After a period of slowdown in the second half of 2023, we’re seeing an uptick in M&A activity internationally, as well as early signs of an upswing in Australia. In 2024, we expect further capital recycling, public-to-private deals and foreign investment, as well as increased volume of private capital investment given the staggering levels of dry powder available. In fact, there’s potential for private capital to take a greater portion of the M&A pie in 2024.
Overall, dealmakers looking to outpace organic growth will seek investments which work together to support or reinforce strategy in business, operating and technology models to accelerate performance. In a nutshell, there’s a pressing, strategic need for many companies to adapt and transform business models.
Despite macroeconomic volatility, interest rates are set to stabilise in 2024, which will provide dealmakers with more certainty for pricing deals and financing.
Corporates still have an appetite to grow through acquisitions and there’s still private capital to be deployed.
M&A can facilitate business simplification by acquiring the skills and capabilities to transform.
Overview: Cautious optimism and plans for business model reinvention
Globally, interest rates are already trending downwards, and Australia’s rates are forecast to fall in 2024. Falling interest rates should provide more certainty for pricing deals and financing. Certainly, a growing number of Australia’s CEOs intend to transact this year and there’s a record amount of undeployed private capital ($37bn) available for investment in Australia. What’s more, this capital offers more flexible funding options than ever. Private capital players will be under pressure to deploy these record-level funds, resulting in higher deal volumes from private capital investors in 2024. Now’s the time that dealmaking businesses can gain strategic advantage by reassessing their portfolios against their core strategy.
In 2024, organisations that transact to transform can potentially unlock significant value. There are multiple ways to do this including horizontal integration (that is, gaining access to new markets or customer segments) as we saw in September 2023 with Orora’s acquisition of a glass manufacturer from a US private equity firm. Also, vertical integration (i.e. margin consolidation up or down the value chain), risk delineation (e.g. BHP’s shedding of its oil and gas assets), separating more cyclical businesses from less cyclical ones (e.g. the demerger of The Lottery Corporation from Tabcorp), creating pure play propositions (e.g. GUD’s divestment of Davey), as well as using M&A to access new capabilities or resources.
We expect corporate divestments to resume in 2024, while private family business owners will likely make the most of stabilising economic conditions to prepare their businesses for sale or partial sale. Intergenerational wealth transfer is proving a major driver of M&A interest already in 2024. And given that more than one in five (22%) of small business owners in Australia are aged 60+, this is a trend that’s set to continue.
While external factors such as geopolitical upheaval are beyond businesses’ control, we predict Australia’s leading dealmakers will seek to shape their own destinies through business model reinvention in 2024. They’ll strive to make organisations simpler and more adaptable by outsourcing or divesting complex/non-differentiating activities; by streamlining operations, data and processes; and by acquiring necessary talent, technology and/or capabilities. In so doing, they will accelerate transformation to drive innovation and respond more quickly to external changes and disruption. Additionally, they will test how M&A may assist in accelerating this transformation. This, in turn, can maximise the long-term value of their assets.
Economic landscape: Looking for interest rate cuts to re-ignite growth
The RBA is at or near its interest rate peak in this economic cycle. While inflation in Australia remains ‘stickier’ than elsewhere due to services inflation, Treasury projects inflation to be 3.75% in 2023-24, and to fall to 2.75% in the June quarter of 2025. Unemployment will likely see a modest rise this year with economic growth remaining subdued without descending into recession. The question is when, and how fast the RBA will reduce interest rates to stimulate economic growth.
The downward trend in interest rates globally is expected to provide more certainty. That said, dealmakers will be keeping a close eye on government fiscal policy which will, in part, depend on a flurry of five state/territory election results within the space of 11 months: Northern Territory (August 2024), Queensland (October 2024), the Australian Capital Territory (October 2024), Western Australia (March 2025) and Tasmania (June 2025). Australia’s next federal election window also opens later this year (which means a House and half-Senate election is possible, though unlikely, between August and October).
Australia’s economy is strongly influenced by commodity prices, which are exposed to the volatility of global commodity markets. Indeed, several other influential macro issues (including geopolitical upheaval and global supply chain instability) are outside our nation’s direct control too. Where Australian dealmakers do have control to outpace the market is to drive transformation through transactions that accelerate organic growth efforts and unlock new sources of competitive advantage.
Current landscape: Strategic deals still being struck
Deal activity slowed in 2023 but was sustained by all the usual suspects (capital recycling, public-to-private takeovers, and deals for broader strategic decisions. Overall, 1,565 deals were announced locally in 2023 (down from 1,773 in 2022), while publicly disclosed deal values reached US$70bn (up from $US65bn in 2022).1
IPO markets remained relatively dormant in 2023. In Australia, there were just 33 new announced listings on the ASX in 2023 (compared with 79 announced listings in 2022, and 204 announced in 2021)2, suggesting the backlog of companies waiting to go public has grown. Globally, there’s cautious optimism for an IPO recovery.
Activity was somewhat buoyed by inbound interest. The biggest deals involved buyers from the US, Europe and Japan and together they announced six of the 10 largest transactions in 20233.
In the past year, we’ve seen significant deal activity in Australia across several sectors such as technology, consumer (SILK Laser/Wesfarmers and Kirin/Blackmores), mining (BHP/Whitehaven), energy (APA/Alinta Energy’s West Australian business), health, telecommunications (Telstra/Versent and Symbio/Aussie Broadband), food and agribusiness, industrials (Incitec Pivot/CF Industries), infrastructure, asset management and financial services (Honan Insurance Group/Marsh).
That said, increased market complexity means that deals are typically taking longer to complete, and higher funding costs are impacting the returns that private equity can achieve through leveraged deals. Also, the valuation gap means sellers may need to adjust their expectations in 2024. (Although, there are signs that the bid-ask spread that may have previously limited deal activity is reducing. If so, expect volumes to rise.)
