A good year for M&A in prospect despite headwinds

Corporate finance partner at Mazars John Bowe believes there will be a reasonably strong level of M&A activity in the Irish market in the coming year despite the headwinds created by rising interest rates, high inflation, and geopolitical disruptions.

“2021 was a record year in an Irish and global context for the value and volume of deals done,” he says. “The carry over in the deal flow into this year was quite strong and a number of significant transactions in the early part of this year probably started in the second half of 2021. Then we had the war in Ukraine, increased equity market volatility, and rising inflation. That all leads to uncertainty and lower valuations. It has an impact on what people are willing to pay and rising interest rates increasing the costs of funding.”

Activity has been slower in the second half of 2022 as a result and Bowe sees that continuing in 2023 but with a caveat: “There are definitely deals still being done for good businesses.”

He points to a number of sectors where he expects sustained activity over the coming year. “There has been a massive wave of consolidation in the insurance broking industry in the last 24 months,” he notes. “That’s not going to stop. The top four or five global players are driving that consolidation. The logistics sector is still quite fragmented, and we will see continued consolidation there.”

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There is a lot of money and not a lot of good opportunities out there. Crises will happen again, and investors will build that in. Resilience will be in the price

—  John Bowe

Business services and technology-enabled companies will also make attractive targets. “Companies that provide support services to businesses to reduce costs and enhance effectiveness will do well and we expect activity there. While the volume of deals may be lower, we still see a good level of activity overall in 2023.”

A relatively benign funding landscape will enable that activity. “There has never been as many funding options as there is today. If you roll the clock back 10 years, we didn’t have domestic private equity and we didn’t have debt funds here. There are funds with between €800 million and €1 billion in capital that has to be put into Irish companies. Those funds are relatively new. That’s a big number, particularly when you add leverage and so on. And that’s just equity funding. We also have debt funds like DunPort Capital Management and Beechbrook Capital which want to fund Irish companies.”

And there is pressure on these funds to do deals. “They will be selective,” he points out. “They will spend longer doing due diligence, but they want to be active. There is no point in raising money and not being able to deploy it. If there are good opportunities in the market, they will go for them.”

There is also interest in the Irish market from UK and US funds. “Brexit was quite a good thing in that respect. All of the mid-market UK funds are looking at Ireland. The strength of the US dollar is giving a big boost to US investment in Europe. They are getting more bang for their buck. Ireland is the only English-speaking country in the EU and that is a big attraction for them.”

In many cases, banks will be the first port of call for businesses looking to fund deals. “Businesses looking to acquire businesses will generally go to the bank first. We only have two banks in Ireland and if they don’t like the sector that might present a bit of a challenge to raise funding there. With the bank, you may have to go through a few people before it gets to the credit department and that can slow things up. Debt funds may be more expensive, but they will give you a quick yes or no.”

Equity funding is the other option. And companies need to make a call on that for themselves. “Private equity is interested in opportunities to get involved with ambitious management teams and go on a growth journey with them. But private equity is a commodity, they have the money. Businesses need to make sure the private equity partner brings value add to the table, not just funding. Private equity can bring advice and expertise and introductions to new partners and markets.”

Of course, with private equity the owners have to give up a share of the business. Bowe says that business owners must decide for themselves if that makes sense. “Debt is probably a cheaper form of funding than equity. If the funding will help grow the business, you will still own 100 per cent of the company using debt.”

The decision doesn’t need to be made straight away. “As advisers we often run parallel processes. If a deal stacks up, there will always be a source of capital available to execute it.”

Another key factor for the year ahead will be resilience. “Companies that have come through things like recessions, Covid, inflation, [and] the impact of the war in Ukraine will be in a very good position,” he says. “Businesses that have shown resilience over time will attract good valuations. There is a lot of money and not a lot of good opportunities out there. Crises will happen again, and investors will build that in. Resilience will be in the price.”

Finally, good preparation is critically important. “If you are thinking of going to the market either to acquire a company or sell, the more prepared you are the better,” Bowe advises. “You need to make it as easy as possible for potential buyers and funders to understand the business and have your data room in place and so on. Good advisers who have experience in the process are worth their weight in gold. Having them on board early is very important.”