Australia’s M&A outlook: trends and opportunities revealed

Garreth Hanley:
This is INTHEBLACK, a leadership, strategy, and business podcast brought to you by CPA Australia.

Gavan Ord:
Welcome to CPA Australia's INTHEBLACK podcast, a podcast for business, finance and accounting professionals. On today's show, we're talking about what's on the horizon for mergers and acquisitions activity in 2025. Stephen Craig, CPA, is joining us again to give us an outlook for Australia's mergers and acquisition market for 2025. He's going to take us through Pitcher Partners' Dealmakers report. Stephen is a partner of Pitcher Partners, and we're inviting him back onto the show to share his insights on the trends, challenges and opportunities shaping the M&A landscape in the year ahead. Welcome to INTHEBLACK, Stephen.

Stephen Craig:
Thank you, Gavin. Thank you for having me back and looking forward to the conversation.

Gavan Ord:
We'll get straight into the questions. Our first question is, could you break down some of the key results in your Dealmakers report, especially around sentiment levels amongst M&A Dealmakers you surveyed? And what do you think that data is telling us?

Stephen Craig:
Sure. So we go out and survey a number of different Dealmakers throughout Australia, a mixture of corporates and private equity firms, mostly local, some international. The questions are a mixture of sentiment, both looking backwards as to the year it's been and also the year ahead. One of the key questions is just around overall sentiment, ease of getting deals done in Australia, and opportunities.

We've asked this question now for about five years. So we're starting to build up a bit of a history and being able to track that against the actual performance. In 2021, which were boom times, that sentiment number was up around the 80 to 81 per cent.

In the last two years, that sentiment dropped down into the 70s. The sentiment score for the outlook for 2025, Dealmakers responded with a 69 per cent response, which is the lowest over the last five years.

We still see it as a positive number, but certainly sentiment has dropped. If I overlay that against some of the other key findings or key sentiment responses, they're still saying, I think over half, so just over 50 per cent of Dealmakers are looking to increase their activity in the Australian market in 2025, and they're expecting deal conditions to be better than last year. Another 30 per cent are also saying they expect conditions to be at least the same. So you're talking about 80 per cent who think conditions will be the same or better, and they're expecting to have the same level of involvement in the market or increased. So it's a bit of a double-edged sword. Their sentiment is down a little bit, but still positive.

I'll put a bit of context around that too from some of our observations. The sentiment score from last year was up in the mid to high 70s. Key challenges at the time were around inflation and interest rates. Those challenges, I think there was an expectation that those challenges were almost under control. There was a lot of commentary at the time around interest rate cuts, inflation being under control. That hasn't eventuated over the 2024 year. And so I think this lowered sentiment, conditions have been good for deal-making, and I'll touch on the actual results of the 2024 year, but the sentiment, I think, is almost a reflection of a bit of fatigue. When are these rate cuts coming? How are we going to get inflation under control? Those two translate into cost pressures, which have been squeezing both businesses and I think also people's personal bank balances.

So I think the 69 per cent is lower, but it's still a positive number. There's still a lot of positive sentiment towards the 2025 year. I mentioned before around how the 2024 year went. Deal volumes were up 2 per cent across the market, and deal value was up 30 per cent across the market. So it was a positive year, and it sort of goes against that drop in sentiment at the end of the year.

The other point, and I'll overlay one more component to the 2024 year, the values and volumes were up, but there were also a lot of deals that were floated, that were considered, bids put in, that didn’t actually go through. There's potentially a way to look at the 2024 year as the year that could have been. You're talking about BHP and Anglo, Woodside and Santos, REA Group, had a look at Rightmove.

And there were several PE deals, Green Cross, Novatec, IMED, Guardian, that were all considered throughout the year and didn't get across the line. Now, if those deals, and they're all quite sizable, we're talking well up into the billions of dollars. Those deals go through and we're suddenly looking at 2024 in a very different light.

So it's probably a very long-winded answer there, but sentiment down, conditions were a slight improvement from prior years, but the outlook is still quite positive for 2025.

Gavan Ord:
I think the report talks about wary optimism or cautious optimism. I think what you said there is quite good that some deals didn't get up, so that might flow through to this year. We might, we'll probably have some certainty on interest rates, at least hopefully in the next few weeks after recording this, but suddenly people will start to see rather than just hope that these things will happen.

