1 00:00:04,230 --> 00:00:06,900 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean 2 00:00:06,930 --> 00:00:10,170 Sean Aylmer: Aylmer. 2023 is looking like a better year for deals 3 00:00:10,170 --> 00:00:12,539 Sean Aylmer: with M and A activities set to rebound in the 4 00:00:12,539 --> 00:00:16,020 Sean Aylmer: next 12 months. Deal making slowed this year with economic 5 00:00:16,020 --> 00:00:19,350 Sean Aylmer: uncertainty and rising interest rates acting as a hand brake. 6 00:00:19,590 --> 00:00:23,369 Sean Aylmer: But leading independent law firm Corrs, Chambers, Westgarth predicts that 7 00:00:23,370 --> 00:00:25,919 Sean Aylmer: could be about to change. Sandy Mak is the head 8 00:00:25,920 --> 00:00:29,310 Sean Aylmer: of corporate at Corrs, Chambers, Westgarth. Sandy, welcome to Fear 9 00:00:29,310 --> 00:00:29,820 Sean Aylmer: and Greed. 10 00:00:30,300 --> 00:00:31,231 Sandy Mak: Thank you very much, Sean. Thank you for having me. 11 00:00:31,231 --> 00:00:34,770 Sean Aylmer: So 2021 was a bumper year. In fact, we seem 12 00:00:34,770 --> 00:00:37,140 Sean Aylmer: to be talking about deals left, right and center. We 13 00:00:37,140 --> 00:00:41,100 Sean Aylmer: started 2022 and there are few deals on the table 14 00:00:41,100 --> 00:00:43,140 Sean Aylmer: actually, I think I might be wrong here, but I 15 00:00:43,140 --> 00:00:45,570 Sean Aylmer: actually think the money was paid to the after pay 16 00:00:45,570 --> 00:00:48,150 Sean Aylmer: shareholders in January this year, which means that was the 17 00:00:48,150 --> 00:00:52,199 Sean Aylmer: biggest deal of them all, but it just seems to 18 00:00:52,200 --> 00:00:55,590 Sean Aylmer: be a dearth of deals this year relative to last 19 00:00:55,590 --> 00:00:56,880 Sean Aylmer: year. Is that a fair call? 20 00:00:57,990 --> 00:01:02,070 Sandy Mak: Look, I think to put everything into perspective, 2021 is 21 00:01:02,070 --> 00:01:03,600 Sandy Mak: just one of those years that I think we are 22 00:01:03,600 --> 00:01:07,020 Sandy Mak: unlikely to see for a while, and the statistics that 23 00:01:07,020 --> 00:01:10,590 Sandy Mak: we have in our survey for 2022 bring us back 24 00:01:10,590 --> 00:01:14,130 Sandy Mak: down to sort of the pre- COVID levels if you like, which 25 00:01:14,130 --> 00:01:17,520 Sandy Mak: were pretty healthy. It's just that relative to 2021, it 26 00:01:17,520 --> 00:01:20,760 Sandy Mak: seems like we're having a quieter year. What is interesting 27 00:01:20,760 --> 00:01:24,450 Sandy Mak: about 2022 though is that about half of our deals were 28 00:01:24,450 --> 00:01:27,179 Sandy Mak: done in the first quarter of the year. So there's 29 00:01:27,180 --> 00:01:30,330 Sandy Mak: definitely been a tailing off in the latter half of 30 00:01:30,330 --> 00:01:33,959 Sandy Mak: the year, and that is very much attributed to higher 31 00:01:33,959 --> 00:01:37,709 Sandy Mak: interest rates, so therefore the costs of acquisition financing going 32 00:01:37,709 --> 00:01:42,390 Sandy Mak: up, which in turn then drives valuation gaps, buyers and 33 00:01:42,390 --> 00:01:46,110 Sandy Mak: sellers, very much like the housing market, where you've got 34 00:01:46,110 --> 00:01:48,390 Sandy Mak: a seller for a house that still wants prices back 35 00:01:48,390 --> 00:01:50,220 Sandy Mak: in 2021, but you've got a buyer looking for a 36 00:01:50,220 --> 