Nine out of ten companies optimistic about the economy

Australia’s leading private companies are confident and poised for continued growth in 2006 according to Ernst & Young ’s recently released annual Transaction Trends survey.

The survey of over 200 of Australia’s leading private companies revealed that almost nine out of ten respondents are fairly or very optimistic about the Australian economy in 2006. Almost half the respondents expect their company’s revenues will rise up to 10 percent, while 17 percent are predicting even stronger revenue growth of more than 20 percent.

“This year is set to mark another strong period, as earnings continue to grow across Australia’s private companies,” said Graeme Browning, partner, Ernst & Young Transaction Advisory Services.

“A strong domestic economy with low interest rates is ideal for transactions, with many companies indicating plans for expansion via access to the debt and equity markets.”

Boom year for acquisitions and mergers

According to Transaction Trends 2006, executives are again planning to grow their businesses by acquisition rather than just relying on organic expansion, with a third planning to make acquisitions in 2006. This compares to 24 percent of respondents that anticipated growth predominantly by acquisition in 2005.

The survey found that larger companies with revenue of more than $100 million are the most inclined to use acquisitions to underpin their growth aspirations, with 40 percent anticipating growth by acquisition in 2006. For the last three years Transaction Trends has found acquisition based growth gaining popularity among those private companies surveyed.

An increase in appetite for overseas acquisitions was also evident in the findings with 23 percent of companies surveyed expecting to grow from acquiring overseas companies – this is up 6 percent on last year. The most favoured region for overseas acquisitions was New Zealand, followed by North America and South East Asia.

“The domestic market continues to be the most popular for acquisitions, and while valuations have risen here over the past few years, they are generally still less than in other developed markets such as Europe and the US,” Browning said.

Divestment of underperforming assets

2006 will see a greater number of private companies divesting underperforming or non-core assets with more than a third (36 percent) of those surveyed indicating plans for divestments. This compares to 30 percent in 2005 and 31 percent in 2004. “This trend shows private companies are analysing their operations more closely and are making increasingly complex business decisions to maximise long term performance,” Browning said.

“It’s all about focussing on what you’re really good at and then realising full value for non-core assets sold. Divestment of non-core businesses will provide a source of transactions and potential growth for other companies, which will help continue the overall level of transactions in 2006.”

Financing Growth

For the third consecutive year a greater percentage of respondents expect to raise funds to help finance their expansion plans. In total, almost half, or 47 percent of those surveyed, expect to raise an indicative minimum of approximately $800 million in 2006.

“The appetite for funds spans across all business sizes and if extrapolated across the population of private companies in Australia, the desire for funding across the private sector in 2006 is likely to be very large,” Browning said.

Forty-eight percent of companies with funding ambitions and revenue greater than $100 million hope to raise more than $20 million each.

Private company sentiment toward raising debt and equity capital remains very positive with 64 percent of respondents believing the market would react favourably towards an equity raising in 2006. Expectations about borrowing debt are even stronger with 65 percent of companies expecting a positive response from financiers.

Transaction Trends 2006 finds debt is still the most common funding source for private companies to grow their businesses (51 percent). Another important, and rapidly growing source, is private equity and venture capital, with a quarter of companies looking to raise capital from these sources in 2006. Sixty percent of the private companies surveyed indicated they raised additional capital in 2005, up 6 percent, from the 54 percent that did the same in 2004.

The biggest challenge? Finding and keeping the right people…

As was the case in 2005, human resource issues, such as recruitment and retention, are likely to remain one of the key challenges for Australian companies in the medium to long term.

“Part of the ongoing challenge is the replacement and transition required as the baby boomer generation retires while companies experience continuing and rapid business growth. The need to recruit and retain high quality staff will be a business success differentiator now more than ever,” Browning said.

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