Tech, finance firms primed for deals
Innovative Technology, Media and Telecommunications (TMT) and finance companies are set to drive M&A interest in the coming months. Picture: iStock
Technology, Media and Telecommunications (TMT) is expected to remain the dominant sector for mergers and acquisitions (M&A) activity in Ireland.
Innovative and disruptive technologies in particular will continue to drive interest and fuel activity in this space. There is also increased deal volumes across business and financial services and a notable increase in interest levels in industrials, particularly precision engineering businesses at the intersection of life sciences and healthcare and those businesses servicing the data centre industry.
An emerging sector for M&A in Ireland is within Energy & Resources, principally renewable energy driven by investment in sustainable and clean energy projects.
Áine Sheehan, director, Deloitte sees most of the deal activity concentrating in the mid-market.
“The Irish market is abundant with family and owner-managed businesses with strong management teams, strong growth profiles and activities in attractive end markets.
“Ireland as a location is attractive for international investors — factors such as our location as an entry point to Europe, positive economic indicators, skilled workforce and tax friendly regime, combined with quality businesses in the growth phase of their lifecycle continue to drive mid-market M&A activity. Irish businesses also tend to internationalise early in their lifecycle which makes them attractive acquisition targets,” says Sheehan.
While deal volume has remained resilient for Ireland relative to European peers in the past year, appetite to do deals was somewhat diminished in 2023 by factors such as rising interest rates, high inflation and geopolitical uncertainty.
An extended period of corporates focusing on cost cutting and building up cash, combined with anticipated interest rate cuts later in the year, sets the scene for driving strong M&A activity in the second half of 2024. Laura Gilbride, partner, PwC Ireland Corporate Finance, agrees that the M&A activity has remained strongest in the mid-market in 2023 and 2024 year to date.
Mid-market companies have an enterprise value ranging from €20m to €200m. Mid-market deals are holding up because they are easier to get done in a difficult financing environment and dealmakers are following a strategy of making a series of smaller deals to drive transformation and growth. “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 €971m purchase of Cellnex Telecom’s Irish mobile phone towers. These transactions highlight a greater willingness among dealmakers to do larger, more complex deals,” says Gilbride.
“The Irish M&A market is poised for an upswing in activity in 2024, and some (but not all) sectors are already seeing an increase in deals. 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,” adds Gilbride.
Ray Egan, director, PwC Ireland Corporate Finance also believes 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,” says Egan.
Generally, two thirds of all Irish deals involve overseas bidders with UK and US based acquirers being the most active according to Micheál Martin, manager, PwC Ireland Corporate Finance.
“Trade buyers continue to be the most active 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 now in a position to compete more effectively with private equity on price.
“Private equity buyers are an important component of Irish M&A; 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 declined PE activity levels across Europe and North America,” says Martin.
John Bowe, partner, Mazars, views a key driver of M&A activity as 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. Moreover, corporate balance sheets are strong currently and there is a strategic focus on growth through acquisition of complementary products and services.
“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,” says Bowe.
Sheehan adds that the valuation gap between buyers and sellers is expected to reduce as factors that were suppressing valuations, such as high inflation, interest rate volatility and margin suppression are starting to stabilise.
“We’re seeing deal structuring come into play where any such gap still exists. Private equity will continue to double down on their investments and use M&A as a means of value creation and maximising returns. One of the most active buyer camps currently is private equity backed companies. These businesses are using M&A to enhance organic growth rates, with financing from their cash rich PE owners,” says Sheehan.
The dominance of both domestic and international private equity investment in Irish business is the most significant trend.
Bowe concludes: “As a result of the ever-growing availability of funding options, another trend emerging is business owners having earlier conversations around de-risking and taking on growth capital.”
A guide to Management Buyouts by James Loughrey, Managing Partner, MC2 Accountants
If management think that the value is primarily tied in with themselves, they could potentially undervalue the business in the eyes of the owners. This could cause resentment on the owner-side and result in wanting to make the deal competitive i.e., go to market for a 3rd party sale.
The management team under-estimate the financial commitment required for the buy-out, through debt, equity, personal guarantees etc. If using bank finance to fund the buyout, management could be required to fund up to 40% of the transaction through cash/equity.
The management team are too focused on the buyout, at the detriment of business performance, ultimately impacting negative on the valuation.
Management and the vendors agree up front and at the earliest stage, a valuation for the business and the mechanics of the sale e.g., will the transaction be a cash-free, debt-free acquisition; what are the timelines for deferred consideration payments, if any.
Having a strong, robust business plan that is deliverable and has been stressed for macro and micro market changes e.g., increases in interest rates. This is particularly important around the cashflows of the business with regards to the timing of any deferred consideration payments.
Having open communication on all sides, especially when unexpected delays arise.
As the process can be long and distracting from daily business, can you explain the importance of seeking professional support from the outset?
All management buyouts should involve legal, tax & corporate finance advisors. As mentioned previously, a key risk for a management buyout is that internal senior resources within the business will be focused on the transaction at the detriment of business performance. Having corporate finance advisors to structure and manage the transaction, as well as regular communications to keep all parties informed of progress, is important to ensure management can continue to focus on the business while momentum is kept in the transaction.
