Now’s not the time to fall out of love with M&A

When company directors gathered online recently to consider this year’s M&A outlook, one message rang out loud and clear: Deals remain firmly on the agenda in 2023, despite macroeconomic headwinds. 

And the numbers we’re seeing certainly back that up. 

In PwC’s 26th Annual Global CEO Survey, 73% of corporate leaders were pessimistic about economic growth, but the majority (60%) do not plan to delay deals this year. 

So, what are the M&A trends shaping local and global deals right now? Read on. 

Where are we now?

While the short-term economic outlook remains clouded, and global M&A activity has slowed as a result, volumes and values are still trending above pre-pandemic levels and, overall, M&A markets are proving relatively robust.

In Australia, deal volumes remain subdued this year, partly due to a persistent gap between the expectations of buyers versus sellers, although signs suggest a value reset is underway. There’s still plenty of public-to-private activity locally, and those corporates who see deals as being strategically important to their business model are pursuing M&A, especially in the energy transition space. 

A good time to buy

While M&A activity is set to be subdued in 2023, it’s actually a good time to buy. As we discussed with webcast attendees, periods of economic uncertainty can be precisely the time when valuations become more attractive and opportunities are created. Why?

1. A better buying landscape: Right now, the economy has swung in favour of buyers, especially those of the cash-rich corporate variety and private investors who have significant capital to deploy. Fierce competition has subsided; valuations have reset (especially in tech-enabled businesses); and many private equity competitors are sitting on the sidelines.
2. The time is right for transformation: Currently, there’s a huge opportunity for transformational deals, and some of the most successful deals in 2023 will allow companies to rapidly transform strategic aspects of their business. Tellingly, 4 out of 10 surveyed CEOs told PwC that they don’t think their companies will be economically viable a decade from now if they don’t transform. Now’s their chance.
3. Leapfrog your competitors: Our analysis shows that doing deals during a downturn gives companies the opportunity to overtake their competitors and reset the industry order. We’ve also found that doing deals during a downturn gives much greater returns than doing deals during economic prosperity.

In short, this is not the time to fall out of love with M&A.

What’s next in M&A? 

With opportunity knocking in M&A, we’ve identified the following key market dynamics. These are the trends that are set to dominate:

• The value of due diligence has increased exponentially, and findings are feeding into valuations and strategic models, making a material difference to negotiations.

• Similarly, scenario planning is more important than ever before thanks to the uncertain economic environment (especially re: planning for the possibility of a recession). 

• Workforce strategy is a priority, too, and keeping hold of your workforce in today’s environment is vital. Don’t underestimate the cost of retaining, motivating and reskilling employees, and factor this into your models and negotiations.

• Strategic reviews and portfolio optimisation are also key. Not only are companies scrutinising the marketplace for deals, but they’re also taking a long, hard look at themselves and asking which non-core assets they might divest and what capital they could redeploy. As a further point, divestments should not be overlooked. For many, there is a stigma attached with divestitures, however, leaders who act quickly to chart a new path, can deliver more value for shareholders.

• We’re also seeing a renewed focus on driving value creation through the M&A process, to ensure that the deal will achieve the strategic objectives and synergies are maximised with an absolute focus on culture

How to cope with creaky credit conditions

Finally, the question on everyone’s lips: How will uncertainty in the US and European banking sectors affect general banking and financing creditor conditions? 

We’re seeing a more cautious approach from financiers across the board. To date, any pullback has been sector-specific in Australia. And as mid-tier US banks attempt to repair their balance sheets, we expect credit creation to be curtailed in the US. As credit contracts further, growth will fall, leading to pressure on credit costs. These increased credit costs are likely to be evident in Australia as well.

Corporates now face “creaky” credit conditions, and those looking to buy assets need to be better prepared than ever before, including closer and more detailed engagement with financiers to execute on a trade. At the same time, conservatism is creeping in. Expect closer examination of T&Cs by financiers, with higher pricing likely to be a common occurrence.

The takeaway? Even if you’re not in the M&A phase right now, the smartest investors will use current conditions as a chance to re-examine their existing debt facilities. (Consider: What are your refinancing risks? What are you doing to mitigate these risks? Do you need extra funds to protect against falling cashflow in the next 12-18 months?) 

Find out more

Learn more with PwC Australia’s Australian M&A Outlook series of sector-by-sector insights.