How Oceania C-suites can turn optimism into growth

Australia and New Zealand executives plan bold M&A moves amid a positive economic outlook.

Despite general satisfaction around their performance during the crisis, its impact also compelled almost all businesses (91%) to undertake an urgent and comprehensive strategy and portfolio review. With the insights of these reviews, and the positive economic outlook that is emerging, executives are now keen to move forward to capture new opportunities. While 42% anticipate most growth to be found within Oceania, many are looking offshore, particularly southeast Asia (22%) and India (14%). This is already translating to increased deal activity, which is expected to pick up further in a low interest rate and stable debt environment. Nearly half of respondents (45%) plan to acquire assets in the next 12 months, and 78% plan cross-border transactions.

But an active M&A market is likely to be more complex and competitive. Private equity (PE) investors with plenty of dry powder are ready to capitalize on value creation during this recovery period. Seventy-eight percent of Oceania respondents expect more competition for assets over the next 12 months, with PE being the biggest competitors (65%) and the major acquirer of assets (97%).

Government regulation is also being flagged as a possible hurdle to M&A by 95% of respondents. This is likely due to the Australian government’s enhanced focus and due diligence of international investment in Australian assets. Executives can best navigate potential regulatory barriers by understanding restrictions and ensuring their narrative for investment or market entry is aligned with what governments are trying to achieve.

Digital transformation will be accelerated by M&A

When COVID-19 hit, companies faced an urgent need to figure out new ways of working and interacting with customers. This drove an acceleration of digital innovation in some parts of the business – for example, to enable working from home, secure the supply chain and interact with customers – but initiatives were largely driven by a need to survive rather than exploring growth-focused innovation. In fact, the disruption by the pandemic meant that for about half (49%) of those businesses surveyed, work to develop new innovative products and services was, understandably, paused.

Now, rebounding economic confidence looks set to recharge innovation. Almost all (89%) of those businesses surveyed said they were pushing forward with major digital and business transformation, triggered by COVID-19 (12%), the need to reduce costs (12%) and changing ecosystems (10%).

The focus on shoring up the cost base is an immediate reaction to the dramatic hits to revenue and profit over the past year. But it also signals a growing trend toward a move to more flexible operating models, such as managed services, to free up capital.

The desire to reshape ecosystems has taken on new urgency as businesses prepare to navigate the longer-term impacts of the pandemic and position for success in the future. One of the biggest lessons of COVID-19 was the need for resiliency. The pandemic’s repeated lockdowns splintered value chains, both upstream to suppliers and downstream to customers. As companies investigate how to defend against such disruption in the future, including through new pricing and delivery models and diversified supply chains, joining ecosystems can be an effective strategy.

The growth of ecosystems is expected to drive further specialization, which in turn requires the acquisition of new skills and the divestment of irrelevant assets. Overall, M&A is expected to be an important tool to fuel transformation, with the percentage of companies intending to transact (45%) only slightly down on the 11-year average (47%). For 65% of these companies, M&A will take the form of bolt-on acquisitions which can be a fast way to gain access to the talent, technology and innovation that will help reframe their future.

Building for recovery and a better future

It’s clear that the better-than-expected economic recovery is giving Oceania executives the confidence to make bold moves. Leaders recognize that the pandemic has not lessened the importance of other critical issues such as climate change, which was cited by respondents as the number one risk to growth. As leaders plan for recovery, M&A may offer a fast track to the digital transformation that will be a key enabler to reimagine new solutions that build a stronger recovery and create greater value over the long-term.