Strategies for Success in the Evolving M&A Landscape: M&A Insights for Australia & New Zealand

The insights from these seasoned dealmakers underscore the importance of adaptability, innovation, and thorough preparation in navigating the complexities of dealmaking in Australia & New Zealand. By leveraging creative deal structures, conducting rigorous due diligence, understanding macroeconomic and regulatory dynamics, and focusing on resilient sectors, dealmakers can successfully navigate challenges and seize opportunities in this dynamic market.

What are we seeing in the M&A space and what are you expecting to see over the next 12 months or so?
I’m an M&A lawyer – and along with bankers, we’re typically cautiously optimistic. Recent data indicates M&A for the first quarter of 2024 was at a three-year low, but I think your perspective is often coloured by your own experience. Some market segments have been relatively strong.
We’re currently seeing some stability and an uptick in M&A activity globally and locally in pockets. The construction sector has seen an exponential increase in aggregate transaction value. Energy, mining and utilities have also been strong and will continue to be so, as will industrials and chemicals. We’ve also seen very large transactions in the transportation space with Keppel and Ventura.
So there’s begininning to be less uncertainty, which has helped increase confidence in getting deals across the line. I think the valuation gap that everyone talked about for a couple of years, which was a major factor in the lack of activity, is closing across a range of industries. In some cases, it’s probably a function of pent-up demand, because you’ve got sellers that haven’t brought their businesses to market for a couple of years, so they need to either achieve an exit or an injection of capital.
For Private Equity funds, exits have been harder, so there’s been a rise in rollover funds, but you’ve got managers working really hard to maximise asset value. So the businesses that come to market in the next 12 months will be well positioned for sale.

Where do you see the cross-border M&A flow going over the next 12 months – which regions will be the beneficiaries and which may lag behind?
Regarding inbound M&A to Australia, we’re still seeing a lot of activity from clients in Japan and Singapore in real estate transactions and manufacturing.
The United States will still contribute a large amount of our inbound M&A – it accounted for about a third of all public deals involving a foreign bidder in 2023. However, there’ll be a pause there until the outcome of the election.
The really interesting jurisdiction is India. Its economy is poised for significant growth, potentially overtaking Japan as the world’s fourth-largest economy by 2025, according to the IMF. So India’s growth trajectory will probably be ahead of what was expected. While their focus is not really on Australia, it’s inevitable that we will see some increase in investment.
And I think there are the inherent challenges in the regulatory landscape that does impact those foreign investments, coming into Australia. From a Foreign Investment Review Board (FIRB) perspective, it’s taking longer and it’s more expensive. So if buyers want to be in a competitive process, they need to put their FIRB applications in before they can get exclusivity on a deal.
In contrast we’ve seen, in some instances, sellers covering FIRB application costs for bidders to keep them in a process. So managing risk is definitely important. The ACCC are also set to introduce the merger control reforms, which will new a significant impact on M&A processes.
The reforms are going to be farreaching and will affect the effort, time and cost of proceeding with deals in Australia. This will be a significant shift from the current approval process. It will introduce a mandatory regime with low thresholds for notification, bringing many deals into that remit that wouldn’t have been captured in the past. This could include international transactions with limited access to Australia, domestic deals that might not have required FIRB and deals that fall below the ACCC’s voluntary threshold. I think these are all factors that will affect cross-border M&A going forward.

What challenges do you foresee for the Australian M&A markets over this period?
Australia is a relatively small market, so any process that comes to market and presents a really solid opportunity is going to be hotly contested. For example, a deal with a stable cash flow is going to be highly competitive – and beating the competition to good assets will be challenging for bidders. This applies across a range of sectors.
I think increasingly, bidders will stay in their lane or be more discerning and play to their strengths. They’re not likely to stay in a process if they don’t think they have a good chance of winning. At the same time, the average deal timetables are longer than they used to be. Sellers accept that due diligence will be more involved, and buyers will want to have a really good look under the hood before proceeding with a transaction. So from a legal perspective, clients have more appetite for a fulsome approach to legal due diligence.

With all the geopolitical risks, do you expect there to be shift in regulation or in the M&A market and what impact might it have on dealmaking?
We’re certainly experiencing heightened geopolitical risk with the conflicts between Russia and Ukraine, Israel and Palestine, and an increase in tension between the United States and China. It’s generally accepted that this geopolitical uncertainty has a negative impact on M&A.
It’s more pronounced when bidders have foreign segments to their business and are under financial pressure, or where their targets are operating in industries with lower competition. More than 40 per cent of the world’s population is set to elect a new government in 2024, including India, Indonesia, South Africa and the United States. The outcome of these elections could really affect business dynamics, changes in trade policies and international relations. This could disrupt supply chains and affect consumer demand – having a real impact on M&A.
So companies are taking a more holistic approach to assessing these geopolitical risks. They’re more willing to engage foreign counsel when looking at a business with minor operations offshore, which they may not have done in the past to the same extent as they do with larger onshore businesses. Now, we’re definitely seeing that change. For example, following the sanctions on Russia, we’ve seen an increased focus on warranty negotiations, AML warranties and sanctions compliance in transaction documents.