M&A Outlook - Australia

Introduction:

The Australian Competition and Consumer Commission (ACCC) is an independent Commonwealth statutory authority whose role is to enforce the Competition and Consumer Act 2010 and a range of additional legislation, promoting competition, fair trading and regulating national infrastructure for the benefit of all Australians. Their primary responsibility is to ensure that individuals and businesses comply with Australian competition, fair trading, and consumer protection laws - the Competition and Consumer Act 2010.

The Australian Energy Regulator (AER) is Australia's national energy market regulator and has an independent board. The AER shares staff, resources, and facilities with the ACCC.

While specific functions vary according to the legislated responsibilities that underpin the ACCC and AER, the two bodies share many common objectives, both working to protect, strengthen, and supplement competitive market processes.

Mergers and acquisitions can be important for the efficient functioning of the economy. However, the Competition and Consumer Act prohibits those mergers that would have the effect, or be likely to have the effect, of substantially lessening competition in a market.

Overview:

Proposals Made: 1630

Deals Completed: 1264

Mergers: 293

Acquisitions: 974

Major Deals of 2019:

Comparison - Pre-COVID vs. During COVID:

From the above analysis, we can see that according to the M&A data In the initial setting of the pandemic .i.e. first 4 to 5 months of the year 2020, M&A of Australia got affected by almost 50 % than the previous year and by analyzing the last 2 months data we think that M&A will come up to the mark from September-October of 2020.

By Sectors:

From the above visualizations, we have analyzed that in the initial months due to COVID the M&A did reduce a bit but it is getting stabilized as we can see that from June 2020 the Mergers and acquisition our increasing.

Facts and Inferences:

The rapid onset of the pandemic across the globe has had a chilling effect on M+A in the short term. Various public M+A deals in negotiation have been put on hold or, in some cases, ceased altogether as the target’s future earnings and valuation is difficult to assess. Some of them are as follows -

• Some competitive auction/sale processes, which at one time had multiple engaged bidders have been delayed or left in limbo (e.g. Owens Illinois’ ANZ business, Laureate Education, Village Roadshow, and the WA Government sale of WATAB).; and
• Some non-binding indicative offers have been withdrawn or put on hold (e.g. Alimentation Couche-Tard’s $8.8 billion proposed acquisition of Caltex Australia) while others have received a flat rejection (e.g. Partners Group/Healius, Strike Energy/Warrego Energy).

In addition, some announced public deals, for which binding transaction documents had been entered, have been terminated (or sought to be terminated):

• Breach of offer conditions prohibiting new financing, such as Starwood CapitalGroup’s proposed takeover of the Australian Unity Office Fund.
• Material adverse change clauses, such as the proposed acquisition of Abano Healthcare by private equity

 We expect to see more reluctant acquirers seeking to withdraw from deals based on material adverse change, stock market fluctuation, and other conditions. Alternatively, if not withdrawing altogether, they may use these conditions as a basis to renegotiate a more favorable deal reflective of the new norm of lower asset prices.

The FIRB website states in Q&A that “Australia is being fundamentally disrupted by the coronavirus, including potentially threatening economic security and the viability of critical sectors. Businesses are increasingly under pressure. There will likely be a rise in debt restructuring transactions for Australian businesses, along with opportunities to invest in distressed assets. Without these changes, it is possible many normally viable Australian businesses would be sold to foreign interests without any government oversight, presenting risks to the national interest.”

The changes have the potential to slow down foreign takeovers and provide a comparative advantage for Australian acquirers who can move more quickly. We’ve seen some smaller deals fall over as the cost and time of going through the FIRB process makes the transaction too difficult at these times. This should be addressed as Australia cannot afford not to be open for business.

These are unprecedented times indeed. As noted, there was a decline in M&A during Covid-19 and there will be many challenges ahead, but we also expect that attractive opportunities will arise.

Post-Covid Analysis:

COVID 19 has affected many businesses in Australia, the data tells us that there is a steep decrease in the number and amount of deals for companies within the Australian territory during and after March 2020. The case is not the same for all the industries. Let’s analyze the existing trend and future expectations step by step for the Australian economy.

