise value of $243 million (up from $184 million) and an EBITDA multiple of 9.4x (7.4x for the corresponding domestic EBITDA multiples).

The outlook

Commenting on the outlook for the current year, Gooley said: “As we look forward to the further reopening of the economy resulting in improved market conditions and the continued weight of money, we should see deal activity remain strong and diversify across a greater number of sectors.”

“Notwithstanding this position, should current inflationary pressures lead to increased funding costs and lower consumer spending and investment, there remains a risk that deal activity will slow and valuations ease as we are starting to see in IPO markets.”