Buyers are skittish and sellers are trying to time an uncertain market, but dealmakers are confident that Australia’s strong economic fundamentals should underpin a strong second half.
The latest data from Pitcher Partners and Mergermarket indicates it has been a rocky start for M&A in the first half of 2022. There has been a sharp fall in the number of Australian mergers and acquisitions, with the 359 deals completed in the first half of 2022, 29% fewer compared to the previous corresponding half year.
The total value of deals, however, was up 6% to $88.3 billion, thanks largely to the $28 billion takeover of Ramsay Health Care by global investment consortium KKR.
The plunge in M&A volume is a big turnaround from dealmakers’ predictions at the end of last year, with most anticipating record levels of activity to continue throughout 2022 and beyond.
Almost half of the dealmakers surveyed in Pitcher Partners’ annual Dealmakers report late last year expected the all-time highs to continue for at least 12 to 24 months, with a further 28% expecting the boom conditions to last longer than two years.
But while the heat has gone out of the market, Pitcher Partners’ Michael Sonego said the current tempo represented a more sustainable climate for both buyers and sellers.
“The market has fluctuated remarkably in recent years, but we are now on a steadier footing,” Mr Sonego said.
“Dealmaking isn’t really in decline, but the dramatic acceleration we saw last year has now fallen away and we are back to a more sustainable pace.
“If 2020 was the year of the earn out and 2021 was the year of the seller, 2022 represents a shift back to somewhere in between.
“We had 18 months of phenomenal M&A conditions, but that boom could not be sustained in the face of renewed uncertainty.”
Mr Sonego said it was clear M&A activity in the first half of 2022 had been impacted by a relentless series of macroeconomic shocks, beginning with Russia’s invasion of Ukraine and compounded by continuing supply chain pressures, skyrocketing global inflation and rapidly rising interest rates heightening concerns of a possible recession.
“Both buyers and sellers had become used to pandemic volatility, but the wave of unexpected threats this year — from Ukraine to monkeypox and foot-and-mouth to inflation, an energy crisis and a possible rate rise-driven recession — has rattled them again,” Mr Sonego said.
“Sentiment is a significant factor in M&A and it was artificially high in Australia. Once the market gets used to the latest round of uncertainty, it will likely recover.”
While the market is understandably cautious, Mr Sonego said dealmakers hadn’t yet completely hit the brakes, with many taking more time to complete better deals rather than faster ones and seeking out deals that closely align with strategic objectives.
He said the extra time taken for due diligence would likely translate to a stronger second half of 2022 than experienced in the first six months of the year, as deals that may have last year been closed in the first half being pushed back.
Mr Sonego said he expects mid-market deals (transactions valued between $10 million and $250 million) to dominate the back end of the year, driven by both domestic and international buyers.
Mid-market M&A fell on trend with the broader M&A market in the first half of the year, with values down 42% and the volume of transactions falling by 28%.
But Mr Sonego said the mid-market would remain a target segment for foreign investors, with large corporations and multinationals likely to reassess their investment strategies to hedge against a possible recession or other new macroeconomic shocks.
Overall inbound M&A accounted for just under 40% of total transactions by volume in H1 2022, and $19 billion in value.
“Australia will continue to offer abundant investment opportunities,” Mr Sonego said.
“As competition for assets heats up, dealmakers who act today will be ahead of the curve and ready to reinvest in growth or access new markets to future-proof their organizations against the uncertainties and challenges that lie ahead.”
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