Australia’s M&A outlook: Why due diligence is your most valuable asset

We’ve all seen the headlines telling us that 2021 was a record-breaking year for M&A, when deal values globally exceeded US$5 trillion for the very first time.

Certainly, it’s not news to company directors across Australia. I’ve sat in many meetings alongside board members who are considering enormously complex transactions in shorter timeframes than ever before, and I can safely say that the independence those directors bring to these processes has never been more important.

But what’s really happening behind the headlines? And how do we keep up given the intensity of competition, and when past strategies and processes are becoming outmoded? These were the questions we explored in our recent M&A Outlook webinar, where we concluded that diligence is more valuable than ever. 

What’s trending

Firstly, the good news. As Brian Levy, Global Deals Industries Leader, PwC US, told our webinar: “The numbers have been absolutely off the charts.” 

Globally, deal volumes are up 24%, while values are a staggering 57% ahead. This can be attributed to several tailwinds, including intense demand for tech and digital capabilities, strategic portfolio reviews, a flood of capital, and the impact of ESG (in terms of risk mitigation and value creation).

That’s not to say it will all be smooth sailing in the coming months. Several headwinds are also having an impact, notably: global geopolitical tensions, question marks around inflation and interest rates, capital availability, supply chain disruption, and regulatory issues (such as antitrust and FDI scrutiny). 

At the beginning of the year Brian predicted “Dealmaking will likely remain robust in 2022, with fierce competition among corporates, PE [private equity] and SPACs [Special Purpose Acquisition Companies]. However, he added, it’s feasible that the top may come off the market, given increasing macroeconomic and regulatory headwinds.” With the current rise in geopolitical tensions, these headwinds have increased, creating greater uncertainty for dealmakers which will likely dampen M&A activity over the next few months.

Closer to home, Australian markets are setting themselves apart due to the amount of public-to-private activity taking place. We’ve seen several ‘mega transactions’ playing out in the Australian market (think: the Sydney Airport transaction). Interestingly, more investors are looking to bi-lateral deals as a way around competing in processes. 

At the same time, partnering with government remains a source of opportunities through programs such as capital recycling, contestability of services or joint ventures, as well as new avenues for the private sector to propose ideas (e.g. via direct dealing process in NSW).

We’re also seeing evidence of changing business models, driven predominantly by ESG agendas or supply chain concerns, and companies are looking to acquire digital capabilities and divest non-core assets. Meanwhile, IPO activity seems to have slowed.

Where are the opportunities?

As Brian put it: “Capital was everywhere [in 2021] in every shape, size and colour, and that capital availability powered the markets.” 

With so much capital still swilling around (albeit, with the cost of capital starting to rise), where, specifically, do the opportunities lie?

For board directors, there are six key Australian industries to watch right now:

1. Retail and consumer

There are significant opportunities for M&A activity here (though they’re tempered by continuing headwinds, including the impacts of the recent floods and COVID-19). Expect several divestitures by large corporates.

2. Infrastructure

Investors are being pushed to explore new territories, for instance the health sector, as the definition of infrastructure has expanded. Expect more creative transactions and ‘Core Plus’ strategies in the remainder of 2022.

3. Financial services

A flurry of M&A activity in the SME lending space is likely as more and more non-bank challengers pop up. Also watch for the buy now, pay later (BNPL) effect, and the continued consolidation of industry super funds and insurers.

4. Health

Health will continue to be a source of opportunities thanks to sell-side processes, continued competition for deals, and sustained sub-sector consolidation.

5. Tech, media and telecommunications

Similarly, tech will drive deals again this year. We’ll see telco operators restructure their infrastructure portfolios, as well as significant consolidation for media assets.

6. Energy, utilities and resources (EU&R)

Finally, the incorporation of ESG into business and investment strategies will further drive deals action in EU&R, especially when it comes to optimising portfolios and accessing new markets via consolidation or capability plays.

What to expect in the months ahead

Overall, with capital still readily available, and competition sky-high, M&A activity is set to remain elevated in most sectors. But economic headwinds mean that prudence will prove perhaps the most valuable asset of all.