Ireland still attractive for international investors
Katharine Byrne, BDO
Nearly a year on from the first Covid lockdown and M&A activity remains remarkably resilient, according to BDO corporate finance partner Katharine Byrne. “After the initial stop to transactions in Q2, the rebound in M&A activity was much better than expected in Q4 of 2020 and this looks set to continue into 2021,” she says.
Many deals that had stalled last year are now closing or back on track, although the practicalities of working through due diligence and integration plans during the lockdowns has made the transaction process longer, with more innovative approaches required.
“Despite these challenges, we are seeing increased activity in ‘hot’ sectors such as technology, healthcare and life sciences as well as businesses such as food retail that have boomed over the last 11 months,” she adds. “Overall valuations remain high despite market uncertainties, but we are seeing shift in deal structures with increased focus on earnouts and share transactions in order to mitigate some of the risk.”
However, things can change quickly. “It’s generally acknowledged that confidence underpins M&A activity. We need confidence in political stability, in the vaccine rollout and the capital markets. A sudden change in these can quickly undermine confidence and disrupt M&A transactions, so it’s really important for buyers and sellers to recognise this at the outset and be ready to react very quickly.”
Byrne foresees a number of key trends for M&A in the coming year. The first is the role of private equity as a driving force behind deals with an increased focus on take privates and corporate divestments. “Across SMEs, succession planning is to the fore, with MBOs and consolidation across sectors being underpinned by private equity funds.
“The second half of the year will see an increase in the sale of distressed assets and opportunistic takeovers as businesses run out of road when Government supports cease and funders call in their loans. Ongoing digital transition, which was accelerated by Covid-19, will continue to drive a lot of activity across all sectors and size of companies, as businesses rethink their strategies and look to acquire new technologies.”
Environmental, social and governance factors will move in from the sidelines to become a pillar of the M&A strategies of large corporates and global equity providers. “This will quickly filter into the M&A plans of Irish companies as funders will seek out ESG investment opportunities.”
And finally, Brexit. “Ireland remains an attractive region for international investors and the fallout from Brexit is still driving activity as corporates look to secure their supply chains and access to the EU,” Byrne points out.
A busy year in prospect
Alan Kelly, Focus Capital
Focus Capital director Alan Kelly believes a combination of improved political stability, capital availability and other factors will result in a busy year for M&A. “In 2020, we had a massive year of volatility,” he says. “We now have a situation going into 2021 with a new US president, Brexit complete and a vaccine-rollout plan that should lead to a less volatile market. With private equity firms estimated to be sitting on $1.4 trillion in dry powder coupled with multiple corporations looking to grow faster through acquisition, we believe that 2021 will be quite strong for M&A activity. We have seen a strong start and we expect this to build through the year.”
Indeed, Focus Capital has already experienced a surge in inquiries from private equity firms and North American software companies regarding companies for which it holds mandates. “We have been very busy in the healthcare, engineering, renewables and technology sector over the past couple of years and we see these sectors continuing to be very active in 2021.
“Our experience in dealing in the low to mid-market sector, where a lot of Irish family companies operate, has been that following a financial crisis a lot of business owners reassess their lives and they often think they should look at their options including an exit or partial exit,” Kelly continues. “We expect that to be the case in 2021 and there are so many more options available now to family companies relative to 10 years ago. We are seeing a large volume of private equity sponsored management buy ins, management buyouts and PE minority investment where owners can take some cash out and stay in for a second bite of the cherry. The options weren’t as plentiful in the past.”
Focus Capital also raises equity for growth companies. “We have built up a network of high net worth individuals who are seeking opportunities to invest and get involved in a business they can put energy into and add value,” Kelly explains.
“We believe that a combination of a more stable macro market, increased capital available for acquisitions and multiple exit options for business owners should result in strong activity in 2021 and we are growing our team to capitalise on this opportunity.”
Pent up demand to contribute to strong year ahead
Patrick Quinlan, Maples & Calder
Maples and Calder (Ireland) corporate partner Patrick Quinlan is relatively optimistic about the prospects for M&A activity in 2021. “As with many areas of the economy, we expect there to be considerable pent-up demand for M&A this year,” he says. “The fact that a Brexit deal, for better or worse, has now been completed will be a contributing factor. Private equity funds, venture capital funds and other financial buyers, both domestic and international, have continued to successfully raise funds which they are now actively seeking to deploy.”
