Merger & acquisition activity slowly recovering

Merger & acquisition activity slowly recovering

Close to 40% of New Zealand’s privately held businesses are expected to grow by acquisition over the next three years, well ahead of the global average, according to an international survey of more than 7000 privately held companies by accounting firm Grant Thornton New Zealand.

The fact New Zealand was one of the early economies to exit from recession and emerge from the global financial crisis in better shape than many advanced nations, is indicated in the survey results where the global average of anticipated future acquisition activity is only 26%.

Sean Abe, Manager, Corporate Finance, for accounting firm Grant Thornton New Zealand, said that New Zealand is expected to continue on a gradual recovery path and merger and acquisition (M&A) activity is predicted to follow suit.

“Most major M&A participants including vendors, trade buyers, private equity firms and lending institutions took a wait and see approach in 2009 due to scarcity of funding, lack of confidence in forecast earnings, low valuations and depressed macroeconomic conditions.

“Many of these negative factors have been mitigated and buyers and sellers are currently more positive and eagerly anticipating increased deal flow,” he said.

Recent M&A activity, which includes Direct Capital’s private equity investments in real estate agency and professional property services provider Bayleys Corporation Limited and SMART Technologies’ acquisition of NextWindow (Next Holdings Limited), a leading designer and manufacturer of optical touch technology, indicates this is already beginning.

“The majority of vendors have been waiting on the sidelines over the past couple of years as earnings have been reduced and pricing multiples decreased, resulting in unfavourable company valuations.

“Many companies have now weathered the storm and stabilised profits while looking toward future growth. Pricing multiples are also slowly increasing but, more importantly for vendors, there appears to be an increase in willing buyers returning to the M&A marketplace,” he said.

The survey indicated that growth through new geographic markets, building scale, acquiring new technology or established brands and access to lower cost operations were major reasons for intended acquisitions.

“Competing companies who may be struggling or have succession issues are prime acquisition targets,” he said.

The findings of the survey are reinforced by the New Zealand Private Equity & Venture Capital Association (NZVCA), which predicts heightened transactional activity and growth in the mid-market, which has generally been classified as companies with enterprise values between $10 million to $200 million.

“Recent successful capital raisings by New Zealand private equity firms totalling approximately $575 million suggest strong institutional investor appetite and a significant amount of available funds. Favourable Government support, the recovering Australian economy, a challenging public market environment and the continual capital demands of many private New Zealand owned businesses provides significant opportunity and impetus for M&A activity,” he said.

ENDS

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