Companies are increasingly buying or selling assets to become “businesses of tomorrow.”
According to new research from Deloitte, Australia’s public companies are increasingly turning to mergers & acquisitions in their pursuit of growth or to manage disruptive technologies.
Deloitte’s M&A Index 2017 report highlighted M&A spend on disruptive innovation-related sectors reached $291 billion globally in 2016, four times the $72 billion spent in 2012.
The report highlighted M&A activity commonly includes “transformational mergers with synergies, acquiring new business models to become the disruptor or divestitures of businesses being disrupted.”
“Facing the reality of a slow growth economy and increasing technological disruption, companies are becoming more strategic about divesting of non-core assets, potentially enabling them to invest in disruptive technologies such as artificial intelligence, robotics and fintech,” said Clare Harding, Deloitte Financial Advisory Managing Partner.
According to Deloitte’s numbers, in Australia average industry income growth decreased from 7.7 per cent in 2010 to 2.5 per cent over the last five years, hardly surpassing inflation. That means more organisations are turning to M&A, or inorganic growth, to achieve corporate growth strategies.
Deloitte interviewed heads of M&A from predominantly ASX100 companies, three quarters of those surveyed (73 per cent) agree that M&A is critical for them to deliver on their corporate strategy and growth ambitions.
Companies are also busy getting rid of ageing, undesirable on non-core assets to free up cash to capture disruptive growth opportunities, the report suggests.
Two thirds (66 per cent) of the survey respondents consider a divestiture of non-core assets likely to happen in the next 12 months. This echoes overseas trends with 73 per cent of US companies planning to sell units or assets in the next year (up from 48 per cent in 2016 and 31 per cent in 2015).
“We’re seeing companies move from reactionary, necessary divestitures where the primary purpose was balance sheet repair, to strategic and planned ones. In turn, this should mean that Australian corporate balance sheets are in a much healthier position and companies can look for opportunities,” said Jamie Irving, Deloitte M&A Transaction Services partner.
The report suggests businesses may be divesting themselves of non-core assets to prepare for the need to invest in data or technology capabilities, to capture disruptive growth opportunities. However the cash reserves of ASX companies remain high, Irving said, with companies citing cautious boards, slow decision making and a lack of desireable takeover targets.
“Companies tell us that primarily, it’s the lack of availability of desired targets. Another factor is risk appetite – boards have in many cases been very cautious given the volatility in the markets. Which leads to the third factor – lack of speed and quick decision-making. M&A is a competitive process and often corporates are outmanoeuvred by private equity firms who can move fast and respond more quickly,” Irving said.
According to the report, 50 per cent of survey respondents do not use data analytics in any part of their transaction approach. Comparatively, in the US two thirds of corporate leaders use data analytics and 64 per cent say they have increased their use of analytics significantly or somewhat in the past year.
When Australian companies do use data analytics in M&A, they are doing so predominantly in due diligence (25 per cent) and strategy development (25 per cent), with a lesser focus on integration, execution and synergy validation (all 14 per cent).
“The number one reason that up to half of Australian companies are not using data analytics to enhance their M&A transactions, is that they presume any request to access data will be refused,” said Irving. “However, that’s an outdated assumption. Most companies have sophisticated enough systems in place to allow easy access to de-identified data.
“Getting data analytics right in a deal can give an invaluable edge and mean that acquirers can continue to receive real-time data and insightful analysis post-deal, to track if a deal is performing close to expectations.”