00:01:54,120 Sandy Mak: bargain, bridging that valuation gap is the challenge, and so 37 00:01:54,390 --> 00:01:55,680 Sandy Mak: we are very busy. 38 00:01:56,010 --> 00:01:58,590 Sean Aylmer: Okay. It just seemed that there are a few deals also 39 00:01:58,590 --> 00:02:01,290 Sean Aylmer: in the last six months or so that fell over 40 00:02:01,800 --> 00:02:04,410 Sean Aylmer: seemingly more than normal. Now that might be wrong again, 41 00:02:04,590 --> 00:02:06,450 Sean Aylmer: but perhaps it just reflects the higher interest rates I 42 00:02:06,450 --> 00:02:09,060 Sean Aylmer: suppose. Ramsay Healthcare was an example, Link Group I think 43 00:02:09,060 --> 00:02:12,810 Sean Aylmer: was another example. Were there more bids that didn't end 44 00:02:12,810 --> 00:02:15,030 Sean Aylmer: up being executed than normal, do you think? 45 00:02:15,630 --> 00:02:18,570 Sandy Mak: So that is very much a tale of two cities, 46 00:02:18,570 --> 00:02:21,660 Sandy Mak: actually a very interesting point. I think that there were 47 00:02:21,750 --> 00:02:25,770 Sandy Mak: a lot of deals that people tried to announce that 48 00:02:25,770 --> 00:02:28,950 Sandy Mak: didn't get off the ground. Ramsay is a good example, 49 00:02:29,250 --> 00:02:33,000 Sandy Mak: and there were multiple other transactions in the market like 50 00:02:33,000 --> 00:02:37,500 Sandy Mak: the Telus bid for Appen and a bunch of other tech 51 00:02:37,500 --> 00:02:41,970 Sandy Mak: deals where there were processes and nothing got signed. Link 52 00:02:42,000 --> 00:02:44,669 Sandy Mak: is an interesting example of something that did get signed 53 00:02:44,669 --> 00:02:48,840 Sandy Mak: and then ultimately fell over, but our statistics actually showed 54 00:02:48,840 --> 00:02:51,360 Sandy Mak: that there were fewer of those sorts of deals this 55 00:02:51,360 --> 00:02:54,329 Sandy Mak: year than there were last year. And that was because 56 00:02:54,389 --> 00:02:58,109 Sandy Mak: last year, and in 2020 in particular when we were still going 57 00:02:58,110 --> 00:03:03,120 Sandy Mak: through that COVID period of uncertainty, many people introduced these 58 00:03:03,120 --> 00:03:07,019 Sandy Mak: material adverse change conditions into their deals. And when something 59 00:03:07,020 --> 00:03:11,850 Sandy Mak: happened, like there was another shutdown or discretionary spending tailed 60 00:03:11,850 --> 00:03:15,180 Sandy Mak: off, many buyers decided that they didn't want to go 61 00:03:15,180 --> 00:03:18,000 Sandy Mak: ahead and do the deal anymore, and then relied on 62 00:03:18,000 --> 00:03:22,980 Sandy Mak: these material adverse change clause to terminate the transaction. In 2022, 63 00:03:22,980 --> 00:03:27,720 Sandy Mak: we saw far fewer material adverse change clause terminations, and 64 00:03:27,720 --> 00:03:29,850 Sandy Mak: I think that's just reflective of a market where the 65 00:03:29,850 --> 00:03:34,019 Sandy Mak: target boards are saying, I need deal certainty for my 66 00:03:34,050 --> 00:03:38,550 Sandy Mak: shareholders, and I'm not prepared to agree to very broad 67 00:03:38,610 --> 00:03:41,700 Sandy Mak: material adverse change clauses that allow buyers to walk when 68 00:03:41,700 --> 00:03:42,690 Sandy Mak: something happens. 