What buyers are looking for in acquisitions and alliances

What buyers look for in acquisitions and alliances

It’s a balanced deals market at the moment, with both buyers, sellers and alliance seekers all looking to grow inorganically. While different growth strategies are resulting in more types of deals being done, the main driver is expanding the customer base, according to KPMG’s 2017 Evolving Deals Landscape survey.

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Southern bell frog

Increased competition over the coming 12 months is the top concern for just over half (51 percent) of KPMG’s 2017 Evolving Deals Landscape survey respondents. Meanwhile, 47 percent are worried about an increase in disruptive technology. This jumps to 68 percent among larger firms and 69 percent in the Technology, Media and Telecommunications (TMT) space.

These findings help to explain why businesses are so intent on shoring up their market share, says Peter Turner, Partner in KPMG’s Australia Mergers and Acquisition team.

“Everybody's looking to pick up market share where they can, so activity is high. However, it is a balanced market. There's a lot of opportunity but there are a lot of people looking as well,” he says. “There are more buyers competing for assets than 5 years ago. They're looking at new business models and new ways to expand. Widening their digital capabilities often forms part of that strategy.”

Acquiring digital innovation to grow your customer base

Digital innovation is the key driver of customer base expansion, says Margaret Cowle, National Managing Partner of Brand & Engagement and Partner in Charge of the Global Strategy Group, KPMG Australia. “Many of the more established players are often hamstrung by legacy systems and the fastest way to shift into new technologies and new approaches is to acquire them.”

While the traditional type of merger and acquisition (M&A) remains, says Cowle, with companies aiming to buy up competitors and their customers, there is now also the non-traditional M&A, which involves expanding the customer base through digital platforms. However, it’s not just about acquisition. “It’s more and more about alliances, white labelling, investment, joint ventures (JVs),” Cowle adds.

“For some of the large incumbents to win in the race for the customer, they have to either partner with or acquire the digital technologies that enable them to move with speed and agility.”

The new face of technology

However, 48 percent of KPMG’s survey respondents who are considering M&A over the next 3 years plan to expand their customer base the traditional way while 36 percent are focused on entering into new lines of business.

Only one quarter of respondents said enhancing intellectual property (IP) or acquiring new technology was a top three reason for their deal plans – although notably this did jump to 50 percent among those in the TMT sector.

Yet there is no doubt technology is affecting the market. Turner confirms that the acquisition of new technology is behind the current increase in JVs and other types of partnerships.

It’s also having an impact on the type of business models being formed as a result. Often these deals result in a new business models as technology drives sector convergence. “This means an existing client might move across sectors. You might see a battery operator acquiring a solar energy company to expand their market.”

Meanwhile, the digital technology space has seen its own raft of acquisitions and public market listings over the past 2 years, says Turner. “It’s been driven by consolidation and also a change in the type of service that's being sold. As that industry evolves towards cloud-based solutions and away from product-based selling, they have had to combine their consultative and technical skills to acquire customers and consolidate their existing markets.”

Cowle sees a rise in consolidation more generally across the market. “There is some portfolio rebalancing going on. Companies are focusing on their key growth assets and divesting their non-core assets.”

Buying rather than building

At the same time, there is a growing trend to buy into new regions. “Rather than setting up an office and a sales team, companies buy a business with an existing capability,” says Cowle.

Turner notes that cross-border deals now account for 50 percent of Australia’s M&A market. “If anything, we expect the pace to increase as buyers seek to take advantage of limited opportunities.”

More avenues for deal making

Both Cowle and Turner see a proactive attitude to growth through acquisition across the various business sectors. “There is an increasing trend to partnership to achieve that growth, but I still see a predominance on the acquisition side,” Cowle says. “Businesses are readying themselves for when the assets come to market.”

Turner agrees, adding that pricing can be high. “But there's a correction happening around IPO pricing and that’ll probably flow through to the private market as well.”

Cowle says that companies are now looking at more dual or tri-track options than previously. “As a buyer, you're competing against not just similar buyers, but also the well-funded Private Equity funds, theIPO market and companies looking for alliances.”

However, Turner warns that companies need to give more consideration to the regulators. “They are getting more involved in large acquisitions, with the Australian Securities and Investments Commission (ASIC) preventing some transactions from going ahead.”.

Increasing the chances of a successful deal

The more successful deals tend to have a well-developed strategy behind them. Turner notes, “It’s important to realise that opportunism doesn’t mean random.”

Cowle agrees: “The best deals are driven by defined strategies and an understanding of why they're doing things. This allows companies to pursue them aggressively.”

KPMG’s Deal Advisory specialists can assist – by providing forward-thinking insights and innovative ideas to inform a company’s inorganic strategy that is critical for future success.

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