The Deal in Focus: corporate M&A leaders shift to realistic optimism for the year ahead

18 JULY 2024: While Australia’s economic outlook remains subdued, corporate M&A leaders believe the time is ripe for deal-making into 2025 to pursue growth and deliver value for shareholders.

Releasing the seventh edition of Deloitte’s annual survey – The Deal in Focus: Heads of M&A – Deloitte National M&A Leader, Ian Turner, said: “After a choppy 12 months for M&A leaders, our 2024 survey paints a surprisingly bullish picture. Last year, they remained positive. That optimism has certainly carried over into 2024.

“The top of the interest rate cycle means more normality in the industry, and this creates confidence. And while even the most optimistic M&A leader would stop short of predicting a dramatic surge in deals, there are strong signs activity will soon pick up. The recent Guzman y Gomez IPO is a great example of the confidence in the market.”

Key report points include:

• 76% of M&A leaders believe current economic conditions support deal activity, up from 66% in 2023
• 53% expect more deals in next 12 months, up from 45% in 2023
• To fund M&A activity, 81% plan to leverage excess cash and operating cash flows
• By deal type, 79% are interested in acquisitions to drive core business growth, followed by partnerships/alliance (47%) and divestitures of non-core assets (33%)
• For the third year in a row, valuation of assets remains their biggest challenge
• 32% consider M&A as one lever to achieve net-zero or decarbonisation commitments
• More than half don’t consider the current and potential value of intellectual property/intangible assets in the M&A process.

The report also covers intellectual property/intangible assets and ESG as increasingly important considerations for the M&A ecosystem and value capture, as well as a focus on four key industry sectors: financial services; power, energy, resources and industrials; retail and consumer goods; and technology, media and telecommunications.

According to Deloitte M&A program leader, Jamie Irving: “Our M&A leaders remain an optimistic group and, despite local and global economic uncertainty after a quieter 2023, they are largely confident conditions will strengthen, and are willing to move when they do.

“If the economic outlook improves, they, and we, expect risk tolerance and deal activity to rise as cashed up corporates act on defensive strategies.

“That doesn’t mean today’s M&A environment isn’t without its challenges. The valuation gap is proving stubborn, and a lack of available targets is hampering deal activity, so it’s not surprising to see defensive M&A strategies front of mind in 2024.

“In this market context, early movers could reap big rewards, as those who have completed the right deals before competition heats could maximise their advantage.”

That valuation gap

“The gap between buyers and sellers continues to disrupt M&A, with asset valuations ranked high as a challenge to deal success,” Irving said.

“To overcome this, sell-side companies should have a deep understanding of a buyer’s universe and be able to identify those willing to pay the most for their targets. This includes offshore buyers, who may have unique motivations to pursue cross-border M&A in Australia.

“Buyers on the other hand need to be very clear on why and how they pursue a deal, including the strategic and cultural fit, the return profile, potential synergies, ESG considerations and macroeconomic variables.”

Getting a handle on IP and intangible assets

“IP and undisclosed intangible assets are becoming larger parts of the value proposition for companies in most industries, and they should, drive significant  value and differentiation in deals,” Irving said.

“But too many M&A teams are still relying solely on multiples and not fully considering this potential value. On the sell side, IP and intangibles can deliver a higher price, while throughout the M&A process and during post-deal integration, buyers need to identify and capitalise on opportunities to create value through strategic management of these assets.”

ESG should be front of mind

“There’s been a monumental shift in how corporate Australia views ESG,” Irving said. “It’s now integral to business strategy and growth, but we’re still seeing a misalignment between M&A, strategy, and sustainability specialists about what falls under ESG and how it’s influencing M&A activity.

“Nearly a third of our survey respondents consider M&A a lever to achieve net zero or decarbonisation commitments, and many have made acquisitions or pursued divestments to benefit from the energy transition or reduce exposure to fossil fuel-related industries.

“ESG remains important in due diligence, but quantifying its impact and integrating it into valuation models clearly remains a challenge.” 

And the outlook?

“In our view, and according to those driving deal activity, the M&A outlook remains resilient,” Irving said. “Eyes will certainly be fixed on interest rates.

Cheaper capital will motivate both buyers and sellers to pursue more deals. And we expect AI-fuelled M&A and the influence of activist investors to play increasing roles.

“Though the valuation gap continues to cause headaches for M&A leaders, we expect it to gradually narrow as confidence recovers, interest rates ease and economic conditions improve. 

“Businesses have been understandably cautious, maintaining a holding pattern in tough external conditions. But as valuation challenges ease, there’s reason to shift into realistic optimism and be ready to move early on the right deal.”