M&A activity in Australia in 2017 was extremely buoyant, climbing 55% on 2016 compared to global M&A growth of just 1%. Of the 1,127 deals 77% (868) were in the mid-market (described by Mergermarket as $10m-250m) and there were 135 deals done below $10m, presumably ignoring the micro deals which normally change hands via a broker and rarely feature in any sort of reporting.
Our performance at Oasis M&A in Australia to a large extent mirrored the broader market activity with half our deals done above $10M but below $250M and half below $10M. One of the key drivers of activity in 2017, which is expected to continue in 2018, is the cross-border deals which are predominantly inbound. We have seen significant increases in activity from overseas buyers motivated by Australian assets which meet their acquisition criteria.
Again, our recent experience mirrors this trend especially where the overseas entity has made some sort of commitment to Australia already. Four of our last five deals involved foreign acquirers. Interestingly two of these were with assets valued at less than AUD $10m. Separately, we have three current deals in various stages of due diligence, two of which involve listed ASX acquirers. Our experience is strongly suggesting that the size of the target is often secondary or not important to the acquirer – the conversations are increasingly focusing on ‘the fit’ not size.
Two of our last four deals involved US and two involved European acquirers. Mergermarkets’ latest research suggests the top four drivers are: growing foreign investment, improved ASX conditions (after the last month perhaps stable rather than stellar!), all time low interest rates (for how long?) and in spite of the medias best attempts to depress us with bad news, business and consumer confidence is at a four year high in Australia.
Pitcher Partners believes activity from foreign private equity firms in the US and Europe increased in 2017 and this is set to continue in 2018. Now don’t get me started on the merits of vendor’s entertaining approaches from Private Equity (PE) firms (that’s a blog all of its own – stay tuned!). What we can say is that PE activity is up significantly.
PE firms are a bit like buses, you don’t see one for ages then three come along at once! We have had a veritable queue of PE firms (domestic and foreign) at our office seeking opportunities. What we can say is they are now back in the game and competing with motivated trade buyers on valuations, and in some cases winning! This is the first time we have seen this since before the GFC. After the GFC most PE firms effectively took their bat and ball and went home.
The Deal Killers
The top challenges to getting deals done are: access to financing, valuation gaps between buyer and seller, volatility on equity markets, followed by difficulties in due diligence.
Our experience is that access to financing is a virtual non-issue for us. We predominantly represent the shareholders of private companies wishing to sell (partially or completely) to larger strategically motivated acquires who we identify through research and an extensive qualification process – if after all that they have not got the money, we simply haven’t done our job!
The valuation gap is certainly a factor as valuations in the sub $100M enterprise value space are notoriously difficult to pick with significant variations. However, our experience suggests that strategically motivated buyers will move significantly to close any gap if there is real value to them through ownership of the asset. Opportunistic buyers rarely come to the party, so it pays to ‘go wide’ provided you have a plan not to divulge identity cheaply (click here to read more on how we do this). At the end of the day people do deals with people, and if there is goodwill on both sides we can normally find a way to bridge any legitimate gap on both price and terms.
We are not sure what Mergermarket means by volatility on equity markets. However if it means a GFC, then yes – this is a very big deal killer. A credit squeeze sends many buyers into lock down mode (not Warren Buffet and the small canny bunch of like-minded and cashed-up value investors). If what they mean is the recent pull-back during February 2018, then no – we don’t see any issues currently. Additionally, the individual sector dynamics can play into deal-doing very significantly and will often buck the broader trend or cycle both positively and negatively. We have seen this in mining services and retail in recent years although both sectors are beginning to look more attractive again to strategic trade buyers.
Problems in due diligence – this is a tricky one. When larger firms acquire smaller firms, they can forget to adjust their expectations with respect to the quality of the available information. We will often flag issues early and well before due diligence regarding the quality of the financial and administrative information available. Smaller companies will tend to under invest in finance and admin, which we think is a mistake. We are keen to see this function right sized and capable of producing accurate and timely management accounts monthly at the very least.
Trade buyers especially can look past issues when evaluating assets they think they know well. Companies in allied verticals get more noticeably spooked by poor information, so be warned. If you want to talk about what a right-sized accounts and finance function looks like, by all means speak to us. We will input on this matter at no charge, as we are keen to see good functionality in this area, which is clearly in the current shareholders interests never mind a future buyer!
What about Timing?
The timing of the market when selling a business is a bit like picking the weather. It’s not easy and efforts in this regard can be futile. The three key elements or variables when selling your company are: the business performance and where it sits in the broader market sector cycle, your own personal circumstances and plans, and the market for potential buyers. We have seen mistakes by business owners who have over emphasized a particular business performance milestone before selling.
If the most appropriate acquirer buys another business to meet its objectives before you elect to proactively look at your options, then the market place and price potential for your business can look very different. On balance we would say, and given it’s not a five-minute job, it’s better to go early than delay provided you have a plan to avoid any unnecessary flagging of your intentions (click here read more).
Is now a good time to sell? On balance we think it is. If you are seeking an exit or feel that now is the time to deal with succession, then for the reasons referred to above we think this year is a favorable time to exit, however a well formulated exit plan and the right approach should be able to handle most market conditions.
If you are starting to consider a strategic exit and would like to understand what the process entails, relevant sector information, and deal flow please contact us today to speak to me or one of the team.
(1) Dealmakers: Mid-market M&A in Australia 2018, Pitcher Partners and Mergermarket