In recent years, merger activity in Australia has been characterised by slow-moving and low-volume deals. Businesses have been reluctant to partake in risky transactions and approaching safer deals with caution due in large part to unstable cash rates and high inflation.

In particular:

• Relatively high interest rates have created uncertainty in valuations, leading to widespread reluctance to begin and complete deals.
• Interest rates are of course driven by inflation. Corporate Australia and policy makers remain concerned of the continuing inflationary risk over the next 12 months.
• This has led to a substantial fall M&A activity across most sectors in 2024, compared to previous periods.
• Those deals which have completed, have generally taken significantly longer to do so than in prior years.
• The exception to this trend can be found in markets boosted by artificial intelligence developments and international purchasers – demand and investors’ interests in acquiring new products in the technological and material sectors have surmounted inflation risks.

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Interest rates – where to from here?

The times are, however, a-changing.

Even interest rates cannot defy gravity forever. It seems increasingly likely that rates will come back either later this year or in 2025, although exact timing is still unclear.

For example, in its May minutes, the Reserve Bank of Australia elected to hold the cash rate steady at 4.35 per cent. The central bank indicated there is some evidence that inflation had declined towards the target of 2 to 3 per cent.

However, there is a growing consensus that inflation is proving more difficult to control than first thought, meaning any rate cuts may be postponed until 2025.

Looking ahead

Barring any global economic shocks, we think there is likely to be a marked uptick in transactions over the remainder of 2024 and beyond. We are already seeing early evidence of this. Moribund sale processes are resuming, and new deals are kicking off, including a jump in inbound M&A interest from offshore buyers. We expect this interest will flow through to increased deal activity over time, in the usual course.

This brighter outlook is supported by market surveys. Close on half of Australian businesses have plans to undertake M&A in the next three years, with many of these intending to execute several transactions.

As above, we believe the technology sector is one which is likely to continue as a notable driver of M&A activity and business value soon. However, as monetary policy eases, we think transactional activity will rise broadly and probably, rapidly, across most or all sectors.

What to do

Experience says that once the music starts up, things move fast, pretty quickly. Having regard to this, what then can Australian businesses do to get ahead of the game?

We suggest, many businesses often need a considerable amount of prework to be “sale-ready”. The process of making a business sale-ready is sometimes referred to as vendor due diligence (VDD), “pre-sale restructure” or the like.

This is important, as buyers will naturally seek out the more attractive targets first, which is to say a business that is easy to understand and easy to transact.

In a VDD process, the business owner(s) takes a critical look at their business to see if it is capable of being sold. If not, what needs to be fixed to make it saleable. There are many aspects to VDD, including financial (e.g. transparent reporting), operational, regulatory, and legal. For example:

• Is the corporate structure simple and readily understandable to buyers?
• Does the business in fact own all the assets it needs to carry on operations? It is remarkable how often it turns out key assets are held outside the business.
• What third-party consents may be required to sell the business? For example, key suppliers, landlords, financiers, others? These consents can take a surprising amount of time to obtain.
• Are there any lingering disputes or other problems that need to be resolved?
• For closely held businesses – are there related-party loans and other transactions that need to be cleaned up? Also, what are the founders’ post-transaction plans? Will they stay on as consultants to the new owners for a period or not.

We think the market is beginning to turn, and this trend is likely to accelerate over the second half of 2024 and into 2025. Business owners would be wise to consider these matters and whether the business is “sale-ready” in anticipation of this.

James Halliday is a corporate and M&A principal, and Liann Chan is a paralegal, at Keypoint Law.