A game of two halves as M&A activity recovers strongly after early reverse

The economic devastation wrought by the coronavirus pandemic was reflected in a dismal performance for global M&A activity in the first half of last year. Having started brightly on the back of good news regarding Brexit and the US economy, deals activity slowed to a near halt in the sectors most impacted.

According to M&A data provider Mergermarket, the number of deals fell 15.5 per cent to 17,545 from 20,767 during the same period in 2019. Total deal value up to the end of June was a disappointing $971 billion (€799 billion).

The recovery in the second half could hardly have been more dramatic. The $2.2 trillion (€1.8 trillion) worth of deals recorded was the highest ever recorded by Mergermarket while the $1.2 trillion (€990 billion) announced in the final quarter was the highest for a single quarter since the second quarter of 2007.

The net result was an overall drop of about 5 per cent in deal value for the year. Not bad considering the enormous disruption over the 12-month period.

In Ireland, there are reports that the value of M&A activity actually increased due to the exceptionally strong recovery in the final quarter while the number of deals involved was about the same as in 2019.

“Once sellers and buyers saw the stability of the economic fundamentals of many companies, deals got up and running again,” says A&L Goodbody head of M&A Mark Ward. “Almost all parts of a deal, other than visiting a premises, if there is one, can happen remotely.”

Brexit risk

“It was a funny year in the sense that we went into it with a high degree of optimism,” says Davy corporate finance director Michael Hussey. “At that stage the Brexit risk had been taken off the table by Johnson winning an overall majority and concluding the withdrawal agreement. One of the big risks in 2019 was a no-deal Brexit and that was gone. And while many of us mightn’t have liked President Trump, the US economy was doing pretty well.”

But then the virus hit. According to Hussey, deals involving companies in sectors like hospitality and aviation which were directly exposed to the coronavirus restrictions were effectively dead. Other deals in sectors like engineering and construction were paused while buyers took stock of their own situation. But there was a third category which included sectors like technology, communications and healthcare which was effectively immune from the impact of the pandemic.

“Certain sectors, such as healthcare, technologies and IT services were particularly resilient,” says Patrick Quinlan, corporate partner at Maples and Calder (Ireland), the Maples Group’s law firm. “We were involved in a number of deals that were successfully completed in these sectors, such as the sale of Brindley to Orpea, Version 1’s acquisition of Singlepoint and the sale of Asavie to Akamai Technologies. More generally, in the marketplace, there were some interesting deals like the sales of Evros, Arkphire, Openet and Inflazome.”

While activity resumed when buyers recovered their composure, it wasn’t all plain sailing. “On a practical level, we probably saw deals being harder to complete in 2020 as a consequence of buyers, lenders and other financial sponsors being more cautious and carrying out more detailed due diligence than perhaps they would have in the past,” Quinlan notes.

“Our experience was that lenders were, understandably, taking more time to commit capital,” he adds. “Of course, execution itself became more challenging in the absence of face-to-face meetings. Debate concerning material adverse change conditions and assessing the impact of Covid-19 was also a common feature. The combination of these factors resulted in transactions taking longer from start to finish.”

That longer process is also noted by Ward. “Some transactions slowed down a bit as both buyers and sellers were more cautious. We had a lot of deals on the books before the lockdown. They slowly almost all fell away or got ‘parked’, but, as everyone worked out that they could still execute deals and that much of the economics still worked, they slowly came back one by one. Also, new deals for other reasons emerged and it picked up strongly in Q3 and Q4. So, a factor that surprised me was how deal flow and type, after a few months break, came back to normal levels.”

But it wasn’t exactly the same. “An unusual feature was that there was less of a push to close all deals out by year end,” says Ward. “We acted on a few transactions that would normally have completed by year-end, but instead drifted into 2021 with a very good pipeline as a result.”

Major deal

One feature of the Irish M&A market during the year was the high level of private equity activity. “This was a key driver of activity during the year,” says Deloitte corporate finance partner Anya Cummins. “We spend quite a bit of time working on that space. Private equity has more dry powder than ever before and all the firms have been raising funds. We saw a number of take-privates supported by private equity during the year. These included the sale of plastics company IPL to Madison Dearborn, CPL being sold to Japanese group Outsourcing, and Applegreen with the support of Blackstone Infrastructure Partners. The CarTrawler acquisition by TowerBrook was another major deal during the year.”

She also points to UK private equity firm Livingbridge’s high level of activity in the market during the year which saw the firm take a stake in Chill Insurance and communications provider Welltel. Cummins believes those companies will probably use the cash to look at acquisitions of their own. “Those deals will probably result in more M&A activity.”

Ward notes another trend in private equity. “It is looking beyond the typical larger markets of the UK, France and Germany for less competitive deal processes and that benefits Ireland,” he says. “Quite a few new private equity names appeared in Ireland for the first time.”

One thing we haven’t seen a lot of during 2020 is that usual feature of troubled markets, distressed sales. “We didn’t see a lot of distressed sales,” says Jan Fitzell, a partner within Deloitte’s M&A advisory team. “Government supports and forbearance by the banks have kept a lot of businesses going. There is a question around what will happen when those supports wind down.”

“Many businesses have taken the opportunity to rationalise their operations, reduce costs where required and improve their online offering,” Quinlan adds. “We hope that this will enable those businesses to excel in the future. The CityJet examinership is one such example and, unfortunately, examinerships and insolvency processes, with the inevitable job losses that follow, are likely to be more common in the next 12 months.”

An interesting feature of the market during the year was some of the sales that didn’t happen, according to Hussey. “One thing we’re seeing is start-up firms from five years ago rejecting offers of €10 or €15 million for their business and going for their own funding rounds to continue growth. That’s very positive news for Ireland.”