A boom year for business hook-ups

Want to give your company a sudden and spectacular growth spurt? The quickest and most potentially rewarding way is to join forces with another company in a mutually beneficial merger, or take over a smaller company, allowing you to scale up your operations to meet the demands of a changing business landscape. This year, the Irish mergers and acquisitions market is set to explode, as more companies look for opportunities to expand exponentially and grab a slice of the post-recession pie.

If there’s any sure-fire sign of economic strength, it’s in the number of mergers and acquisitions coming on stream, and, after a year of relative calm and “apprehension” on the M&A scene in Ireland, 2018 is looking like boom year for big-business hook-ups.

Recently, KPMG published its M&A Outlook 2018 report, and it found that, following a year of growing strength, confidence for the coming year is high, with almost 60 per cent of respondents saying they expect deal volumes to well exceed 2017 levels. And who's doing the deals right now? According to KPMG, the sectors that will be most active on the M&A market in 2018 are agribusiness and food, technology, healthcare, and property.

Although dealmakers were cautious in 2017, as they watched the Brexit scenario play out, and kept a close eye on the spread of protectionism in the US and other economies, the past year saw an increase in the number of domestic deals, while Irish corporates including CRH, Kingspan, DCC and Kerry Group, were busy on the international M&A scene.

Globally, the mergers and acquisitions market has been enjoying a sustained period of growth, says Mark McEnroe, corporate finance partner with PwC, while the Irish market has taken its time to catch up.

“The past six or seven years have seen consistently strong valuations. In an Irish context, it’s not been quite as long as that, but certainly over the past two or three years we’ve seen increases year on year in the number of deals. And that’s generally been the best way to look at it – by the number of transactions rather than the value of transactions, because given the size of the Irish market, one or two really large transactions can swing the numbers. But if you look at volume of deals, there’s certainly been sustained increase in the last two to three years.”

McEnroe is a returning partner to PwC, having spent the last seven years working in the US, and he’s come back to a “very active environment”. “I’ve had no shortage of work to do since coming back to Ireland.”

Good sign

For an Irish economy coming out of recession, the increase in M&A activity can only be taken as a good sign. “I think when you have a healthy economy with strong GDP growth, as we do here in Ireland, and when you have strong availability of capital, that is always going to help to drive a strong M&A market.”

There’s no shortage of capital available for good, well-run businesses looking to finance their expansion plans, says McEnroe, and that includes funding their acquisitions agenda.

McEnroe has seen success coming in clusters, with fintech, medtech and business services in particular showing “robust” growth. The fintech revolution in Ireland is led by the Collison brothers, who recently became Ireland’s newest billionaires at just 30. Their online payments company Stripe has been snapping up other companies with an eye to widening their market reach. In March, Stripe acquired point-of-sale software developer Index, which gives them an opening into in-store payments.

As consumer spending increases, so too does investors’ appetite for transactions within that space, reckons McEnroe.

PwC is expanding its corporate finance business in the Irish market to meet the growing demand for capital to fund mergers and acquisitions, he says. “We see good reason for continuing to invest in our M&A capabilities.”

Overall, McEnroe is upbeat about the opportunities for Irish companies to make waves in the global M&A market. “There’s a core of established Irish corporates that have been very successful at expanding overseas through acquisition. But there’s another tier of companies that have emerged in the past few years that are very successfully accessing both the Irish and international capital markets.”

The coming year is looking good for M&A activity, if first-quarter figures of about €1.2 trillion are anything to go by, says Liam Booth, head of corporate finance at Investec.

“Deal activity is well up on the previous peak of 2007, and the momentum is set to continue in the Irish M&A market over the next year. But unlike 2007, I think it’s more soundly based. While in 2007 it was more credit-based, this time round it’s based on trade and private equity looking for good opportunities for buying businesses with solid foundations.

“There’s always a danger signal around M&A when valuations get too stretched to a point where you have over-leveraged structures put around deals, which means if there’s any dip in performance post-acquisition, you’ve got a very fragile deal structure and the inability of any deal to withstand any minor shocks to the system.”

Irish technology companies are an attractive proposition for bigger technology companies looking to get access to advances in technology and a wider talent pool, and that’s set to continue into the near future, reckons Booth.

“The amount of inbound interest in the Irish tech sector is strong, and I don’t see that abating anytime soon. In fact, the pace of deals in that sector could increase.”

Food and food ingredients are also a strong sector, and despite a few Brexit clouds around it, the long-term forecast for good, higher-margin food companies is good, says Booth. “These higher-value companies have the ability and pricing power to deal with the adverse currency effects of Brexit, and are proving themselves to be attractive acquisition targets.”

