Dealmakers ANZ Blog Series: Interview with Marc Wyld and Jason Marcus of Thomson Geer


14 December 2016

dealmaking

In an uncertain market, what factors have been impacting deal flow?
M&A Deals: Avoid surprises in an era of uncertainty

After four consecutive quarters of declining or flat activity in Australian M&A markets, the Intralinks Deal Flow Predictor shows a decrease in early-stage deal flow heading into the 1st quarter of 2017. There are several important factors that may be holding back growth.

We spoke with Marc Wyld and Jason Marcus, partners at law firm Thomson Geer, about factors impacting deal flow in the Australian mid-market.

Regulatory, cost and tax uncertainty
According to Marc and Jason, in the mid-market space there is a fair amount of activity and a reasonable pipeline, but it is taking longer for deals to get done in this uncertain environment, particularly in relation to the global economy, interest rates and Australian government policies on overseas acquisition approvals.

For example, the Foreign Investment Review Board (FIRB) is now asking for nonrefundable application deposits from overseas investors. Deposits can be as high as AU $100,000 – and deal approval is not assured. Jason points out that, for large acquisitions, such fees are viewed as a cost of doing business. But at the mid-market level, deposits of that size add significant risk, and investors may be dissuaded from seeking FIRB approval too early on in a competitive sale process.

From the sell-side perspective, Marc suggests that Australian companies will sometimes consider less-competitive bids from domestic buyers rather than cope with the uncertainty and potential delays associated with the FIRB approval process.

Overseas investors believe Australia’s M&A market still presents significant opportunity and remain enthusiastic about investing there. China, Europe and India in particular view Australia in a positive light due to its stable regulatory framework and reliable political and banking systems. However, Marc notes that efforts by the Australian Tax Office to clamp down on tax evasion by international companies may be holding back deal flow and lowering prices achieved for Australian assets. “I think the markets, particularly overseas investors, are starting to form the view that complex tax structures may not be as effective as they have been in avoiding or minimizing tax, and they are factoring that into their bids.”

Examples
Over the last 24 months, the residential aged care market has consolidated and valuations of residential aged care facilities have peaked, largely due to changes in payment legislation. Complex regulations favor experienced players who understand the clinical needs of care recipients and have firmly established processes to deal with payment and reimbursement issues. In this case, a deep knowledge base of arcane rules and regulations, as well as a thorough understanding of the risks of a aged care business, provides a significant competitive edge. The end result is a dampening effect on M&A activity as entrenched players pick up market share from those who can’t keep up with changes to the legal framework.

According to Jason, government policies and funding are also impacting deals in the medical devices and pharmaceuticals industries. Changes in government policies and disability schemes have introduced additional compliance work in these industries.

Election results
Deal flow traditionally tightens leading up to an election – particularly elections which are expected to be close. Marc says that he experienced that to a degree with the Australian election earlier in the year, and that there was a small but noticeable uptick in activity after the election. Marc says deal flow did not change noticeably leading up to the US election, but he anticipates some initial negative impact on deal flow as the business community comes to terms with what a Donald Trump presidency means for the world economy. "I think the markets have overreacted to the news of Trump's win because it came to most as a surprise. People are still trying to understand precisely what a Trump presidency means, and we won't really know that until he starts making decisions as president. I expect the predictions of doom and gloom for world markets which are prevalent today will dissipate over time, and that markets will return to normal."

Jason also says that "with uncertainty in the US, in some instances some sectors in the Australian market may become a more attractive place to do business, and local businesses may focus their attention on opportunities in the Asia-Pacific region."

No surprises
Markets don’t like surprises – and neither do investors. In an uncertain environment, clients want advisors who are able to foresee problems and avoid roadblocks. They certainly don’t want to get 80 percent of the way through a deal only to discover a new FIRB condition or approval process that increases costs.

In an environment rife with regulatory, cost and tax uncertainty, eliminating unpleasant surprises that can upend deals has become an increasingly important factor for M&A firms and their clients.

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James Render

James Render

Jim Render is an Account Executive at Intralinks specialising in helping the Advisory and Legal community maximise the efficiency of their deal-making process.