The firm also expects consolidation to be a big feature with larger companies in financial services and other sectors seeking to strategically acquire smaller competitors who may not have weathered the storm quite as well. “Ryanair for example, have referenced the opportunities for growing market share, which they expect to emerge as the recovery begins. We also expect new technologies and businesses to emerge from the current crisis to, for example, capitalise on decentralisation and the reality of working from home.”
More traditional businesses such as those in the residential construction industry are also likely to benefit from the changing nature of the work environment as people begin to see homes as workplaces as well, he adds.
Unfortunately, as with the 2009 financial crisis, distressed M&A and corporate restructurings will be a theme in the next 12 to 24 months as investors look to source opportunistic deals. “We don’t expect there to be a fire sale of Irish assets to international investors as we experienced to a degree after the last financial crisis,” says Quinlan. “Instead, we anticipate that there will be a more measured approach with the recently reported sale by AIB of 650 distressed residential mortgages to the Irish Mortgage Holders Organisation hopefully being a positive omen.”
There will also be areas of positivity in 2021, he predicts. “Ambitious Irish technology companies will continue to attract strategic acquirers and for many others, private equity backing may provide the fuel for Irish companies themselves to be active buyers. There are certainly signs that we have a generation of private equity backed platforms in the Irish technology sector that will drive more and more activity in the future. Sustainable and green investing will also be high on the agenda for investors.”
“Even without widespread vaccination, we expect that the patterns of the second half of 2020 are likely to be repeated in 2021 with strong businesses looking to make sensible and value-enhancing acquisitions,” he concludes.
The right conditions for a good year
Anya Cummins and Jan Fitzell, Deloitte
The brisk start to 2021 is likely to continue in the opinion of Deloitte M&A advisory team partner Jan Fitzell. “We are optimistic for the year ahead,” he says. “And we are quite happy with the pipeline of deals we have coming through. The levels are very good with trade deals and private equity activity both very strong.”
Unlike previous recessions and periods of economic volatility, distressed sales haven’t been a significant feature of the market thus far. “That’s something we haven’t seen yet. It may be because a lot of companies in distress have been receiving supports from their banks and the Government. If either or both of them are turned off the owners may decide to exercise their options. They may choose to sell or take in new equity.”
And there will be no shortage of potential acquirers given the amount of private equity out there and trade buyers with strong balance sheets, he adds.
External buyers aren’t the only option, of course. “Management buyouts [MBOs] will be another theme during the year,” says Deloitte corporate finance partner Anya Cummins. “Founders whose businesses have been adversely impacted by Covid may not want to double down and go through the process of rebuilding the business. They may look at selling to the existing management team.”
And then there are those businesses which are still doing well. “Ireland has a lot of disruptive and massively scaling technology businesses and some of them have actually benefitted from the pandemic, particularly those in the e-commerce, fintech, and life sciences sector,” says Cummins. “We are seeing evidence of this in the Deloitte Fast 50 Awards ranking of the country’s 50 fastest growing technology companies. When we looked at those companies in 2020 during the pandemic the growth rates have been phenomenal. They are riding the wave of disruption and have built up significant levels of capital. Many of them are raising capital to make acquisitions in order to internationalise and accelerate growth. That’s good news for Ireland.”
Valuations may present difficulties, however. “Earnings are quite volatile at the moment,” she says. “That makes valuations very difficult and deal structures quite challenging. We will see more earnouts and deferred considerations to bridge the gap between owners’ and buyers’ expectations. Earnings forecasts are quite difficult so paying for future potential as a buyer usually would is a lot more complex. You need downside protection for buyers but there will be upside opportunities for sellers as well.”
Those difficulties will ease over time, according to Fitzell. “When we see the vaccine rolled out and life getting back to normal, valuation may be a bit easier. As we see other sectors like hospitality and transport businesses opening up again, we may see people selling or spotting opportunities for acquisitions. You will have winners and losers and that will lead to more M&A.”
