What’s happening in M&A

2023 saw a decline in the overall headline deal value both globally and locally, no doubt driven by the rising interest rate environment and concern about an economic slow-down. In Australia, small to medium sized enterprise (SME’s) continue to be the engine room of Australian deal volumes, however according to Matt Ogg writing in Business News in October 2023, “SME owners are showing a reluctance to sell, seeking higher valuations.” By way of context SMEs accounted for 77 per cent of deals in 2023 (disclosed deals below $100M)[1]. We reported back in August that one of the features of the first half of CY2023, was an increase in high frequency smaller transactions. These deals don’t push the headline deal value very much, but they do increase the number of smaller transactions. We do think that the opportunities for owners to exit in the mid-market remain positive. Boston Consulting Group (BCG) reported that “M&A is set pick up in 2024 despite ongoing headwinds”, saying that “deal activity bottomed out in early 2023.” They suggested that the energy, power, and resource industries were the most active sectors.[2] SP Global shares this optimism for deal doing in CY24, suggesting “dealmaking would see a significant boost if private equity firms started putting a greater amount of their dry power to work (uninvested cash)”.

In our view this optimism in the SME space is predicated on the intelligent matching of an asset with buyers who are active and have a clear criterion, which is then matched by the vendors business features. This inevitably involves cost and marketing synergies. The good news is that interest rates have much less affect on these kinds of transactions, normally involving trade players, driven by solid commercial reasons – the one plus one equals more than two idea.

These deals are typically done when a large business buys a much smaller business. The buyer leverages their much stronger balance sheet and often pays cash, in many cases not requiring bank funding. We reported in August [3] that corporations had record levels of cash on their balance sheets – this has not changed. Whilst not all this cash is ear-marked for acquisitions, companies are under pressure to put that cash to work, and a well-thought-out acquisition is a great way to do that.

Some Trends in 2024

Industrials Sector.[4] According to Dealtracker, 31 per cent of total deal flow in Australia in 2023 was from Industrials – 523 deals[5]. These deals are typically associated with an expanding economy, however certain subsectors are seen as defensive in nature (aerospace, defence, electrical equipment, and machinery).

Environmental and Social Governance (ESG). The last year has seen continued and significant development in this area of policy as Australia grapples with the race to reach net zero. We are seeing an increasing number of acquirers talk to us about their desire to see the environmental credentials of vendor companies. Companies with products and services skewed toward energy conservation, energy efficiency and innovations are highly sought after where larger companies see opportunities to scale the distribution of those products and innovations. Action to challenge the phenomenon of greenwashing, where companies make false or overblown claims around ESG, is on the rise with ASIC taking major civil penalty proceedings against large well-known brands.[6]

Cyber Security. This sector continues to provide challenges for companies when determining how to avoid breaches in security. Boards that fail to give sufficient priority to cyber resilience expose themselves to enforcement action for failing to act with reasonable care and diligence. This area presents increasing challenges for SMEs who often must outsource having limited resources to assess the evolving risks.

Owners of cyber security businesses remain in demand by acquirers although many are too small to be attractive, with challenges around the transfer of good-will often concentrated in a small team of cyber experts.

Companies with genuine commercial products and services are in high demand from larger acquirers who do not have the time or the skills to develop their own capabilities. As with cyber security the transfer of the good-will, in what are small micro body shops, is not easy. This can be largely a talent acquisition exercise. Nevertheless, where there is strong appetite, deals can be struck (often demanding the suspension of normal valuation methodology), saving acquirers valuable time.

Software as a Service (SAAS). This sector continues to power ahead with strong appetite from acquirers seeking specialist niche expertise in various verticals. The annual recurring revenues (ARR) remain the key driver of value with experienced buyers relying on typically low attrition to support and defend valuations.

Established Private Companies. Established private companies in whatever sector reminds us at Oasis of properties in great locations, to the right acquirers they are always attractive. Whether a sector is considered HOT or NOT, beauty is in the eye of the beholder. Trade players will often be attracted to a competitor with a niche offering or a unique positioning where they determined that time is more valuable to them than money. A business that has taken 25 years or more years to develop can save even a large conglomerate, even those with unlimited resources, a decade or more. Don’t be shy – if you feel the time is nearing for you to consider your options, talk to us.

Whatever is in store for us all in 2024 we wish you and your loved ones a happy, healthy, and prosperous year ahead!

References:

[1] Grant Thornton Australia. Dealtracker report October 2023

[2] Boston Consulting Group 26^th October 2023 

[3] https://www.oasispartners.com.au/2023/08/04/ma-market-snapshot-first-half-of-2023/

[4] What is the Industrial Goods Sector? In contrast to the consumer goods sector that produces goods and services directly consumed by households, the industrial goods sector provides capital goods to other businesses for manufacturing and construction. The sub-sectors include aerospace and defence, homebuilding, electric equipment, machinery, construction and engineering, distributors, etc.

https://corporatefinanceinstitute.com/resources/economics/industrial-goods-sector/

[5] Grant Thornton Australia. Dealtracker report October 2023

[6] Gilbert + Tobin Boardroom Brief 18^th December 2023