Discussing Allen & Overy's Quarterly M&A Index, released today (17 October), A&O partner Michael Parshall said while the statistics appear positive for Australia, the overarching trend is one of ongoing volatility demonstrated by a 26 per cent drop in volume of deals in the second and third quarters of 2011.

"This is not a tale of remarkable recovery, but one of considerable volatility," warned Parshall.

According to the M&A index, the strength in Australia's energy and resources sector has ensured the country's attractiveness to overseas investors. However, while cross-border investment in energy and resources is driving a relatively high volume of deals in Australia, some of the recent, larger Australian deals by value - SABMiller/Fosters and Foxtel/Austar - have occurred outside that sector.

"You read a lot of stuff that suggests everything's about E&R but if you look at a number of significant transactions there have been some quite significant transactions in the media sector," he said. "Energy and resources underpin a lot of activity but it's not the sole source of it."

The index ranked Australia fourth overall as a target for inbound M&A deals worldwide, following the USA, UK and China. A "net seller", Australia recorded a significantly higher volume of inbound deals (35) than outbound deals (13) over the last 12 months - a trend that is likely to continue.

"The Australian economy has essentially punched above its weight in relation to attracting foreign investment," said Parshall.

"Foreign investment in the resources sector continues to be active, although not all sales processes have made it through to completion. However, big ticket foreign investment has extended to a range of other sectors such as food and beverages."

Parshall added that Australia's position as a net recipient of foreign investment is unlikely to change in the future. However, he said, larger Australian businesses - especially in relatively concentrated sectors - are "increasingly but cautiously looking" at cross-border opportunities, both as a means of achieving their growth aspirations and diversifying their market risk.

The index also highlighted a global drop in the value of joint ventures - down 19 per cent compared to the same period last year - and a 254 per cent increase in public hostile acquisitions by value (representing a 50 per cent increase in volume) compared to the same period last year.

Parshall noted that volatility in international equity markets and challenging operating conditions were contributing factors to the growth in hostile takeovers globally as bidders want to put the decision-making process directly in the hands of shareholders.

"Generally in Australia, fewer mega deals are conducted on a hostile basis with some obvious expectations," said Parshall.

Looking to the future, Parshall is cautiously optimistic, pointing to a number of global macro-economic issues which could affect the Australian economy.

"We have relatively good fundamentals at the moment, but if the USA or European economies continue to go backwards, or should China choose to dial back its growth, the Australian economy could find itself more exposed," he said.

Going forward, Parshall expects more "opportunistic plays" however he said companies will be taking their time and evaluating and considering opportunities carefully.