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Worrying times for M&A

Worrying times for M&A

The second half of the year has not been kind to the Australian M&A market.Global economic uncertainty and the growing euro zone crisis has affected the deal flow in the Australian M&A…

The second half of the year has not been kind to the Australian M&A market.

Global economic uncertainty and the growing euro zone crisis has affected the deal flow in the Australian M&A market, with many lawyers who were busy in the first half of the year now finding it increasingly tough to source work in a shrinking market.

"Our first six months were very strong and there has been a noticeable drop in deal flow in the second six months," said Mallesons Stephen Jaques Melbourne M&A head Craig Semple. "As a general proposition the deal flow has slowed and I think people are just very cautious."

Semple said that global economic uncertainty has affected the psychology of the Australian M&A market, with prospective deals put on ice until there is more certainty about the status of European economies and the euro itself.

"Uncertainty surrounding the euro is making vendors and purchasers circumspect about the future," he said. "In that context, it is very brave to undertake large or important transactions."

In the first half of this year, the Australian M&A market was humming.

The Freehills M&A Report released in September showed that for the 2010-11 financial year, the Australian market had rebounded strongly from the global financial crisis (GFC).

"Any remaining effects of the previous GFC in terms of M&A activity is behind us," the report's co-author, Perth based corporate partner Simon Reed told Lawyers Weekly at the time. "During the GFC period we were down to 72 deals and the total spend was $19 billion. In 2011, we had 104 deals worth $79 billion."

While the most recent Bloomberg M&A League Table for Q3 2011 showed a modest increase of four per cent when compared to July to September 2010, despite a worldwide drop in activity of 12 per cent, the Australian M&A market has slowed down appreciably in the last quarter of this year.

"I think the Australian M&A market has suffered as much as anywhere in the latter half of the year," Jones Day Sydney partner-in-charge Chris Ahern told Lawyers Weekly. "Whether it is because of resource rent tax or market gyrations, they have had more of an impact here than perhaps elsewhere. The latter half of the year has seen deals shelved that would have otherwise sailed through."

The downturn in the M&A market is starting to mean law firms are revising their budgets for this financial year, with the revenue stream from what is one of the most lucrative practice groups for large Australian and global law firms expected to take a big hit.

"We work on a rolling forecast model, and what we are expecting is that where work has slowed in some places, that has been offset by strong performances in other areas," said Allens Arthur Robinson chief executive partner Michael Rose. "We haven't had to dramatically reforecast for this [financial] year as of yet, but we are conscious that work levels in last quarter aren't at the same level that they were leading up to last quarter."

Room for cautious optimism

Despite M&A lawyers having more free time than they would like over the past two to three months, there is an expectation that the market will rebound.

Craig Semple said that compared to other years, there is an urgency to not let the Christmas and new year period interrupt current deal flows that have gone to the market.

"We have matters coming in much closer to Christmas than I have ever seen," said Semple. "Deals are starting now, with Christmas seen as a five day gap in the timetable.

"Even in a reduced flow market, we have not seen a pre-Christmas slowdown."

Earlier in the week Freehills released its Top 10 M&A predictions for 2012.

Freehills number one prediction was that the resources sector would continue to provide a consistent deal flow next year, with property and food security also providing strong levels of activity.

See Lawyers Weekly 564 on Friday 16 December for extended interviews with Craig Semple, Chris Ahern and Michael Rose

Justin Whealing

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