As the figures for deal activity show, it seems that increasingly, companies are opting for the merger and acquisitions route as a way to grow their business. Indeed merger and acquisition activity in Ireland forged ahead over the last twelve months against the background of a more buoyant economy and easier access to finance. According to William Fry’s Annual Mergers & Acquisitions report, there was a 37 per cent annual increase in deal volume last year. Deal value also increased by 139 per cent, albeit with one deal – Medtronic’s €34bn purchase of Covidien – skewing those figures significantly.
Nonetheless, the report notes that with M&A; activity in Europe averaging nine per cent, Ireland is powering ahead in this area, with genuine dynamic growth, rather than just a return to pre-recession activity levels. Strong macro-economic factors together with the presence of alternative funding sources were identified as key factors. “Most of big players in the Irish corporate scene were involved in some form of acquisition activity over the past twelve months. When you see a wide and diverse range of PLCs active in this area, it’s a really good sign,” says Mark Collins, a partner with KPMG.
For Collins, a common characteristic of the latest wave of M&A; activity is a return to a more strategic approach. “Long-term value, geography, product fit – these were among the factors influencing deals. There was less of the opportunistic approach of just grabbing what was out on the market.”
Following a period of several years sitting largely on the sidelines, the pillar banks and others are now active in the market. “All of the traditional players are out there aggressively competing for business, then you have others such as private equity funds and the National Pension Reserve Fund. Access and pricing conditions are very favourable at the moment,” Collins notes.
Rationale for deals varies but typical considerations include the desire for synergies, deeper customer penetration, diverse or complimentary product lines or access to new geography.
The alternative to mergers and acquisition – achieving growth organically - is a much slower way of developing a business, albeit a less risky one. Often a business lacks a key ingredient – a major piece of intellectual property, a well-developed supply chain system or simply economies of scale – that it make take years to acquire, if that’s even possible.
The relatively small scale of the Irish market has focused mid – to large-sized firms on foreign opportunities and acquisitions are often an easier way to achieve scale quickly.
“Scale is important,” notes Aidan Walsh, a partner with PwC. “Deals can be complex and expensive so it’s at the larger end of the scale where they often make most sense. You have to be able to see the value of one and one equalling more than two.”
While the larger deals have attracted the headlines, there has also been an upsurge in mid-market transactions in the €5-50m range too, he says. Preparation is vital, Walsh notes. “Experienced buyers will have intelligence on perhaps as many as 20 to 30 companies that they may wish to acquire and they will have plans in place to move quickly. Conversations will also be taking place with trusted intermediaries who have a key role in brokering deals.
Access to finance is less of an issue now than heretofore. “Experienced buyers, especially the blue chips, will typically have a war chest when they go into the market. There’s an element of pent-up demand in the market, where companies were holding off during the recession but now feel the time is right to move.”
Senior debt is generally more freely available from banks now, as is private equity for the right projects. In the case of quoted companies, a rights issue is also an option, he notes.
The due diligence phase can unscramble deals. One suspicion sellers often have is that approaches from competitors are merely fishing exercises to go through the books of a competitor before finding an excuse to back out.
Nonetheless, even when goodwill does exist, deals can come apart at the eleventh hour. “On close examination of the books, historic profitability may not be sustainable as one-off events may have affected previous financial statements. There might be skeletons in the cupboard, for example, issues with customer relationships or contingent liabilities not being properly accounted for. Deficits in pension schemes have been a huge issue lately too,” Walsh observes.
Mark Ward, a partner with law firm A&L; Goodbody, which has offices in the UK and North America as well as Dublin, sees Ireland’s M&A; activity in a global context, given the openness of the market and the success of Irish firms in sectors such as food and pharmaceuticals. There’s also renewed interest in property, while aircraft leasing has re-emerged as a significant sector for Ireland. Ward agrees that funding is now a less challenging issue than it had been. Having the right team in place, both during and after the acquisitions remains a challenge for firms, however. “You need to have the right advisors at the deal stage, both in the finance and law areas. Good negotiating skills are vital and that can be outsourced. When a deal completes you need to have your own full-time management team in place, however. Integrating two firms can’t be done on a parttime basis.”