1. The overall trend: We plotted the month on month change in the overall trend of the number of deals closed and the amount involved in those deals.

If we look at the March 2020 rate (202003) in the above graph, we can see that there is a steep decrease in the number of M&As and the amount involved. We had 163 deals amounting to a transaction of around 7500 Mil US dollars in just Feb 2020, while the number dropped to 91 deals leading to 1500 M USD in April 2020.

But we do observe a brighter picture just a little bit ahead of the curve. If we come to June 2020 the numbers are again on the higher side as high as 132 deals amounting to 5500 M USD. This indicates that some of the organizations are being acquired more just after the lockdown was imposed (23rd March, 2020). Let’s have a deeper look at which sector is performing the best. On a positive note, the future for M&A’s isn’t that bad as far as the COVID times are considered.

2. Acquirer Industry: We went ahead in the data and plotted the number of acquisitions after 23rd March 2020 based on the Industry and arrived at the below chart.

Not to our surprise, The Financial sector has the most number of acquisitions under its cap after the lockdown was imposed. There are 109 deals done under Financial services while Brokerage which is the number two here has 71.

The above time series plot also hints on the same fact that the financial services industry is going to play a major role in the ultimate uplifting of the Australian economy as far as M&As are considered The growth for financial sector would be the highest post the COVID 19.

3. Form of Transactions: There are different forms of transactions when it comes to M&As. We will now have a look at the data and analyze which form has the brighter future post-COVID 19.

We can see that transactions with pure Acquisitions are very low as compared to the Acquisition of Assets. The Assets have around 185 deals covered from 23rd March 2020. This means that the Acquisition of Assets industry will also be on a rise post-COVID 19. The final verdict after the above in-depth analysis says that The M&A’s number and deal size are more likely to increase at a slower rate in the future. The momentum pushing this increase will be provided mainly by the Financial Services industry and The Metals and Mining Industry through Major Acquisition of Assets.

Drivers Vs. Restraints

Drivers:

?  Private Equity and Foreign Investment: This continues to be a key driver of Australian public M&A activity – with increasing innovation in acquisition structures including co-investing with superannuation funds and target management. Australia’s low-interest-rate environment has been positive for deal-making, the combination of low-interest rates, low inflation, and a relatively stable currency has made Australia an attractive destination for offshore capital.

?  Inbound Activity: Inbound activity will increase as the investors search for solutions to manage volatility and risks from global economic uncertainties. It will continue to grow as Australia provides a safer hub for growth and new investment possibilities.

?  Valuation Alignment: A valuation gap arises when an individual wants to sell his company for more money than the buyer is willing to pay, so, Valuation alignment between sellers and buyers will also help to propel deal-making. This has contributed to increased deal flow and overall interest from offshore buyers as they search within the Asia Pacific and globally for value.

?  Capital: There will be an increase in competition for assets as more and more companies from North America and Europe show interest in Australia. Considering the global trade situation, the trade wars, and the changes in policies, Australia is becoming an interesting destination for investors from developed and developing economies.

?  Inorganic growth: It is the rate of growth of the business, sales expansion, etc. by increasing output and business reach by acquiring new businesses by way of mergers, acquisitions, and take-overs. Therefore, Australian mid-markets provide a platform for that. Dealmakers continue to use mid-market assets to secure and amplify growth, with wide recognition that these assets can help larger organizations reach higher revenue levels accessing new product streams and markets. Growth acceleration through inorganic growth is current and will be a future objective as organizations turn to the Australian mid-market for acquisition opportunities. These markets also provide a proper base on which there can be an expansion of objectives, such as product and service enhancements.

?  New Customers: In today’s digital economy, companies which lack the clout of large-cap corporations often stand to benefit from merging with industry peers, a move which can offer them access to new market segments and geographies, as well as larger and more comprehensive pools of talent, know-how, and financial resources.