69 00:03:43,380 --> 00:03:46,470 Sean Aylmer: Okay. It kind of begs the question then, is M 70 00:03:46,470 --> 00:03:48,480 Sean Aylmer: and A activity more likely to pick up if we 71 00:03:48,480 --> 00:03:52,500 Sean Aylmer: have stable markets or do we end up seeing a 72 00:03:52,500 --> 00:03:56,340 Sean Aylmer: lot more M and A activity when prices are down 73 00:03:56,340 --> 00:03:59,310 Sean Aylmer: trotting, people don't want to take risk. So we find 74 00:03:59,310 --> 00:04:04,140 Sean Aylmer: equity assets relatively cheap versus historical standards, so people jump 75 00:04:04,140 --> 00:04:07,200 Sean Aylmer: in at that point. Or is that economic stability more important? 76 00:04:08,040 --> 00:04:13,740 Sandy Mak: It's a confluence effect, Sean. I think you need certainty from certain perspectives. 77 00:04:13,740 --> 00:04:17,880 Sandy Mak: So for example, on interest rates, buyers are going to 78 00:04:17,880 --> 00:04:22,290 Sandy Mak: want to understand where the inflationary pressures on the businesses 79 00:04:22,290 --> 00:04:23,940 Sandy Mak: that they are buying are and how much it's going 80 00:04:23,940 --> 00:04:27,330 Sandy Mak: to cost from an acquisition financing perspective, so that, the 81 00:04:27,330 --> 00:04:31,680 Sandy Mak: settling down and certainty in that aspect is really important. 82 00:04:32,070 --> 00:04:35,580 Sandy Mak: Market volatility makes doing deals difficult if things are jumping 83 00:04:35,580 --> 00:04:38,880 Sandy Mak: up and down, but a downward turn in the stock 84 00:04:38,880 --> 00:04:41,549 Sandy Mak: market is not of itself a bad thing, particularly for 85 00:04:41,550 --> 00:04:44,130 Sandy Mak: public M and A because it just means that valuations 86 00:04:44,130 --> 00:04:47,010 Sandy Mak: go down, and as long as they stay down and 87 00:04:47,010 --> 00:04:51,660 Sandy Mak: they don't keep fluctuating, and buyers have a much stronger 88 00:04:51,660 --> 00:04:53,970 Sandy Mak: sense of confidence about the value at which they're getting 89 00:04:53,970 --> 00:04:56,669 Sandy Mak: some of these assets. So yes, a downward trend in 90 00:04:56,670 --> 00:05:00,839 Sandy Mak: the stock market actually does perversely sometimes see an increase 91 00:05:00,839 --> 00:05:02,430 Sandy Mak: in public M and A transactions. 92 00:05:02,880 --> 00:05:04,980 Sean Aylmer: Stay with me, Sandy, we'll be back in a minute. 93 00:05:10,650 --> 00:05:12,990 Sean Aylmer: My guest this morning is Sandy Mak, head of corporate 94 00:05:13,140 --> 00:05:17,880 Sean Aylmer: at Corrs, Chambers, Westgarth. Okay. So let's talk about what 95 00:05:17,880 --> 00:05:22,080 Sean Aylmer: you expect to happen in 2023. You think that M 96 00:05:22,080 --> 00:05:23,790 Sean Aylmer: and A activity will pick up in the middle of 97 00:05:23,790 --> 00:05:25,080 Sean Aylmer: next year? Why? 98 00:05:25,860 --> 00:05:26,970 Sandy Mak: So I'm going to go out on a limb on 99 00:05:27,270 --> 00:05:30,180 Sandy Mak: this one and that's my personal prediction, And the reason 100 00:05:30,180 --> 00:05:32,550 Sandy Mak: for that is because I do think that to my 101 00:05:32,550 --> 00:05:36,779 Sandy Mak: earlier point, the inflationary pressures, the interest rate movements, I 102 00:05:36,779 --> 00:05:39,270 Sandy Mak: think they're going to stabilize in the second half of 103 00:05:39,270 --> 00:05:44,190 Sandy Mak: 2023. And once we have that, barring a significant geopolitical 104 00:05:44,250 --> 00:05:47,040 Sandy Mak: