Australia’s M&A outlook has lost some of the wind from its sails after reaching record levels in 2021 and 1H22. But make no mistake, market conditions are still favourable for dealmakers in search of opportunities.

I’ll be discussing the trends and opportunities at the upcoming Mergermarket M&A Forum in Sydney. Safe to say, we’ll explore the M&A reset that’s starting to take place. While volumes and values remain well above pre-pandemic levels, and all sectors are generally buoyant, the market has come off a little. This is prompting a rethink in corporate strategies, plus some bold moves to transform business models. 

Below I highlight some notable trends, as well as the issues to watch out for in 2H2022, and the next steps for dealmakers. The topics covered here are also explored in our global PwC M&A Trends: Mid Year Update report.

Current outlook: M&A reset

Everybody remembers investor Warren Buffett’s warning: only when the tide goes out do you discover who’s been swimming naked. Right now, we’re nowhere near the tide being out, and volumes and values remain well above pre-pandemic levels. But the market has turned a little since the high-water mark of 1H22 and dealmakers are smart to think strategically about the long-term.

And there’s plenty to consider. Geopolitical challenges (including the war in Ukraine), the ongoing pandemic and macroeconomic factors (rising inflation, rising interest rates and fears of a possible global recession) are creating strong headwinds in M&A. Meanwhile, the capital shootouts and financial leverage of the previous 12 months may not play out in the same way over the coming months.

Similarly, there’s been a fundamental downward shift in retail and consumer sentiment since April. Supply and demand challenges are impacting profitability and causing investors to reassess, while interest rate rises are biting particularly hard, and punters are closing their wallets.

That’s not to say there’s not capital available – there’s still plenty around. Certainly, there’s less liquidity in capital markets (IPO and high yield debt markets are closed to many issuers); and increasing interest rates will make financing on PE leverage buyouts more costly now. But rest assured, corporates have cash on their balance sheets and PE firms have abundant dry powder.

In fact, there’s plenty of deals in the pipeline right now as companies continue to divest non-core assets and reinvest in higher growth. The market is awash with corporates monetising their balance sheets, especially in the technology, media, and communications (TMT) sector, where we’ve seen plenty of telecom assets deals in the past year (including two significant asset divestitures, when Telstra and Optus sold shares of their tower portfolios).

Outlook for 2H2022: Choppy waters ahead

There’s no denying the market is moving into potentially choppy waters in 2H2022. However, there’s every reason to be optimistic that dealmakers can achieve good returns from M&A in this market. 

Overall, most sectors remain buoyant. And in those sectors where there is distress, this creates turnaround opportunities. Forward-thinking investors will use market dislocations as a chance to revisit how they operate. Also, to focus on portfolio optimisation. Expect to see more carve-out divestitures, as management redirect resources away from non-core businesses to focus on high-growth ones instead.

Dealmakers also need to consider inflation, global risks, and rising interest rates. The current crop of Australian business leaders has limited experience when it comes to inflationary impacts on business and M&A strategy, and dealmakers should think carefully about how to manage supply chains, and how to pass on price increases, to avoid putting margins at risk. 

Expect to see big things in the energy transition space – and beyond – as decarbonisation affects all the industries that you’d expect (such as mining), as well as some less obvious suspects. (For instance, the new energy transition is already impacting infrastructure via more stringent requirements). This presents a huge opportunity for those dealmakers who get ahead of the curve, and who leverage their strong ESG credentials to secure a place in supply chains, creating significant value.