Stakeholder expectations around assets’ environmental, social and governance (ESG) targets and performance have never been greater, and diligence is broadening beyond financial due diligence, reflecting lower risk appetite.
In our latest CEO survey, fewer than one in five Australian respondents said their companies have achieved meaningful impact from making acquisitions to enhance capabilities (compared to about one third of their global counterparts). This suggests a potentially significant missed opportunity. In 2024, value creation needs to be transformational rather than incremental and businesses can go further and faster by using acquisitions to enhance their capabilities. From unlocking new sources of value with technology to accelerating decarbonisation, over half (56%) of surveyed UK corporate leaders view transactions as the best way to keep up with market developments. In short, acquisitions can accelerate transformation.
Market outlook for 2024: Despite uncertainty, there’s still appetite for growth and deployment of capital
Corporates began the year cautiously but there’s an appetite to grow through acquisitions and deployment of capital. In our latest survey of Australia’s CEOs, almost two thirds (59%) are planning to execute a deal in the next three years, and more than a third (34%) are planning to make three or more acquisitions in the next three years (versus 19% of overseas CEOs). Furthermore, we expect continued interest from foreign investors from nations such as the US, Japan and South Korea. This is especially the case in mining and resources, as well as in technology and consumer goods.
The question is: Which of this year’s deals will achieve their long-term potential, and which will leave value on the table? While there’s recognition that businesses need to reinvent themselves (due to technology disruption, demographic shifts, regulatory change, etc.), relatively few Australian companies are leveraging M&A to achieve this.
Generative artificial intelligence (GenAI) is the talk of the town right now but strategic investors know that technology tools are only part of the value equation. Instead of inventing solutions of their own, a growing percentage of organisations are undertaking technology-driven transformation deals to boost their capabilities.
For dealmakers, the real value potential of GenAI will be to simplify businesses in 2024. (Here, GenAI will be used alongside divestment, automation, managed services, offshoring and/or outsourcing). GenAI will also be used to standardise what remains to focus on differentiation through customer experience. This is where organisations can leverage transformation to create leaner, more competitive assets that generate returns.
In 2024 and beyond, savvy dealmakers will seize the initiative and transact to transform. In fact, new PwC research shows the top performing companies are 9.5 times more likely to embrace top-to-bottom, end-to-end transformation through both organic and inorganic means. Top dealmakers will commit to building and acquiring capabilities, equipping employees with leading technology, and driving internal efficiencies. In so doing, leading dealmakers will seek to leverage transactions to accelerate value creation and leapfrog their slower-moving competitors.
Questions for dealmakers: Shaping your own destiny during uncertainty
To get on the front foot in 2024, dealmakers can ask the following questions:
In this environment of higher-for-longer interest rates and higher cost of capital, how can we gain strategic advantage by reassessing our portfolios against our core strategy? What is the right combination of investment and acquisitions (and divestments to free up capital to reinvest) that can still achieve a return on capital? Also, consider other forms of transactions such as strategic partnerships.
Where are the gaps in our data and processes that could hamper our asset’s adoption of new technology? How will we close those gaps so that new solutions deliver immediate value?
How might we simplify back-office work to drive out costs? What might we outsource?
What are our missing or sub-par capabilities that could accelerate our transformation, and could we acquire these from targets that excel in these capabilities, or through more partnerships and alliances?
Consider where best to allocate capital to get the most value. For instance, could we carve out equity or recycle capital?
When weighing up where to invest in our assets, what will give us the biggest bang for buck? What are the mutually reinforcing investments that will sharpen operating and technology models to drive performance factors, such as innovation, speed-to-market and flexibility?
Realising value requires more than just financial reengineering of assets. When preparing our holistic value creation plans, where are the revenue synergies and cost synergies?
When PwC researched what Australia’s top performing companies do differently, most had transitioned to a cloud native platform and followed an API first strategy. For dealmakers, the questions are: How can we discard old legacy systems in favour of cloud native systems? (Or add a reporting or API layer to existing systems?) How can we leverage APIs to connect internally to data and systems across the organisation, as well as connecting to data outside the organisation for insight-driven decision making? What alliances can we form to quickly secure access to micro-solution tools, skills, customer data and even new markets?
Finally, how can you maximise value from your investments? It may be that your existing systems, processes, technologies and people are up to the task; it’s about working smarter to ensure your capital works harder.
Transact to Transform: How we can help you uncover and realise value
Time to make your move?
As disruption gathers speed, M&A can be the fastest and most effective way for transformative change across your organisation. Transact to Transform quantifies the value potential of a transformation opportunity pre and post deal, ensuring you have the insights and skills needed to deliver the value you planned.
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We provide an end to end transact to transform service. Our deep transaction expertise focuses on optimising value creation through deal execution. While our transformation expertise, including ESG, Customer, Cloud, Workforce and Technology, ensures enduring operational solutions.
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Whether you’re looking to transform your workforce, secure your IT, engage your customers or digitise your operations, at every step of the journey, we are focused on delivering on our promises so you can deliver on your potential.
Disclaimer
1. We have based our commentary on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by the London Stock Exchange Group (LSEG) as of 31 December 2023 and as accessed on 3 January 2024. This has been supplemented by additional information from Preqin, S&P Capital IQ and our independent research. Certain adjustments have been made to the source information to align with PwC’s industry mapping.
2 & 3. Standard & Poor’s Capital IQ, reflects calendar year data.
Contact us
Charles Pickett
Partner, Deals Analytics| Deals Technology Leader, PwC Australia
Tel: +61 2 8366 5769
Jeremy Thorpe
Partner & Chief Economist, Insight & Economics, PwC Australia
Tel: +61 416 245 535