development that none of us have predicted, I think you 105 00:05:47,040 --> 00:05:49,140 Sandy Mak: get a much better sense of what things are going 106 00:05:49,140 --> 00:05:51,540 Sandy Mak: to cost, how much they're going to cost, and whether 107 00:05:51,540 --> 00:05:52,860 Sandy Mak: or not you're going to be able to make a 108 00:05:52,860 --> 00:05:55,200 Sandy Mak: good return out of the values that you're getting on 109 00:05:55,200 --> 00:05:57,960 Sandy Mak: the market. So for those reasons, I think that we are going 110 00:05:57,960 --> 00:06:00,360 Sandy Mak: to see a big uptake. Now, it's not going to 111 00:06:00,360 --> 00:06:02,910 Sandy Mak: be in all sectors, so certain sectors, and we are 112 00:06:02,910 --> 00:06:06,450 Sandy Mak: seeing this play out right now in terms of competitive 113 00:06:06,450 --> 00:06:10,349 Sandy Mak: bids for oil and gas assets, for a lot of 114 00:06:10,350 --> 00:06:14,130 Sandy Mak: the energy transition related assets there's been a lot of 115 00:06:14,130 --> 00:06:17,729 Sandy Mak: interest for anything to do with digitization and tech. Those 116 00:06:17,730 --> 00:06:19,979 Sandy Mak: are the hot sectors, and I suspect that they will 117 00:06:19,980 --> 00:06:21,750 Sandy Mak: continue to be the ones where we'll see the most 118 00:06:21,750 --> 00:06:22,501 Sandy Mak: activity next year. 119 00:06:22,501 --> 00:06:27,720 Sean Aylmer: Okay. Are any of the out of favor sectors likely to see a 120 00:06:27,720 --> 00:06:29,010 Sean Aylmer: little bit more interest, do you think? 121 00:06:29,910 --> 00:06:33,240 Sandy Mak: Well, we had a prediction in there and I will 122 00:06:33,240 --> 00:06:35,790 Sandy Mak: wait to see whether I'm wrong, but we did think 123 00:06:35,790 --> 00:06:39,089 Sandy Mak: that some of the outer favor sectors in the COVID times, 124 00:06:39,240 --> 00:06:45,180 Sandy Mak: particularly in things like travel, retail, discretionary spending on cosmetic 125 00:06:45,180 --> 00:06:50,130 Sandy Mak: procedures, adventures, experiences, all of the enjoyable things in life 126 00:06:50,130 --> 00:06:53,279 Sandy Mak: that we didn't get to experience during COVID that took 127 00:06:53,279 --> 00:06:55,860 Sandy Mak: a big hit. We think they'll come back. I think 128 00:06:55,860 --> 00:07:00,270 Sandy Mak: the cap on that will be whether or not inflation really 129 00:07:00,270 --> 00:07:02,940 Sandy Mak: starts to bite and consumer spending stops. But at the 130 00:07:02,940 --> 00:07:08,310 Sandy Mak: moment in Australia, there's this very strange dichotomy between inflation 131 00:07:08,339 --> 00:07:11,970 Sandy Mak: and retail spending. It hasn't really slowed down in the 132 00:07:11,970 --> 00:07:15,600 Sandy Mak: way that (inaudible) has been expecting and hoping, and 133 00:07:15,600 --> 00:07:17,850 Sandy Mak: that's because our employment rates are really high as well. 134 00:07:18,270 --> 00:07:21,510 Sandy Mak: But it may get to a point where those sorts 135 00:07:21,510 --> 00:07:25,380 Sandy Mak: of sectors just start to become unattractive. The other thing 136 00:07:25,380 --> 00:07:28,290 Sandy Mak: that is really difficult to do is that there has been 137 00:07:28,290 --> 00:07:30,450 Sandy Mak: a bit of a jump in those sectors, these out 138 00:07:30,540 --> 00:07:32,910 Sandy Mak: favor sectors that have now come back into favor again. 