The Australian M&A Outlook: 2023

ESG is core to value creation agenda

ESG themes are core to long-term value creation, hence ESG considerations will continue to drive deal activity in 2023. Evidence shows that when investors embed ESG considerations into their strategies they achieve superior valuations.

Value is at risk if ESG is not properly managed and integrated into company strategy and operations, and we have seen divestments and spin-offs of assets that fail to meet investor expectations across E, S and G areas.

Moreover, the current environment means the ESG stakes are higher than ever before. ESG is no longer seen as a box-ticking exercise – it’s a business imperative and lenders and investors are looking for genuine commitments and action. They’re also looking for transparency, so reporting is key (even if your news is less than rosy).

Stakeholders are more informed about ESG and how it can impact value. Faced with spiralling inflation and interest rates rises, stakeholders are sensitive to the cost structure of target companies, and ESG now forms part of due diligence almost without exception. Good ESG governance is a must. Buyers want to be confident that risks are being identified and managed. (Can you, for instance, demonstrate your management of physical climate risk? Or, of modern slavery risk in your supply chain? What about good workplace hygiene such as policies that support diversity and inclusion? And how will you allay concerns around cybersecurity and data privacy?)

In terms of targets, we’re seeing plenty of interest in assets with circular economy opportunities and decarbonisation potential. And buyers are savvy. Potential acquirers know the difference between simply purchasing carbon offsets versus taking real steps towards decarbonisation, so organisations must make every effort to move towards net zero. Also, to use technology to improve visibility of supply chains, and to invest in better ESG reporting platforms.

People at the heart of deals

Organisations can’t afford to lose quality staff during the M&A process. In fact, 82% of companies who say significant value was destroyed in their latest acquisition lost more than 10% of employees following the transaction. To ensure the value creation objectives of a deal are preserved and unlocked, organisations must focus on the following four no-regret steps:   

• Culture: It’s hard to overstate the importance of culture in M&A transactions. In fact, 81% of surveyed executives wish they’d better understood the culture of a target organisation earlier in the transaction process. Too often, cultural issues only start to emerge during or after the signing process. How, then, do you get on the front foot to mitigate the risks associated with culture in M&A? It isn’t always easy to get a clear picture of an organisation’s culture. Robust due diligence incorporates interviews, focus groups, cultural reviews, surveys and more so that a wide range of voices are heard (and not just the executive team), to get a representative sample of the whole organisation.

• Staff retention: With the unemployment rate currently at its lowest level since 1974, and it being an employee-led market, now is not the time to shift your focus away from talent retention. Seasoned dealmakers and business leaders appreciate the significance of employee attrition and turnover, and in the current employment landscape, this will continue to be a key risk factor to manage. It all comes down to identifying key people and keeping them engaged. (Note, this is not just those people in managerial or business-critical roles; it includes key talent in all layers of the business.) 

• Employer value proposition (EVP): Given the challenges associated with attracting and retaining talent, it’s never been more critical to have a robust employee value proposition in place. Our research shows that 69% of employees say that fulfillment and meaning are important factors when considering a change in work, and while financial incentives are important, it's not the whole picture. To keep employees engaged, organisations need to leverage a strong and differentiated EVP - think: development opportunities, emphasis on work/life balance, flexible hours, hybrid working, and a focus on health and wellbeing. 

• Regulations and obligations: Employer obligations are an increasingly important consideration when it comes to due diligence. They’re also increasingly complicated. Workplace laws and regulations often differ between states and are constantly evolving. For instance, the model Work Health and Safety regulations were amended by Safe Work Australia in June 2022, to deal with, among other things, the lack of regulation around psychosocial risks in the workplace. In adhering to the global standard for occupational safety and health management systems (ISO 45001), employers’ now have obligations to identify and control psychosocial hazards. M&A activity is a significant change event and dealmakers need to ensure that employees are provided the adequate support and safeguards to transition through the change. 

Maximising the potential of technology

As the economy softens, and dealmakers work harder to get more value out of each deal, investing in technology will pay dividends in 2023. From capitalising on current systems and vendors, while managing the risk of potential cyber attacks, to data and analytics/reporting, through to transforming dealmaking to future-proof your (post-deal) organisation, technology, and the effective use of data will prove more fundamental than ever to organisational value this year.

As a start, technology and the potential impact on value must be a critical focus throughout every stage of the deal lifecycle. The importance of tech in deals has been further accelerated with the increase in the number and sophistication of cyber attacks. Globally, Australia was hit harder by cyberattacks than many other countries in 2022 and, as a result, we found 60% of Australian organisations are increasing their cyber budget in 2023 in an effort to proactively manage this risk and build digital trust.

This means involving true, business-minded technologists during the early stages of the deal. And then having analytics experts working side-by-side with dealmakers throughout the entire deal process, entrenching collaboration and connectivity between commercial, analytics and technology workstreams, capitalising on your tech experts during due diligence. 

Ask yourselves: How are we using tech to get greater insight during the deals process? How are we using data? How are we managing our cyber risks during the business change? How is it driving value? During dealmaking, it’s vital to have the right (tech) people in the tent. 

The second part of the equation is around future-proofing your organisation, and that means making the most of your technology post-deal. Whether through training or skills capture, ensure your people understand the current technology available, and the ways in which it can transform the business. For instance, rather than necessarily investing in new tech, can you optimise your current tech environment to better service your business? It’s about getting bang for your (tech spend) buck.

Notably, we’re seeing an interest in businesses that are less mature around technology and data. Instead, dealmakers are looking for opportunities to maximise return by investing in data rich businesses that can be brought up the maturity curve whilst managing their costs (such as right-sizing existing in-house technologies, negotiating with current vendors, or simply making better use of data. And there are plenty of data-rich businesses in Australia which haven’t yet made the most of their data.) It’s about doing more with less and focusing on the gaps to implement more agile and efficient solutions, rather than opting for a wholesale replacement.