Australian firms rethinking approach to M&A as focus turns to cost reduction: Report

The number of Australian companies actively pursuing mergers and acquisitions has dropped, with more than 50% of firms surveyed by Ernst & Young for the latest instalment of its Australasia Capital Confidence Barometer report instead opting to focus on improving operational efficiency and reducing costs.

However, 44% of companies surveyed for the report indicate they still plan to grow via acquisitions and these companies are focusing on international targets and innovative and disruptive technologies to achieve their goals.

EY surveyed more than 1600 senior executives in 54 countries, including 127 in Australia and New Zealand, to put together the report, which was released today.

While six months ago 54% of survey respondents said they were actively seeking growth, today’s report shows that figure has fallen to just 22%. Instead, cost reduction is now at the heart of the strategy for 55% of the companies surveyed, compared to approximately 25% six months ago.

Of the 44% of Australian companies still actively seeking growth through an acquisition strategy, 70% indicated they are considering offshore acquisitions. Among the top international destinations for Australasian countries are the UK, the US, China, Germany, Canada, India and Japan.

Australian executives surveyed also said they are confident about the outlook for mergers and acquisitions, with 84% saying they are confident about the quality of acquisition. Three-quarters of executives said they were confident they could close acquisitions and 89% indicated they feel confident about the number of potential deals available.

Julie Hood, transaction advisory services leader for EY in the Oceania region, told SmartCompany the more cautious approach towards mergers and acquisitions being taken by many Australian companies “plays off the subdued nature of the Australian economy”, including volatility in commodity markets, instability in the region and slower economic growth at home.

For small and medium size companies, Hood says the fact that cost reduction is back on the agenda is particularly relevant.

“From the past barometers, cost reduction was very strong around the time of the Global Financial Crisis, but then it was all about growth,” Hood says.

“Now it is back in play.”

But Hood says given 44% of companies said mergers and acquisitions are still part of their strategy, there is still growth there.

“But it is quite different acquisitions around innovation, digital and disruptive technology areas, in their core business as well as complementary areas that really have their customers at heart,” Hood says.

And despite more companies focusing on cost reduction, Hood says this does not necessarily mean reducing staff numbers. In fact, 78% of companies reported plans to create new jobs to add capabilities to their business and underpin digital strategies.

Hood says EY’s research also shows Australia is now in the top five investment destinations for global companies pursuing mergers and acquisitions, alongside the UK, the US, Germany and China. This means Australian SMEs are increasingly becoming acquisition targets too.

“The reality is Australia is on the radar as a destination of choice for potential acquisitions,” Hood says.

Hood believes this presents an opportunity for SMEs to review their portfolio of assets and consider if there are assets they could sell. And she says larger companies that are now focusing on cost reduction will also be reviewing their portfolios and potentially looking to sell those to firms in the mid-market.

“Because capital is such a scarce resource, reviewing [your company’s] portfolio allows you to truly understand where your portfolio adds value and the gaps in the requirements you need to build success,” she says.