Orica on Friday became the latest company to bemoan the impact of the Aussie on foreign exchange earnings, predicting a $25 million first-half hit on unfavourable FX impacts.
But those executives considering growth via an offshore deal could be in for a treat.
“We expect to see Australian companies using the strong dollar to look beyond our borders to enhance their growth potential,” EY partner and investment banking veteran Duncan Hogg said.
“Australia has performed well during COVID but given likely subdued GDP growth over the near term, the analysis suggests companies will be looking to supercharge their growth aspirations through overseas investment.”
Interestingly, the EY report shows the top five most likely investment destinations are India, New Zealand, Japan and Singapore, with the US and China slipping from the list.
An expected increase in competitive bidding in the M&A space in 2021 comes as cashed-up execs prepare to take advantage of a tide of insolvencies and a subdued deal-making environment in 2020.
EY’s survey found that 45 per cent of companies in Australia and New Zealand are expected to pursue M&A in the next 12 months – slightly down on the 10-year average – but a figure that has accelerated with the rocketing recovery of equity markets over the back half of last year.
“There’s a large amount of what we called dry powder, sitting out there with both private equity and with corporates,” Mr Hogg said.
The sectors likely to see elevated M&A activity in will be those who proved resilient during COVID, with Mr Hogg tipping financial services M&A as the standout opportunity.
Just this week Bank of Queensland snapped up ME Bank for $1.3 billion.
Meanwhile, Westpac’s head of business development Macgregor Duncan said the big four bank wants to partner with more fintechs to grow its customer base and fortify its balance sheet, after announcing its second deal in five months with the start-up sector.
Westpac announced on Tuesday it would partner with low-cost lender SocietyOne by sharing its banking licence in exchange for access to the eight-year-old fintech’s 75,000 customers and $1 billion loan book. This is after it secured its first partnership in October with buy now, pay later giant Afterpay.
“A lot of those financial services are thinking about ways in which they can counteract potential disruptors by making acquisitions across the technology platforms that are out there,” Mr Hogg said.
Technology and utilities sectors are the next most likely to be engaged in deal-making activity, he added.
“Thinking about M&A in the technology space, it is really driven by the fact that, once again, people are not only worried in the financial services space about disruption, but also across other traditional industries,” Mr Hogg said.
“So, the key driver is the concept of opportunity. Probably the highest in terms of potentially opportunistic M&A – which is driven by really low valuations – is in power and utilities.
“That sort of space is more value than growth, and is one where businesses are relatively safe because it is a regulated space.”
Mr Hogg said that M&A is likely to remain heightened as coronavirus vaccines take effect and people start to look well beyond the pandemic.
“Ultimately, when the IPO market is strong, it just gives more competition for underlying assets, because the ability of companies to actually list rather than be sold.”
Read More: Markets Live, Friday 26 February, 2021