April 2013

Transactions forecast to rise

Australasian Capital Confidence Barometer

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What is your expectation for M&A/deal volumes in the next 12 months?


Questions to ask yourself

Do you regularly analyse your capital allocation strategy, ensuring that it is well positioned to provide sustainable growth that meets your business objectives over the longer term?
If experiencing funding challenges, have you considered the full range of financing possibilities to appropriately position your organisation for growth?
Are you missing out on valuable M&A opportunities that could provide a competitive advantage and foothold over rivals?
Do you lack the experience and skill to identify and execute transactions that will provide you with valuable synergies and an enhanced market position?
Have you considered capital markets as a viable option to fund growth in the low interest rate climate?
Are you looking at opportunities abroad? Have you considered investment in stronger growth environments as a way to meet longer term objectives?
Is realising price expectations your biggest hurdle to divestment? Are you considering the full range of potential buyers? Can you articulate a compelling value and growth story for each buyer, including synergies?

M&A sentiment on the rise, deal volumes to follow

Australasian respondents believe the M&A conditions are more favourable than global respondents, having slightly increased confidence in the number of deals (54% vs 50%) and in the quality of opportunities (46% vs 39%).

Australasian organisations also believe the likelihood of closing deals has improved, with 38% saying they were confident in getting transactions across the line, up from 25% last October.

The perception around broader M&A deal volumes is significantly more promising than actual acquisitions plans. 77% of Australasian organisations believe that transaction activity will improve at a global level and 70% believe that local deal volumes will be higher.

What is your expectation for M&A/deal volumes in the next 12 months?

Transactions lag

However, there appears to be a lag between increasing confidence and actually initiating transactions. Despite acknowledging improving transaction conditions, acquisition intention remains modest, with 24% and 29% of Australasian and global organisations respectively saying they will acquire in the next 12 months, up from 20% and 25% in October.

This transaction lag is understandable as actual activity typically follows improving sentiment. It may also be a result of deal lead times being pushed out significantly since the GFC. Organisations are now taking longer in their due diligence process, weighing risks with associated value, buying time in an attempt to ensure market conditions will remain stable and critical deal drivers remain relevant.

77%   of Australasian organisations believe that transaction activity will improve at a global level

Divestments activity rises

Appetite for divestments has increased this Barometer with 18% saying they are likely to sell assets in the next 12 months. Last Barometer the primary driver of divestment activity was enhancing shareholder value. This has dropped from 39% in October to 20% today, and has been replaced with organisations wanting to sharpen their focus and concentrate on core assets.

This is another sign that there has been a shift in sentiment. Organisations are now looking at more sustainable strategies that will pay off over time, rather than taking internal measures to meet short term targets.

38%   of Australasian respondents say the likelihood of closing deals has improved

Will the IPO window open?

Not surprisingly, those wanting to divest are looking at straight forward transactions, seeking likely buyers for their individual business units. However, IPOs are also popular with 26% saying they would consider floating.

Australia and New Zealand have both witnessed strengthening equity markets for the better part of the last nine months, and more businesses are now looking at a potential capital market activities later in 2013. Given the low interest rate climate, there is an appetite out there from investors for good businesses with solid fundamentals.

A lot of private businesses have been waiting on the sidelines for some time now. For businesses that have a positive outlook, are generating good cash flow and have low gearing, now may be the time to being preparing for a potential IPO in the second half of 2013.

Questions to ask yourself