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In 2021, Australia was a hive of M&A activity across most market sectors. The buzz is continuing in 2022, driven by growth ambitions and access to capital, although geopolitical tensions and possible interest rate rises may temper valuation expectations among bidders.
PwC’s latest research suggests 88% of Australia’s CEOs expect growth in the Australian economy in 2022 and 77% expect global economic growth to improve. An extraordinary 98% of CEOs reported high levels of confidence for revenue growth in their own companies for the next 12 months, which further suggests that dealmaking is being considered.
Below we highlight Australia’s prevailing M&A conditions, the issues to watch out for in 2022, and the next steps for dealmakers.
Current landscape
It’s hard for dealmakers to take their eyes off the market at the moment, such is the volume and variety of activity underway. Acquirers have capital to spend and competition among them is high. Supply chain disruptions and ESG (environmental, social and governance) factors are forcing companies to revisit and (in many cases) reimagine how they operate. Meanwhile, public market activity remains high and private equity firms are joining the hunt for tech deals.
- 1. Deals go where capital flows
- 2. Supply chain disruptions prompting structural change
- 3. Tech deals spurred by increased innovation and decreased costs
- 4. Long-term rewards await those with strong ESG performance
- 5. Public market activity is high
1. Deals go where capital flows
Together, fiscal stimulation of the economy and low interest rates have put capital in the hands of investors in 2021. Deals were a natural consequence of that, and we expect to see plenty more activity on the ‘buy side’ in 2022. A shortage of opportunity has led to some substantial valuations and buyers will be pushing to secure exclusive deals to avoid running the gauntlet of bidding wars. Investors will also be alive to any moves by government to alleviate public debt through capital recycling or private sector partnering (e.g. with operating budgets under strain, government may revisit how it funds the services it provides.)
Australia’s deals market is not impervious to global risks, including rising interest rates, geopolitical tension, increased overseas regulation, new COVID-19 variants/outbreaks, and China’s economic performance. However, the appetite for local deals is unlikely to be impacted while Australia remains an attractive jurisdiction for investment and the cost of capital remains low.
2. Supply chain disruptions prompting structural change
Supply chain interruptions (and associated costs) during the pandemic have been widely documented, and the short-term impact can be seen on the bottom line of many companies. To control their own supply chain destiny, many businesses are considering how vertical integration could be achieved through M&A.
As companies pursue greater agility and resilience in 2022, we expect deals up and down value chains, from raw components to product distribution. A prime example could be pharmaceutical and medical device manufacturers seeking to onshore or nearshore their supply chains to reduce lead times and provide much-needed certainty to customers.
We also anticipate strong investor interest in technology companies specialising in supply chain processes (particularly those who can leverage data and analytics).
3. Tech deals spurred by increased innovation and decreased costs
Across all sectors, companies are seeking to acquire technology capabilities via M&A then using these as a springboard to transform their business models.
There’s a growing number of private equity firms showing interest in digitally innovative companies too. For many, this represents a noticeable shift in strategy. Private equity firms were traditionally risk averse about early-stage highly innovative companies but that’s changing as the pace of innovation increases and the cost decreases.
4. Long-term rewards await those with strong ESG performance
Overseas, we have seen how ESG factors have altered the value equation for buyers, and Australia’s dealmakers are now making similar calculations.
The impact was already being felt in Australia’s carbon intensive industries, but ESG performance (and potential) is beginning to influence M&A decisions across every industry sector. In 2022 and beyond, a growing pool of capital will be poured in the direction of businesses that have steered themselves towards greener sources of energy and greater social responsibility.
This year, forward-thinking investors are taking a fresh look at their portfolios and policies to make sure they can satisfy shareholder ESG expectations. Potential sellers with genuine ESG credentials have much to gain from comprehensive and transparent reporting and assurance.
5. Public market activity is high
The global deals market has been awash with public market activity and Australia is no different. In recent years we’ve seen numerous public market transactions and that appears set to continue in 2022. Meanwhile, as CEOs rebalance their portfolios for longer-term growth and profitability, demergers are likely to remain more common than was traditionally the case in Australia too.
Market outlook for 2022: 5 trends to watch
Portfolio optimisation
With confidence still relatively high in the deals market, some corporates are revisiting their portfolios and weighing up the possibility of carving out or spinning off assets. However, before taking the plunge, it’s important to assess how divesting or carving out assets could affect the likelihood of the company itself being the subject of a takeover later on.
Value creation opportunities
In Australia’s high-multiple environment, acquirers need to consider where future value creation opportunities lie. This might include bolt-ons to utilise existing corporate platforms/structures or repositioning the investment thesis to attract a higher group multiple (e.g. integrating a technology angle to the existing operations).
