M&A dip fails to dent dealmaker sentiment

Dealmakers are divided over whether 2022’s cooler market for M&A represents the start of a longer decline or a pause for breath in what was an overheated market for activity.

Pitcher Partners’ annual Dealmakers report, which looks at mid-market M&A, confirmed both values and deal volume fell in 2022 — value by 52% and volume by 5% after the heady heights of 2021.

But dealmakers are also more optimistic than those figures might suggest, with 56% expecting a rebound in 2023 and half of these anticipating major improvements.

That optimism is backed by the long-term view with deal values in 2022 still nearly twice that in 2020.

Pitcher Partners Melbourne Corporate Finance Partner Michael Sonego said the 2022 Federal election influenced the downtrend in value and volume but had not dented positive sentiment.

“For all the pessimism and fear of an impending recession, this economy is not slowing people down, Mr Sonego said. “If you strip away the noise, we saw a year in which a long lead-up to a Federal election dampened activity, and it has been picking up ever since.”

The report tracked 959 mid-market M&A transactions that occurred in 2022, collectively valued at $140 billion.

Respondents remained confident in Australia as an M&A environment, delivering a 75% confidence score based on factors such as relative ease of doing deals and abundant opportunities that created value. Some 78% suggested they planned to increase their mid-market investments in the next 12 months.

Dealmakers continue to see Australia as a favourable destination for M&A opportunities, with 87% of respondents planning transactional activity within the next 12 months and 56% saying they expect M&A conditions will improve in 2023.

Nearly two thirds (63%) of respondents rated Australia’s economy as significantly more attractive than those in Singapore, India, Emerging Southeast Asia, China, Korea, Japan, and Hong Kong.

“Australia’s economic stability and certainty has cemented its position as the preferred M&A market in the Asia-Pacific region, as dealmakers seek to insulate themselves from global volatility,” Mr Sonego said.

Optimism for 2023 was founded in an expectation of a return to reality. The survey showed half of respondents expected closer alignment between buyers and sellers would deliver an increase in deal flow, while 47% per cent said realistic value expectations would factor into 2023’s M&A trends.

While cost-of-living pressures and rising inflation are raising concerns over consumer discretionary spending, Mr Sonego said there was little else for dealmakers to be concerned about.

“I don’t think we’ll be seeing any overly high valuations or dealmakers paying a big multiple for a business at the moment but realistic deals will be made,” Mr Sonego said.

Mr Sonego said deals could take longer to complete but the quality of those transactions would remain high.

Buyers with the patience to pursue strategic opportunities were poised to capitalise as global economic conditions continue to shift throughout 2023.

“Rising interest rates might make acquisitions more expensive and high inflation could bite into investment returns, but offsetting those concerns is the fact that Australian investments are seen as a strong hedge against economic and geopolitical uncertainty,” he said.

For the first time in the survey’s history, the industrials and chemicals sector was tipped to experience the biggest increases in mid-market M&A.

More than three quarters (77%) of respondents expect deal flow to rise in industrials and chemicals, ahead of the technology, media and telecommunications sector (72%).

Mr Sonego said succession plans loom as a major driver of M&A activity in industrials and chemicals and could explain the rise in deal anticipation around the sector.

“A lot of company founders are ageing, and the reality is a lot won’t  wait for a recession to happen and for Australia to recover from it,” Mr Sonego said.

“If it looks like we are about to enter a protracted period of low growth or economic trouble, we expect more owners to pull the plug.

“People are going to have to be more accepting of a lower number because they need to do a deal and they don’t have years to deal with it.”

You can access the key findings and download the full report in our Dealmakers hub.