M&A activity surged in 18 months, but will the pandemic acquisition boom continue?

A report released by advisory firm Grant Thornton Australia has found mergers and acquisition (M&A) activity flourished in the 18 months to the end of December 2021 with a 15 per cent rise in the number of deals.

A significant portion of the 1,606 deals outlined in the firm's Dealtrackers report were for Australian SMEs, as reflected in the median enterprise value for domestic acquisitions of $28 million.

In contrast, the median value for acquisitions with inbound cross-border investment stood at $243 million, with notable examples of large foreign buyouts including the takeover of Coca-Cola Amatil from Coca Cola European Partners (CCEP), and the acquisition of Spark Infrastructure Group from KKR and the Ontario Teachers’ Pension Plan Board.

Other significant deals completed during the period include Santos (ASX: STO) acquiring Oil Search for $12.5 billion in late 2021, Transurban (ASX: TCL) acquiring Westconnex for $11.1 billion, and Seven Group Holdings (ASX: SVW) taking a 44 per cent stake in Boral (ASX: BLD).

Other notable deals were the acquisition of Vocus from a subsidiary of Macquarie (ASX: MQG) and Aware Super, and Bain Capital snapping up Virgin Australia from the turbulence of administration.

The share of overseas buyers rose by one percentage point to 30 per cent, which in the eyes of the researchers validate the attractiveness of Australian assets. Half of the inbound investment came from the USA and Canada, followed by Europe (30 per cent) and the Asia-Pacific region (12 per cent).

IT only just managed to overtake industrial as the leading sector for acquisitions with 28 per cent versus 27 per cent, followed in third place by consumer discretionary (12 per cent) and then financials (9 per cent).

The list of leading corporate buyers included Swoop Holdings (ASX: SWP), Tesserent (ASX: TNT) Healthia (ASX: HLA), Apiam Animal Health (ASX: AHX) and Maas Group (ASX: MGH).

In contrast, the report emphasises investment manager activity moderated during the pandemic, although the firm expects there should be greater volumes in the current period in this area due to the significant funding that remains available coupled with an expansion of available opportunities across all sectors.

Top private equity buyers included Quadrant Private Capital, Five V Capital, Pemba Capital Partners, BGH Capital, Envest, and Livingbridge.

"This Dealtracker showed M&A activity levels have been remarkably resilient. As we look forward to the economy reopening resulting in improved market conditions and the continued weight of money, we should see deal activity remain strong and diversify across a greater number of sectors," says Grant Thornton partner and national head of corporate finance, Paul Gooley.

"Notwithstanding this position, should current inflationary pressures lead to increased funding costs and lower consumer spending and investment, there remains a risk that deal activity will slow and valuations ease as we are starting to see in IPO markets," he said.

"High M&A volumes in the information technology sector are predicted to remain as the importance of investing in technology is a key driver to maintain competitiveness, serve post-pandemic customer preferences, and to deploy new growth strategies across the wider business landscape."

Just three M&A deals completed in early 2022 - Square's merger with Afterpay, a consortium takeover of Sydney Airport, and Brookfield's buyout of Ausnet - already exceed the latest Dealtrackers' Top 10.

It is a possibility that this is merely momentum from last year's flurry of activity, but further deals at the negotiating table for the likes of Ramsay Health Care (ASX: RHC) and Crown Resorts (ASX: CWN) could keep the rhythm going in the current 18-month period.

However, as alluded to by Gooley recent initial public offering (IPO) activity pales in comparison to what was seen throughout most of the pandemic, which according to the report grew by 712 per cent to $20.6 billion in the timeframe covered.

The IPOs were dominated by offer sizes of more than $500 million which accounted for 43.9 per cent of the total funds raised, with examples including Dalrymple Bay Infrastructure (ASX: DBI) at $1.28 billion, GQG Partners (ASX: GQG) at $1.19 billion, Pexa (ASX: PXA) at $1.18 billion, APM Human Services International (ASX: APM) at $985.7 billion, Judo Capital (ASX: JDO) at $657 million, 29Metals (ASX: 29M) at $527 million and Pepper Money (ASX: PPM) at $500 million.

The best performers out of the period's IPOs were Best & Less Group (ASX: BST), Universal Store (ASX: UNI), Dusk Group (ASX: DSK) and 29Metals, while the worst performers were Zebit (ASX: ZBT), Nuix (NXL), Harmoney Corp (ASX: HMY) and Adore Beauty (ASX:ABY).