Careful post-deal integration is also vital to ensure no short-term value erosion. To successfully bring companies together, it’s important to understand the purpose, culture, and digital capability of both organisations.
Committing capital to growth
With market confidence and valuations both remaining high, astute buyers are weighing up genuine growth vs "growth for growth's sake." Corporate shareholders in Australia still have a strong preference to see excess cash returned rather than corporates building large war chests, whereas private equity firms are seeking to commit funds, providing strong competition for assets.
International bidders joining the fray
With Australia’s borders re-opening after two years of hibernation, cross-border transactions in the midcap market are more likely in 2022. But the profile of foreign players won’t be quite the same as they were pre-pandemic. While US investment will continue, Chinese investment is declining at the same time as Japanese, South Korean and UK investment all show greater signs of promise.
Election seasons could impact the flow of Australia’s energy
In the lead up to the federal and state elections (Victoria and South Australia), potential sellers and acquirers in the energy sector will keep a close eye on political party manifestos. Governments are generally eager for the private sector to help fund the energy transition but slow progress to date may prompt government(s) to take the initial risk, then seek private sector investors later.
Outside the energy sector, any electoral uncertainty is unlikely to translate into lasting or substantial changes in acquirers’ investment strategies.
Top predictions
Listen to our Deals industry leaders, who share their top predictions for the deals landscape for the year ahead.
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What's next for dealmakers?
With capital coursing through Australia’s deals market, the volume of M&A activity is likely to remain high through 2022. While this is positive news for dealmakers, competition will be equally high.
Proactive CEOs will continue to rebalance their portfolios for longer-term growth and profitability in 2022. Meanwhile, buyers need to bring deep operational expertise, plus a strong focus on responsible investment (ESG) and M&A value creation.
Explore other industry insights as part of this series.
Financial Services
A buoyant market with many more deals bubbling up
Infrastructure
With competition and capital both high, buyers are thinking outside the box
Health
Busy year for dealmakers with capital, competition, and valuations all high
Energy, Utilities and Resources
ESG is prompting companies and investors to nail their colours to the mast
Retail and Consumer
Revealed: Australia’s retail and consumer trends that dealmakers need to know
Technology, Media and Telecommunication
How dealmakers can capitalise on Australia’s red-hot TMT sector
Financial Services
With another wave of deals coming this year, our Australian M&A Outlook: Financial Services reveals what’s brewing beneath the surface. While incumbents will be hunting for growth, scale and capability, and private equity firms will explore various sub sectors of financial services, there may be macroeconomic storms ahead.
To succeed in these conditions, dealmakers, more than ever, will need clarity on their strategic priorities to allow them to act decisively when opportunities arise.
Health
Following a record year for deals (in terms of volume and value), this year’s Australian M&A Outlook: Health suggests another flurry of deals will be struck in the healthcare services sector. This is underpinned by increased competition for transactions, new sponsors, available capital, and strong valuations.
Energy, Utilities and Resources
This year’s Australian M&A Outlook: Energy, Utilities & Resources (EU&R) underlines just how important environmental, social and governance (ESG) performance has become to both buyers and sellers. More than ever before, ESG is driving deals activity across the EU&R sector (in Australia and overseas). In fact, the global push towards decarbonisation has made ESG the leading factor when determining, protecting, and creating value in many EU&R deals.
Retail and Consumer
With consumer sentiment still in the recovery phase, this year’s Australian M&A Outlook: Retail & Consumer pinpoints the sub-sectors and trends for dealmakers to watch. In 2022, retail and consumer M&A activity has been somewhat tempered by inflationary pressure (which is likely to push interest rates up faster than expected), ongoing supply chain issues, recent floods in NSW and Queensland, and geopolitical tensions. And while the federal budget provided some short-term economic stimulus, this won’t fundamentally alter the deals landscape.
Infrastructure
This year’s Australian M&A Outlook: Infrastructure signals another busy year ahead. While traditional government privatisation (or ‘capital recycling’) deals remain thin on the ground, funds still have capital to deploy, so more creative transactions and ‘Core Plus’ strategies will dominate. For buyers, that means thinking outside the box.
Technology, Media and Telecommunication
Australia’s Technology, Media and Telecommunications (TMT) sector has had its hottest year in deals in a decade, with M&A activity hitting a ten-year high in 2022. This year's Australian M&A Outlook: TMT signals dealmakers are seizing opportunities as the three key trends driving deals – demand for data, digital transformation, and a re-evaluation of traditional asset ownership strategies – remain dominant this year.
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Contact us
Clara Cutajar
Partner, Advisory, Global Capital Projects & Infrastructure Leader, PwC Australia
Tel: +61 409 223 037