Restraints:

The rise of social and environmental activism: A leap in sentiments seen toward activist pressures on business is seen. Since last year, social and environmental activism or unrest has rocketed from one of the least challenging factors to one of the top issues facing dealmakers. While most protests and unrest have been geared toward mining and resources companies for their negative impact on the environment, activists and their followers are also placing pressure on banks and financing companies, in addition to various consumer businesses, to become more environmentally conscious in the battle against climate change. Such pressure is only likely to increase in the wake of the Australian bushfires earlier this year and industries across the board could see themselves in the crosshairs of regulatory changes as policymakers target businesses seen as bad for the environment.

Other than Private Equity, the other important drivers of M&A according to a study:

Deloitte Touche Tohmatsu Limited commonly referred to as Deloitte is a multinational professional services network. Deloitte is one of the Big Four accounting organizations and the largest professional services network in the world by revenue and number of professionals, with headquarters in London, United Kingdom. The firm was founded by William Welch Deloitte in London in 1845 and expanded into the United States in 1890.

With more than 150 years of hard work and commitment to making a real difference, our organization has grown in scale and diversity—approximately 286,000 people in 150 countries and territories, providing these services—yet our shared culture remains the same. Our organization serves four out of five Fortune Global 500? companies.

It merged with Haskins & Sells to form Deloitte Haskins & Sells in 1972 and with Touche Ross in the US to form Deloitte & Touche in 1989. In 1993, the international firm was renamed Deloitte Touche Tohmatsu, later abbreviated to Deloitte. In 2002, Arthur Andersen's practice in the UK as well as several of that firm's practices in Europe and North and South America agreed to merge with Deloitte. Subsequent acquisitions have included Monitor Group, a large strategy consulting business, in January 2013.

Services provided by Deloitte are as follows:

• Audit
• Consulting
• Financial advisory
• Risk advisory
• Tax and legal
• GovLab

The Australian partnership of Deloitte Touche Tohmatsu is committed to growth, client service, and its people – 790 partners and more than 8000 people located in 14 offices across the country, plus Papua New Guinea and Timor-Leste. Deloitte Australia achieved record revenues of A$2.013 billion for FY18 - a 15 percent increase in FY17, and the fourth successive year of 15 percent revenue growth. To sustain its momentum, Deloitte continues to invest in innovative new services, products, and people, while expanding its business through acquisitions, alliances, and organic growth.

Deloitte Mergers and Acquisitions (2017-2020):

Deloitte’s appetite for acquisition is showing no signs of abating across Australia and New Zealand (A/NZ), with 19 technology specialists snapped up within the space of five years.

• 2020- Deloitte acquired cybersecurity firm Zimbani, adding a team of around 50 to its Australian ranks. Deloitte closely monitors the developments of all start-ups and scale-ups that make the list, either for its own offerings or to the benefit of its clients across the country.

“The deal is Deloitte’s seventh deal in Australia and New Zealand in the past year. The accounting and consulting firm generates over $2.3 billion in revenue and has been using inorganic growth to complement its organic growth for years, helping it achieve double-digit growth for five consecutive years.”

• 2019-Accounting for 18 transactions in Australia, and two in New Zealand, the consultancy giant is continuing aggressive plans to build out technology capabilities on both sides of the Tasman.With one acquisition already confirmed in the form of Splunk specialists Converging Data Australia.
• 2018- Deloitte produced another record-equaling haul of businesses in 2018, in taking control of five technology providers. Mexia, CloudTrek, and ATADATA came into the fold across Australia, while API Talent and CloudinIT joined the business in New Zealand.
• 2017-CBIG Consulting; Well Placed Cactus; JKVine; Nesoi and Strut Digital were purchased, following Plenary Networks; Kid Neon; The Explainers; Sixtree and Cinder Agency 12 months earlier.

Therefore, the deliberate nature in which Deloitte is building out technology capabilities across A/NZ should not be underestimated, as the channel awakens to a new type of competitor.

Redefining deal-making:

The post-COVID world will unleash structural and systemic changes and it is widely expected that recovery will be highly asymmetric across regions and sectors. Most sectors will reinvent themselves in order to thrive and many will use M&A to accelerate this transformation.

But as companies prepare for a new world with fundamentally reshaped economies and societies, it is inevitable the deal-making environment will also materially change. Beyond traditional M&A, companies need to deploy a wide range of inorganic growth strategies such as partnerships with their peers, co-investments with private equity, investment in disruptive technologies, cross-sector alliances with specialists, and partnership with governments.

