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In this special edition, the last for 2023, we summarise what we believe were the top five corporate finance trends and themes in corporate boardrooms over the year, and take stock of our top five predictions for the dealmaking landscape in Australia for 2024. 

Boardroom Brief will resume on 30 January 2024.

THE YEAR IN REVIEW – OUR TOP 5 THEMES

1. ESG is core to value creation. As in other countries around the globe, environmental, social and governance (ESG) factors have increasingly become key considerations to the business strategies of the public and private sector in a bid to ensure that Australia, and Australian businesses, are future-proof. M&A activity across Australia has been increasingly underpinned by a need for Boards to demonstrate sound ESG credentials, as investors become acutely aware of “stranded asset” risks. Value is clearly at risk where ESG considerations are not properly integrated into corporate strategy and operations. Major milestones over the year in this space include the introduction of long-awaited changes to the Emissions Reduction Safeguard Mechanism, and the ongoing development of global and domestic climate, sustainability and nature-related risk disclosure standards (see previous article).

2. Decarbonisation is the future, but headwinds are growing. The past year has featured major developments in the climate, energy and environmental policy space, particularly at the Federal level, as Australia (and the world) continues to grapple with the race to reach net zero. Conversely, the evolving international geopolitical landscape has brought energy supply and security to the forefront, trends which (along with rising interest rates) can work in opposition to the clean energy transition. Major milestones over the year in this space include Australia and the United States signing the Climate, Critical Minerals and Clean Energy Transformation Compact – a landmark joint formal statement of strategic intent to establish climate, clean energy, and a shared energy industrial base as a third pillar of the Australia-US Alliance (see previous article) – and committing to end public investment into climate polluting projects during the 28th United Nations Climate Change Conference (see previous article).

3. Greenwashing action is on the rise. Hand in hand with rising investor focus on ESG and decarbonisation is an increased regulatory crackdown on greenwashing claims, given the risks greenwashing claims pose to the integrity of capital markets and the private allocation of capital. This year has seen ASIC commence major civil penalty proceedings against multiple players including Active Super and Vanguard Investments Australia (see previous article). Major litigation in this space was also complemented by the publication of guidance by the Australian Competition and Consumer Commission (ACCC) for businesses making environmental and sustainability claims, including ‘good practice’ principles (see previous article).

4. Cybersecurity is key to resilience. Fresh from the pain of major cybersecurity breaches including household names Optus and Medibank, cyber security and cyber resilience continues to be a recurring theme across corporate Australia. ASIC has repeatedly warned that failure to give sufficient priority to cyber security and cyber resilience will expose Boards to potential enforcement action for failure to act with reasonable care and diligence (see previous article). A major milestone in this space was the Federal Government’s publication of its ‘game-changing’ Australian Cyber Security Strategy, which shifts cyber security from a technical topic to a whole-of-nation endeavour, “enabled by stronger public private partnerships” (see previous article).

5. Blocking stakes. The past year was marked by a consistent pattern of sophisticated shareholders acquiring large ‘blocking’ stakes in ASX listed companies, prompting both spikes and troughs in target share prices as major takeover battles unfolded. The Brookfield / EIG play for Origin Energy was thwarted in large part by a major shareholder opposing the deal. Similarly, bids or proposals for Azure Minerals and Liontown were met with concerted buying action from interlopers. The hurdle of a bidder gaining the support of a large shareholder with a large ‘blocking stake’ has clearly emerged as, and continues to present, a recurring execution risk to deals across the energy sector over the past year (see previous article).

OVER THE HORIZON – OUR TOP 5 PREDICTIONS

1. ESG considerations a key deal driver. ESG considerations have been a significant driver of M&A activity in the past few years, and we expect this trend will continue into 2024 and beyond. ESG considerations will prompt divestments and spin-offs in assets that fail to meet investors’ ESG expectations. Companies will continue to integrate ESG more proactively into their core business strategies, reflecting the evolving expectations of a socially conscious global business environment. 

2. More joint ventures and alliances. Uncertain economic conditions, rapidly evolving technological advancements, and geopolitical instability are key features of the current global business landscape. We expect these forces, combined with increasing execution risks in public M&A, will encourage an increasingly dynamic and collaborative approach to dealmaking, and we will see greater appetite for joint ventures and strategic alliances in 2024. Companies will prioritise strategic agility and resource-sharing benefits as they seek to mitigate risks and foster resilience in an era of uncertainty.

3. Deal structuring becomes more dynamic. We expect that companies will become increasingly inventive with their approach to public M&A, continuing a trend that we have seen in recent years. Structures such as concurrent schemes of arrangement and takeover bids will become more commonplace, and bidders will seek to be aggressive in their attempts to encourage target shareholder acceptance, including by acquiring pre-bid stakes and conducting targeted shareholder campaigns. Further, flexibility in deal structuring will be key vital for bidders to respond to the demands and preferences of increasingly assertive target shareholders: we expect renewed focus on contingent value instruments, stub equity and similar structures as a way of balancing the disparate objectives of public company shareholders.

4. Continued clean energy investment. We expect to see continued investment in clean energy developments as the world continues on the path towards decarbonisation. M&A activity in this sector will increase as projects are de-risked and the timeline for companies to deliver on aggressive decarbonisation commitments becomes tighter. At the same time, the path to net zero will be a winding one: rising interests rates and regulatory complexity may lead to an increase in consolidation and the potential for some distressed asset sales.

5. Regulatory scrutiny to complicate deal making. Regulators will continue to take a close look at M&A transactions in the Australian market in 2024, seeking to promote market integrity, protect consumer interests and ensure that national interests are upheld. We may also see macro considerations play a role in regulatory policy-setting (as seen by the ACCC's recent authorisation of the Brookfield / EIG proposed acquisition of Origin Energy). Further, the Foreign Investment Review Board will have a key role in scrutinising inbound foreign investment, particularly into critical industries, as key global players seek to diversify their supply chains in the context of ongoing geopolitical instability and trade tensions.