News and Articles of Interest - Jan 2019
January is usually a quiet month news wise - but some items that caught our interest have been listed below.
Merger and Acquisition Articles
A slow month is to be expected for January in M&A activity, however the IT sector has continued its acquisition pace with several announcements such as:
rhipe (ASX listed licensing, business development and knowledge services provider that facilitate the adoption of the cloud by end customers) has acquired Dynamics Business IT (a privately-owned, Queensland-based IT services integration and support business) solutions for up to $8m in cash and shares.
Powernet Group and Evolve IT announced a merger to become a powerhouse MSP and IT services provider across Australia.
HLB Mann Judd has reported IPO's in the smaller end of the IPO market (market capitalisation of less than $100m) is expected to be lower than 2017 listings with 93 listings in this sector in 2018. They expect 2019 to be similarly subdued, with external factors such as the ongoing US-China trade wars, local economic conditioned and banking royal commission outcomes likely to force investors to put their cash back in their wallet.
Smith Herbert Freehills has come to a similar conclusion in its report M&A in 2019: Succeeding in a Climate of Disruption, that external factors will put a dampening effect on M&A activity, but still suggests it is a good year for acquisitions. The report considers the potential for disruptive influence by politicians, regulators, activist and active shareholders, and interlopers on M&A activity, but still suggests it could be a good year for acquisitions.
The endowment effect is a big deal in valuation - I have seen many owners think their business is worth more than others would expect. Exit Oasis recently published this excellent article on the endowment effect and details some questions you can ask to highlight if you are valuing your business more than it is worth.
Bob Deutsch, CTA, Senior Tax Counsel reported in a recent The Tax Institute newsletter on a recent High Court decision ( High Court in Commissioner of State Revenue v Placer Dome Inc  HCA 59 (the Placer Dome case)) that has left the door ajar to the consideration that legal goodwill may be different to accounting goodwill. One of the High Court judges (Gageler J) made differing comments by noting a broader concept of goodwill, where the going concern value could be substantially greater than goodwill represented by custom alone. In essence the comments raise the notion that a business "...which is not profitable or trading at less than industry average profitability...the legal value of goodwill may differ from the value agreed upon by accountants and businessmen." We will explore this concept further in a future whitepaper.
Whilst not specifically about valuation, the latest news release from IBISWorld highlights the concept of a cost of capital continuum, which we often refer to when determining the cost of capital for SME's. It highlights that returns on investment of different asset classes over the past 5,10 and 20 years. Interesting to see Australian shares returning an average 10% over the past 5 years.
Another view on the importance of reducing owner dependence before a sale
More growth is expected in ride sharing services as well as organic farming and softare publishing, according to IBISWorld.
Low wage growth for Australian seems to be likely after a global survey by HR management consultant Korn Ferry suggested Australia may be among the slowest wage growth forecasts of any country, rising by just 0.2 of a percentage point in 2019.
Having enough cash in the business has to be a proactive process and CFO On Call have listed the seven key things that impact cash flow. The first five are the processes that every business owner should have in place.
From The Economist: "...China's recent "slowing growth" is put into perspective when the increase of 8trn yuan ($1.2trn) is well above the 5.1trn yuan added in 2007, when it notched up 14.2% growth...The point is simple—China is now growing from a much larger base—but it was overlooked in the flurry of headlines about its slowdown." It may be slowing down but the shear enormity of the market size means Australian business should only ignore it at it's peril.