State of Play in M&A

There is no disputing the fact that in Q1 2010 we are still in a low growth environment. A new Ernst & Young report reveals that 49% of Australian companies believe this may continue for another 12 or 24 months. This is prompting renewed interest in acquisitions as a means to secure market share, as businesses see little growth potential in the recovering markets.

Highlights of the report include:

• 29% of Australian companies are likely or highly likely to acquire other companies in the next six months.
• 80% of companies expect consolidation in their industries over the next 12 months
• 36% rate the M&A outlook as very favourable
• 41% would like to use potential opportunities for inorganic groth over the next six months
• 3% of companies are presently focused on survival
• 46% of companies are ‘very well positioned’ to make a quick acquisition within 30 days notice

It would appear that in Q1 2010 Australian M&A activity is back on the agenda. Obviously the less well capitalised companies will become targets. In a low growth environment companies using acquisitions to get ahead will perform better than those relying only on a market return.

I am hoping that executive boards will place more emphasis on effective integration of company brands pre- and post-acquisition and will allocate funds accordingly to seek external help and reduce the risk of failure – which remains at around 20% for all mergers. The big distractions of 2008/09 did little to improve investment in M&A branding.

So which sectors will experience the most M&A activity moving forward? According to the latest semi-annual survey of 921 investment professsonals by the Association for Corporate Growth (www.acg.org) and Thomson Reuters...

• 23% of respondents named the healthcare/life life sciences as the most active area for merger activity in Q1-2 2010. 
• closely following this is manufacturing and distribution - 18%, and financial services - 14%. 

It also revealed that...

• 94% believe strategic investments will accelerate in the first half of 2010
• 54% are actively pursuing distressed companies
• 48% expect more than one in four deals to be with distressed companies in the first half of 2010
• 34% identified manufacturing and distribution as the best opportunity for distressed investing
• in November 2009 there was a drop of 33% in announced deals compared to November 2008
• 87% describe the Q4 2009 M&A environment as fair or poor
• 82% expect an increase in merger activity over the next six months
• 80% expect to pay no more than five times EBITDA for acquisitions over the next six months
• 37% identify the main M&A obstacle as the gap between the price at which a company is willing to sell and the price a buyer is willing to pay

Valuations will not return in any great hurry to what they were pre-downturn. Buyers realise this and are patiently awaiting sellers to come to grips with the new valuation structure and be more realistic.

Perhaps only then will M&A activity start to surge?



Tony Heywood is a Sydney-based brand guidance counsellor, founder of Heywood Innovation in Sydney Australia with affiliates in Melbourne, Gold Coast, London, Singapore and Mumbai.