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M&A activity on the rise

Australia’s strong economic COVID recovery is being challenged by the Delta variant outbreak in Sydney, and we are once again counting the economic and social costs of locking down.

While the Sydney lockdown will clearly curtail spending and confidence in the short term, the country’s experience over the past year has been that activity has rebounded fairly sharply when restrictions are eventually eased. One area where there is significant momentum at present, and that may be hard to stifle, is corporate M&A.

Leaders from corporate Australia are primed for a surge in deal activity, with Deloitte’s latest Heads of M&A survey revealing that 82% of respondents are expecting the number of deals they pursue to increase over the next 12 months. By contrast, last year, around 60% expected M&A activity to be negatively affected by COVID-19.

In 2021 Australian business leaders are more optimistic about the economic outlook and 95% of respondents are confident there will be growth opportunities in their sector. Other key drivers of the lift in M&A activity include healthy balance sheets and cheap capital for large corporates.

          Source: Deloitte, The deal in focus, Heads of M&A survey 2021

A challenge to growth momentum may be finding deals at the right value, with 55% of respondents not confident that targets will be available at attractive valuations. High levels of competition, low interest rates and rising equity markets have contributed to increasing valuations. With interest rates lower, investors are pushing more money into a wider range of (typically) riskier assets, thereby pushing up demand for the assets and hence prices.

While interest rates have shifted lower, equity hurdle rates have been slower to move. This backdrop is being partly helped by some improvement in the supply of high-quality assets in the market, as businesses are undertaking strategic reviews and divesting non-core assets.

Key M&A objectives over the next 12 months include pursuing strategic alliances and acquiring assets to fill gaps in core portfolios. Trends in digital transformation have accelerated, with 55% of respondents listing this as a priority. For many companies, pandemic driven disruptions highlighted gaps in technology and infrastructure, leading to an increase in corporates acquiring technological and digital capabilities and platforms.

Meanwhile, the importance of environmental, social and governance (ESG) issues to M&A success is growing quickly. More than half of dealmakers are already incorporating ESG impacts into regular M&A decision making, with this share expected to reach 76% within the next three to five years.

While many market participants are still figuring out how to factor ESG into valuations, 30% of survey respondents are already willing to pay a premium if the target has positive ESG attributes.

Overall, the survey finds that stronger M&A conditions are widespread, driven by growth opportunities across a broad range of sectors. Business has jumped back to life, and that is a good sign for a prospective lift in business investment, a critical element in Australia’s continuing economic recovery.