Dealmakers mid year report 2024 by Pitcher Partners

Dealmakers

Mid-market M&A in Australia 2024 Mid-year report

Foreword

Australian M&A increasingly defined by caution, strategic alignment and clear emphasis on long-term value creation in 1H24.

Earlier this year, our annual Dealmakers report found that 70% of respondents were planning to increase their M&A activities in Australia in 2024. Another 85% said that M&A conditions would improve, paving the way for greater deal volumes.

Despite this initial enthusiasm, the first half of 2024 has seen dealmakers proceed with caution. Australian M&A deal totals dipped 9% from 459 transactions in 1H23 to 416 in 1H24. Deal values rose a nominal 1% in that same period to hit approximately AU$52.8bn. While somewhat lacklustre compared to past years, this suggests that dealmakers are recalibrating strategies while monitoring interest rates, inflation and broader economic conditions rather than staging a broader retreat from M&A altogether.

One of the main factors tempering M&A activity is the current macroeconomic environment, underpinned by interest rate unpredictability and persistent inflation, as well as a general lack of business confidence – something highlighted in our first Business Radar report of 2024. When surveyed for Business Radar, business leaders averaged a rating of 7.84 out of 10 when reporting their confidence in future business success, down from an average of 8.1 across 2023. These elements have reintroduced a degree of concern and uncertainty in the market, complicating investment decisions for dealmakers, and ultimately delaying deals.

In response to these conditions, dealmakers are opting for more risk-averse strategies. This caution is increasingly evident as buyers demand more thorough due diligence processes, which can often slow deals. This shift reflects a significant change from the quicker, sometimes less scrutinised dealmaking that drove the more buoyant M&A market during the pandemic.

There has been a notable shift towards more strategic investments. The period of rampant M&A fuelled by the unique conditions of the pandemic has given way to more deliberate dealmaking. Today, dealmakers are prioritising investments that promise clear strategic benefits, aligning closely with long-term objectives rather than short-term gains. Likewise, the criteria for pursuing M&A has become more stringent, with a stronger emphasis on return on investment. These changes indicate a shift in the market where quality trumps quantity, and every investment must be sufficiently compelling to justify the associated risks and costs. These conditions also result in some business owners experiencing a lack of appetite for their offering –emphasising the importance of having a business that is valued by both customers and employees.

While Australia certainly offers opportunities that fit these evolving criteria and investment goals, the mid-market (deals valued between AU$10m and AU$250m) represents a particularly significant area of interest. Mid-market deals remain an active part of the market. While mid-market M&A may have declined in the first half of 2024, it still offers a reservoir of strategic potential and value that comes with a lower risk profile, which can be attractive to risk-averse dealmakers.

The outlook for the rest of 2024 and beyond shows promise. While high interest rates and inflation will continue to impose constraints, they will also compel dealmakers to adapt and refine their strategies. And it is worth noting that with the flurry of global political activity, if an early election is called by the Prime Minister later this year it may cause dealmaking to slow. But even with further cooling, the Australian M&A market will remain dynamic and a source of positive returns for dealmakers ready to leap into action.

Dealmakers are prioritising investments that promise clear strategic benefits, aligning closely with long-term objectives rather than short-term gains.

Michael Sonego Pitcher Partners, Melbourne Partner

Australian mid-market M&A

Mid-market remains an active area for investment, offering both resilience and potential growth amid broader market challenges.

Australian mid-market M&A contracted in 1H24, with deal value dropping approximately 16% and deal volume declining 18% from 1H23.

Despite this downturn, mid-market businesses continue to present a significant source of value. These businesses are often more attractive than their larger counterparts due to their more manageable scale and comparatively lower investment requirement. This makes mid-market acquisitions more appealing to risk-averse dealmakers during times of economic uncertainty or periods of market volatility. Why? Because they require less capital, are easier to integrate and are perceived as lower-risk investments with potentially high returns and significant synergy opportunities with multiple (valuation) arbitrage.

Moreover, middle-market businesses are often more agile than larger enterprises. This agility stems from their ability to adapt quickly to changing market conditions, implement new technologies and pivot business strategies. This flexibility is a critical advantage in the rapidly evolving economic environment of 2024.

Australian mid-market M&A

Australian M&A: Number of deals by size

Mid-market acquisitions: the unique value proposition

• more manageable scale

• require less capital

• easier to integrate

• perceived as lower-risk investments with potentially high returns

• synergy opportunities with multiple (valuation) arbitrage.

Australian M&A: 1H24 snapshot

Deal volume disappoints, but M&A value total starts to stabilise thanks to prevailing tempered enthusiasm among dealmakers.

