The typical purchase price for a regionally based M&A transaction is between $50m and $200m and the typical business involved in a transaction is either a subsidiary or business unit operated by a large national firm or a privately owned, small to medium enterprise (SME). Unsurprisingly, when it is mentioned in the press, regional M&A is referenced as a market segment that booms in the good times and falls silent (relatively quickly) when times are tough. But what has led to the establishment of this “truism”, and is it real?

Any generalisation about a decision to buy, sell or raise money needs to consider that deals are often impacted by delay and imperfect information. For an SME, the decision to trade is often made over a kitchen table, rather than in a capital city boardroom. A board will base decisions concerning a prospective transaction on known facts (particularly due diligence reports), current economic data and forecast information. In this way, a well-run SME or family board is no different to an ASX listed board.

While due diligence conducted by commercial, legal and finance advisors is generally timely, there are information and reporting time lags and economic data is often non-specific and not directly “regionally focused”. Further, because of the style of economic reporting, a regional board is often only left with very “high level” and nationally (or internationally) focused data. While a regional company director will consider the national figures, and there is often “industry association” data that is relevant to a decision, their key focus will usually be on whether macro-economic factors will impact their transaction decision in the local markets in which they operate. Understandably, that can be a very difficult assessment to make from the kitchen table.

Over the past few years, when we look at the regional transactions our legal and advisory firms have been involved with, an average board decision to acquire a business has been made and recommended for final approval over perhaps a 4-to-6-month period. In a down market, that period tends to blow out and, in some sectors, we are now seeing 9-to-12-month deal timelines becoming more common. Better availability to ‘regionally focused’ or market specific economic data is quite likely to improve transaction lead times and board decision making.

It is well recorded that the past 18 months has seen one of the worst bear markets for M&A in a decade. Transaction data shows that, excluding the mega deals such as the Oz Minerals sale to BHP, the Zimmermann sale or the Downer EDI asset spinoff transactions, Australian M&A deal numbers have been bouncing along at historic lows. Similarly, Initial Public Offers on the ASX dropped to 55 after peaking at 204 in 2021 (double the prior decade long average).

Some large global corporate finance teams are saying that calendar 2024 should see a resurgence in M&A activity and locally, Australian advisors are poised for the IPO window to reopen. However, not every advisor shares this sentiment. For example, in February Macquarie Group’s third quarter update to the ASX flagged that confidence remains weak in the market for mergers and acquisitions despite the recent pause in interest rates.

We think the regional position generally, and regional SME private treaty M&A more specifically, lags significantly behind the position in metro markets. It follows that we do not think there will be a dramatic change or resurgence in regional M&A for some time.

During 2022 and the early part of calendar 2023, we did not see a decline in M&A involving private SME businesses with exposure to regional markets in NSW, Queensland or WA. Our experience, and that of advisors we work closely with, suggests regional markets in these States were less exposed to national (and international) bear M&A market conditions. Our firm worked on several private M&A transactions in the Hunter Valley and Central West regions of NSW, and on an acquisition in WA, that all had regional focus throughout the mining territories of those States. These deals, and the positive sentiment surrounding them, tended to buck the national downward trend.

However, from July 2023, as interest rate increases started to bite, the economic data demonstrated a growing “cost of living crisis” and the Federal Government ramped up the reshaping of the industrial relations landscape, we have started to see increased hesitancy and reluctance in the regional markets. For example, transactions are now being pulled because of purchaser finance or funding constraints, or because of risk aversion with respect to issues that may have traditionally been considered perfunctory by a buyer. Similarly, regulatory risk (most notably in the IR space) has been blamed for the cessation of some recent sale processes.

Our view is that, rather than 2024 seeing a resurgence in deal flow, it is more likely that regional M&A will continue to lag behind the national trend. If Macquarie Group and their likeminded peers are correct, and the broader market is not yet poised for a “Bull Run”, we think regional M&A could remain quiet for the remainder of 2024 and possibly into 2025.

One reason promoted for a 2024 deal resurgence is the large pool of private capital waiting to be deployed. Many bankers, private equity funds and corporate finance professionals subscribe to this thesis and are actively pushing the theory that last year’s economic uncertainty and relative instability was stifling capital investment. When coupled with the media’s focus on interest rates, inflation and GDP numbers, these stakeholders say more stable economic conditions appear to be evolving, with the big 4 banks now forecasting lower interest rates as inflationary pressures reduce.

More stable economic conditions at a national level may well loosen constraints on M&A and capital deployment, but we expect that loosening to be slow to flow through to regional markets. It may even be the case that instability is the new norm. When we contrast the transactions SWS worked on in Q1 and Q2 of FY’24, with those from FY’22 and FY’23, recent board decisions to proceed or kill a deal took longer and focused more heavily on regulatory and market (economic) risk factors.

Sensible regional company directors, particularly at the family office or SME board table, are proceeding on the basis that geopolitical and national economic uncertainty will have at least some impact on proposed transactions for the foreseeable future. Even if there is an uptick in the volume and complexity of M&A deals at the big end of the market in calendar 2024, we believe the volume of regional M&A will take longer to recover.

Of course, there will be exceptions in our regional economies. And the unstable conditions may well lead to some excellent opportunities for the brave.

During FY’22 and FY’23 our experience shows that smaller deals in the more resilient energy, mining and engineering services sectors were not impacted at all by the downturn. These deals are likely to continue for SME buyers and sellers, despite challenging operating environments, regulatory complexity, delays (particularly for inputs and consumables) and instability in commodity prices. Market instability tends to create ongoing opportunities in these sectors, particularly as the larger energy and resources operators pursue increased scale and consolidation.

The regional tech industry also appears to be weathering the storm reasonably well. We have seen several (relatively smaller) deals in tech and digital transformation businesses, including larger acquisitions initiated by inbound overseas acquirers. We think owners of good well secured intellectual property and knowhow will remain a target. We also think foreign buyers will continue to look for opportunity. Overall regional tech and service business transactions (perhaps involving a business that may have relocated a workforce and flourished in a regional area following the work from home phenomenon) should continue to buck the general regional slowdown.

As always, a family or SME business that is transaction-ready and acts locally while considering the national and global context, will be well placed to participate in M&A. The trick in the current environment is understanding how best to manage the “new economic normal”, while also looking out for and capitalising on opportunities when they present.

This Article was first published in February 2024 by Andrew Windybank, Director and Principal, SWS Lawyers Pty Limited.

SWS Lawyers, and its sister advisory firm, support small and medium businesses, private clients and family groups by providing cost effective access to professional M&A and transaction services. Members of our team have over 30 years’ experience in private treaty M&A and capital raising. We employ and work with lawyers and professional advisors who have genuine expertise and experience working on large ASX listed, private equity and private treaty deals, across a very broad range of industry and market segments. We know our markets. We run tight deal processes. And we close transactions.