When set against 2021 the last 12 months can appear disappointing in terms of global mergers and acquisitions (M&A) activity but that would be an unfair comparison, according to PwC corporate finance partner Mark McEnroe. “2021 was a phenomenal year for M&A,” he points out. “There was something of a feeding frenzy after the pause in activity in 2020 as a result of the pandemic. There was about US$5.7 trillion in transactions during 2021 globally. We had never seen activity like that before and it may be some time before we see it again. You can’t really use an exceptional year like that as a benchmark.”
Strong pipeline for 2023
When compared with 2021, it might have appeared that 2022 activity was falling off a cliff, but this was far from the case, McEnroe explains. “The final out-turn for transactions globally looks like being around $3.5 to $3.6 trillion. That’s almost in line with 2019 when we had $3.7 trillion in transactions. And that was a very good year for M&A. At PwC we have one of the largest M&A teams in the market, we had a very busy 2022 and we have a very strong pipeline for 2023 as well.”
Looking ahead to 2023, he notes the headwinds which companies and investors will have to contend with. “There is no question that there are challenges out there. We are all very aware of interest rate rises, high inflation and the geopolitical issues that impact on investor confidence. But well-run companies with good management teams and good fundamentals are still coming to market and trading well.”
There has been turbulence in the public markets as well. “The public markets were down quite significantly in 2022,” he notes. “The S&P was down nearly 20 per cent and the Nasdaq was down over 30 per cent for 2022. By comparison, the Iseq was down about 18 per cent for the same period.”
The larger fall for the technology-dominated Nasdaq is primarily explained by the hit taken by technology stocks in recent months. While that has naturally been of significant concern here in Ireland due to the importance of that sector to the economy, McEnroe believes the longer-term picture is more positive.
“We can all see what’s happening with US technology jobs and that is understandably worrying for people,” he says. “That said, I believe that the international technology companies that are located here in Ireland are fundamentally sound businesses, and they will continue to be strong employers in the Irish market in the years ahead.”
Some technology companies have had a bumpy ride in terms of their market valuations, particularly those with recurring revenue business models or those that are in the software as a service (SaaS) area. These have been hardest hit by market turbulence as investors focus on their customers and potential cutbacks on subscriptions in an effort to reduce costs.
According to McEnroe, this has caused a change in focus from investors when it comes to investments in high-growth technology firms. “There has been much greater emphasis on burn rates, including profitability and break-even timelines, over the last six months,” he says. “That increased focus is not necessarily a bad thing, particularly for Irish companies who have historically been more conservative when it comes to burn rates. Despite the recent challenges, there is no shortage of capital providers looking to invest in good-quality high-growth tech businesses, particularly those with strong management and a global reach.”
Capital availability remains healthy
Notwithstanding the economic and geopolitical challenges, capital availability remains healthy. “If you compare the capital markets in Ireland to what they were 15 years ago there is substantially more capital available in private markets now,” he points out. “This includes private equity and private debt. There has been significant growth in both of those sources of capital over the past decade, which is a really positive thing for business owners. There is a large number of investors in the market with capital ready to deploy into good businesses, with a four-to-seven-year time horizon.”
That time period is important as it means that short-term turbulence will have less influence on investment decisions. “If you look at things with a 12-to-18-month time horizon, you may take a different view, of course.”
Capital availability isn’t the only driver of M&A activity, but it is a necessity. “M&A is a really important tool for business owners,” McEnroe explains, “Succession issues are real. Owners can get to a point where they need to transition out of the business. Having suitable capital available to support that is vitally important.”
The private capital markets are also key when it comes to funding growth, according to McEnroe. “If business owners want to grow, either organically or through acquisition, there needs to be competitive and supportive capital available to facilitate that. The broadening of the private capital markets has been hugely important for business owners in this respect.”
He remains cautiously optimistic for the year ahead. “There were a number of large deals in the US in Q4, including the J&J acquisition of Abiomed and the Kroger Co acquisition of Albertsons. That speaks to the point that well-capitalised companies continue to seek out good acquisition opportunities.”
Do current market conditions mean they are getting better value for their money? Possibly, but we are not seeing anything drastic from a valuation perspective, according to McEnroe. He believes that there could be some correction in valuations, but the primary effect will be a reduced risk of overpaying due to less bidding competition.
“The current challenging conditions potentially create opportunities thanks to lessened competition for deals,” he adds. “We expect to see some companies open their wallets to capitalise on these opportunities and leapfrog competitors.”
McEnroe also believes there may be reason to be more optimistic about the interest rate environment in 2023 than there was in 2022. “The key point is that business needs a degree of certainty when making medium- to long-term decisions. That applies as much to interest rates as anything else. When businesses have greater certainty around funding costs they will come in and make M&A decisions. And the recent mood music has been a little bit more positive about the level of increases still to come. The feeling is that inflation may be levelling off and interest rates might reach their peak in 2023, with estimates being between 4.75 and 5 per cent in the US and between 3 and 3.5 per cent in Europe. I believe that’s a level business can work with. It’s below the long-term average and provided there is confidence around those being peak interest rate levels, it still allows for a reasonable return to equity.”
That’s a lot different compared to the sentiment which prevailed in mid-2022. “That was quite a challenging time for investor confidence,” he says. “The narrative then was around there being no end in sight for interest rate increases. That is changing now, and I believe it should lead to increased confidence, which is key for a well-functioning M&A market.”
Finally, he believes Ireland will remain an attractive market for overseas investors. “We have seen some interesting transactions over the last 12 months with Irish companies being acquired by US, UK and European investors. That should be no surprise. There is a reason why so many multinationals are set up here. We have a very good, highly educated workforce and a strong environment for business. It’s a great place to headquarter a global business out of and that has an impact on M&A sentiment.”
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