Australian dealmakers are expected to make the most of the face-to-face advantages an open border with New Zealand would offer.
A report by the legal firm Chapman Tripp says New Zealand's merger and acquisition activity has had a strong start to the year. Photo: Unsplash / Cytonn Photography
A report by the legal firm Chapman Tripp said New Zealand's merger and acquisition (M&A) activity has had a strong start to the year, driven by access to cheap debt and the availability of high-quality assets.
It said New Zealand companies, which bolstered their balance sheets with fresh capital to help them manage the impacts of Covid-19, may look to other growth avenues, including M&A.
"Conversely, corporates could go for a more defensive strategy and create M&A sale opportunities by choosing to dispose of their non-core businesses or, in the case of multinationals, to sell their New Zealand operations altogether," it says.
The report said M&A activity had been strong over the first quarter of the year, although market conditions were likely to continue to favour initial public offerings (IPOs) ahead of trade sales for some businesses, particularly as interest rates are likely to remain low.
"As ever, we expect there to be high levels of demand for quality assets, of which there should be several coming to market as sales which were shelved in 2020 make a return in 2021."
However, Chapman Tripp partner Joshua Pringle said this year could end up being more subdued than last year.
"There's been a feeling that maybe the bad times will come in terms of transactions and the economy more generally, that maybe last year there was some irrational exuberance and spending, but that the reality would hit this year, as it were. We aren't we aren't seeing that yet," he said, adding there had been a one-to-two-year investment lag following the global financial crisis in 2008.
"There is still strong activity occurring, so we haven't yet seen that more pessimistic scenario play out."
Chapman Tripp partner Joshua Pringle. Photo: Supplied
The report said restrictions on overseas investment introduced in response to Covid-19 were still in place with further changes in the pipeline.
It said the temporary emergency notification regime put in place to prevent opportunistic acquisitions of key assets by overseas investors was subject to a 90-day review and had recently been extended to May 2021.
Transactions caught by this provision have been processed relatively efficiently by Overseas Investment Office, however, it recommends overseas purchasers factor in an initial 10 working days for the evaluation period, it said.
The report also suggested purchasers would take a more conservative approach to pricing over the rest of this year and continue to include earn-out structures as a means of managing the uncertainties associated with Covid-19.
"In opting for earn-outs, parties should be careful to ensure that the mechanics and targets agreed are as clear and objective as possible," it says.
"Earn-outs can be useful devices for bridging valuation expectations, but if not handled carefully can result in disputes down the line."
