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M&A Forecast: Some Light Cloud, Sunny Tomorrow

I’m sure everyone has felt it – that gentle squeeze on our purses and wallets. Whether it is at the supermarket or the petrol pump, the café or the corner store, inflation seems to be hitting our hip-pocket nerve once more.

With rising inflation comes the bane of all borrowers – rising interest rates. Over the past two months, the RBA has increased the cash rate from 0.10% to 0.85% – the first increase since 2010 and the fastest month-on-month increase in more than two decades.

This sharp rise in costs affects us not only at home, but also in business.

M&A Market Uncertainty Starting to Bite

M&A had been on a tear over the past year and a half. Once everyone got a handle the market impacts of COVID, the smart money started looking to take advantage of the situation. With record low interest rates, buyers started to cash up and go on the hunt for assets that would yield value on the other side of the pandemic. However, this tidal wave of activity could only last for so long.

Inflation and interest rate increases have now started to hit the M&A markets. Uncertainty has started to build around the impact that higher debt costs will have, what effect rate rises will have on asset valuations, and the second-tier effects of supply chain issues and increasing wage costs. When market uncertainty starts to take hold, deals slow down or even stall.

What Have We Been Seeing at Oasis Partners?

Strategic acquirers are not yet challenging valuations, however they are talking about risk and seeking deal structures that help mitigate any decline in near term performance. We are not seeing deals falling over due to the macro-economic environment, far from it. Good businesses with enduring futures remain in demand to both strategic acquirers and correctly matched PE firms seeking to put money to work.

Why We Think Deals Will Continue to Get Done

Our experiences through many peaks and troughs since 1984 suggest that deals will continue to get done despite current volatility. Acquirers at this stage remain cashed up and need to put their money to work. Business owners still want and need to sell. Old father time keeps marching on and the baby boomers, myself included, need to think about succession. Debt is still available (albeit at a higher cost), unlike during the GFC. Deal urgency may decrease – however both sides realise that where the macro picture does not affect an individual assets performance then those counter cyclical businesses become in high demand.

Secondly, many other businesses affected by supply side challenges and other potentially short-term issues are already moving through that volatility and have adjusted through a reset. Smart trade buyers rarely see this kind of volatility as a deal breaker.

We anticipate that the volatility of the last few months is likely to persist for a little longer, at least until both inflation and interest rates somewhat stabilize and everyone has a clearer idea about where the economy is headed. Once that happens, we would expect deal flow to increase once more and deal structures to reflect the increased certainty.

However, that’s only our best estimate of the future at this point in the cycle, and to quote John Lennon, ‘life is what happens to you while you’re making other plans’.

Good luck in your deal doing and stay safe!

  1. ‘We’re in a period of uncertainty’: M&A bankers on the big deal pause, Jemima Whyte, AFR, 27 June 2022 –

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