Australia's acquisition aversion

Australian companies are passing on a rare opportunity to exploit weakness in their American and European counterparts to pick up cheap acquisition deals in Asia.

Australian companies have proven themselves adept at exercising caution when it comes to M&A activity. But this strategy brings with it a host of risks that corporates may be ignoring at their peril.

Australia has escaped relatively unscathed from the meltdowns seen in Europe and the US over the past four years, yet Australian corporates seem determined to wait until the global economy is fully recovered before dipping their toes into transaction activity.

This could prove a costly mistake. A new report from Ernst & Young shows Australasian companies have fallen behind their global counterparts in investing in the world’s growth markets, including Asia.

Graeme Browning, Ernst & Young’s Transaction Advisory Services Leader for Oceania, says that Australasian companies are taking a "wait and see” approach, but they risk missing out on potential opportunities in growth markets.
"I think they’re abnormally cautious. And on the one hand I can understand that, because this recovery from the GFC has been long and disruptive.

But sitting on the sidelines is not a growth strategy. Companies are in business to grow, so they really need to work out how they best do that.”

Browning is exactly right – sitting on the sidelines is not a growth strategy. But it’s one that Australasian companies seem intent on pursuing, in the near term at least.

Australasian companies have a chance to leapfrog ahead of the competition and take advantage of not only their proximity to Asia but also the ability to transact while global companies are getting back on their feet. Corporates need to carefully consider the benefits that such a move could bring.

Instead, the findings of the Capital Confidence Barometer show a fall in confidence for Australasian companies, with 82 per cent believing the local economy is stable or improving, down from 91 per cent in April, when the last survey was conducted.

The survey also found that 25 per cent of global companies expect to pursue acquisitions in the next 12 months, compared with just 20 per cent in Australasia.

That Australasian companies are more pessimistic of the business environment than global companies is a curious development that is proving a hindrance when considering acquisitions.

After all, Australian companies have the ability to transact. They’ve got the balance sheets, but what’s missing is the will to go after M&A because of the risks posed in the current climate.

Also missing is the will to transact on a large scale in Asia. Traditionally, Australian companies have generally shied away from M&A in growth markets, preferring the more developed markets of the US and UK.

It can’t be ignored that restrictions on foreign ownership and a less developed market for M&A also hinder such activity in emerging markets, including Asia. Nonetheless, there is a growing market in the region and Australasian companies are in the perfect position to reap the benefits.

But they need to be considering such a strategy now, before the competition heats up. Companies in both Europe and the US have struggled for years with subdued market activity that has led to offshore M&A being seen as the only feasible means of top-end growth.

Australia has not had to do this yet, because the domestic economy is stronger than other developed markets. But this should not be seen as a reason not to pursue offshore M&A. In fact, Australia’s major advantage is that it is not as desperate as Europe and the US.

The best time for any company to be considering an acquisition is before it’s needed to drive growth. By getting in early, smart companies can take more time in getting to know the local market and make calculated moves with less risk.
On the other hand, striving to make offshore acquisitions from a position of greater need means more risk.

Australasian companies are still in a position where they can consider offshore M&A in growth markets from a position of strength relative to Europe and US. Now is the time to consider taking advantage of such an opportunity.

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