Mid-market to provide impetus for rebound in 2021 M&A levels
The hunger for M&A has returned and investors in Australia anticipate a promising year ahead. Australia’s economic recovery will be faster and stronger than competitor markets in Asia Pacific and some even think M&A volumes will return to or exceed pre-pandemic levels within the next 12 months.
The 7th annual Dealmakers report from Pitcher Partners, produced in collaboration with Mergermarket, reviews M&A activity and canvasses dealmaker expectations for deal volumes, drivers and opportunity sectors in the Australian mid-market for 2021 and beyond. The research provides an inside look at challenges in the M&A market form the past year, while offering a glimpse into expectations among serial dealmakers who continue to tap Australia for deal opportunities.
Key findings include:
- 75% of dealmakers say Australia’s economic recovery will be quicker and stronger than other markets in Asia Pacific
- 84% are planning to complete a deal in Australia within the next 12 months
- 65% say Australia’s mid-market (deals valued between AU$10m and AU$250m) are superior to those in other markets
- 62% say Australian M&A will bounce back to pre-Covid-19 levels by the end of 2021
James Beaumont Corporate Finance Partner at Pitcher Partners Melbourne said that this year’s deal data underlines the scale of the recovery now needed simply for Australia to get back to where it was prior to the pandemic.
“Many respondents (62%) expect Australian M&A to bounce back to pre-pandemic levels by the end of 2021 – and 38% think this recovery could occur by the end of the first half of the year,” James said.
“In 2020, Australia reported 963 deals, a 20% decline compared to figures for 2019 (1,204 transactions). The decline was not quite so precipitous in value terms, slipping 4% to AU$94.3bn from AU$97.7bn in 2019.
“We found that most dealmakers unanimously agree that Australia’s tech opportunity is one that cannot be overlooked. 98% say TMT deals in the mid-market will increase in the year ahead, an increase from 85% who said the same in 2020. Tech deals accounted for 34% of all mid-market deals (67 deals) and increased 16% from 2019 (58 deals).”
Warwick Face Corporate Finance Partner at Pitcher Partners Brisbane said the second half of the year demonstrated beginnings of a recovery. Deal volumes increased sharply during the third quarter, with deal values bouncing back especially strongly during the final three months of the year.
“Respondents give Australia an 81% confidence score when asked to rate the current environment for M&A in the country, based on factors such as ease of doing deals and sourcing opportunities,” Warwick said.
“Q4 saw AU$55.7bn in deals, comparatively better in value terms than Q4 in 2019 (AU$25.7bn). For the half-year ended 31 December, deal values increased 170% in value (AU$68.8bn) and 23% (531 deals) in volume compared to six months in June (AU$25.4bn, 432 deals).
“Sentiment is particularly strong toward Australia’s mid-market (deals valued between AU$10m and AU$250m), with 65% saying Australian mid-market opportunities are better than other markets. More than half (58%) say they are actively searching out such deals.”
From the survey, Australian dealmakers also predict:
- Political and regulatory stability to remain Australia’s top advantage, alongside an abundance of new and advanced tech, deal sourcing opportunities and low risk relative to other markets;
- Moderating foreign investment levels as offshore buyers assess market conditions and await borders to reopen. Only 38% say foreign investment deals in the mid-market will increase in the year ahead, compared to 75% who said the same in 2019;
- Decreasing competition for assets, with only 25% expecting there to be more buyers in the market than in past years;
- Earn out structures will see greater use, according to more than half (52%) of respondents;
- Due diligence challenges to be a common problem facing all dealmakers, particularly foreign buyers, and 82% say that due diligence today is more difficult than it was before the pandemic; and
- Consumer and pharma deals to capture investor interest and see increasing mid-market M&A levels through 2021.
Warwick concluded by saying private equity could play a major role in driving deals in 2021, with 78% expecting funds to be more active in the year ahead.
“Many point to the record amounts of dry powder funds are sitting on as motivation to enter the market,” he said.
“The Dealmakers report showed valuations may pose the greatest challenge to dealmakers in the year ahead, with half of respondents (50%) saying the gap between buyers and sellers could prevent deals from moving forward.”
In the current market environment, cautious buyers may not be prepared to pay the prices they might once have considered, and there was feedback amongst respondents with more than nine in 10 warning they will apply an additional risk premium to deals under consideration. At the same time, many businesses have been trading strongly, and the run up in capital markets is prompting vendors to consider a deal, the art will be parties aligning on value.
The full report can be found via this link.