Lockdown lessons point to bright 2021
Mark Ward, A&L Goodbody
There is growing optimism for a busy M&A market in the year ahead, according to Mark Ward, partner and head of M&A with A&L Goodbody. “2021 has started well – we had a healthy pipeline flowing out of last year, so it’s been very busy,” he says. “Dealmakers and corporates have worked out that M&A processes can continue and close out in a lockdown. That and the impact when the vaccination rollout begins to take effect and consumer confidence increases are causes for optimism. There are some sectors, particularly retail and hospitality, that will face severe after-effects of the current lockdown, so we could see a flurry of restructuring and acquisitions there later this year despite the Government supports. Last year held up well, and we’d be optimistic for this year.”
Activity is likely to be broadly spread. “There has been a lot of the talk about healthcare, pharma, biotech and the technology, media, and telecom (TMT) sectors. But the statistics show it’s across most sectors – some will be positive stories, some distress. Ireland has more than its share of good companies. Owners of some of those companies have for example become sellers over the last year, having maybe gone through a few recessions and being keen to not go through another. We still have a fantastic TMT ecosystem here. Some tech deals are of very young companies selling at large multiples of revenue to the right large corporate buyer. Restructuring of distressed businesses may follow later in the year too once government supports begin to dry up.”
Covid-19 will continue to influence the market. “Prolonged lockdowns will continue to create uncertainty in the market and further depress certain sectors,” says Ward. “While this presents challenges it could also create opportunities if valuations suffer. Although we are tempted to say that we could see a buyer’s market in 2021, there is still a lot of both trade and private equity interest in buying good assets so sales processes by sellers to maximise price will continue.”
Brexit and other geopolitical factors will come into play as well. “We may see a bit more activity this year off the back of Brexit, but its yet to emerge as a big driver of M&A,” he notes. “The main impact from the US and elsewhere is that Ireland is now much more attractive, post Brexit, as an EU hub. That’s whether or not a regulated licence is needed for trading with the rest of the EU or even more generally for trading and certainty reasons.
“We’ve already some interest in inward investment into Northern Ireland from companies who see the benefits of the current NI protocol for business,” he adds. “A more outwardly looking US administration will benefit direct investment into Ireland, although we didn’t see much of a falloff with the previous administration.”
A very strong backdrop for M&A
Peter Bennett, Davy
“It’s looking like a very strong 2021 in terms of M&A volumes,” says Peter Bennett, head of technology corporate finance with Davy. “Three things will propel the market in 2021. The risk associated with three key uncertainties has been removed. The US election is behind us; Covid-19 vaccines are here and being rolled out; and Brexit is largely over and done with. Those things hung over the market a bit and they are now out of the way.”
Some uncertainties persist, however. “The Biden administration stance on some areas is still somewhat unclear. For example, the stance in relation to Russia and China is important. We saw when Trump took action against China the markets reacted negatively. Virus mutation is another uncertainty. Can mutations be handled by existing vaccines? And then there is the true extent of the economic damage caused by Covid-19 which has yet to be revealed. That might make industry a little more nervous in relation to M&A.”
There are also a number of considerable supporting factors. “The corporate landscape is back in good health,” he says. “The consensus of analyst opinion is that equity markets will be supportive of M&A activity. M&A is typically undertaken with a view to growth and investors are willing to pay a premium for growth at present. And the capital markets are open. If you look at market analysts and their targets for the S&P 500 in the year ahead, they are expecting growth of 7 to 11 per cent. If you are a CEO with that level of certainty below you, you will go and do M&A. That’s a very strong backdrop for M&A.”
Among the key trends he foresees for the year ahead is old economy companies acquiring new economy firms. “Everyone has realised technology is the future and that companies need to be technology enabled. Last year we saw Visa trying to acquire fintech Plaid with a view to increasing its position in the technology market. We will also see trends driven by the Covid experience. Companies will be using M&A to grow bigger and become more resilient in order to better withstand future shocks. Another theme is increased shareholder activism. There is a new breed of activists focusing on ESG. They are agitating for companies to become more ESG compliant and that will put pressure on institutional investors.”
The growth of technology M&A will continue, he believes. “Technology accounted for 6 per cent of deal volume in 2010, now it is 23 per cent. We will see strong activity in tech sub-sectors like fintech, cleantech and anything with a strong SAAS (software as a service) or cloud flavour.”