Goldman expects an increase in M&A flow

Sarah Thompson, Anthony Macdonald and Gretchen Friemann

Low interest rates, strong balance sheets and a tough environment for organic growth should see a gradual increase in merger and acquisition deal flow, according to Goldman Sachs analysts.

In anticipation of a pickup in deal activity, the bank’s portfolio strategy research team published a model of its takeover candidates this week that identified companies that could deliver the highest return for an acquirer in a takeover and re-gearing scenario.

The M&A model found Downer EDI, Qantas and Seven West Media had the most upside for a potential buyer, along with small caps Emeco, Billabong and Seven Group.

“Our M&A model attempts to identify stocks with the highest IRR under a takeover and re-gearing scenario,” the analysts told clients.

“Expected returns from the model have fallen with the rise in valuations and a modest increase in existing leverage.”

Goldman Sachs said weak business confidence and fair valuations may put a dampener on M&A activity, but there were more positive catalysts than negative factors.

The analysts presented six positive catalysts for deals, including interest rates to stay low for longer; room for companies to increase leverage; organic growth is hard to find; greater political certainty; Australian firms are at a discount to global stocks; and a weakening Australian dollar.

The Australian Financial Review