Indeed, while deals can look strategically sound on paper, the key to unlocking value lies in successful integration. “Merging two entities can be challenging,” agrees PwC’s Walsh. “At a practical level, you might have issues like two distinct technology platforms that need to be integrated. Then there are issues such as how the transport fleet or supply chain management system can cope with the increased volume of business. There are relationships with suppliers that may change with a new owner. A customer may feel that a larger entity should be able to offer them discounts on price, for example.”
Such practical concerns are in addition to the challenge of merging two workforces, often with different work practices or cultures. “In some sectors such as pharmaceuticals or IT, a lot of the assets of the business lie in the brainpower of the management and key staff.
MEDTRONIC: The return of the smaller deal is the real story
MEDTRONIC’S PURCHASE OF COVIDIEN FOR CLOSE to €34bn late last year was the daddy of all deals, creating a new Top Ten company in the Top1000 and turbo-boosting Ireland’s M&A; figures for 2014. By transaction value, this single deal accounted for the vast bulk of Ireland M&A; figures last year. Strip this out of the overall market transaction total of €43bn and a year on year decline was recorded. However, this is not the true picture.
The number of deals grew by an impressive 37 per cent, with the ICT sector up by 23 per cent, pharma up by 14 per cent, financial services up by eleven per cent while leisure grew by 17 per cent. Meanwhile private equity investment climbed to its highest point in the last seven years in terms of both volume of transactions and deal value.
Aside from some of the mega-deals – many of which involved pharmaceutical corporations – there was a noticeable pick-up in activity in small to midsized firms with 58 deals under €100m, an 81 per cent increase on previous years.
Nine out of ten deals involved foreign buyers with in-bound deal numbers increasing by 23 per cent to 75 transactions. While the majority of these purchasers were US (52%) and Western European companies (35%) an emerging trend is that buyers are now starting to come from other overseas locations, notably Asia. One of the attractions for Asian firms is Ireland’s dominance of aircraft leasing. Last year, Japan’s Mitsubishi UFJ Lease and Finance company announced plans to acquire Irish-based Engine Lease Finance Corporation and Beacon Intermodal Leasing for €285m.
RIBWORLD trebles turnover in three years
SOMETIMES, ACQUISITIONS ARE WELL PLANNED. OTHER TIMES, you need to act fast. When consumer branded meat company Ribworld, went into receivership towards the end of 2011, John Walshe did not hang around. Walshe, who runs the well-established Callan Bacon Company in Co Kilkenny, visited the Ribworld plant on a Tuesday and acquired it 48 hours later.
“It was a business I had been interested in for around 18 months. We knew we could add value and when it went into receivership, we had to act fast as there was a lot of interest,” he recalls.
The swift takeover for an undisclosed sum meant that the business never lost a day of production. Since 2011, turnover has increased from €8m to €23m and further expansion is planned now that the firm has acquired a 100,000 sq ft. facility in Fethard. Ribworld has received backing from Enterprise Ireland and now employs 140 people. Around 90 per cent of its sales are in the export market with expanding markets in German, Italy, France, Sweden, Portugal and other European countries, while the company has also made inroads in Thailand and North Africa.
Callan Bacon’s background has been of huge benefit to Ribworld. The acquiring firm had a well-established network of contacts on both the supply and customer side in Ireland and abroad which it has been able to leverage to gain market traction quickly. It was also able to import a range of techniques and tools used in Callan to make production more efficient.
Walshe sees scope for significant further expansion. The sous vide market is expanding and the company has a growing range of products with sauces tailored for different markets. Its range includes pulled pork and beef products as well as the traditional pork ribs.