In this short article we provide some commentary on what we’ve seen in the M&A market since our last M&A update, both locally and nationally, through our continued involvement in a range of transactions, and recent trends as we move into a new calendar year.

In the past 12 to 18 months we have continued to enjoy a strong pipeline of deals, for both buyers and sellers, typically in the $10m to $60m price range.

Buyers want quality

In the NSW Hunter region we continue to see strong interest in mining services businesses who have good people, good technology and good cashflow. These are the companies that survived the mining investment downturn five or six years ago, where others perished, and are now being rewarded.

Since out last update we have acted on the sales of  two well-known Hunter based mining services businesses (both with national and international operations). The first sale was to one of Australia’s largest ASX listed mining services operators who identified immediate synergies with their existing operations, particularly in Queensland where our client had a very strong client base. The other sale was to a large multi-national engineering company, head quartered in northern Europe, who saw big opportunities in bringing the know-how and technology our client had developed to a wider client base beyond the mining sector.  

The quality and uniqueness of both of these businesses resulted in high multiples being paid and some very satisfied sellers who were able to achieve lucrative exits.

But while good businesses will sell, we continue to see potential buyers taking a cautious approach, with extended due diligence, resulting in longer transaction timetables and higher transaction costs.    Financiers are also extremely cautious and are taking a more hands on approach to satisfy themselves their money will be well invested.

Weak Australian dollar make deals attractive for overseas buyers

Nationally we are seeing a lot of interest from overseas buyers, who can find attractive deals given the comparatively weak Australian dollar against other major currencies, particularly the US dollar and the Euro.

Earlier this year we acted for a large US software company, which is a leader in ERP software, particularly for the hardware and building industries,  on the  acquisition of a Melbourne based software business.  The strong US dollar made another Australian acquisition an affordable and timely option for our client and allowed the Australian sellers to meet their price expectations on the exit.

We also acted for the Australian subsidiary of a US industrial services company on the acquisition of a complimentary business which immediately added to the US groups profitability, demonstrating again the attractiveness of Australian businesses to overseas buyers who have the benefit of advantageous exchange rates.

We can expect to see continued interest from overseas buyers for the foreseeable future as the Australian dollar remains weak.

Money is cheaper, but harder to get

There is plenty of money out there which can be borrowed for historically low interest rates. There are also plenty of cashed up private equity firms, family offices and high net worth’s who are always looking for solid deals. But the hurdles to convincing them to part with their money, whether for a specific deal or a more general capital or debt raise, are getting higher.

Again quality will win the day, particularly in the ‘start-up space’ where we are seeing big demand for  capital raises between $1m to $5m. Whilst those are relatively modest levels of investment, don’t expect the process to a successful raise in this space to be quick or easy, but if you have a good product and, critically, a good management team/founders, your chances are better.

We recently acted for a Hunter based company which has developed cloud-based software for the pharmacy industry. The quality of the product and track record of the founders meant they were able to attract an Australian listed pharmaceutical company as a cornerstone investor and are now well on their way to a larger capital raise. Beyond that, a possible IPO or trade sale beckons.

Insurance against warranty claims is the new normal

Again, at a national level we are seeing more and more M&A deals using ‘warranty and indemnity’ insurance (W&I Insurance) as an additional mechanism to protect both buyers and sellers against post completion warranty claims. Whilst previously this type of insurance was only used in private equity, large corporate and high value deals, it is now common in the mid-market space.

We are currently acting  for the sellers on two deals, in the $50m price range, where W&I insurance has been included as a key condition in the initial term sheet for the deal to proceed.

We will cover this aspect of emerging trends in M&A in a future article.

In summary, we are seeing good companies being bought and sold for good multiples in a challenging environment. Our ability to attract these transactions on a regular basis is a testament to the quality of our clients, our people and our product.

This article is not legal advice.  It is intended to provide commentary and general information only.  Access to this article does not entitle you to rely on it as legal advice.  You should obtain formal legal advice specific to your own situation.  

James Stevenson

James Stevenson -

Consultant

Corporate and commercial law specialist