Brexit and the election of Donald Trump as the 45th President of the United States created a period of much uncertainty for businesses in the second half of 2016.
Following on from that, there was a “period of apprehension” for global dealmakers, according to a report from US law firm Baker McKenzie. In the Republic of Ireland, mergers and acquisitions fell to €3.6 billion last year but while uncertainty can create apprehension, it also leads to opportunity.
Michele Connolly, head of corporate finance at KPMG, says people "got to grips with the new reality" last year and things became slightly more stable.
“There was a good level of steady activity throughout the year which is ideal and is more normal. Not to say the apprehension eased, but people got to grips with the new reality a little bit more. The previous year we had Brexit and Trump and during 2017 people in Ireland and globally were recognising that this is the level of uncertainty we’ve got to live with now and business needed to move on. So while people were cautious, they recognised that need,” she says.
Katharine Byrne, head of corporate finance at BDO, agrees that as Brexit negotiations rumbled on and the Trump tax reforms started to unfold, the unease created resulted in sporadic bursts of M&A, with many deals taking longer to complete as buyers conducted detailed due diligence.
“There has been a notable increase in valuations as pressure mounts on buyers to invest and vendors seek to leverage this and the rising economy. There’s also been an increased focus on strategic M&A, as larger corporates take action against the threat of disruption. This is likely to result in an increasing number of non-core assets sales in 2018, along with opportunistic buys for MBO teams.
“There are now a number of new financial buyers active in the Irish market, which is helping drive the return of the management buy-out, as increased funding options become available. Irish businesses are now also understanding the benefit of private equity, as demonstrated by some notable successful exits in 2017, such as the sale of Viviscal and Blueface by BDO Development Capital fund, the sale of Lily O’Brien’s by CCI and the sale of Merlyn and Vita Liberata by Broadlake,” she says.
Liam Booth, head of corporate finance at Investec, argues that 2017 was one of the stronger years for Irish M&A, coming after a sluggish 2016.
“There’s no doubt the UK Brexit vote in June 2016 and the uncertainty that followed that had a very dampening effect on the market. I think as we came through the back end of 2016 and saw the continuing highs in equity markets and with that the growing corporate confidence, the continuing plentiful supply of capital and low cost of capital through low interest rates, it all led to a confluence of very positive factors for M&A in 2017,” he says.
These included equity markets at all-time highs and interest rates nearly at all-time lows, leading to an environment that’s conducive to deal-making, Booth says.
“The confidence around Ireland itself became stronger and the economic recovery gained pace. Ireland was seen as a highly attractive place to acquire businesses to deploy capital and all of that pointed to a positive backdrop for Irish M&A.”
This is evident in the fact that Ireland now ranks seventh in the most attractive locations for investment.
Booth says there were similar trends globally and in Europe, with M&A exceeding 2016 levels.
“There were similar factors at play there and there was more confidence around the European growth story,” he says.
Key ingredients
Nicholas O'Gorman, director with Davy Corporate Finance cites a buoyant economy and confidence as the key ingredients for the deals that have taken place.
“For purchasers, there were a number of debt-funding opportunities out there, both from the traditional lenders, who are most definitely lending again and from alternative lenders offering various funding options, both in debt and quasi equity. This environment, in certain scenarios, provided opportunities for business owners to extract value from their companies without necessarily engaging in a full sale.
“Internationally and in Ireland, there is a lot of private equity chasing deals. They are cash-rich and under pressure to put their money to work. While traditionally private equity favours majority equity investment, we also saw situations where they would consider investment on a minority basis,” he says.
sThe public equity markets, despite some periods of volatility, fundamentally remained both resilient and strong, he says.
“If you are looking at private companies, the public equity markets are a key consideration which influence valuation and provide confidence for companies to sell. High stock market valuations also create pressure for listed companies to make acquisitions. As stock markets price in both current and expected future performance into share prices, the listed companies themselves are under pressure to continue to make their earnings grow. Organic growth can only bring you so far, so these companies were more than ever seeking acquisitions as a means to achieve growth,” he says.
O’Gorman says a lot of private owners have come to the market to sell their companies, which is being driven by strong demand from potential buyers and higher valuation expectation created by a few years of very strong profits, with a positive outlook for future growth.
“Also, some of these business owners may have missed their opportunity to sell before the last boom/collapse and didn’t or don’t want to risk missing it again,” he says.