M&A activity involving Australian companies has hit US$86.1bn in the first half of 2011, according to the latest Thomson Reuters M&A review. The equivalent level of activity in 2007 was US$93.8bn, which suggests that M&A activity is approaching pre-GFC levels. However, lawyers report that the number of deals and sentiment in the market are a far cry from 2007.  “Even though the overall value is closer, I don’t think there is the same feeling in the market,” said Clayton Utz M&A partner Karen Evans-Cullen. “In 2007 deals happened faster and more frequently.”

Of the overall M&A cross border activity in the first half of 2011, outbound deals accounted for only 25%, while inbound accounted for 75%. “We have been surprised by the strong inbound investment activity, given that the Australian dollar has appreciated in recent years,” said Evans-Cullen. “But, we think this [activity] has continued because of the strong and robust economy, which gives confidence to overseas investors.” A majority of inbound deals focused on the materials sector, which accounted for 262 of the 801 transactions in the first half of the year.

A high Australian Dollar should, in theory, slow the amount of inbound investment; however according to Evans-Cullen there are a number of deals going ahead based on strategy, which are not affected by the dollar’s movements.  “The Fosters and the Barrick Canada/ Equinox Minerals deals, for instance, have gone ahead regardless of the Australian dollar. The resources space in particular has a number of strategy-based deals,” said Evans-Cullen.

While strategy will vary from company to company, the inability to expand further in the local market and regulations prohibiting acquisitions are just two of the reasons why Australian companies are heading abroad, says Evans-Cullen. However, just like inbound investors they are adopting a cautious approach, leading to a drop of 20% in outbound M&A activity in the first half of 2011 compared to 2010. Of the deals that went ahead, the majority occurred in the US, which claimed 82.6% of all outbound Australian investments.

“The US is one of the more attractive markets for Australian companies looking to invest offshore. Prices there are depressed there at the moment and a high Australian dollar makes it cheaper,” she said. “Companies are also more confident in investing in the market because of its similar laws and regulatory framework.”  Overall, Evans-Cullen said there was a large amount of interest in the market, but boards were remaining cautious when it comes to acquisitions. “Compared to 2007, M&A activity is much lower and much more conservative,” she said.

Significant M&A deals first half 2011