Australian M&A deal volume dropped 9% in 1H24 from 1H23, but deal value rose 1% in that same period to reach AU$52.85bn. This value total follows a broader trend, where values appear to be settling into a sustainable overall trajectory –and the 1H24 value total was higher than those recorded before the pandemic. The ongoing contraction in overall deals does not necessarily indicate a lack of opportunities. In fact, the current environment could be viewed as conducive to strategic M&A. With valuations adjusting to more realistic levels, assets that were previously overpriced are now becoming accessible at more attractive rates. This is particularly appealing to private equity firms and strategic investors with the patience and capital to invest during a market downturn. This is largely consistent with global deal activity, which saw fewer deals (down 13%) but higher values (up 23%).

Australia M&A

1H24 deal value (approx. AU$52.85bn) rose from 1H23 (approx. AU$52.38bn)

Global M&A

Global M&A has shown resilience and strategic adaptability despite rising economic and geopolitical challenges.

Global deal value posted a positive first half in 2024, rising 23% from 1H23 to hit US$2.5tn. Conversely, deal volume dropped 13% in that same timeframe, part of a downtrend starting in early 2021.

Global mid-market M&A has likewise dropped, with deal volumes in 1H24 down 11% and values down 5% from 1H23.

Instability in global M&A markets can be attributed to a range of macroeconomic and geopolitical factors. Rising interest rates in major economies, such as the US and EU, have led to tighter credit conditions, which in turn are making debt financing more expensive.

Likewise, geopolitical tensions, particularly those involving major economies, have had a dual impact on M&A activities. On one hand, these tensions have led to increased regulatory scrutiny and protectionism, especially in tech, which has impacted cross-border M&A. On the other hand, such tensions have also driven strategic divestitures and relocations of supply chains, creating new M&A opportunities, particularly in regions perceived as geopolitically stable.

Despite these challenges, M&A remains a crucial tool as companies and private buyers focus on strategic deals to drive growth, unlock aligned partnerships and build scale. With many major economies holding elections throughout 2024, it’s unlikely we will see a significant swing in activity until the new year.

Australian inbound M&A

Offshore investor focus

Inbound M&A continues to play a pivotal role in shaping Australian dealmaking.

Offshore buyers completed AU$30.2bn in deals in 1H24, the second highest half-year total over the past five years. Inbound deals were likewise robust, declining 4% to 162 deals in 1H24 compared to 169 in 1H23, although accounting for 39% of all M&A in the Australian market.

However, inbound mid-market M&A saw sharp declines when comparing half years. 1H24 deal values were down by almost half (46%), dropping to AU$2bn (from AU$3.8bn in 1H23). Volumes were down 44%, with a total of 28 inbound mid-market deals compared to 50 in 1H23.

Foreign investors, particularly from the US and Asia, continue to show an interest in Australian mid-market companies. This interest is driven by the stable regulatory environment, clear legal frameworks and strategic positioning of Australia as a gateway to the APAC region and increasing their geographical footprint and operational capability.

A period for bumper inbound deals

The top 10 inbound deals were each over $1bn with French Compagnie de Saint-Gobain’s SA 4.4$bn acquisition of CSR taking out the top spot.

Australian inbound mid-market M&A

Australian inbound mid-market M&A: Buyer groups (deal value AU$m)

Sector watch

Sustainability, ESG and digital transformation continue to be key drivers of overall and mid-market M&A.

Australia’s energy, mining and utilities (EMU) industry accounted for 21% of deal value in the broader and mid-market space in 1H24, with investments being driven by sustainability and ESG considerations. Renewable energy has become a focal point for investments amid growing environmental concerns and government targets for reducing greenhouse gas emissions. The transition toward a low-carbon economy has not only spurred domestic investments but has also attracted foreign companies and funds looking to capitalise on Australia’s rich resources and supportive regulatory framework.

The tech sector has also seen a surge in M&A, primarily driven by the acceleration of digital transformation across industries. Australian businesses are increasingly investing in tech firms to integrate advanced technologies such as AI, big data analytics and cloud computing into their operations. The global demand for cybersecurity solutions has also propelled investment in firms that specialise in security software and services.

Private credit deals in the financial services space, like HMC’s acquisition of Payton and Regals’ acquisition of Merricks may also be an indication of things to come. The growth in alternative asset managers has been driven primarily by a tightening of traditional bank lending standards and ongoing demand for alternative financing solutions. The landscape is ripe for consolidation as large players may look to acquire niche firms to broaden their asset bases and enhance their offerings.

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