In the midst of economic uncertainty and a sluggish growth landscape, corporate leaders and fund managers in Australia are beginning to reevaluate their strategies. The recent UBS Australasia Conference shed light on a dilemma plaguing the financial industry, succinctly summed up by a casual remark made in the lunch line: "The defensive stocks are expensive, and the growth stocks aren't growing."
This conundrum encapsulates the challenges faced by both fund managers and corporate executives as they grapple with the question of where to find growth in an environment of economic slowdown and tepid real growth (adjusted for inflation).
While discussions of M&A were not prominent in public presentations, behind closed doors, it became apparent that M&A is quietly making its way back into corporate agendas. With organic growth becoming increasingly elusive and the economic landscape shifting, companies are once again considering deals as a means of expansion and rejuvenation.
The backdrop for this potential revival of M&A activity is marked by several factors. Firstly, a slowing economy has made organic growth harder to achieve. Secondly, corporate balance sheets in Australia are in robust condition, thanks to a period of fiscal discipline. Thirdly, M&A volumes have been subdued for nearly two years, allowing companies ample time to identify and evaluate potential targets.
However, Australian boards have a reputation for caution and conservatism, which raises questions about whether they will embrace M&A in the face of interest rate volatility, geopolitical uncertainties, and economic weakness. Nevertheless, banking experts argue that while there is uncertainty, the Australian economy has not yet reached a critical tipping point.
ANZ CEO Shayne Elliott's prediction suggests that the real impact of higher interest rates is likely a year away. Boards can take solace in the belief that interest rates are near their peak, with expectations of only one more rate hike rather than three or four.
This current landscape has created a window of opportunity for companies considering M&A deals. They can find relatively supportive investors in the market. Despite challenges in debt markets over the past year, there are signs of improvement. Local fund managers have demonstrated their willingness to support companies they trust, as evidenced by capital raisings, such as the one at Treasury Wine Estates. Moreover, with equity market liquidity down by approximately 15% this year, there is capital sitting on the sidelines.
While it's too early to declare a full-fledged M&A revival, industry observers and participants are closely monitoring this space. As companies navigate the complexities of a shifting economic landscape, the possibility of M&A could be a viable strategy to reignite growth and create value in the uncertain times ahead.
