Deloitte report paints rosy M&A future despite prevailing economic headwinds

Most corporate leaders of M&A divisions across Australia and New Zealand believe mergers and acquisition deals are likely to rise during FY23, with the uncertain economic outlook posing the most significant challenge in determining transaction prices.  

The findings derive from Deloitte’s fifth edition of its annual ‘The Deal in Focus: Heads of M&A survey’, which is compiled from interviews with business leaders during May and June, as well as insights gathered from Deloitte Access Economics and the views of the leading experts in its M&A practice.

The survey, which has long been viewed as a smart tool to help companies grow during challenging market environments, found 80 per cent of respondents said acquiring assets to fill gaps in the core portfolio was a priority over the next 12 months.

Despite signs that the market is moderating from the phenomenally high deal volumes experienced in 2021, four-fifths of leaders indicated that the valuation of assets will be their greatest test.

 “Last year, we saw M&A bounce back to record levels from the darker days of COVID. Now, in 2022, the market is being offered new opportunities (and risks) from the ongoing disruptive and evolving landscape,” Deloitte National M&A leader Ian Turner said.

“But with an eye to the next 12 months, there will be continued deep pools of capital availability for high-quality inorganic targets, and we certainly remain optimistic that the glass of opportunity will remain half full.

“M&A will continue to be a fundamental part of the corporate arsenal, helping businesses to build resilience to withstand evolving economic conditions and assisting growth drivers, while also continuing to accelerate business transformation.”

The low-interest rate environment and buoyant equity markets, coupled with strong company balance sheets, resulted in phenomenally high deal volumes in 2021.

With three-quarters of the people surveyed highly confident their balance sheets remain strong, there is still a deep pool of money available for good-quality M&A targets, with companies able to draw on significant cash reserves and debt markets to get deals done.

“The strong run of deals is far from over, but twelve months later, the market has evolved yet again,” Deloitte M&A program leader Jamie Irving said.

“We’re still seeing large cash reserves on balance sheets, plenty of private equity dry powder and strong debt markets – albeit with higher borrowing costs – but the competitive deal environment has also increased the focus of M&A on delivery of the deal thesis, including the importance of integration and the realisation of synergies.

“Corporates are looking to M&A to grow their core portfolio, accelerate transformation and combat disruption, but the uncertain economic outlook is making valuation of assets a challenge, which may affect the speed of the transaction process.”

This year’s results also reveal that environmental, social and governance (ESG) factors are increasingly crucial for successful M&A deals, with 63 per cent of respondents factoring its impacts into their decision-making.

ESG has also become an influence in portfolio rebalancing and redesigning, with almost half of respondents re-evaluating or planning to re-evaluate their portfolio to acquire or divest through the lens of ESG, including energy transition commitments.

Looking at FY23 and beyond, Irving believes value creation is likely to become the dominant motivator for embedding ESG in M&A strategies.

“Despite this progress, the market is still grappling with the relationship between ESG and value and quantifying the value of ESG in a deal remains a real challenge for many,” he said.

“We’re certainly seeing a continual maturing in the market on what embedding ESG in the context of a deal entails; and how it is connected to core business priorities.

“As ESG data becomes increasingly standardised, it is expected that quantification practices between ESG and value will continue to evolve.”

Influenced by various macroeconomic factors, including economic growth, financial conditions, and prevailing sentiment, any outlook is clouded by a range of global uncertainties.

Increased inflation, supply chain disruptions and the elevated costs of energy and food from the Russian-Ukrainian conflict have resulted in central banks responding with faster-than-expected interest rate hikes, which hurts asset prices and puts pressure on businesses and household budgets.

However, the report states that some key drivers, such as the international price of oil, are starting to subside and headline inflation is expected to peak in 2022 in Australia and NZ.

“M&A leaders are well aware of risks over the economic and geopolitical outlooks, but a high proportion are also confident there will be growth opportunities in their sector,” Irving said.

“Expediting synergy capture and the value realisation that comes with this is seen as a higher priority, and cross-border M&A is also still on the cards for many, with the Asia Pacific region remaining the most attractive geography for acquisitions.

“In this environment, one clear message to emerge from this year’s survey is that M&A leaders should be prepared, meaning knowing what targets they do and don’t want to acquire and those that they don’t want their competitors to acquire. The challenge will be to maintain deal momentum and focus on the long game in a market facing a myriad of distractions.”