Majority (78 per cent) of merger and acquisition (M&A) dealmakers in the $10 million-$250 million mid-market sphere anticipate an increase in the number of deals done, with the other 22 per cent assuming current levels will hold.
The fourth annual M&A report, Dealmakers: Mid-market M&A in Australia 2018, was produced by Pitcher Partners and Mergermarket, and featured interviews and insights from M&A dealmakers, which helped form a collegiate sentiment about the future of deal volumes, drivers and opportunity sectors for this year.
Speaking about the new report, Pitcher Partners global head of corporate finance Michael Sonego said, “the increase in deal activity in 2017 has laid a great foundation for 2018, during which we’d expect modest increases in deal volumes driven by confidence within the Australian business sector.”
The comments, and survey responses, come on the back of an 18 per cent rise in deal volume in 2017, with an increase of 55 per cent in M&A work.
The report also found 55 per cent expect favourable valuations and the divestiture of noncore assets or business lines to be the top sell-side drivers of Australian mid-market M&A.
Elsewhere, 85 per cent of respondents expect private equity deals to increase in the next 12 months, and 72 per cent feel the same for foreign inbound M&A.
Acknowledging the rising relevance of internationalism in mid-market dealmaking, Mr Sonego said, “in an ever globalising world, the participation of foreign buyers in Australian deal activity is a trend we expect will continue over the coming years.”
But getting deals done is not always straightforward, with one in four respondents saying their most recent acquisitions took longer than expected to finalise.
Many among that 25 per cent highlighted flaws in the due diligence process as case for the delays.
“Financial due diligence typically gets the primary focus as it is paramount to supporting the valuation and business case,” Mr Sonego explained.
“Once achieved, the due diligence required to ensure the business platform and legal rights to IP or contractual earnings is often underestimated.”
Of particular concern, he noted, were recent global trends to commoditise due diligence.
“While the cost of due diligence can be high, it is not as significant as getting it wrong,” he said.
“Understanding the business and risks is crucial to being able to structure a deal and mitigate deal risks. This should be the focus of due diligence, rather than a mere tick the box exercise.”
Last week, in conversation with Lawyers Weekly, Kain Lawyers director Gerry Cawson commented on the M&A market in Australia, noting it had significantly picked up over the past 18 months compared with where it was previously.
“We’re seeing not just activity levels going up but also valuations are rising, and with debt providers offering better terms, there’s more enthusiasm around returns,” he explained.
“The market is buoyant and people are enthusiastically chasing assets.”
And while he doesn’t currently see anything that suggests M&A won’t continue to thrive, he did note the last few years had seen a lot more sovereign risk-type issues come into play than before.
“Issues around FIRB [Foreign Investment Review Board], in particular, have given people pause for thought [though] that’s calmed down a bit,” he said.
“Debt is more available for the right deals, and the terms of that debt seem to be improving from a leverage perspective, so that might give rise to some exuberance and affect pricing pressures, and I think generally, a focus on technology and export has helped put the market in a good place.”
Mr Cawson’s latter point about technology is in line with sector expectations, with 100 per cent of survey respondents predicting technology, media and telecom will see the most activity in the year ahead.
Forty per cent of respondents also thought cybersecurity would present risks for the sector, with another 25 per cent saying it would present unique opportunities.