This article is a summary of a podcast conversation between Nicola Charlston & Anthony Boogert discussing global M&A sentiment and direction.
Anthony Boogert Nicola we’re just back from New York, let’s talk through the sentiment we're picking up among deal makers around the world, what people see as the reasons behind the recent slowdown in M&A, the expected catalysts to see it pick up again, and the reasons to be optimistic or cautious about the prospects for that.
Nicola Charlston Generally people we spoke to in the US seemed to have a fairly negative sentiment in terms of when M&A activity will pick up again, which they are expecting to be more around the second half of calendar ‘24. What did you hear Anthony?
AB I really noticed a lack of consensus on the economic outlook for the global economy. Some people were more optimistic, while others are more cautious. Really a mixed bag that depends on where people are focused - areas like healthcare are still busy, but other areas, such as tech or financial services, seem a bit more depressed.
Reasons for caution
NC I think that's right. A lot of people we spoke to while we were over there focus heavily on private equity, which we know has been challenged given the current environment, especially challenging debt markets. The second big point is disagreement over valuations. I think we heard a few times, Anthony that there was still that disconnect between sellers not recognising any decrease in the value of their assets or businesses, and buyers who are looking at increased costs of financing and uncertainty ahead and who perhaps had different expectations around valuations. And then the third one was around board and management confidence, which goes to a whole range of factors including the economy, inflation, interest rates, uncertainty, geopolitical tensions, I think they seem to be some of the key reasons people are attributing to the current M&A downturn. Would you agree with that?
AB 100%. On the disconnect in valuations, sellers seem naturally optimistic, while buyers are naturally cautious. Clearly we'll need to see some alignment on valuation expectations to get M&A moving.
NC People were also talking about potential catalysts to see a significant uptick in M&A volumes? One of them was getting some certainty around financial conditions, particularly interest rates and inflation stabilizing - to give boards and management confidence around what the immediate and medium term future looks like from a financial perspective. And I think linked to that is consensus on economic outlook you mentioned. There are a lot of differing views on where things are going and over what timeframe. What about sector specific factors?
A sector-specific story - AI & energy transition bright spots
AB The energy transition and securing supply of critical minerals is one. We saw that in those large transactions involving lithium, copper and gold producers that KWM has been involved in already this year, including Allkem and Newmont. As our colleagues Will Heath & Antonella Pacitti discussed – that demand will keep deal activity up.
Tech has been relatively quiet. But one thing from the conference - everyone's talking about AI in every industry, it's getting a lot of attention. We think that will result in significant activity going forward.
NC AI was unsurprisingly at the top of everyone's mind and a potential driver or catalyst for M&A, as businesses look for opportunities to bolster their capability from an AI perspective.
So that gives us a sense of what people saw as the reasons behind the current downturn in M&A activity levels. We heard some reasons for optimism too.
AB One in particular. Whilst there's a lot of talk about interest rates and inflation being quite high in Australia, the US and around the world, unemployment has been very low. And that has given a real boost to the economy. To the extent that interest rate rises don't start having too much of a negative impact (ie result in a hard landing), that can actually be a source of confidence.
Catalysts for a restart & reasons for optimism
NC And there’s a really interesting point in terms of availability of capital?
AB Yes, we haven't really touched on it, but the amount of dry powder that private equity sponsors are sitting on in Australia. We saw a lot more selling of assets by private equity during the COVID years than buying. So they're primed to really put their capital to work in the current environment. That will drive M&A activity once there is some stabilisation in the economic conditions.
Another catalyst is the pace of the energy transition required to hit the climate targets various governments have set. A lot of investment has to go in there and we think that will also drive M&A activity.
NC It was fascinating to hear the global perspectives on the current market conditions. And what I took away was that, yes, there's clearly been a decline in M&A levels - largely just linked to uncertainty at the moment across a range of factors, but underneath, there are still really good drivers for M&A activity. A few people we spoke to were gearing up and saying that, even if it doesn't happen till mid 2024, they expect a huge uptick in in the pace of M&A and volumes once a little bit more certainty returns to the environment. So there are some reasons for optimism.
