Interest rates dampen M&A activity for mid-market deals: Pitcher Partners
Australian mergers and acquisitions have dipped 9 per cent from the same period last year with dealmakers cautiously watching interest rates, inflation and broader economic conditions.
Pitcher Partners' latest Dealmakers report revealed that dealmakers are navigating a complex M&A landscape in 2024, balancing caution with strategic opportunity.
Overall, Australian M&A deals dipped 9 per cent in the first half of 2024, a 9 per cent decline from the 459 transactions in the same period last year.
Deal values rose by only 1 per cent, increasing to $52.4 billion.
The mid-market segment, comprising deals valued between $10 million and $250 million, experienced a more pronounced downturn, with deal values contracting 16 per cent to $7.96 billion, and volumes falling 18 per cent to 117 deals.
One of the main factors tempering M&A activity is the current macroeconomic environment, underpinned by interest rate unpredictability and persistent inflation, as well as a general lack of business confidence, according to the report.
Pitcher Partners said this was previously reflected in its Business Radar Report of 2024 which indicated that business confidence had declined from 8.1 out of ten last year, down to 7.84 in 2024.
"These elements have reintroduced a degree of concern and uncertainty in the market, complicating investment decisions for dealmakers, and ultimately delaying deals," the report said.
Despite downturn in deals, Pitcher Partners said mid-market businesses continue to present a significant source of value.
"These businesses are often more attractive than their larger counterparts due to their more manageable scale and comparatively lower investment requirement," the report said.
"This makes mid-market acquisitions more appealing to risk-averse dealmakers during times of economic uncertainty or periods of market volatility."
The report noted that these businesses require less capital, are easier to integrate and are perceived as lower-risk investments with potentially high returns and significant synergy opportunities.
"Moreover, middle-market businesses are often more agile than larger enterprises. This agility stems from their ability to adapt quickly to changing market conditions, implement new technologies and pivot business strategies," it said.
"This flexibility is a critical advantage in the rapidly evolving economic environment of 2024."
The report also indicated that dealmakers are opting for more risk-averse strategies in respond to the current economic conditions.
"This caution is increasingly evident as buyers demand more thorough due diligence processes, which can often slow deals," it said.
"This shift reflects a significant change from the quicker, sometimes less scrutinised dealmaking that drove the more buoyant M&A market during the pandemic."
Pitcher Partners Melbourne Partner Michael Sonego said in the current M&A market, quality trumps quantity, and investments must be sufficiently compelling to justify associated risks and costs.
“Despite initial enthusiasm earlier this year, with 70 per cent of respondents in our February outlook survey planning to increase M&A activities, dealmakers are proceeding with caution," said Sonego.
Inbound mid-market M&A saw sharp declines in the first half of the year, with deal values down by 46 per cent to AU$2 billion and volumes down 44 per cent from 1H23 to 28 deals.
However, the report indicated that the depreciation of the Australian dollar could make local assets more affordable for foreign buyers, potentially leading to an increase in overseas investments.
Looking ahead, Sonego said that while high interest rates and sticky inflation will continue to impose constraints, they will also compel dealmakers to adapt and refine their strategies.
“The Australian M&A market is expected to remain dynamic, offering positive returns for well-prepared dealmakers,” he said.
