Technology, Media and Telecommunications (TMT) companies have long been the darlings of Australian investors and those targeting Australian companies. But Pitcher Partners’ Dealmakers survey indicates that the sector might not be leading the pack in 2023.
- For the first time Technology, Media and Telecommunications (TTMT) is not at the top of Australia’s M&A list according to Dealmaker report
- 77% survey respondents identified Industrials and Chemicals (I&C) as like to see an increase in M&A ahead of TMT (72%) for the first time, as well as the Consumer sector (65%)
- I&C businesses are in the sights of entrepreneurs who are increasingly turning away from traditional acquisition financing models to alternative funding
Australia’s strength in technology development has produced companies such as Atlassian, Afterpay, Canva and countless other success stories, riding the world stage and growing revenue at staggering multiples.
Asked which sectors would see an increase in mid-market M&A in the next 12 months, 77% of respondents picked Industrials and Chemicals (I&C), the first time the sector has come out ahead of the TMT (72%) and Consumer (65%) sectors.
The sector includes companies involved in manufacturing and distribution of chemical products, capital goods and industrial machinery – among the key deals during 2022 were Viva Energy’s acquisition of polymer manufacturer and distributor LyondellBasell Australia, and CEFC’s Series A investment in Hysata.
It’s an improvement in fortunes for I&C, which in last year’s Dealmakers was favoured by just half of respondents, so what’s been behind this greater assurance coming into 2023?
The interest in I&C suggests several factors are colliding – profitability, succession planning and a growing subset of private investors.
Low inflation and rock-bottom interest rates fuelled credit for TMT and there has been a ‘build it and profits will come’ mentality among venture capitalists, private investors and other kingmakers looking to back any business that had potential.
The cash poured in and valuations in were sometimes ridiculous multiples of 10-or 15-times revenue. In the technology sector, the business didn’t even need to be profitable for a shiny company to attract investor attention.
But the world has changed. Money is valuable again and safe investments are offering returns. It’s a sobering moment that has brought the focus back to profitable options, such as I&C.
While the I&C sector is broad, it includes companies that are typically family- or founder-run businesses in manufacturing or materials, providing componentry or essential goods for supply chains.
They might not be the most exciting businesses, but with the onshoring of supply chains and manufacturing during the pandemic, many have robust balance sheets.
Downstream markets such as mining and advanced manufacturing strongly influence the industry’s performance, and the outlook in Australia remains robust with the demand for iron ore and critical minerals powering renewable energy technology.
These businesses are in the sights of entrepreneurs who are turning away from traditional acquisition financing models to alternative funding, including search funds — investment vehicles through which an entrepreneur raises funds from a group of private investors to acquire a business.
Search funds seek established, profitable businesses with prospects for growth or expansion but one where fresh thinking or technology may be necessary to embrace new markets or scale up.
It’s a succession story, for the most part. Typically, funders are relatively young, dynamic entrepreneurs actively looking for businesses valued in the range of $5 million to $20 million. They see the opportunity in organisations where the owner may be a bit older, perhaps not as deeply vested as they once were, but with no obvious succession plan.
That doesn’t always mean sellers are being forced out altogether and many transactions involve the retention of ownership for a period following the changing of hands. But it is a change of mindset to a focus on profitable growth.
It’s not the beginning of a decline necessarily in the technology sector – after all, 72% of respondents still have high confidence that there are deals to be done in the coming year.
Technology companies are the ones that everyone could see and wanted to be seen with – and this remains key to attracting new rounds of funding and capital growth.
But with jobs being shed from big technology firms and capital starting to dry up, the gloss is starting to come off this sector, and dealmakers are tipping that industrials and other sectors will fill the void.