Australia's influx of merger and acquisition (M&A) activity in 2017 has set a good foundation for the year ahead, as business confidence remains high, new research suggests.
According to new research M&A activity more than doubled last year (up 55 per cent from 2016), with the mid-market accounting for more than 77 per cent of total deals and the momentum is expected to continue well into 2018.
Given that Australia racked up over $4.2 billion in mergers and acquisitions among technology companies in 2017, the forecast for this year could mean a substantial increase in tech-related M&A activity locally.
Among the big tech deals last year was Telstra's acquisition of managed services provider VMtech in December and ASG Group's $124 million purchase of SMS Management and Technology.
The latest M&A findings are part of a research report conducted by accounting and business advisory firm, Pitcher Partners titled Dealmakers: Mid-market M&A in Australia 2018.
The research involved about 60 per cent of Australian respondents, while 30 per cent were foreign corporations, covering a range of market sectors including industrial (25 per cent); technology and telecommunications (23 per cent) and energy and mining (20 per cent).
The report classifies mid-market M&A activity as deals valued between $10 million and $250 million.
Michael Sonego, who is a partner at Pitcher Partners, said the increase in deal activity in 2017 laid a great foundation for 2018, which is expected to witness modest increases in deal volumes driven by confidence within the Australian business sector.
“ASX [Australian Securities Exchange] trading is at a 10 year high and listed companies are required to continue to grow their earnings, which can’t always be achieved organically,” he said.
About 70 per cent of respondents indicated inorganic growth will be the focus on future M&A activity, with about 85 per cent expecting to see private equity deals rise in the next 12 months.
“Throughout 2017, activity from foreign private equity firms in the US and Europe increased in Australia. Political issues and pricing in their ‘home’ markets have prompted the move offshore,” Sonego said.
“We’ve seen Australia as a beneficiary of this trend, given our political stability, quality of business, strong labour skills and more realistic pricing.”
Divesting non-core assets or business lines were an impetus to sell with 55 per cent of respondents expecting it to be the top mid-market sell-side deal driver in the next 12 months. In 2017, 28 per cent of mid-market Australian deals were divestitures according to the research.
“Increasingly, we’re seeing companies review their strategic direction and consider under-performing or non-core assets with a view to exiting them and re-directing both the capital and management time into existing businesses or new opportunities,” he said.
The research also pointed out that there will be an increase in foreign in-bound M&A, with Sonego expecting to see inbound investment from markets such as North America and Asia (mainly Japan and China).
In getting the M&A deal across the line, about one in four respondents said the deal took longer than expected, with about 25 per cent pointing out flaws in the due diligence process as a cause for delay.
“While the cost of due diligence can be high, it is not as significant as getting it wrong. Understanding the business and risks is crucial to being able to structure a deal and mitigate deal risks,” he warned.
Gaining access to capital or financing, the valuation gap between the buyer and seller as well as the volatility of equity markets were some of the top challenges that dealmakers will face in the year ahead, according to the research.
In 2017, M&A activity as a whole was worth about $120 billion. The tech sector saw Telstra buy into GPS and telematics fleet management provider, MTData, in addition to VMtech.
Equinix paid $1.03 billion for Australian data centre operator, Metronode, and its 10 datacentres across the country.
Oracle’s $1.56 billion purchase of Melbourne-based cloud collaboration platform provider, Aconex, marked another significant deal for the tech sector.
Deloitte also went on an acquisition spree buying Nesoi, Well Placed Cactus, JKVine and Strut Digital.