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Mid-market M&A activity set to stall?
It is likely that, for at least another year, the mergers and acquisitions sector will be slow, says one partner.
Jerome Doraisamy
“Right now, with rising inflation and associated economic uncertainty, the consistent theme is parties are watching from the sidelines to see what’s going to happen,” said Bartier Perry partner and head of corporate and commercial Michael Cossetto.
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“We’re not expecting that to change or for mid-market M&A activity pick-up in the second half of next year.”
The comments offer a contrast to earlier optimism about the financial year 2023 from Australia’s legal profession, including reports of M&A activity in Australia being “primed for strength”, strong momentum from last year continuing, and surges in private equity deals.
However, since that time, discourse surrounding a potential recession has increased, with BigLaw firms and SME law firms being advised to prepare (here, here and here). And whilst legal salaries will, perhaps, not be impacted by a recession, there will certainly be an impact upon the recruitment market (here and here).
According to Mr Cossetto, the slowdown in the mid-market mergers and acquisitions sector will continue until the second half of 2023.
“If central bankers get inflation under control quicker than expected, that time frame could change, but equally, it could be even longer before we see a return to the levels of M&A activity we’ve seen in recent years,” he warned.
Australia’s mid-market M&A sector accounts for deals valued between $10 million and $250 million and makes up a third of all overall transactions annually, he explained.
In the first half of 2022, Mr Cossetto went on, it experienced similar declines to the broader M&A market, with deal value down 42 per cent and volume down 28 per cent on the previous corresponding period.
However, despite this drop, he said that activity would continue in some sectors, and opportunities would remain.
“If you look at areas such as gaming, some Australian companies were recently bought at multiples of 20 to 30 times earnings, which is pretty remarkable,” Mr Cossetto remarked.
“So, there will be specific sectors that perform strongly. Likewise, buyers will be eyeing good businesses that have not been managed as well as they could have been and are now struggling in a tougher economic environment.
“Finally, given Australia’s economy and political environment is relatively stable compared to many international peers, there will continue to be inbound interest from foreign investors.”
Businesses looking to be acquired or merged needed to take a pause in M&A activity to position themselves for when sentiment begins to shift.
“Now is the time to be patient,” Mr Cossetto suggested.
“If you are a buyer, we expect opportunities will reveal themselves as the economic tide runs out.
“If you are a seller, you should get your house in order and make it [as] attractive as possible to a potential buyer. Doing that now will pay real dividends in the future.”
