Dealmakers

Mid-market M&A in Australia 2023

Deals may be down, but the mid-market remains resilient and a promising value proposition.

Mid-market deal volume in 1H23 dropped 26% from 1H22, in line with declining totals across the broader M&A market in Australia. Values declined a more modest 4% in the same period, although still remained in line with historical averages observed over the last half decade, making another period of extraordinary stability.

Regardless, mid-market activity remains robust with positive sentiment, driven by several key trends. For instance, many mid-sized businesses in Australia are facing the challenge of succession planning as founders reach retirement age. This is creating abundant opportunities for strategic buyers and private investors who can provide capital and management expertise to drive growth.

Equally, mid-market targets offer significant potential for value creation and dealmakers can leverage their own resources and expertise to enhance operational efficiencies, implement strategic initiatives and optimise cost structures.

Australia 1H23 snapshot: The big picture

Overall M&A deal totals sink to five-year lows, although values remain robust, setting the stage for a promising second half of 2023.

Deal volumes dropped 26% from 1H22 while value rose 13% to hit AU$64.8bn, one of the highest first-half totals over the past five years. The lone exception was 1H21, although that period was marked by a rapid uptick in M&A as dealmakers went back to work following a tumultuous 2020 amid the onset of COVID.

The outlook for 2H23 looks promising, as dealmakers start to act on M&A sidelined in late 2022 and 1H23 as valuations begin to stabilise despite persistent uncertainties (inflation, geopolitics, rate increases).

Rising distressed opportunities could also factor into M&A in 2H23 and beyond. Insolvencies and restructuring situations will create more buying opportunities as underperforming businesses with heavy debt burdens are forced to reorganise and divest assets.

Global M&A cascades lower as macroeconomic headwinds and geopolitical uncertainty continue to plague the international deal space.

Global deal value in 1H23 dropped 35% from 1H22 as the war in Ukraine, soaring energy costs and concerns around inflation and interest rates continue to impact market sentiment.

Global mid-market M&A has likewise dropped. Deal volumes in 1H23 are down 30% and values dropped 37% from 1H22.

Despite challenges, M&A remains a crucial tool for unlocking synergies and building scale – and companies are turning to dealmaking to digitalise their organisations and expand into new markets.

In North America, persistent inflation and tighter financing conditions have been ongoing concerns impacting markets. Regardless, signs of recovery are in sight: primarily that stock markets are once again surging amid signals that the US Federal Reserve’s monetary tightening policies could be coming to an end.

Big-ticket deals have all but evaporated from the European deal space, mired by a gloomy economic outlook. However, there is some solace: while the Ukraine-Russia war rages on, major escalations and chances of the conflict spilling over into the rest of the continent appear slim, providing a sense of calm and confidence.

Within Asia-Pacific, the Chinese economy continues to struggle although a recovery could be a near-term possibility. India and other emerging markets, bolstered by promising growth potential, are generating interest and deal momentum

Investor Focus: Foreign buyers ramp up M&A

Inbound M&A reaches new heights as Australia experiences a surge in interest from offshore investors.

Offshore buyers completed AU$48bn in overall inbound deals in 1H23, the highest half-year total over the past five years and 205% higher than 1H22 (AU$15.8bn).

This increase in value shows strong support for the Australian market driven by various factors, including Australia’s stable economy, strategic geographic location, attractive investment environment and abundant resources.

Within the mid-market space, inbound deals have likewise posted a positive uptrend, with both volume and value climbing their way out of pandemic lows. The AU$3.8bn was the highest value first half since 2018 and upward momentum could see volumes continue to rise through 2H23.

Overall foreign inbound values have been led predominantly by North American dealmakers, accounting for 77% of value and 38% of volume in 1H23. These investors are actively exploring opportunities in Australia’s rich tech, mining and resources, finance and healthcare spaces as they expand their global footprint and leverage the country’s robust market potential.

In the Australian inbound mid-market M&A chart below highlights, Asia-Pacific based buyers have led the charge within Australia’s mid-market, accounting for 44% (AU$1.7bn) of inbound values and 37% (17 deals) of inbound volumes, given the country’s proximity to key markets and its resource-rich industries.

A strong focus on decarbonisation and digital innovation continue to drive M&A in both the broader and mid-market.

Energy, mining and utilities (EMU) was the top sector in 1H23, accounting for 78% of deal value. Even factoring out the AU$30bn Newcrest Mining deal, the EMU space still accounted for 50% of values.

Australia’s energy space is undergoing a transformative shift towards decarbonisation and the expansion of renewables, with solar and wind power leading the way. The rapid growth of utility-scale renewables projects, coupled with declining costs and supportive government policies, has propelled the transition and seen rising investment in this industry in both the broader and mid-market.

Distress in the energy and mining industry could also be a theme going forward as these companies explore M&A as an avenue to financial recovery or restructuring operations more broadly.

As the rapid adoption of digital advancements disrupts and transforms traditional business models, dealmakers are feverishly turning to tech M&A to bolster operations and secure future growth. Technology, media and telecommunications (TMT) accounted for 25% of total deals in 1H23 and will likely see greater activity going forward as Australia’s flourishing and innovative startup scene continues to captivate investors.