Developing a taste for M&A

Katherine Simmonds discusses the changing landscape of M&A in New Zealand and the increasing appetite for M&A insurance from businesses.

In the world of mergers and acquisitions, the first half of 2024 is shaping up to be more active than the sluggish start to 2023. This shift in the M&A landscape is driven by several factors that are transforming the industry and creating opportunities for investors, corporates, and private equity firms.

New Zealand is emerging as a promising hub for M&A activities. It boasts a well-developed market with industry-specific or specialist businesses, offering quality targets thanks to its vibrant entrepreneurial sector.

It is also attractive from a currency perspective for target companies.

In the first half of 2023, M&A deal activity witnessed a noticeable decline in New Zealand and globally. This decline was a sharp contrast to the previous years, including the COVID-19 period. However, as we soon move into the first half of 2024, the landscape is showing signs of revival. While it may not replicate the frenzied bidding seen in the “fear of missing out” (FOMO) days of 2021 and 2022, the overall deal activity, in New Zealand, Australia and more broadly across the Asia Pacific region, is on an upward trajectory.

Several factors are contributing to this resurgence:

Adjusted Price Expectations:

One significant reason for the revival is that sellers have adjusted their price expectations to align with what buyers are prepared to offer. This balance has reduced the gap between what buyers are willing to pay and what sellers expect, making transactions more appealing and feasible.

Understanding Economic Shocks:

Economic shocks, such as inflation, interest rate fluctuations, supply chain disruptions, and demand changes, are now more understood by all parties involved in M&A transactions which has reduced the uncertainty that was prevalent in 1H23.

Exploring Alternative Transactions:

Another contributing factor is the consideration of alternative transaction types. Continuation fund transactions are on the rise, indicating a diversification of M&A strategies and deal structures. We expect these trends to continue into 2024.

As M&A activities heat up, there is a growing demand for insurance to de-risk these transactions for both buyers and, increasingly, sellers. Insurance provides a buffer against unforeseen contingencies, making M&A deals more secure and attractive.

The Private Equity sector is experiencing a transformation, with more emphasis on due diligence and different risk profiles. There are some in the sector focusing on distressed assets whilst others are focusing on unlocking value in a variety of businesses.

The M&A landscape is not limited to large transactions, and there’s been a trend of smaller deals in New Zealand and globally. Recently, we launched a new online M&A insurance platform in New Zealand called Mio, (mergers and acquisitions Insurance online) which is specifically designed for buyers or sellers of smaller sized deals up to $NZ100 million. The digital based Mio offers a transfer of risk for Buyers or Sellers, or a clean exit as its commonly referred to, whilst also adding efficiency to the underwriting process for all parties in terms of time and cost.

Dealing with cyber threats

There are other ongoing challenges in today’s M&A landscape that are not necessarily tied to market volatility. Cyber threats are significant concerns for all parties involved in the M&A process and M&A insurance underwriters like Fusion are actively working to respond to this growing challenge, emphasizing the importance of robust cybersecurity measures in today’s transactions.

ESG considerations are also gradually making their presence felt in the M&A landscape. At Fusion, we are exploring ways to recognize and factor good ESG practices into our underwriting and pricing models. While this trend is still in its early stages, its role in M&A deal underwriting and due diligence is becoming clearer, though there is much work to be done in this sector.

Looking ahead, the M&A landscape is undergoing a significant transformation, with opportunities for both large and small deals, and a growing emphasis on risk management, cybersecurity, and ESG considerations.

There’s confidence that the first half of 2024 is expected to be a more active period for deals, as the market becomes more favorable for investors. As ever, the adaptability of the M&A sector underscores its enduring appeal and potential for growth.

Katherine Simmonds (pictured) is CEO of Fusion International, an underwriting agency focused on underwriting M&A transactions.