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Tighter economic conditions have forced businesses to adopt a more cautious approach, resulting in a significant decline in M&A activity in the past 12 months, the latest HLB Mann Judd Australian M&A report reveals.
The report also says the outlook for M&As remains subdued with global economic and geopolitical uncertainties weighing on activity.
The HLB Mann Judd Australian M&A Deal Summary FY2024 report analyses Australia’s M&A market, analysing deal trends, valuations, and industry dynamics.
While low interest rates and government stimulus fuelled Australia's M&A market during the pandemic, this has given way to more subdued activity in 2022 and 2023, a trend that has continued in 2024.
Amidst tighter financial conditions, including a higher cost of capital, the total number of M&A deals fell 21 per cent to 945 M&A deals being completed in FY2024, a fall from 1,190 and 1,487 in the two preceding financial years, the report reveals.
“The reduced number of deals across all quarters in FY2024 compared to FY2023 and FY2022 indicates that investors are continuing to take a cautious approach when meeting vendor pricing expectations in light of high interest rates, increased inflation, and ongoing geopolitical tensions,” said Nicholas Guest, assurance and advisory partner at HLB Mann Judd Sydney.
“As a result, some transactions continue to be put on hold as dealmakers prioritise extending their operating cash runway, delaying deals until market conditions improve, and pursuing those transactions that offer clear value add.
“Overall, there's a growing appetite for deals, but the market is still navigating economic uncertainties and geopolitical risk.
“However, we are noting a large increase in the number of institutional investors, particularly from the superannuation sector, that are actively seeking investment opportunities across the Australian market, with environmentally friendly, green sectors being front of mind for many,” he says.
According to Mr Guest, private investors are exercising caution in evaluating M&A opportunities within the Australian SME segment until there is an improvement in the current economic and geopolitical environment.
“We anticipate private investors will be prioritising investments in ventures with strong business fundamentals, such as stable earnings and clear value propositions to optimise their portfolios amid the persistent high interest rates and inflationary pressures,” Mr Guest says.
However, there was some good news in the report. The year ended 30 June 2024 saw an increase in the number of deals exceeding $1 billion, with 26 deals compared to nine deals in the previous year and 15 deals in FY2022.
The average transaction value increased to $121 million in FY2024, rising from $89 million in FY2023, equivalent to the average transaction size of $121 million in FY2022. The increase in the average deal size was driven by a higher number of deals exceeding $1 billion in FY2024 (26 deals) than in FY2023 (9 deals) and FY2022 (15 deals).
“This indicates that large businesses with available finance are seizing the opportunity to pursue mergers and acquisitions that were previously viewed to be overpriced and out of reach,” says Mr Guest.
“Additionally, the trend may reflect dealmakers’ prioritising deals with clear strategic advantages and long-term potential over short-term investments. However, the increased cost of debt and equity, coupled with stricter investment and lending criteria from financiers and equity investors respectively, has led many to adopt a more cautious approach when evaluating M&A opportunities, resulting in a wider bid-ask spread.”
Q2 FY2024 maintained a consistent number of deals with Q1 FY2024, likely due to the push to complete transactions before the end of the 2024 calendar year, a trend that had been observed in previous years.
The overall average multiple achieved for completed deals decreased from 10.3x in FY2023 to 9.3x in FY2024. The consumer discretionary, consumer staples, information technology and industrials industries have all seen a decrease in the average transaction valuation multiple in FY2024 compared to FY2023. In contrast, the materials industry average transaction valuation multiple increased in FY2024 compared to FY2023.
According to Mr Guest, the Australian government’s commitment to achieving net-zero emissions by 2050 could also boost M&A activity within energy transition infrastructures, including the energy storage and distribution sectors, particularly among government-backed fund managers.
“This trend was evident in FY2023, when the Clean Energy Finance Corporation, a government-backed fund, invested in 50 new and follow-on transactions, committing a total of $1.9 billion to ventures aimed at reducing emissions across the Australian economy,” he said.
The M&A report analyses annual deal volume, pricing and industries, as well as providing an overview of deal activity in the SME segment, based on data sourced from S&P Capital IQ and publicly available records.
