Australasian M&A activity remains strong, despite dampened economic outlooks

Activist shareholders are driving local businesses to execute M&A in Australia and New Zealand.

Ten years ago, when we first launched the EY Global Capital Confidence Barometer, acquisition intentions largely tracked the economic cycle. In boom times, M&A ticked up. In downturns, the transactions market dampened.

But it seems M&A activity is uncoupling from the economic cycle.

Despite a clear slowing of economic activity, our 20^th Barometer finds 54% of executives across Australia and New Zealand are expecting to pursue acquisitions in the next 12 months — the second highest level in the last nine years.

The need to respond to the pace of disruption and delivering growth to stakeholders is trumping ongoing geopolitical risks and economists’ expectations of slower economic growth. Local boardrooms are looking to M&A as both a defensive and offensive play, hoping to counter disruptive forces they can barely discern but know are coming.

The increase in appetite to pursue acquisitions is a strong signal that executives have learned from prior soft economic periods. The need to satisfy investors’ demands for above-trend returns, combined with increased disruption, means businesses are continuously looking to acquire assets, capabilities and technology.

As a result, the timeline for identifying and buying assets has become compressed, making active pipeline management a must-have for companies. Right now, 51% of local executives expect pipelines to increase in the next 12 months — a sign of active pipeline management.

While capital remains plentiful, we expect to see boards continue to lock in low interest rates to fund their acquisitive ambitions.

Activist shareholders are reinforcing the transformation drive to reshape portfolios

In the wake of an ever-accelerating pace of disruption, local executives are reviewing their portfolio more frequently than ever to be better positioned to identify capital recycling opportunities. Two-thirds of local executives are now reviewing their portfolios at least quarterly — up from 38% six months ago.

This comes as activist shareholders are demanding action be taken to reshape portfolios and drive value creation. Shareholder scrutiny is forcing local management to assess assets at risk of disruption and consider divesting underperforming assets to seek better returns elsewhere.

As portfolios are reinvented, workforces are also transforming 

However, local executives are slow to take up the gig economy, even as pressure is on to re-skill into new technology. Global and local respondents rank AI, automation and technology as the most critical “re-skilling” priority areas for their company’s employment strategy in the next 12 months. Yet Australian and New Zealand executives are significantly less likely than global peers (14% vs 24%) to meet their upskilling needs by drawing on contractors or freelance staff — and they are twice as likely (23% vs 11%) to hire more full-time staff. This may reflect the relative shallowness and low mobility of the labor market in Oceania compared with many OECD countries.