A combination of defensive and offensive M&A strategies should emerge as companies strive to safeguard existing markets, accelerate recovery, and position themselves to capture unassailable market leadership. Redefining M&A in terms of these scenarios and choices will bring much-needed clarity of purpose while confronting uncertainties.

So we think Deloitte as a company will continue its run with M&A and grow. These are the areas where Deloitte will probably invest in the coming future.

Cybersecurity

All over the world, the COVID-19 pandemic has been the headline over the past few months. While the world is focused on the health and economic threats posed by COVID-19, cyber criminals around the world undoubtedly are capitalizing on this crisis. There has been a spike in phishing attacks, Email scams and ransomware attacks as attackers are using COVID-19 as bait to impersonate brands thereby misleading employees and customers. In these critical times, cybersecurity professionals have their task cut out. Few business processes are designed to support extensive work from home, so most lack the right embedded controls, and thus cybersecurity always remains a critical area requiring attention. Organizations that make it possible for employees to work from home must enable higher online network-traffic and transaction volumes by putting in place technical building blocks such as a web application firewall, secure-sockets-layer (SSL) certification, network monitoring, anti-distributed denial of service, and fraud analytics. Cyber hygiene, cybersecurity, and cyber innovation remain verticals of critical importance in the times to come.

Deloitte purchased Converging Data, an Australia-based cybersecurity firm that works with AttackIQ, Carbon Black, Phantom, and Splunk. Converging Data joined Deloitte’s risk advisory practice as part of the transaction.

Consulting

The coronavirus pandemic has already had a huge impact on the economy in general – something which has of course had a knock-on impact on consulting. Just exactly how much of a dent on the industry’s growth Covid-19 has had is extremely difficult to tell, but in a new forecast, researchers have tried to put a number to the damage, and have found global consulting could lose some $30 billion of value in 2020.

The global consulting industry has grown strongly in the 12 years since the last financial crisis. The planet’s consulting scene is now worth a combined $160 billion, but with the coronavirus having pushed many sluggish economies to the brink of a recession, clients are delaying projects, decreasing their scope or canceling them altogether. As a result, the revenue of consulting is taking a big hit.

To understand what the impact of this is likely to be, researchers from Source Global Research have gathered the views of hundreds of consulting firms from around the world. The group has subsequently estimated that Covid-19 could reduce the size of the consulting industry by 19%, from $160 billion in 2019 to $130 billion in 2020, with the second and third quarter of 2020 expected to be the worst periods for negative growth.

While the good news is that Source anticipates a rapid recovery, which will likely commence before the end of the year, there will be large variations across regions, countries, industries, and firm types.

Strong Analytics

Organizations are standing up analytics capabilities to inform business responses to COVID-19 challenges and prepare for the future. Business leaders must protect their employees and customers while managing the economic repercussions in the wake of community lockdowns, consumer fear, and continual uncertainty. The decisions they make today may alter their company’s trajectory for years to come.

In these uncharted waters, where the tides continue to shift, it’s not surprising that analytics, widely recognized for its problem-solving and predictive prowess, has become an essential navigational tool. Analytics supports numerous urgent tasks facing businesses today: forecasting demand, identifying potential supply-chain disruptions, targeting support services to at-risk workers, and determining the effectiveness of crisis intervention strategies. The pandemic has shown that rapid change is both possible and pivotal for business survival. Certainly, some more complex challenges won’t be solved overnight. But we believe that leaders who pay heed to the lessons from COVID-19 responses, acknowledge that the future will be quite different from the past, and build on the new—and pragmatic—ways of working have the potential not only to survive but to also thrive.

Team(in Alphabetical order): Ankita S, Gaurang Gulati, Gaurav Chaudhary, Keshav Tripathi, Manika Sankhla, Shubham Jha, Sneha Jaju, Vishakha Telang.

Mentor: Prof. Shrinivas Shikaripurkar

Tools used: Tableau, Power BI, R-Studio (Time Series Forecasting).

Data Source: Thomson Reuters.