A good year in prospect for the deal makers

The KPMG M&A Outlook 2016 survey predicts that deal activity this year will top already buoyant 2015 levels, with the healthcare, pharmaceuticals and life sciences sector expected to see most deal flow in in the year ahead.

Other key findings point to a high level of confidence among Ireland’s M&A decision-makers, with debt forecast to be the primary source of funding for acquisitions in 2016. There is also a belief that this year will see a return to transaction health for the beleaguered construction sector.

This is the second year of the survey which identified a renewed sense of optimism among Irish deal-makers in 2015. This was reflected in strong M&A activity, with Irish companies involved in several transformational transactions both domestically and overseas. These included the €8 billion Paddy Power-Betfair merger, CRH’s acquisition of assets from Lafarge- Holcim in a deal worth €6.5 billion and One51’s strategic acquisition of Canadian plastics producer IPL, which will give it a platform in North America.

The survey reflects the views of more than 100 of Ireland's top M&A decision-makers and influencers, according to KPMG head of transaction services Mark Collins. "We surveyed people at a very high level in corporates, including CFOs, heads of M&A and, in some cases CEOs", he says. "We also spoke to the banks, advisers, and the private equity community. A very good representative cross-section of Ireland's M&A community participated."

Collins believes the survey is timely in that M&A activity is itself a useful economic indicator. “Mergers and acquisitions activity is a good bellwether for the economy. It tends to reflect what’s happening in the economy generally. In fact, it can even be a predictor.”

The 2015 survey was prompted by the increase in M&A activity, which was indicative of the upturn in the wider economy. “We thought that people would be interested in getting perspectives from an Irish professional services house that touches at least 50 per cent of the transactions which happen on the island,” Collins notes.

“We were also seeing an improvement in both the economy and M&A activity and we wanted to validate and verify that with decision makers around the country. The 2015 survey acts as a reference point for this year’s and the exercise will become more interesting as the years go by.”

One of the key drivers of activity during 2015 was enhanced access to capital as more and more deal-makers looked to finance new acquisitions through debt and equity markets. There were notable equity fundraisings during the year by newcomer PLCs such Dalata Hotel Group, Malin Corporation and Cairn Homes. Indeed, despite continuing volatility on global equity markets, IPOs and equity fundraisings remain attractive options for organisations seeking to raise funds.

Looking to the year ahead, half of all respondents intend to finance potential acquisitions through debt funding. This reflects the improved availability of credit in the market.

It also an indication that debt providers, particularly the Irish banks, are willing to extend credit to fund sound, local transactions on quite attractive terms.

The drop in value of the euro has also been an influencing factor. “Dollar and sterling buyers have enjoyed increased purchasing power as a result,” Collins says. “Many of their targets are export led companies selling on to dollar and sterling markets and converting sales revenue back into euro. That is making them even more attractive and there is an element of a double whammy in that.”

Unsurprisingly, the healthcare and pharmaceutical sector is once again expected to be at the forefront of activity in 2016. This was in part due to a number of high-profile corporate inversions featuring Irish domiciled companies, including Pfizer-Allergan and Shire-Baxalta.

While transactions of this scale and nature are considered unlikely to be repeated in 2016, survey respondents still anticipated substantial acquisitive activity involving pharma and biotechnology companies.

Other sectors expected to see substantial activity in the year ahead include technology and the agribusiness and food sectors. Many respondents also believe that this will be the year in which transactions within the Irish construction sector will continue to recover.

The main factors driving deals were quite diverse, according to the survey responses. Strategy was the main consideration discussed in Irish executive boardrooms when identifying potential acquisitions. Companies are seeking to maximise shareholder value by identifying suitable targets in similar industries which will boost earnings growth through new sales channels for existing products, new technologies, complementary products acquired, and so on.

The achievement of cost synergies through the elimination of duplicate back-office functions, reduced accommodation requirements and leveraging increased buying power were also cited as an important factor.

Very interestingly, opportunistic acquisitions were deemed to be the least attractive of rationales. This indicates that Irish deal-makers are interested in acquisitions that enhance shareholder value over the long term rather than short-term fixes.

Collins sees this diversity as a strength. “Buyers will do deals for different reasons, it might be to acquire a customer base or new technologies or intellectual property or it might be to establish a foothold in a new market. It could also be to realise synergies. This diversity is a positive, buyers are now much more focused on cash-flow generation than they were 10 years ago. The due diligence we are carrying out now is very much around cash flow and that is a good thing.”

Price expectations remain positive, although Collins does sound a note of caution in this regard. “There was an overwhelming belief among respondents that we have entered a cycle where price multiples are more likely to increase than decrease.

“This is as a result of companies being able to point to a track record of sustainable earnings, availability of funding and growth prospects fuelled by a resurgent Irish economy. Companies which have emerged from the recession will be able to point to a further year of earnings growth in 2016 and that can only make things better.

"On the other hand, when we look at what's been happening in China, the decline in sterling, the fall in the oil price and equity market falls in recent weeks, you would have to wonder if that sentiment would remain as strong. A month or even a week can be a long time when it comes to market sentiment."

That said, survey respondents already expressed reservations in relation to price expectations on the part of vendors and said this could inhibit the level of deal activity this year. Deal-makers were also cautious about the impact on investment decisions of potential changes in the political landscape.

“Confidence is very strong but we have to be aware of these factors”, Collins says. “The potential negative impact on investment decisions of recent developments such as ongoing concerns over a slowdown in the Chinese economy, volatility in global equity markets, depressed oil prices and the weakening of sterling has to be borne in mind.

"Upcoming elections in Ireland and the US as well as a probable vote on a British exit from the EU in 2016 will inevitably influence M&A sentiment as well. However, it has to be said that the overall sentiment remains very positive at present."