Stephen Craig:
Yeah, exactly. Cautious optimism is certainly the right way to look at it. I think people are wanting to do deals; they're out there looking for deals. We certainly get plenty of inbound calls saying have you got any acquisition targets. So there's plenty of activity in the market, but I think that caution comes through with a lot of deals or buyers are very happy to run the ruler over a company and spend a lot of time considering, they're not in a rush, so that caution certainly does come through.

Gavan Ord:
So the report details some opportunities and the risks that dealmakers have on their radar for this year. What factors are influencing dealmakers' confidence and uncertainty for this year?

Stephen Craig:
So look, I certainly touched on inflation and interest rates and overall, I guess that pulls together around sort of the uncertainty around the economic recovery. They're the challenges that have been faced over the last 12 months and even a bit before that, and they're still being faced now.

Certainly, at least with interest rates, there's probably an expectation they're not going to rise. So that at least adds some certainty, but we're still dealing with higher interest rates, which is impacting cost of capital, impacting businesses' cost base.

The respondents look at the Australian market as quite a positive place to do M&A. Australia is considered a low-risk jurisdiction to do M&A; a robust legal and regulatory system provides buyers with a lot of certainty. valuations and returns are considered quite positive. Buyers are often able to get good valuations and good returns out of their acquisitions, particularly foreign investors, if you factor in exchange rates as well.

We're considered quite advanced from a technological sense, and not just in acquisition of pure technology, but even in technology embedded into industrial companies or medical companies. It's the technology embedded within the business. And also, I mean, Australia is a pretty diverse place from a business sense. There is plenty of dealmaking opportunities across a number of different industries. So we're seen as a pretty fertile hunting ground for dealmakers.

Gavan Ord:
Good to have a bit of a positive spin on the Australian market, so that's good to hear. And before this recording, we'll talk about succession planning and how much of a trigger that is for M&A activity and a key driver. But why do you think succession planning is such a factor? And what are your insights into this, particularly with the mid-market in mind rather than the large market?

Stephen Craig:
Yeah. Succession planning has always been, I think, a big factor within the mid-market. I think it's only increasing in prominence. The mid-market, I guess, I don't think there's a hard and fast definition, but if you sort of draw a circle around the bottom end, maybe a $20 million transaction up into sort of a few hundred million, you're talking about your private businesses largely, which are owned by individuals or groups of individuals, often the founders themselves.

Like all of us, no one is getting any younger, and succession planning, I think, with an aging population is becoming more and more prominent.

Succession planning certainly helps support the middle market because it's not as determined by economic factors. You talk about the top end of town, you get people who I've certainly mentioned enough, interest rates, inflation, et cetera. Succession planning and driving that middle market is, there's another factor which is personal. You've got the vendors, the owners of these companies, and they've got personal reasons behind their decision-making.

Whether it is lifestyle, they're keen to retire, they're keen to go out and try something else, or they're keen to take their money and do something else with it. Clearly, these businesses, more often than not, are a very significant part of their personal wealth. So if they want that change in lifestyle, it's often the business sale that's going to have to fund that. Even down to just health issues from an aging population can be a determinant of it's time to put the tools down, offload the business, and move on to the next stage of life.

So those reasons aren't determined by what's the interest rates doing, what's the economic cycle. That's a very personal decision. And we often find with clients who are in those circumstances, there's an internal alarm in their head. When that alarm goes off, it almost doesn't matter what else is going on around the world. It's their decision to sell, and that's what they're going to do.

So that's a really key driver of the mid-market. It is increasing in prominence. Again, as we see the, I think the baby boomers are leading the charge and they're getting into their 60s and some are sort of almost approaching their 80s. And so that incentive to transition their business, transition their wealth is only increasing in importance. And whether that's handing down to other generations, or if those generations, those next generations aren't interested in the business, then it comes down to most likely some sort of sale process.

Gavan Ord:
The report also talks about what's called strategies for leadership transition. So going a little bit on the succession planning side, this is an issue that faces dealmakers but also organisations more broadly. The report lists seven strategies, three look high value, four look helpful for some respondents. Could you tell us a little about what those strategies for leadership transition are? What do you think are most important and valuable, not just in an M&A context, but for businesses more broadly?

