Mergers and acquisitions tipped to increase in 2010 as businesses chase growth

Nearly half of all Australian companies believe they are in a well-structured financial position and could make the preparations to acquire another business within 30 days if necessary, a new Ernst & Young report reveals.

But the author of the report, E&Y partner Graeme Browning, has warned that businesses that are not actively seeking acquisitions or not looking to grow through a merger could fall behind in what will be a low-growth environment.

The first annual Ernst & Young Capital confidence barometer reveals about 25% of companies around the world are likely or highly likely to acquire other companies in the next six months, but that number jumps to 29% in Australia.

However, the survey also shows about 49% of Australian companies expect the impacts of the financial crisis to remain visible in their industries for the next one to two years.

Report author and Ernst & Young Oceania leader for transaction advisory services, Graeme Browning says this is the catalyst for pursuing acquisitions, as businesses realise growth cannot be found in the market’s recovery.

“I think we’re going to be in a low-growth environment for quite a period of time, and I think that will be the case around the world. I think some parts of the world will give a greater return, particularly in the Asian region. But what I hear from my clients is that they know there will be low growth, and so they will use transactions and investments to grow.”

The report reveals about 80% of Australian companies expect consolidation in their industries over the next 12 months, while about 36% rate the outlook for mergers and acquisitions in the domestic market as very favourable.

Additionally, about 41% said they would like to use potential opportunities over the next six months for inorganic growth, even though they are restricted due to issues such as financing. Only 3% of companies said they are “focused on survival”.

Browning says the results are a good indication businesses now have the confidence and strategy to make acquisitions, with 46% of companies saying they are “very well position” make a quick acquisition within 30 days notice.

“The companies which will be able to do well in acquisitions are those which are better capitalised. There are many companies which can acquire cash in rights issues, or cut costs, but these are companies with more prudent working capital management. They will be acquirers, and I think we’ll see less well-capitalised businesses being targeted.”

But Browning also says the report is a warning to businesses, and says if a business is not looking for an acquisition, or is not a target of an acquisition, then they should question the health of their business and its direction.

“Businesses need to be aware there about 30% of Australian companies considering an acquisition in the next six months. And if a particular company is not in that target band, or is not a target, then they are going to fall behind.”

“In a low growth environment, companies which are just relying on the market return to give them their growth will perform worse than those which are able to strategically use acquisitions to get a leap ahead.”

Browning also says a number of executive boards are putting more strategic effort into synergising acquisitions into existing businesses, which he says indicates the value these boards are placing on the growth obtained through buying a smaller business.