High interest rates dampen M&A activity in FY23
Merger and acquisition deal activity was subdued in the 2022–23 financial year with higher interest rates and inflation increasing the cost of capital, a HLB Mann Judd report reveals.
The 2022–23 financial year saw a reduction in the number of merger and acquisition deals with capital becoming more restricted, according to the M&A Annual Report FY2023 by HLB Mann Judd.
In the 12 months to 30 June 2023 there were 1,077 deals completed in 2023 financial year, down from 1,455 in the 2022 financial year and 1,314 deals in the 2021 financial year.
The number of deals across all industry groups (except utilities) was lower in FY23 than FY22.
The average transaction value also declined, falling to $92.97 million in the 2023 financial year, down from $121.30 million in the 2022 financial year.
However, the average deal size was still above the average for the 2021 financial year of $80.38 million.
HLB Mann Judd advisory partner Simon James said investors were more cautious about meeting vendors’ pricing expectations in the 2023 financial year due to rising interest rates, a higher inflation environment and ongoing geopolitical factors.
“The reduced number of deals across all quarters of the past year indicates that the deployment of capital has become more restricted. As the price of debt rose, some M&A transactions were put on hold in FY2023 until financial markets improved,” said Mr James.
“Buyers were more cautious about paying too much for acquisitions, which resulted in valuation expectation gaps between what investors were prepared to pay for acquisitions and sellers’ price expectations.”
Reflecting the lower deal values, Mr James said the overall average multiple achieved for completed deals fell to 10.3x in the 2023 financial year, down from 13.9x in the 2022 financial year.
“However, average multiples varied among sectors. Average transaction valuation multiples rose in the consumer discretionary and industrials industries in FY2023 whereas, in contrast, average transaction valuation multiples fell in the consumer staples, information technology, materials and telecommunications sectors,” he said.
“Information technology and telecommunications are typically more sensitive to interest rates, so we saw valuation multiples fall.”
The drop in M&A deals in Australia follows a broader trend happening globally.
Recent data from analytics company Dealogic indicates that during the first nine months of 2023, dealmakers agreed to 26,608 deals totalling USD $2.1 trillion globally, a 29 per cent decline in volume compared with the same period last year.
The September quarter statistics declined into the worst third quarter by volume in 11 years, with only 6,730 transactions worth USD $719 billion.
Dealogic said the decline in deals is likely driven by fears that US interest rates may remain high for a prolonged period to combat inflation, poor economic outlooks for Europe and China, and a tougher antitrust environment in Washington, Brussels and London.
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