Resilient mergers and acquisitions market set for an upturn
Acquirers are seeking strategic assets and the fundamentals of the Irish economy remain strong making it an attractive location for investment.
Following a stellar year for M&A activity in 2021, the market went into reverse somewhat in 2022 as a result of the war in Ukraine, the spike in energy prices, rising inflation and consequent interest rate rises. The outlook for the remainder of the current year is positive, however, with rising business confidence leading to an increased appetite for acquisitions.
“While 2022 saw a global slowdown primarily due to uncertain debt markets and macroeconomic factors, there is confidence that a much stronger appetite for deals is returning,” says Ronan Murray partner EY Ireland Corporate Finance and president of Cork Chamber of Commerce. “Despite some continued headwinds in the first quarter of this calendar year, it is expected that the M&A landscape will see a more tangible positive shift in activity by the third quarter of 2023.”
He says the Irish market has remained resilient and is well placed to see an uplift in volumes for the remainder of this year as Irish assets continue to attract both local and international capital investment.
“At EY Ireland, we have an all-island Strategy and Transactions (SAT) team which experienced an enhanced pipeline of opportunities in the second quarter of 2023,” he adds. “I therefore expect to see an increase in M&A activity for the year ahead.”
Richard Grey, A&L Goodbody partner and head of M&A, agrees: “In general, the market has held up well in 2023 with the number of transactions in the first half of the year generally consistent with the number of M&A transactions recorded in the first half of 2022. In terms of the rest of the year, we are expecting deal volumes to increase, particularly in the fourth quarter, as and when debt markets start to reopen and credit terms return to those that we would have seen in 2021 and the first half of 2022.”
Grey says there is strong M&A activity in certain sectors in respect of targets which can demonstrate reliable annuity income with limited customer churn or turnover.
“In addition, prospective acquirers are keen to ensure that there are no customer concentration issues with targets where the business of the target is dependent upon a small number of customers,” says Richard Grey. “Against this background prospective acquirers are particularly attracted to targets which have a diverse income stream.”
He believes dealmakers are seeing the current environment as an opportunity to acquire attractive assets at realistic valuation levels.
“Dealmakers are looking for targets which produce or provide goods or services that people would regard as essential or ‘must have’ rather than goods or services which involve discretionary spend,” he explains. “We are also seeing dealmakers look to use acquisitions as an entry point into markets and geographies where they do not have an existing presence with a good example of this being UKG's recently announced acquisition of the Irish headquartered payroll service provider, Immedis.”
Capital availability is also important, according to Ronan Murray: “There remains significant capital to be deployed, business owners continue to seek growth capital, acquirers are seeking strategic assets and the fundamentals of the Irish economy remain strong making it an attractive location for investment. Private equity investment in the mid-market, driven by the availability of dry powder, will play a key role in market activity for the remainder of 2023.”
There is a perception too that value expectations in certain sectors have levelled off and this will attract further interest as deal sizes may be considered more palatable.
“As we move forward, private business optimism coupled with the existence of a more developed and balanced risk appetite, will also define the level of activity for the year ahead, Murray notes. “At EY we are working with numerous clients in the indigenous private market who are seeking to unlock value in the next six to nine months.”
There may also be opportunity in adversity. “While uncertainty and volatility can often result in a decline in M&A activity, it can also create significant opportunities for growth through acquisition where buyers seek to acquire companies with earnings potential,” says Murray.
“From a seller’s perspective, a transaction can allow them to de-risk, while at the same time realising value,” he adds. “From a private equity perspective, there is often the opportunity to obtain growth capital and commence a buy and build process with a defined M&A strategy. Dealmakers are also looking at synergies across the various functions of a larger organisation.
“Investors could be looking at several areas in terms of the objectives behind a transaction. These could include new products or services, access to new markets, increased purchasing power, new talent, diversification, more advanced technologies, or enhanced supply chains. Often the deal is about unlocking the potential and value that exists in an organisation.”
Increased interest rates are, of course, having an impact on activity.
“Potential purchasers are seeing the debt required to fund acquisitions become more expensive or in certain cases simply not available,” Richard Grey explains. “We are not, however, necessarily seeing these factors resulting in in depressed valuations but instead are seeing that the consideration mix for attractive targets is very different now than what it would have been in 2021 and 2022.
“While in 2021 and the first half of 2022 the most attractive targets would have attracted strong valuations with the vast majority of the purchase price being paid upfront, we are now seeing a material proportion of the consideration on most transactions deferred for one or two years after completion of the transaction.”
Earn-out Activity will by no means be evenly spread across sectors.
“From an Irish as well as a global perspective we are still seeing continued strong deal activity in sectors such as infrastructure, renewable energy and financial services, including the insurance sector,” Grey notes. “We are seeing reduced levels of deal activity in sectors which are heavily reliant on discretionary spend such as consumer facing services businesses.”
Deal activity also remains strong in the tech sector.
“The technology sector continues to dominate M&A through transactions, partnerships and strategic alliances,” says Murray. “A tangible focus on data utilisation, cybersecurity and operational efficiency makes the technology sector attractive for further investment. Large corporates keen to enhance their tech offerings are active in the market and creating additional competitive tension for assets in the private indigenous landscape.” Along with colleague Rob Hussey, Murray recently advised the Cork headquartered IT services group PFH Technology, which had revenues of €175 million to June 2022, on the sale of their business to the global Japanese electronics company Ricoh.
“This is a good example of the increasing number of large international corporates seeking to invest in strong Irish private enterprises in this space,” he points out. “We are working on a number of other transactions in the technology sector. Achieving additional scale is also a common theme along with market consolidation.
“Other sectors which continue to attract interest and where investment mandates are on the rise include engineering, financial services, business support services, healthcare, life sciences, and ESG. The green transition to a lower carbon economy is also driving investment decisions and companies in this space with particular sustainability credentials will continue to be attractive.”
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