139 00:07:33,270 --> 00:07:35,070 Sandy Mak: And what you need to do when you're a buyer 140 00:07:35,070 --> 00:07:37,770 Sandy Mak: is you need to reverse out all of this bump 141 00:07:37,770 --> 00:07:42,780 Sandy Mak: in spending, because it's not normal. It might normalize at 142 00:07:42,780 --> 00:07:44,790 Sandy Mak: a later point in time, and therefore trying to work 143 00:07:44,790 --> 00:07:48,330 Sandy Mak: out what your normal level of earnings and profit will 144 00:07:48,330 --> 00:07:50,340 Sandy Mak: be on a go forward, long- term basis will be 145 00:07:50,340 --> 00:07:50,521 Sandy Mak: the trick in those areas. 146 00:07:50,521 --> 00:07:57,150 Sean Aylmer: Okay. So about, I mean, you mentioned transition commodities, that's something 147 00:07:57,150 --> 00:08:00,780 Sean Aylmer: that's likely to be popular. What about other big thematics? 148 00:08:00,780 --> 00:08:03,810 Sean Aylmer: So we've been through COVID, and the thematics that were 149 00:08:03,810 --> 00:08:07,410 Sean Aylmer: there before, COVID are probably still there now, ESG being 150 00:08:07,410 --> 00:08:11,100 Sean Aylmer: a very obvious one. Do you think some of those 151 00:08:11,100 --> 00:08:13,020 Sean Aylmer: will play out in the next year or so? Some 152 00:08:13,020 --> 00:08:15,510 Sean Aylmer: of those sort of now that we're post- COVID? 153 00:08:16,860 --> 00:08:18,780 Sandy Mak: Yes. Look, I think ESGs is more than just a function 154 00:08:18,780 --> 00:08:23,970 Sandy Mak: of post-COVID. I think it's a function of clearly all of the 155 00:08:23,970 --> 00:08:26,670 Sandy Mak: climate change considerations and direction in which the world is 156 00:08:26,670 --> 00:08:31,890 Sandy Mak: heading in terms of expectations of corporates and governments. The 157 00:08:31,890 --> 00:08:35,699 Sandy Mak: geopolitical situation that's playing out in Russia and the Ukraine 158 00:08:35,700 --> 00:08:39,330 Sandy Mak: and Europe has really impacted on how that energy transition 159 00:08:39,330 --> 00:08:42,600 Sandy Mak: story is going to play out. So that oil and 160 00:08:42,600 --> 00:08:45,270 Sandy Mak: gas really do have a much bigger role in my 161 00:08:45,270 --> 00:08:47,460 Sandy Mak: view to play as part of that story. And that 162 00:08:47,460 --> 00:08:50,700 Sandy Mak: is why you are seeing, for example, the three way 163 00:08:50,850 --> 00:08:54,300 Sandy Mak: tussle for Warrego Energy at the moment. All of that is 164 00:08:54,450 --> 00:08:58,800 Sandy Mak: a function of private enterprise recognizing that oil and gas 165 00:08:58,800 --> 00:09:02,609 Sandy Mak: has a significant role to play in that story. The 166 00:09:02,610 --> 00:09:07,229 Sandy Mak: other interesting thematic I think will be, and again associated 167 00:09:07,230 --> 00:09:12,480 Sandy Mak: with geopolitical uncertainty, is which foreign bidders will continue to 168 00:09:12,480 --> 00:09:17,280 Sandy Mak: dominate activity in Australia. Historically, Australia's always been a net 169 00:09:17,340 --> 00:09:20,820 Sandy Mak: importer of foreign capital. And so foreign bidders in the 170 00:09:20,880 --> 00:09:23,370 Sandy Mak: 12 years that we've been doing this survey for most 171 00:09:23,370 --> 00:09:26,130 Sandy Mak: of that time, foreign bidders were the majority of the 172 00:09:26,130 --> 00:09:29,730 Sandy Mak: buyers in the market. And in the last two years, 173 00:09:29,760 --> 00:09:33,210 Sandy Mak: Australian bidders have overtaken foreign bidders in the M and 174 00:09:33,210 --> 00:09:33,900 Sandy Mak: A space. 