Stephen Craig:
Sure. a lot of the responses from our survey do relate quite closely to each other. So when looking to transition a business into new ownership, one thing that buyers will always look at is how do I transfer the knowledge, the skills, the IP? I've bought this business based on what it does. I clearly like what it does. Maybe there's additional opportunities, but at its very core, I want to at least take what it does and then improve later on.

So how do you make sure you transition that existing business going forward under new ownership? Our respondents said that the number one factor for them is retention of key employees. You’re probably talking about that layer of management that sits just under the owner or maybe around the owner, because clearly the owner is either stepping completely away from the business or taking a much or significantly reduced role, which is probably the majority of transactions we see.

So it's how do you retain those key employees? And that's a critical factor. There are a number of different components to that. When to bring those key employees into the deal tent, you know, when do you let them know about the transaction? And then how can you incentivise them to, you know, be motivated to stay on and work with the new owner, the acquirer, post-transaction? That can be on a number of different strategies, whether it's selling the opportunity that a new buyer brings. Often these companies are selling to a bigger party, so a bigger business, bigger party, more opportunities, further growth.

There could be financial incentives, bonuses around helping through the transaction and then a retention bonus. Each case is going to be an individual way, but I think the key point there to understand what motivates the employees and how to motivate them to then carry on. And that works on both sides, both the vendor assisting with that and the acquirer trying to work it out so that they keep that knowledge.

The second most popular response was around clear leadership handover timelines. Again, it goes to this transition of knowledge, continuity of business. Often the buyers will say that they would like the vendors to remain in the business for a transitional period of time, whether that's six months, 12 months, or out to three years, whatever it might be. I think having a clearly defined timeline is really important for everyone involved, the buyer, the seller, and those other key employees, just so there is certainty around what's happening. When do we need to have all the knowledge transferred by, and when does the vendor actually walk away and any remaining knowledge walks off with them? So it's about creating that certainty for all parties involved.

The third most popular response there was around leadership development programmes for existing management. I think I've probably touched on that a little bit, again presenting that opportunity for existing employees, for key management to further grow, the acquisition becomes an opportunity for them.

The fourth one, and I'll put my hand up to say, this might come across as, or I might be criticised as this is more of a sales pitch than a response, but it talks about the involvement of external advisors and consultants. I won't go into too much detail there at risk of any sort of conflicts here, but I think the key point there is that these transactions, again, I'm focusing probably on the mid-market and these private businesses, but these transactions are more often than not a one-off event in a person's life, and also a substantial component of that person's net wealth. And so bringing people in to not only assist with the transaction, but even the preparation phase, getting a business ready for sale can have a material impact on the success of that transaction.

And when I talk about success, clearly everyone's first thought is probably the dollars, the headline purchase price, the biggest number, the better. The other components are though, you’ve got different structures of transactions, which can impact, not the headline price but then how those dollars fall down into your pocket. Ther's a number of different stages, adjustment mechanisms, and the tax man comes through and takes a clip. So what actually ends up in your pocket.

There's also the preparation phase and preparing a business can help you maximize the value, but also maximise the certainty that it presents to a buyer. If that certainty is there, you've got a better chance of a buyer putting forward their best offer. That best offer might be a high purchase price, the simple one, the dollars. The other components though, it might be more favourable conditions, less restrictions, less restraints, less deferred payments, less conditional payments. So more certainty around dollars upfront.

The third component is having a business prepared for sale. If it's not prepared for sale, the buyer might not even take a look. They might walk away without even, and you don't even know that they're actually a genuine buyer because they'll just say, no, not interested, too hard. There are too many issues going on here. So that's where I think, again, happy to put my hand up and say sales pitch here, but an advisor can come in and help.

Gavan Ord:
I don't see that as a sales pitch. I think it's essential that people go and seek the advice they need. And you made a good point; this might be the only time they do this in their life. So you do need to speak to people that do this all the time. So you do get it right. You do maximise the value and the purchaser gets value out of it as well.

