Australian M&A space enters ‘unique time for deal making’

15 March 2022 By Naomi Neilson

As the Australian mergers and acquisitions space shifts back into pre-pandemic mode, an international law firm has found there has been an increase of strong sell-side dynamic and high deal activity within an environment of changing deal terms.

According to King & Wood Mallesons’ (KWM) DealTrends report, these deal terms are bouncing back from the initial uncertainty generated by the COVID-19 pandemic, meaning that the M&A space has been buoyed by favourable macro-level conditions, a shift into strong sell-side dynamics and a retreat from buy-side risk aversion.

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Within an environment of changing deal terms, KWM found that high deal activity is taking place again. Overall, there has been an increasing retreat from unduly cautious risk positions adopted by buyers during the initial COVID-19 period and “deal terms are returning to pre-pandemic seller favourable positions”.

Commenting on the findings, partner Ros Anderson said: “While much of the regulatory change of recent years remains a key issue in deals, such as a more stringent FIRB regime with stricter critical infrastructure and security considerations and longer processing times, a number of deal term differences have emerged.

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“While deal parties are faced with potentially longer pre-closing regulatory timeframes, the seller friendly deal environment has meant that deal conditionality has otherwise reduced, including less frequent agreements to buy-side protections, such as MAC conditions and third-party consent conditions.”

Additionally, deal activity in the financial sector has increased and sellers are becoming more accepting of part of their consideration being pushed into payment structure, with almost one-third of structures existing for a period of three years.

KWM added that market development around warranty and indemnity insurance was a notable feature as it has rebounded to pre-pandemic levels, with approximately 54 per cent of deals utilising warranty and indemnity insurance.

Higher M&A activity, combined with high take-up warranty and indemnity insurance, has translated into capacity constraints in the market, the international firm found. This includes a longer lead time to underwrite warranty and indemnity “trees” at the competitive bid stage. KWM’s DealTrends report also indicated that increased premiums “do not appear to have dampened market appetite for the product”.

“W&I insurers are willing to underwrite the key deal issues such as data protection and cyber security as long as adequate diligence had been done,” said partner Matt Coull. “Payroll and award compliance remains an area of focus, and may impact sellers’ ability to achieve a ‘clean exit’ if not adequately addressed through diligence.

“While market conditions have been favourable over the last 12 months for both private and public market transactions, macroeconomic factors such as geopolitics, rising interest rates and an Australian federal election will test the robustness of the domestic market over the medium term.”

Australian M&A space enters ‘unique time for deal making’
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