The outlook for merger and acquisition (M&A) activity appears to be robust, despite a challenging economic environment and geopolitical uncertainty.
Deloitte's survey of corporates found that 83 percent of respondents expected the number of deals to increase or remain stable in the year ahead. Photo: 123RF
A survey by business consultancy Deloitte of corporates on both sides of the Tasman found that 83 percent of respondents expected the number of deals to increase or remain stable in the year ahead, compared with 95 percent a year ago.
"While there were many similar viewpoints across both geographies, we also saw some district trans-Tasman differences with New Zealand respondents having a slightly less optimistic view of the economic outlook and felt that uncertain market conditions will likely impact their future M&A activity," Deloitte NZ financial advisory services leader Richard Dorset said.
He said one of the key reasons why corporates remained optimistic in light of high inflation and rising interest rates was that they had strong balance sheets.
"They're well capitalised, a number of corporates have got the support of their shareholders to provide equity to help fund acquisitions... the ability to access debt capital markets with existing facility headroom and the like."
"That just provides them with the confidence that they will be able to fund transactions if they choose to look at them."
Despite having the funding to execute deals, businesses reported that some assets were overvalued in the current market or there was a lack of available targets altogether.
"Over the last two years in particular, valuations for businesses have been increasing, we have seen that reflected in the valuation observed in equity capital markets," Dorset said.
"Whilst equity capital market valuations have come off over the course of 2022, vendors and owners off businesses' valuation expectations have held where they were, so you're seeing this increasing gap emerging between the price at which purchasers are prepared to acquire and the price at which a vendor is prepared to sell."
In some cases, this could result in fewer transactions being completed, Dorset said, but earn-outs and deferred consideration mechanisms could be possible ways to help get deals over the line.
The lack of available acquisition targets in some sectors was pushing some local corporates to pursue alliances or joint venture arrangements instead of a traditional acquisition or merger, Dorset said.
"If you're open minded to those sorts of arrangements, it really just opens the playing field to other means by which companies can access growth," Dorset said.
He said consumer businesses did this very well, with the likes of TipTop collaborating with Whittakers chocolate to introduce a new ice cream range to access pockets of consumer demand they may not have been able to individually.
Looking ahead, Dorset said despite some of the headwinds companies face, there were many reasons to remain optimistic that corporate M&A activity would remain strong over the next 12 months.