Increasing interest rates, fear of recession, global political crises, and increased adoption of new technologies, including growing AI hype, have had a huge impact on our lives and businesses. What does this mean for M&A?
With eight interest rate increases (by 3% in 2022 alone) and higher borrowing costs many companies decided not to pursue M&A in 2022. They reviewed their strategic objectives and reconsidered using equity financing rather than debt financing. Most buyers do now have a clear strategy, have adjusted to higher debt levels and are looking for high quality targets.
It is expected that especially the number of outbound and inbound M&A transactions in Australia will increase. Outbound M&A activity will be driven by open borders and Australian companies seeking to grow and expand globally. Inbound M&A, on the other hand, will be driven by foreign companies seeking to establish a presence in the Australian market.
Another driver for increased M&A activity will be the number of private equity and venture capital investors seeking to capitalise on innovative growth opportunities in the mid-market. Smaller and mid-sized companies become more appealing targets, given their size and strategic fit for investors’ buy-and-build strategy.
When it comes to industries that will benefit in 2023, three will be in the spotlight, driving transactions and offering a wide range of M&A opportunities.
1. Energy and resources – awakening of the giants
M&A activities in energy and resources have been significant in recent years and this will continue in 2023. Australia’s abundant resources have attracted domestic and offshore investors1, supported by the ongoing energy transition, supply chain challenges and global competition for raw materials.
In the past year, there has been a number of significant M&A transactions, with companies looking to expand their portfolio of assets, including renewable energy projects. However, the sector has also been under scrutiny for its heavy carbon footprint, climate change concerns, environmental impact, and pressure to increase efficiencies2 and to transition to cleaner energy. Many companies and investors are now looking for targets to diversify their energy portfolio3 and to invest in renewable energies.
2. Technology – disruption on a bigger scale
M&A activities in technology have been fuelled by buyers seeking greater exposure to the digital economy, traditional businesses addressing technology gaps, and technology firms adding capability and scale. Companies offering cyber security solutions and generative artificial intelligence-based solutions will be in high demand. Microsoft’s recent $14 billion investment in ChatGPT4 has demonstrated its importance, and similar investments and transactions will certainly follow.
In Australia, technology transactions are anticipated to be driven by private equity buyouts and venture capital investments as these investors look to gain access to cutting-edge tools and solutions in order to grow and expand globally. Corporate buyers have traditionally been reserved, but have now the opportunity to expand their capabilities, and transform the way business is done.
3. Infrastructure – a conservative long-term bet
In the past years there have been continuous M&A infrastructure activities, with corporate buyers, private equity investors and superfunds looking to acquire assets. A variety of assets, including ports, airports, toll roads, power and water utilities have been in focus and will continue to be subject of M&A activities in 2023.
In particular investments of superfunds in infrastructure have been increasing in recent years and are expected to stay strong. The acquisition of Sydney Airport for $23.6 billion by the Sydney Aviation Alliance group, a consortium of IFM Investors, QSuper, AustralianSuper and Global Infrastructure Partners, was probably one of the deals with the highest publicity in 20225, but also transactions that drive digital transformation and improve efficiencies will be a key deal rational for infrastructure M&A.
What’s in for 2023?
This positive outlook and the growing interest of offshore investors will result in increased competition for high value and quality targets. Buyers will be facing a trade-off between having to move quicker while running their due diligence with renewed intensity. An even stronger focus will be on resilient supply chains, proven financial performance, ESG and IT due diligence to guarantee innovation, performance, as well as security.
The above will put pressure on targets, as M&A readiness and the ability to provide relevant information and answers will become critical to success and will have direct impact on the purchase price.
Having said that, it does not look like 2023 will be the year of the crisis for M&A. On the contrary, with every economic and political uncertainty comes an opportunity for M&A.
Are you and is your company ready?
Martin Linhart is Managing Partner at MAKE Consulting Group, a boutique M&A Consulting firm that works with medium and small-sized businesses on their acquisitions & divestitures.
References
1 www.afr.com/companies/energy/why-this-czech-tycoon-wants-to-buy-our-coal-mines-20220923-p5bkgd
2 www.afr.com/companies/mining/miners-need-to-take-more-risks-warns-bhp-chief-20230118-p5cdcx
3 www.bhp.com/news/media-centre/releases/2022/12/bhp-and-ozl-enter-into-scheme-implementation-deed
4 ChatGPT parent Open AI gets multibillion-dollar boost from Microsoft – Forbes Australia
5 www.sydneyairport.com.au/proposedscheme