The Irish healthcare market is also seeing a lot of interest, says Booth. “With the demographic that we have, an ageing population and increased demand for healthcare, and a public healthcare system that’s extremely stretched, then the private healthcare market is being seen as a very attractive sector to look for acquisition targets or to allocate capital on behalf of private equity.”

While the overall atmosphere in the mergers and acquisitions market is generally very positive, it is tempered by a certain amount of geopolitical uncertainty, says David O’Donnell, a partner in corporate legal advisers Mason, Hayes & Curran.

“I think Ireland will remain an attractive location for foreign buyers, particularly in the US and the Far East, to acquire businesses here in Ireland, and get a good foothold into Europe. It gives them a good opportunity to develop their EMEA hub and grow their business with substance rather than having to come and start up from scratch.

“But on the downside, I think Brexit is peeling back an onion every day, with a different story, and it has impacted on dealer confidence, and will continue to impact on it over the near future. At some stage it will turn, but it’s difficult to predict when. I think once we have positive news on Brexit and what it’s going to look like, then we’ll have the inevitable swing, but that’s probably not going to happen for some time.”

For UK investors in particular, it’s a challenging time, reckons O’Donnell, with many companies focusing on their Brexit strategy rather than on expansion, and currency fluctuations causing jitters among buyers.

But the Brexit blues are being offset by a definite tone of optimism, as Irish corporates go back into deal mode, says O;Donnell. That optimism was apparent as 2017 ended with plenty of bang for investors’ bucks, and 2018 opened its account with a flurry of M&A activity.

Mason, Hayes and Curran has recently advised Virgin Media, a subsidiary of Liberty Global, on its acquisition of UTV Ireland from UTV Plc, and advised Irish pharma company Genable Technologies Ltd on its sale to US gene-therapy company Spark Therapeutics Inc. These deals are a good fit for the players on both sides of the deal.

According to the KPMG report, strategic growth, enhanced customer base and wider geographic reach are the three main drivers behind the mergers and acquisitions market.

If your company has been waiting in the wings for a while, now might be the chance to take your place on the mergers and acquisitions stage.

“I think there’s an opportunity now for people who have owned their business for a long number of years and haven’t had the opportunity to exit,” says O’Donnell. “These are indigenous Irish companies I’m talking about, perhaps a family-owned business, or a closely held business that’s owned by two or three entrepreneurs. I think there’s now an opportunity for them to sell out to a larger, strategic investor. Certainly the valuations would be a lot more healthy than they were a few years ago. And there’s more availability of cash through private equity houses if they’re going to be a finance buyer, or alternatively if they’re going to be a strategic investor.”

Dangers

But while the road ahead looks clear, there are dangers to watch out for, and you only have to open your news app to see where the mergers and acquisitions market may hit some serious speed bumps, says O’Donnell. Brexit, of course, has everyone on a sticky wicket, but the threat of global trade wars is also causing nerves to shred. US president Donald Trump’s recently announced tariffs on steel and aluminium have raised hackles in China, and last year he launched a thinly disguised attack on Ireland’s corporate tax regime by lowering the US corporate tax rate to 15 per cent and offering big incentives for companies to repatriate to the US.

“I think it’s fair to say, though, that the pick-up in M&A has been positive for Ireland, and it’s one of the indicators of the recovery that we’re experiencing at the moment, which have been borne out by the stats,” says O’Donnell.

The outlook is also good for foreign investors with ambitions to grow their European hubs by acquiring businesses in Dublin or other parts of Ireland, “I think the outlook is positive, but tinged with a little bit of geopolitical uncertainty, so proceed with caution,” he adds.

The real-estate sector will continue to thrive, predicts O’Donnell, particularly with the huge demand for housing.

“There are a lot of recent entrants into the housing market, and some of them have raised funds on the capital market and are out there building and developing.”

Developments that address the housing crisis, with social and affordable housing and buy-to-let schemes, will attract a lot of capital, reckons O’Donnell.

As for the long-term prospects, Ireland is now part of the global mergers and acquisitions market, he says, and as such can’t help being buffeted by world events.

“What happens in other economies can have a huge impact on us here in Ireland. We’re a small, open, transparent economy, very much reliant on and working with foreign direct investment, and it’s a very important part of our make-up and prosperity, but I think so long as we can remain attractive and have a real offering that differentiates us, we’re in place to provide a competitive landscape for non-European acquirers who want to get a foothold in Europe. After Brexit, we’ll be the only English-speaking country in the EU, and if you want to do business in the European Union, then obviously here is a great place to do it from. So I think as long as we have the fiscal regime that we have, and hold on to our corporate-tax rate, we’ll continue to be attractive in the M&A market.”