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Turbulent times for dealmakers but reasons for cautious optimism

Last year started strongly but was a year of two halves in relation to activity; 2023 looks set to reverse that trend, with a stronger performance in the second half

Everything is relative. The year 2019 was regarded as a pretty good year for global merger and acquisition (M&A) activity with total transaction value reaching $3.7 trillion; 2022, on the other hand, was viewed as quite disappointing, with deal value of $3.6 trillion, ahead of 2020′s $3.4 trillion but a long way behind the quite remarkable $5.7 trillion notched up in 2021.

The merely ordinary pales in comparison with the extraordinary.

“It is tough to compare 2021 and 2022, as 2021 saw near-perfect conditions for M&A, which changed as we moved into 2022,” explains Peter Bennett, Davy’s head of technology investment banking. “Geopolitical tensions were not as acute in 2021 versus what we have today or back in 2022. Inflation and interest rate rises were not as much of a reality in 2021 versus 2022. The threat of recession was much further away in 2021 than it is today or was in 2022. And equity and credit markets were fully open, functioning well and the cost of capital was comparably low in 2021 versus 2022. Combining all these items, you saw a drain of confidence in the market as 2022 progressed.”

Stephen Keogh, head of William Fry’s corporate department, describes 2022 as a “year of two halves” for M&A activity. “The first half compared very favourably with 2021,” he says. “The pent-up demand we witnessed in 2021 carried on into 2022, leading to a very strong H1 M&A market. However, this slowed down significantly in the second half; 2021 will most likely prove to be a record year for a long time to come so, in a way, 2022 was just unlucky to have to try to follow that.”


That slowdown was the result of macroeconomic headwinds and geopolitical uncertainty stifling the dealmaking environment, according to Katharine Byrne, BDO’s head of corporate finance. “Supply-chain disruption, rising energy costs, inflation and higher borrowing costs, alongside lower levels of consumer confidence all contributed to volatility in the market,” she says. “This led to a shift in valuations across certain sectors as well as a pause in M&A strategy as businesses focused on conserving cash and protecting their core business.”

The return to more normal levels of activity didn’t affect all sectors or market segments equally, however. “We saw a spike in 2021 and some really good outcomes for sellers as a result,” says Paddy Dillon, Grant Thornton’s head of corporate finance. “It was a very good sellers’ market with very strong demand. Activity fell in 2022 but our fee income was up on more deals. The frenzy was gone out of the market and deals took a little bit longer but there were a lot of good deals at good valuations.”

Deloitte had a similar experience. “2022 definitely started well and we came into the year with a very good pipeline of deals,” says Anya Cummins, a partner in the firm’s M&A advisory team. “The year was very good for us and we were 30 per cent up on 2021. But it was quite sector specific. Activity was heavily weighted to sectors like technology, financial services, healthcare and companies involved in mission-critical business services. Funding was more challenging and deals became more difficult and complicated to execute.”

Quality assets will continue to perform well, according to Paddy Dillon

Byrne adds: “While 2022 did not achieve the same record-setting level of M&A activity as 2021 the volume of transactions completed in the Irish market was still higher than pre-Covid.”

“Despite all these headwinds optimism still persists for 2023 M&A activity,” she continues. “This is underpinned by the quantum of capital globally that needs to be deployed, combined with the attractiveness of Ireland – compared to the UK, in terms of our economic performance and access to the EU. Succession planning is very much front of mind for owner-managed businesses, where founders that survived the last recession are now emerging post-Covid with a clear objective of crystallising their equity value while also positioning the business for future growth. This is where we have seen an increase in ambitious management teams seeking to grow the business internationally who are seeking trade or equity partners that will enable them deliver on their expansion plans.”

Bennett also sees some room for increased optimism. “While recessions in major economies are widely predicted in 2023, commentators currently believe they may be shallower than previously thought; some even predict the US may avoid a recession altogether. There are signs that inflation growth is tapering off and with it the pace and size of interest rate rises. Financing markets are beginning to show some more signs of unlocking as market participants become increasingly accustomed to life with higher interest rates.”

Quality assets will continue to perform well, according to Dillon. “We have some really nice mandates coming to market with a slightly higher concentration in the technology and logistics sectors. Private equity is still very active in the market and there is no shortage of money out there. Buyers are a bit more discerning though. There has been a flight to quality. Quality assets will trade as well if not better than previously and there are plenty of those out there.”

Keogh shares that reasonably positive outlook. “I think there are some reasons to be optimistic for the M&A market in 2023,” he says. “For example, private-equity firms still have plenty of their much-discussed ‘dry powder’ and as seller expectations on valuation levels reduce a bit, M&A deals, and in particular leveraged M&A deals, will start to make more sense.”

Cummins warns of a potential mismatch between buyer and seller price expectations, however. But there are ways to deal with it. “Valuations in the stronger sectors have stood up well but in other sectors where growth rates are challenged you could get a mismatch. You could bridge that gap with minority deals – where instead of selling 100 per cent of the business, the seller hangs on for bigger deal in a few years’ time when the valuation has gone up again. They can also use vendor loan notes where they put some money back into the business by way of a loan. We may also see more earn-outs as well.”

She believes the year ahead may see a reverse of 2022 in terms of activity levels. “The second half will probably be stronger than the first half. We are seeing a ramping up in momentum of owner managers and private-equity investors preparing companies for sale. We expect to see strong deal-closing activity in the third and fourth quarters of the year.”

Barry McCall

Barry McCall is a contributor to The Irish Times