Trends in Australian M&A

Over the last year economic uncertainty has affected the Australian mergers and acquisitions (M&A) landscape. Whilst recent business surveys reveal a more positive outlook for growth and acquisitions, we have identified some recent trends in the Australian market, and the effect of various economic, legislative and legal trends on these transactions.

Economic factors

• Inflation and high interest rates have resulted in an increase in the cost of borrowing which reduces purchasers’ ability to fund acquisitions.
• In certain sectors the failure to achieve forecasted financial results has created a valuation gap between buyers’ and sellers’ expectations and this has led to the deferral of some transactions and the collapse of some deals.

Legislation

• The Australian Government has proposed reforms to domestic merger rules which aim to prevent anti-competitive M&A transactions and to deliver more favourable outcomes for businesses and consumers. However, the proposed mandatory approval process and financial threshold for application of the new regime may in practice slow down transactions and increase the costs.
• The Foreign Investment Review Board which enforces the foreign acquisition rules in Australia, which restrict certain investments from foreign entities, has announced that there will be increased scrutiny on foreign investments.

Legal trends

• In the context of current economic conditions, deal structures have become more complex, deal times are longer, and buyers are carrying out more rigorous due diligence on target companies, as they try to mitigate the risks associated with acquisitions and integration.
• Earn-out provisions are being used in most transactions to bridge valuation gaps. Also some earn-out arrangements which were agreed one or two years ago are being renegotiated where the financial outcomes are significantly different to the negotiated position and are no longer perceived as fair in the current conditions.
• Locked box adjustment mechanisms are now being used more frequently for completion accounts to provide more certainty to buyers on the financial state of the target business.
• Ticking fees (effectively interest payments for the period between the locked box accounts date and completion) are becoming more common to incentivise buyers to complete transactions quickly.
• The cancellation fees paid to participants in a seller’s employee share or option scheme when the scheme is cancelled on completion of a sale are more frequently being deferred in order to incentivise employees to stay with the buyer.

For more information please contact Alistair Jaque at Deutsch Miller.

Further reading:

Australian Competition and Consumer Commission approvals

About Deutsch Miller:

As Alliott Global Alliances’s law firm member representative in New South Wales, Australia, the team at Deutsch Miller combine technical excellence, first class service and a practical, commercial approach to legal issues, earning them a reputation as the astute choice for international and domestic clients and their advisers when they face complex, critical commercial challenges and opportunities. Read more.