175 00:09:34,230 --> 00:09:36,270 Sean Aylmer: So are we talking super funds here? Are we talking about 176 00:09:36,480 --> 00:09:41,400 Sean Aylmer: the big pension funds being more active and potentially increasingly 177 00:09:41,400 --> 00:09:42,210 Sean Aylmer: being more active? 178 00:09:43,170 --> 00:09:47,640 Sandy Mak: We are. We're looking at some very significant investment from 179 00:09:48,090 --> 00:09:53,640 Sandy Mak: superannuation funds and large Canadian pension funds, for example. And 180 00:09:53,880 --> 00:09:56,370 Sandy Mak: I expect that they will continue to be very active. 181 00:09:56,429 --> 00:09:59,280 Sandy Mak: I expect that we'll continue to see that trend of 182 00:09:59,280 --> 00:10:04,170 Sandy Mak: Australian superannuation funds directly co- investing into public M and 183 00:10:04,170 --> 00:10:07,710 Sandy Mak: A transactions, which is a relatively new trend where they 184 00:10:07,710 --> 00:10:11,790 Sandy Mak: take stakes alongside private equity bidders, for example. 185 00:10:11,790 --> 00:10:14,490 Sean Aylmer: Is it a good or a bad thing? Because as 186 00:10:14,490 --> 00:10:17,939 Sean Aylmer: an investor, obviously my superfund is investing my money too, 187 00:10:17,940 --> 00:10:20,370 Sean Aylmer: but as an investor, the bigger role some of those 188 00:10:20,370 --> 00:10:22,530 Sean Aylmer: guys play, the more I have to look to diversify 189 00:10:22,530 --> 00:10:26,460 Sean Aylmer: my investments, which means perhaps looking offshore more or looking 190 00:10:26,460 --> 00:10:27,900 Sean Aylmer: at alternatives more or whatever? 191 00:10:28,710 --> 00:10:31,589 Sandy Mak: I suppose it depends on which lens you're looking at 192 00:10:31,590 --> 00:10:38,070 Sandy Mak: it. I think the Australian retail investor community really does 193 00:10:38,190 --> 00:10:41,100 Sandy Mak: struggle to find good assets. What we are seeing that's 194 00:10:41,100 --> 00:10:45,330 Sandy Mak: really interesting is the rise of more effectively private equity 195 00:10:45,330 --> 00:10:49,740 Sandy Mak: style funds, but for retail. And that's probably where people 196 00:10:49,740 --> 00:10:51,179 Sandy Mak: are going to start putting more and more of their 197 00:10:51,179 --> 00:10:56,040 Sandy Mak: money if they're not finding the right investments in the 198 00:10:56,100 --> 00:10:57,510 Sandy Mak: listed company space directly. 199 00:10:58,380 --> 00:11:00,180 Sean Aylmer: Sandy, thank you for talking to Fear and Greed. 200 00:11:00,630 --> 00:11:01,740 Sandy Mak: Thank you very much for having me. 201 00:11:02,309 --> 00:11:04,890 Sean Aylmer: That was Sandy Mak, head of corporate at Corrs, Chambers 202 00:11:04,890 --> 00:11:07,740 Sean Aylmer: Westgarth. This is the Fear and Greed Daily interview. Remember, 203 00:11:07,740 --> 00:11:10,410 Sean Aylmer: this information is general in nature and doesn't consider your 204 00:11:10,410 --> 00:11:13,500 Sean Aylmer: personal circumstances. Join us every morning for the full episode 205 00:11:13,500 --> 00:11:16,380 Sean Aylmer: of Fear and Greed, australia's most popular business podcast. I'm 206 00:11:16,380 --> 00:11:17,970 Sean Aylmer: Sean Aylmer, enjoy your day.