Key themes and forecast for M&A in 2023

Deloitte has released the 6th edition of the annual corporate survey of M&A executives. The report features more than 130 responses from corporate representatives from Australia and New Zealand. These insights provide genuine insight into the recent trends and expectations for the M&A market moving forward.

“While we are still seeing activity in the M&A space, transactions have been hampered by a changing interest rate environment and a general focus towards mature businesses with operating history and favourable financials.” — CEO at Gallantree

The M&A outlook in Australia is proving resilient to the headwinds of global and local economic conditions. Activity won’t be at the boom levels of 2021, but most M&A leaders expect the number of deals they pursue to increase or remain stable over the next 12 months.

While there are clear challenges, most survey respondents are cautiously optimistic across each sector, with appetite for inorganic growth remaining steady. Respondents expect divestures to make a more regular appearance across deals in the next 12 months suggesting businesses are constantly reviewing their portfolios to ensure they are ‘match fit’ for whatever external market conditions might throw at them.

Economic Outlook

There’s been a large shift in the economic factors most affecting M&A in 2023. More than half of this year’s respondents selected interest rate movements as a factor affecting their ability to successfully execute deals, up from only 38% of respondents in 2022. Global growth has slowed significantly despite China reopening its borders, with the risk of a recession in the United States, United Kingdom and Europe remaining elevated. The economic outlook will depend on the outlook for interest rates. Central banks walk a narrow path in many advanced economies, attempting to raise interest rates enough to contain inflationary pressures without slowing the economy too much.

Theme 1 - Organic growth remains imperative

Corporate leaders are continuing to build resilience in their organisations as they emerge from the long tail of the pandemic, the ongoing effects of the war in Ukraine, and current domestic economic variables. With uncertainty likely to continue, leaders need to get their organisations into shape, to the point where they can sustain other shocks and navigate market issues with a good degree of confidence.

Theme 2 - Valuation divergences remain a key challenge

The valuation of assets is once again the biggest obstacle for M&A success. Almost three quarters of respondents say it’s one of their top five M&A challenges in 2023, a slight drop from 80% in 2022. Many deals are stalling due to an insurmountable gap as buyers are increasing their hurdle rates and, in some cases, taking a more conservative approach to valuation, while some vendors have yet to change their price expectations to reflect the current environment.

Theme 3 - Realising the value

The expediting of synergy capture is a key priority for respondents in this year’s survey. This reflects the changing conditions as deals completed in more buoyant markets now need to deliver value, whilst facing headwinds. Delivering the expected synergies are a key element in most transaction business cases, yet 42% of the respondents indicated that this was the most challenging or second most challenging item to execute on. Businesses will need to develop appropriate change management plans and embed a culture of continuous improvement in the organisation, to ensure value continues to be delivered beyond transaction date.

Theme 4 - Facing the financing challenge

Our survey showed 78% of respondents are highly confident they have a strong balance sheet with adequate cash reserves; however, the changing economic cycle has seen the financing of M&A as more challenging, with 22% of respondents identifying the status of debt markets as a challenge to M&A success (8% last year).

Theme 5 - ESG comes of age

There is an evolution taking place around how environmental, social & governance (ESG) is understood in the context of corporate strategy, with companies increasingly leveraging ESG as a key source of value creation and a means to drive commercial growth. As a result, corporate strategies, ESG commitments, and M&A processes — which have traditionally been disconnected — are becoming intertwined across the deal lifecycle as ESG thematics are now shaping deal theses and infiltrating the decision-making space in M&A.

Disclaimer: Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek a second professional opinion for any legal or tax issues raised in your investing affairs. Article sourced from Deloitte.