Prospects for Australian M&A remain strong despite a softening in the market in Q1 2016, according to a global report released today on the future of M&A by international law firm Herbert Smith Freehills.
The comprehensive report, Beyond Borders: The Future of Dealmaking, draws on a survey at the end of 2015 of more than 700 senior executives of companies with annual revenues of at least US$1 billion from around the world. The Report includes additional data from 100 of these respondents, who were re-surveyed in February 2016 to gauge fresh insights following global markets stutters at the start of the year.
More than a quarter (28%) of global dealmakers predict that Australasian M&A levels will increase significantly in the next three years, while 43% expect a moderate increase - despite the slow start to 2016, the Report shows.
This sentiment is supported by Australian respondents, who, according to the survey, are increasingly prioritising capital for M&A activity (40%, up from 28% three years ago).
Not only are Australian businesses prioritising capital for M&A, they do intend to deploy it, with three out of four respondents in the survey planning to make one acquisition over the next three years and, significantly, 57% planning to undertake two or more deals. Half of the respondents said that this represents more deals than they undertook in the previous three years.
Of the Australian respondents to the February 2016 component of the survey, 83% said that the Q1 market turbulence would have no impact on their M&A plans in the coming 12 months and 66% said it would have no impact on their plans in the next 2-3 years. In fact,16% said it would see them increase their M&A levels in the next 2-3 years.
Herbert Smith Freehills M&A partner Andrew Rich said:
“Last year, M&A records tumbled as boards across Australia, and indeed the world, boldly pursued target companies in a bid to achieve ambitious growth. However, that bullish confidence was tested early this year when global stock markets faltered and key economies softened, particularly in Asia.
“What we’re seeing though is that Australian businesses are undeterred and have retained their appetite for deal making, with some even seizing the opportunity to acquire cheaper assets and get a competitive advantage over their more cautious competitors.
“Savvy dealmakers know that the fundamentals that gave rise to a boon of activity last year – particularly in the second half of last year - are still in place, such as high availability of debt and equity capital. The lower Australian dollar, low commodity prices and distressed assets in energy and mining will drive M&A volumes, particularly inbound volumes. The various free trades agreements inked last year should also help to drive activity.”
According to the Report, outbound activity is also predicted to do well, with all Australian respondents saying that at least one of their planned deals in the next three years is likely to be cross-border, and 50% saying that two or more deals would target international assets.
This is not surprising considering that 26% of Australian respondents cited geographic diversity as the main driver behind their M&A strategies, followed by increased market share (22%).
While Australian businesses are looking beyond their borders to achieve their growth aspirations, they are focusing their acquisitive attention on neighbouring countries rather than looking further afield. In fact, half of Australian respondents looking to undertake cross-border deals are focussing on Australasia or South East Asia.
This regional approach to deal making is reflected globally, with the survey finding that businesses based in the EMEA region are most likely to be focused on deals in Western Europe (cited by 33% of respondents). Asian respondents meanwhile, are clearly focused on transactions in Southeast Asia (37%). In the Americas, the approach is more global, with 28% of respondents focused on Western Europe and 23% prioritising Latin America.
While the future for Australian M&A remains bright, the Report does highlight a number of emerging challenges and risks which could dampen M&A appetite if not addressed.
One of the key issues uncovered by the survey is the risk of litigation in M&A, with around 73% of all respondents believing this risk will increase in the next few years. Andrew Rich commented: “Hearing that three-quarters of our respondents expect to see an increase in M&A litigation was somewhat surprising given that, historically speaking, unlike some other sophisticated jurisdictions such as the US, Australia has seen relatively little litigation between parties to M&A deals.”
Australian businesses in particular risk losing their M&A appetite as a result of this potential increase in litigation, with 41% of Australian respondents saying that the increased risk would make them significantly less likely to undertake M&A - compared to just 17% overall.
Globally, anti-trust regulation was another challenge cited by a quarter of respondents, followed by labour and employment regulations (21%) and environmental regulations (18%). Rising global concern about data security and protection saw 10% of respondents cite this as a challenging issue during the deal making process.
Stephen Wilkinson, Global Head of Mergers & Acquisitions at Herbert Smith Freehills says the rise of anti-trust is a global phenomenon made more complicated by the increasing reach of anti-trust regulators.
“Compared to ten and even five years ago, there are many more regulatory regimes on a national level – in countries in Africa and South America, in China and other Asian countries – which in theory have jurisdiction not only over transactions that involve companies incorporated in those regions, but also over foreign-to-foreign transactions,” he said.
Andrew Rich said: “Every M&A transaction presents its own unique challenges, particularly those undertaken across borders.
“Whether it’s environmental concerns, labour and employment regulations or anti-bribery and corruption challenges, businesses need to ensure that they are conducting the necessary due diligence specific to every region relevant to their deal.
“Comprehensive jurisdictional insights and knowledge will enable businesses to best manage multiple risks and to efficiently complete deals and deliver a positive outcome for shareholders. It is therefore crucial to use advisors who have both local on-the-ground experience as well as a global understanding and experience in complex cross-border M&A transactions.”
For more information or to obtain a copy of the report visit: http://www.hsfbeyondborders.com/
Methodology & background
Towards the end of 2015, Mergermarket surveyed 700 senior-level executives at major businesses around the globe about their experiences of cross-border M&A and their views on the outlook for deal-making in the future. Some 44% of respondents were EMEA-based, 37% were from the Asia-Pacific region and 19% were headquartered in the Americas. All companies had annual revenues of at least US$1 billion and all participants have considered at least one cross-border acquisition over the past 24 months. 81% had completed at least one deal.
Following the market volatility present since the start of 2016, a further survey update of 100 of the original respondents was conducted in February 2016. The constituents of this survey reflected the geographic and industry composition of the full report exactly.