Following a blistering start, merger and acquisition (M&A) activity in Ireland cooled somewhat as the year progressed but the overall prospects in this area both locally and globally remain bright, writes Frank Dillon.
With some 89 reported deals in the first quarter of 2024, the year got off to a strong start locally as the early months are traditionally weak ones for M&A activity. Notable deals included Phoenix Tower International’s €971m acquisition of Cellnex Telecom’s Irish tower portfolio and Starwood Capital’s 50 per cent stake acquisition in Echelon Data Centres at an enterprise value of €1.6bn.
While Irish M&A volumes declined in the most recent quarter compared to the corresponding period last year, with 108 deals reported, this compared to an exceptional second quarter last year. Consolidation themes, declining inflation and a positive European Central Bank (ECB) rate outlook continue to provide an increasingly favourable M&A environment, according to Davy stockbrokers.
“Year-to-date deal volumes in the first half of 2024 have been positive. This allied to the return of significant mergers and acquisitions internationally and with the first signs of a reversal in the recent monetary policy tightening cycle due to inflation coming down towards target in the US and Europe we feel the backdrop is conducive to a good second half of deal activity for 2024. This should result in a fourth consecutive full year of around 400 deals in terms of market activity which compares very favourably with historic levels, as the market looks to have now settled at a structurally higher level of M&A activity,” says Davy head of M&A Jonathan Simmons.
Notable deals included Blackstone’s acquisition of a significant interest in Winthrop Technologies at a reported deal value of €0.8 billion, Copenhagen Infrastructure Partners €292 million acquisition of Elgin Energy and DCC’s acquisition of Next Energy Solutions for about €105 million.
Internationally, the story so far has been one of volumes down slightly but values up strongly, with deals above $1 billion showing their third consecutive quarter of growth in the period to the end of June. The global M&A market saw $1.5 trillion of deals in the first half of 2024, up 22 per cent on the corresponding period last year.
The US saw the largest level of activity, contributing more than half of the global total in the first half of 2024, on a value basis, up 43 per cent ($796 billion). Similarly, Europe saw a 43 per cent increase in deal activity over the same period, whilst the Asia-Pacific declined 21 per cent in the same period.
Large recent deals have included US oil and gas producer ConocoPhillips’s $23 billion acquisition of Marathon Oil, and Aon’s acquisition of US middle market broker, NFP for $13 billion. According to Simmons, it appears that global mega-cap M&A has increased largely in anticipation of interest rate cuts.
With further rate cuts expected later this year, this should add further fuel, particularly to the large-cap M&A market, spurring further activity both in Ireland and abroad. Given that Irish deals are smaller and generally less leveraged, however, this is likely to be more of a factor internationally than at home.
Mark McEnroe, Partner, PwC Corporate Finance, agrees that mid-market transactions here have not been as affectected in recent years as the large buyout deals which are dependent on the availability of vast quantities of low-cost debt. A cut in rates will help, however, he says.
“While there is broad recognition that interest rates aren’t going to return to the zero rates we have had for several years, the recent cut in the ECB rates as well as a signal towards further rate cuts later in the year will have a positive impact on valuations and will encourage more sellers to launch sale processes. Over the longer term, buyers and sellers will need to factor in interest rates of between 2 and 3 per cent.”
McEnroe sees a healthy outlook for the remainder of 2024 into 2025. “While deals are taking longer to complete than say two or three years ago, there is still a strong volume of deals in the market with good interest from both private equity players and strategic buyers.”
The sectors he sees attracting the most interest include those businesses with a sustainability angle, technology businesses- particularly those with a proven annual recurring revenue model — and pharmaceuticals and healthcare.
“There is a strong recognition that M&A remains an important lever for those companies looking to grow and remain relevant. With significant changes in the macro environment such as the rise of AI and the importance of sustainability, M&A will be crucial for those companies who wish to adapt quickly. This, together with a large number of business owners reaching retirement age create a very strong backdrop for M&A activity.”
The softening of inflation and the expected downward trend in interest rates and increased availably of capital has led to cautious optimism that conditions are returning that will allow for an increased deal flow, says Gerard Ryan, head of corporate, at law firm Evershed Sutherland.
“The historic high amounts of dry powder, estimated to be $3 trillion, available to private equity firms and the pressure to deploy such capital means there will inevitably be an exercise in terms of balancing risk and opportunities as fund clocks tick down. The accumulation of uninvested capital points to an appetite among investors but also demonstrates a move towards private equity firms being ever more strategic and selective in where they invest. The re-emergence of strategic buyers is also a trend that we have seen in the first half of 2024.”
The reduction in valuations seems to have stabilised and there is a sense that although it remains a buyer’s market there is less compression of multiples, he says. “It remains to be seen how quickly the easing of global economic anxieties that had increased the cost of capital starts to be seen in terms of a real increase in M&A activity, but the sentiment is positive.”
In terms of what is driving buyer interest at the moment, Ryan says that a key feature of the current market is strategic buyers looking to leverage their current offering through technology, innovation and proven expertise.
“Digitalisation of the global economy means technology integration is now a cornerstone of all corporate strategies —generative AI is going to be a hot area over the next few years and it will affect all sectors. ESG [Environmental, social, and governance] is also a cornerstone of corporate strategy and that has resulted in buyer interest in acquisitions that will enhance and contribute to their ESG credentials and corporate goals. We have also seen consolidation in the insurance sector and PE [private equity] activity has now started to drive consolidation in the accounting/advisory and wealth management space.”
Energy transition is predicted to be an increasing driver of M&A activity, and the confluence of technology can be seen here as strategic buyers look to acquire energy tech businesses and this is a trend that will only increase, he adds.
Aside from interest rates and general economic conditions, Ryan also notes that M&A activity has been dampened by geopolitical events, a trend that is likely to be accelerated in the years ahead.
“With the emergence of technology and advancements such as AI, we have seen an increase in regulator activity and an increased scrutiny and screening of foreign investment and acquisition by governments and regulators which leads to increased deal uncertainty and execution risk. Strategic interests and assets and foreign investment in the same is now seen as a critical risk for governments and there will be a growing move to defend critical infrastructure, technologies and information from foreign investment.
“The fragmented and embryonic nature of AI means regulators are still coming to terms with it but we’d expect a robust regulatory regime to be developed in the near future similar to the evolution of that in relation to data privacy and this may impact on how those deals are structured and exited,” he concludes.
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