Stephen Craig:
Yeah, that's exactly right. And that's, from a buyer's perspective to have an advisor in there on the other side, well, sometimes it can hinder because it means you're dealing with someone who's at least somewhat sophisticated, but it also can help smooth the transaction out. You've got someone helping guide a vendor who might not understand all the components of a deal. And from a buyer's perspective, it actually can become quite advantageous to be able to talk to someone who understands transactions. You're talking on par with somebody else and you're not dealing with somebody who doesn’t quite understand the M&A frameworks.

Gavan Ord:
The report states that 52 per cent of respondents said ESG considerations are an essential ingredient to every deal. Another 45 per cent said it's important. That's really not surprising. But going beyond the acronym, environmental, social, governance, why has ESG become so important in the M&A deals that you're looking at?

Stephen Craig:
Yeah. ESG is an interesting one. It is certainly growing in prominence. And yeah, as you said, there's no surprise that the vast majority have said it's either essential or a component of most deals. We're seeing that in a number of different fields. We've had stories from potential bidders who have looked at a business; the numbers look good, but they've got, I think in the instances I've seen, environmental issues sitting in the background, and they've looked to acquire a business.

They think they can make a good financial return, but there's environmental issues. One of the parties we spoke to, they said their concern was they don't know how they could exit that business in the future because of those issues.

So it wasn't the case of buying it and managing it. It’s the case of ESG being a growing issue, which they thought in the future they wouldn’t actually be able to offload this.

So look, our dealmakers have responded saying it is of growing importance. They do look at it. And I think the obvious ones are when you're in a deal and they are doing environmental studies, they are doing a review of your governance structures. That's the obvious time when you know it's happening. I guess from a vendor's perspective where you don't know it’s happening, and this is similar to what I said before around preparing your business for sale, you might have buyers who come in and look at it and just go, "I'm actually not going to touch it. I can already see there's some issues and I'm not even going to get into it."

So from a vendor's perspective, you actually don't know that the buyer was there. So there's a piece there where trying to understand what your ESG issues are, and accounting has standards; there's debits and credits and there's some pretty clear structures, ESG is not the same way. I think each business is going to have their own specific issues. So the first port of call there is for a vendor is to go through and try and understand what are my issues.

I think the best way to do that is to look at your stakeholders. You've got your immediate stakeholders, and there might be a ring of the next level out. Understand what their key issues are with your business or potential key issues are. I think the first port of call here is understanding where your potential weak spots are so you can actually start to take control of them.

Gavan Ord:
Just being prepared for what the purchaser might be looking for.

Stephen Craig:
Yeah, exactly. And look, the other point around that is mandatory reporting is coming up. So I think the first of January 2025, there's already a group, one of the criteria being greater than 500 million of revenue. There's another cohort coming through that will require mandatory reporting on the first of July 2026. And then the final cohort, first of July 2027. And that final cohort is for businesses greater than $50 million in revenue. There are some other tests around, I think, asset bases, but $50 million revenue starts to catch a lot of businesses.

I appreciate when some people sort of say it's another burden, it's another cost of doing business, it's a challenge; why does it impact me? But reporting requirements are coming, and for businesses greater than 50 million, it's going to catch a lot.

Gavan Ord:
And for the listeners, Stephen's talking about climate-related disclosures in Australia. Just going back to what's on the radar for 2025, what industries do you think are most likely to see M&A activity in the coming 12 months? And maybe what could be some of the drivers behind why those industries are at the top?

Stephen Craig:
Yeah. TMT, Technology, Media and Telecommunications, that ranked number one on our survey from the respondents. It has been near the top or at the top of our survey response for a number of years. One of the key drivers, I think, in this group is around AI. We're talking about Large Language Models within finance, within healthcare, within retail.

Businesses are acquiring other companies with those AI capabilities, often to enhance data-driven decision-making, analytics, and unlocking new ways of doing business. So AI-powered innovation from predictive analytics to customer service automation. I'm sure everyone’s seen those YouTube videos of the AI salesperson talking to a potential purchaser. You can't tell that that person is actually speaking to a robot, which is a little bit scary.

But those advancements in business operations, I think buyers are really keen to look at businesses that have adopted and created something within that space and then take it on board themselves to overlay it into their existing business.

Industrials and chemicals is another far less exciting group, but a really stable group within the Australian economy. Our respondents have ranked them as number two. Again, they typically sit around the top as well.

