We interviewed Australian corporate heads of M&A and identified key trends influencing deal activity and the expected impact of COVID-19 to their business in 2020. You can download our full The deal in focus report for data findings from our interviews and actionable insights from our M&A leaders.
Below, we share the highlights from our theme, Valuation expectations.
The only way was down
Even before COVID-19, there was a sense that there was only one way the market could go — down.
Low interest rates and high growth expectations led to high asset valuations so, it wasn’t going to take much for markets to get the jitters. And with the dramatic falls in the equity capital markets when the crisis hit, came a substantial repricing of assets.
While private markets will likely take a more considered and pragmatic approach to valuations, the types of impact on business of COVID-19 described below are not isolated to listed companies and we anticipate multiples for private companies will also drop.
Business disruption – and the impact this has had on cashflow and earnings – and the unwinding of high growth expectations that had been priced into valuations, has brought about a double-whammy decline to business values.
As business value lies mostly in its long-term prospects, the uncertainty around ongoing impacts of the crisis has increased the level of risk and is also driving down valuations.
When there’s more certainty around the implications of COVID-19, we should see some of that volatility decrease, with a commensurate decrease in the risk priced into valuations.
Although risk appetites have changed, lower valuations and pricing will create opportunities for buyers with liquidity, who can now realise greater value in good quality businesses that might not be faring so well in the short term.