A downturn in global mergers and acquisitions (M&A) is expected to reverse this year as market participants gain more certainty on interest rates. However, the energy and resources sector in Australia faces uncertainty due to slumping commodity prices. According to advisory firm Bain & Co., global M&A activity dropped 15% in 2023 to $3.2 trillion, the lowest level in a decade. Strategic deals fell by 6%, with Europe and Asia experiencing a decline while the Americas remained stable. Deals in the energy and natural resources sector increased, while tech deals slowed.
The decrease in deal activity last year was attributed to higher interest rates, an uncertain macroeconomic outlook, increased regulatory scrutiny, and geopolitical risks. Bain’s report highlights the disconnect between buyer and seller expectations as the biggest obstacle. However, there is optimism that the trend will be reversed in 2024. The advisory firm expects an increase in M&A deals, with a potential acceleration as a big backlog of tradable assets from 2023 starts to move.
Bain notes that corporate balance sheets remain strong, indicating an abundance of cash available. The firm believes that certainty regarding the cost of capital and a reduction in interest rates will provide a boost to dealmaking. However, regulatory scrutiny and geopolitical tensions may impede certain deals from materializing.
Despite the global scenario, Australia’s M&A market aligns with the overall trend. In 2023, the total M&A market value in Australia and New Zealand was $79 billion, down 13% from the previous year. Strategic deal value increased by 4% to $67 billion, mainly driven by two megadeals. However, strategic deal volume experienced an 11% decline.
The energy and natural-resources sector accounted for approximately 50% of the total strategic deal value in Australia and New Zealand in 2023. However, Bain partner Liam Connolly reveals that over $13.22 billion worth of deals in this sector were stalled or canceled due to increased regulatory uncertainty. Notable examples include Albemarle’s abandoned deal to acquire Liontown and Brookfield’s rejected takeover bid for Origin Energy.
Mark Judah, a partner at Bain, highlights the growing influence of Australia’s superannuation sector and its impact on dealmaking. Connolly further emphasizes the need for a narrowing valuation gap and points out that changes in commodity prices, particularly for critical minerals like lithium, could create uncertainty in the energy and resources sector.
Nevertheless, Connolly believes that Australia’s energy and natural-resources sector will continue to witness M&A momentum as the industry requires significant capital to meet government and corporate targets in the energy transition.
Overall, while the global M&A market experienced a downturn in 2023, there is optimism for a rebound in 2024. As certainty regarding interest rates and cost of capital increases, dealmaking is expected to accelerate. However, regulatory scrutiny and geopolitical tensions may continue to pose challenges. In Australia and New Zealand, the energy and natural-resources sector remains a significant player in M&A activity, despite facing uncertainty due to slumping commodity prices.
