Clear signs of revival in M&A market
While the M&A market is more buoyant, deal processes still require careful preparation to be successful, industry experts advise.
Following a decrease in deal volume of between 7% and 10% during 2023, the Irish M&A market appears to be poised for a welcome upswing in activity.
Pent up investor demand, coupled with the continuing strong performance of the Irish economy, makes this country attractive to dealmakers.
“Notwithstanding ongoing macro-economic and geopolitical considerations, Ireland continues to benefit from a resilient M&A market, particularly relative to the UK where M&A activity has been more muted,” says Ross O’Donovan, director, Financial Advisory, with Deloitte.
“Pent up demand from Irish and international private equity investors, well-capitalised international trade buyers and delayed shareholder exits post-Covid are conducive to volumes remaining strong in 2024 and beyond,” he continues. “As the domestic private equity market continues to mature and with typical hold periods of three to five years, we also expect to see a number of private equity portfolio company exits this year. Furthermore, ongoing signals from the ECB in respect of targeted interest rate cuts later in the year are providing greater comfort over the access to and affordability of financing to support such activity.”Â
As a result, international trade buyers and private equity investors continue to regard Ireland as a highly attractive location for opportunities, supported by strong management teams and businesses inherently focused on international growth, he adds.
PwC Ireland corporate finance partner Laura Gilbride also believes the Irish M&A market is poised for an upswing in activity in 2024.
“Some, but not all, sectors are already seeing an increase in deals,” she says. “The market upturn will differ from previous ones, with a larger role for private credit and greater focus on value creation and growth. Pent-up demand from private equity, a stabilising interest rate environment and growing pressure for strategic transformation among companies will create more opportunities for deal activity.”Â
Mazars deals partner John Bowe agrees: “While deal volumes dipped in 2023 compared to 2022, mainly due to economic uncertainty and escalating interest rates, this downturn has created pent-up demand for transactions. As uncertainties subside, we expect deal activity to rebound, with heightened activity expected throughout 2024. A key driver of M&A activity is the availability of investment capital earmarked for Irish companies. Irish and international private equity funds all have capacity to invest and are looking to back strong management teams on their growth journey.”Â
Gilbride also points to a number of significant major deals, both internationally and in Ireland. “It is worth noting, that although M&A activity is continuing to focus on mid-market deals, 2024 has already seen a number of mega deals announced including Hewlett Packard Enterprise’s proposed US$14bn acquisition of Juniper Networks, in Ireland we saw Starwood Capital paying €791 million for 50% of Echelon Data Centres, and Phoenix Tower’s €971 million purchase of Cellnex Telecom’s Irish mobile phone towers. These transactions highlight a greater willingness among dealmakers to do larger, more complex deals.”Â
Her PwC colleague, corporate finance director Ray Egan, says we shouldn’t expect a dramatic increase in activity, however. “A measured upswing in 2024 is expected versus 2023, during which approximately 330 deals closed in Ireland. Whilst dealmakers are understandably eager for the downward trend to be over, the upturn is expected to be more measured than the surge of dealmaking activity which occurred during late 2020 and in the record-breaking year of 2021.”Â
According to Ross O’Donovan, businesses with strong fundamentals including a repeating revenue profile, attractive customer base, strong margins and downside risk mitigation continue to attract significant interest. “TMT, financial services, business services and industrials — notably precision engineering, are sectors of particular interest for both private equity investors and trade buyers on the basis of being naturally aligned to such characteristics,” he adds.
“Other macro trends are having a positive impact on domestic M&A activity,” he points out. “The energy transition agenda continues to attract significant interest, supported by unprecedented dry powder and capital allocation towards ESG initiatives, while the international growth in data centres has driven recent M&A interest in Irish companies servicing this space.”Â
Grit Young, Strategy & Transactions partner and head of Valuations and Transformation with EY, also notes the trend towards ESG investment. “Investors are alive to the opportunities presented by the net zero transition and are keen to play their part in funding it,” she says. “Overall, the transition to a net zero economy is estimated to require US$125 trillion in investment globally by 2050. On the flip side, boards must be conscious that a poor ESG rating can act as a barrier to outside investment as the ESG reports from rating agencies are used by investors to inform their capital allocation decisions. Organisations without strong ESG scores are likely to be excluded from ESG funds and indices.”Â
Another feature of the Irish market is continuing strong overseas interest. “Generally, two thirds of all Irish deals involve overseas bidders with UK and US based acquirers being the most active,” says Micheál Martin, manager, PwC Ireland Corporate Finance. “Trade buyers continue to be the dominant buyer type, and whilst interest rates are stabilising, it is still the most expensive credit environment we have seen in a decade, which means trade buyers are in a position to compete more effectively with private equity on price."
Private equity buyers remain an important component of Irish M&A, Martin adds. “Over the last few years, private equity buyers on average have accounted for circa 20% of M&A deals in Ireland, though this declined in 2023 — consistent with reduced private equity activity levels across Europe and North America. Pent up demand from private equity is expected to drive an upswing in their participation in Irish deals.”Â
Trade buyers continue to account for the lion’s share of activity. “Interestingly, we continue to see the emergence of private equity-backed trade buyers participating in competitive M&A processes,” O’Donovan notes. “The concentrated focus of M&A activity within the Irish mid-market affords family-owned and owner-managed businesses significant optionality in respect of achieving a full exit or de-risking by way of disposing of a shareholding — either minority or majority, initially.
“Given the wide range of options available to shareholders in realising value, it is critical that vendors are making informed decisions in respect of selecting a strategy that is aligned to underlying objectives. Furthermore, the increased optionality presents differing structures which need to be appropriately considered and negotiated.”Â
AI is likely to be an important deal driver in the year ahead and beyond, says Young. “As one of the most disruptive and transformative technologies in decades, interest in AI, especially GenAI, remains very strong, driven by an array of factors including unprecedented public interest and high early adoption rates of what is still a nascent technology. GenAI’s potential applicability across a wide variety of sectors and industries, as well as adoption potential across the c-suite is also driving the investment as the sector matures. The number of deals and investment is projected to only increase over the coming years.”Â
While the market is more buoyant, deal processes still require careful preparation to be successful. “Investors and buyers continue to apply enhanced due diligence as part of any prospective acquisition or investment with a significant focus on the sustainability of the underlying trading performance,” says O’Donovan.Â
“Vendor due diligence is increasingly being recognised as essential in terms of identifying and positioning any key financial considerations in advance of launching a formal sale process and thereafter ensuring prospective bidders/investors adhere to process timelines. Deal structuring — such as earn-outs, deferred consideration and so on — presents buyers and sellers with an equitable opportunity to bridge any valuation gaps and has become a more common feature of transactions in recent years.”
