What’s driving exceptional M&A outcomes?


Over the past year, the New Zealand market has experienced a surge in the volume of deal activity as well as a significant increase in the valuations achieved.

While valuation multiples fluctuate, and depend on a wide range of factors, such as the sector and current macro backdrop, we have observed some common attributes across businesses achieving high valuation outcomes. In this article we describe the wider macro environment and summarise some of the business characteristics.

What’s happening in the macro environment?
Multiple factors are at play in the buoyant New Zealand market. Global markets, particularly private equity (PE) firms, have ample cash as a result of low interest rate environments, monetary policy stimulus and growing superannuation funds.

COVID-19-related lockdowns have increased global connectivity and made New Zealand more accessible to foreign buyers (particularly American and European). Previously, this country was viewed as somewhere where investments were hard to manage given the distance involved. However, we have now completed numerous deals without the buyer physically visiting New Zealand.

The pandemic has also highlighted the value of businesses operating in countries with strong fundamentals, such as political and regulatory certainty. Throughout the pandemic, New Zealand has been seen as a ‘safe haven’, driving inbound investments.

Some sectors are particularly popular right now. These include, technology and renewable energy, especially those with an ESG focus and healthcare. This is driven by an aging population and global focus on the importance of healthcare.

Successful acquisitions have created a ‘snowball effect’ by providing confidence to other business owners seeking solid returns and significant capital gains on the sales of their businesses. With many high valuation sales in the market, owners are looking for their ‘slice of the pie’.

What attributes are driving exceptional outcomes?
The following attributes are common across businesses achieving high valuation outcomes:

Clearly outlined growth opportunities. Many New Zealand businesses have not yet capitalised on rapid geographic expansion, leaving this as a tangible growth opportunity area. There is a strong correlation between a company’s growth prospects and the multiples achieved. Having a clear growth strategy with evidence of execution ability are critical to investor interest and valuation.

Ability to sell into large markets. Traditionally, Australasian businesses have tended to trade at a discount to international peers, primarily as a result of having a perceived smaller total addressable market. Businesses that have either entered, or are able to easily scale into larger offshore markets (e.g. SaaS businesses) have attracted significantly higher valuation multiples. Natural Pet Food Group (NPFG) and Ziwi are good examples of this. Both entered and demonstrated strong growth in the large North American and China markets.

Premiumisation. Ultra-premium products are increasingly in demand from consumers and the companies that produce them are equally sought after, with particular focus on acquiring existing high profile brands. Examples include Ziwi, Allpress or My Food Bag.

First-rate management teams. Management teams that are able to clearly articulate the unique selling point (USP) and vision of the business, and then execute upon the strategy.

Disruptive products or services. A company’s ability to disrupt a traditional industry or model commands a premium multiple. For example, Education Perfect is disrupting the traditional delivery model through being online. Both NPFG and Ziwi are disrupting the traditional kibble-based pet food industry.

First mover advantage and defensible positions. Companies with products or services that were first to market or with a market position that is largely unchallenged. My Food Bag had a clear first mover advantage in New Zealand through being the first provider to launch nationwide and becoming a name synonymous with meal kits.

Positive tailwinds in the sector. Businesses operating in sectors driving or benefiting from change, particularly where this has been expedited by COVID-19 and accelerating a transition that would have otherwise occurred over many years. For example, Education Perfect and Mighty Ape with the shift in consumer behaviour to online, and Ziwi and NPFG with the increasing humanisation of pets.

Resilience to COVID-19. Some sectors have demonstrated incredible resilience, or even taken advantage of COVID-19 adversities. Companies with capability to respond swiftly to the intricacies of the pandemic with innovative solutions have seen the best results. For example, the technology sector as a whole, with notable spotlight on e-commerce companies and ‘work-from-home’ capability providers. Ninja Kiwi and Education Perfect both fared well during the pandemic.

ESG aligned. Environmental, social and governance (ESG) considerations are increasingly moving from the periphery of the investment decision framework to a more central role. Investors are seeking companies they feel comfortable investing in long-term, and align with public interest.

Move to digital. Software as a Service (SaaS) and other digitally enabled businesses have attracted premium valuation multiples. This reflects unique IP and large global market opportunities with the ability to scale quickly via a digital business model. Recent examples include Timely, EzyVet, Ninja Kiwi and Education Perfect. We are also seeing more investors using the ‘Rule of 40’ as a screening tool to measure the balance of growth and profitability. This rule states that a company’s combined revenue growth rate and EBITDA margin should exceed 40%.

While valuation is a function of numerous converging factors, and can result in large variances, currently multiples are experiencing extreme highs – ones that some would consider ‘all time highs’. If investors are mulling a potential sale in the near future, there is no better time to integrate the attributes into the business than now.


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Ruth Deacon