Anything that sits within that category, anything that sits within sort of feeling the transition towards sustainability, increasing efficiency, and reducing emissions, and going back to those ESG expectations are obviously very popular as well within those industrials and chemicals.

Gavan Ord:
Well, I found the report really interesting myself. And last year we read the mid-year report, now I've read this one. Before we wrap up, are there any other key takeaways or predictions or anything else from the report you'd like to add for the listeners?

Stephen Craig:
Yeah, certainly. Look, I was nervous. Is this the point where you sort of want me to put my neck on the line and give a prediction myself, and in 12 months’ time, you tell me where I went wrong?

Gavan Ord:
Yeah. What's your prediction? No one ever goes back and looks at predictions.

Stephen Craig:
I'll hold you to that. Look, I think, and I won't get you too excited by this, but where we are right now, I think deals are continuing to get done. That's probably one of the key takeaways. The 2024 year was positive, increased volumes, increased values. I should mention that mid-market was down a little bit, but the overall market was up. So there's two sides to that story.

I think overall, M&A activity at the moment is solid without being spectacular. The responses in our survey clearly show that sentiment is slightly down, but still overall positive. There's still a majority of parties who say we're going to do the same, if not more in the coming year.

Where to for 2025? I think what we're going to need is one of these catalysts that we've talked about to occur. A decrease in the interest rates, driving the cost of debt, you know, acquirers’ cost of capital, driving that down.

Another one might be around some of those mega deals, those larger deals that we talked about coming back to market. There's also the federal election. That's always, it's not so much a key driver as to whether the market's going to increase or decrease, improve or decline, but it's more a case of there's a little bit of uncertainty around it. It's often just a little hurdle that we need to get past before things can free up and off they go.

So if I had to put a prediction down, I would, and I don't think this is overly controversial, I would suggest that I think we're going to continue at our current pace, probably through the first half of the year. I think we're going to need to see some sort of catalyst to give the market a bit of a shot in the arm and then potentially might see a stronger back half of the year. That's probably what I see happening.

The survey itself did rate several factors that they thought would be the key drivers of the year to come. Interest rates we've talked about, foreign investment was number two for them. I think that probably ties back to interest rates. Interest rates have dropped overseas, particularly in the US; I think it's had three rate cuts already. So a few rate cuts there, you've got Trump now coming into power and what he does for their economy, there's some speculation that he'll rev that up. So there might be some more outbound funds. And then PE, PE is typically ranked in the top three year after year, mostly because of the constant claim of the amount of dry powder.

Last year, I think it was circa $21 billion of dry powder that needed to be deployed. I don't have the current year figure, but my understanding is that number has increased. That's been consistent for a number of years. The other component with private equity is the need to actually sell off assets. Private equity comes with almost a two-pronged approach now to drive 2025.

I mentioned before several transactions that didn’t get through from private equity. And so t hey’ll still be on the cards as potential acquisitions or transactions, I should say, for 2025. So private equity could be a driver of the market on two fronts. And then obviously we've talked about succession planning, which I think is going to be underpinning the mid-market. It has done consistently over the years, and I think it's only growing in prominence, which again will help support the M&A activity in 2025.

Gavan Ord:
Well, I hope it is actually a strong year because M&A activity is good for the economy. It can lead to more improved businesses, improved economic activity. And I know that succession planning is part of it, but new blood, new ideas, new money coming in, it's good for business and good for the economy. So I hope 2025 is a good year and a busy year for you. Thanks, Steven.

Stephen Craig:
Thank you.

Gavan Ord:
That was Steven Craig, a partner at Pitcher Partners. And that brings us to the end of today's episode on INTHEBLACK. If you enjoyed this episode or found it helpful, be sure to subscribe to INTHEBLACK wherever you get your podcasts and leave us a review to let us know what you think.

For more resources, insights, and updates, check the show notes for this episode, where you'll find a link to Pitcher Partners' report, and visit CPA Australia's website at cpaaustralia.com.au. Until next time, thanks for listening.

Garreth Hanley:
Thank you. If you've enjoyed this episode, help others discover INTHEBLACK by leaving us a review and sharing this episode with colleagues, clients, or anyone else interested in leadership, strategy, and business. To find out more about our other podcasts, check out the show notes for this episode. And we hope you can join us again next time for another episode of INTHEBLACK.