M&A specialist John Bowe speaks to Irish Times journalist Edel Corrigan for a recent special report on mergers and acquisitions in the Irish market and what experts expect for the second half of 2023.
What has M&A activity been like so far this year?
When we talk about activity levels so far this year, we need to consider in the context of the record levels recorded in 2021 and H1 2022 for both the value and volume of deals done in Ireland and globally. Activity in the second half of 2022 was impacted by the war in Ukraine, increased volitivity in equity markets, rising interest rates and inflation. These factors combined to create greater uncertainty leading to reduced deal activity. As we start 2023, given this dynamic, deal volumes are down on prior periods, but there are still good levels of activity and deals are getting done across sectors where fundamentals remain strong.
Do you expect a resurgence in activity in the second half of this year?
I don’t expect activity levels in H2 2023 to be at the levels we saw in 2021 / Q1 2022, but I would expect the second half of 2023 to be stronger, in terms of activity levels, than the first half. Driving this will be a better understanding of where interest rates and inflation may settle and greater certainty in the business environment, which still faces headwinds. The rising cost of funding has affected valuations investors are willing to pay, and as we move through the balance of the year, a reduction in multiples and public market valuations will feed into private company valuations. This will realign seller and buyer expectations of value.
What will drive this increase?
In simple terms, capital (money) will drive deal activity. In an Irish context, there are indigenous private equity funds with between €800 million and €1 billion in capital that need to be invested in Irish companies over the next five years. These funds can’t afford to miss out on good opportunities and will want to do deals. There is also a lot of interest in the Irish market from UK and US funds. We are seeing a large number of mid-market UK funds actively looking at Ireland and several overseas investment houses having recently opened Irish offices.
The strength of the US dollar is giving a big boost to US investment in Europe. Added to that, corporate balance sheets are strong, with resources in place for acquisitions. Large corporates are looking across their product and service offerings and, in an environment where valuation multiples may come back, will certainly want to make strategic acquisitions. Corporates will feel that strong balance sheets will present a buying opportunity for them given tighter financing conditions. We are seeing businesses across our client base receiving strategic approaches, and we expect this to continue as we move through 2023.
What sectors will see the most activity?
Tech-enabled businesses and software companies will continue to be very attractive, and we see activity levels remaining high in this sector. The IT-managed services/consulting sector is fragmented in Ireland, and with digitalisation a key focus for businesses, these companies are performing strongly. We expect to see M&A activity in this sector over the course of 2023. Consolidation in the insurance broking market continues at pace in Ireland, and we don’t expect to see that slowing down any time soon, so we anticipate that activity levels will remain high in this sector. We also recognise that the logistics sector is still quite fragmented, so we expect continued consolidation there. Healthcare is another sector where we expect activity. We are all living longer, so businesses with digital healthcare products and services will attract investment.
Will distressed sales be a feature?
I don’t know if it will be a driving feature for M&A activity. Economic headwinds (such as rising inflation and increased interest and energy costs) and the removal of government supports (debt warehousing and energy grants) will likely result in an increase in corporate insolvencies in 2023, which in turn may lead to the sale of distressed businesses. However, our insolvency team is seeing actual insolvency cases still below pre-pandemic levels, so we are still not at normalised levels yet. We would expect that distressed sales may be sector-specific – the service industry and the hospitality sectors being an obvious one due to a downturn in consumer spending and the availability and cost of resources, and the construction sector given recent cost inflation and supply chain issues.
Will rising interest rates and a tightened credit environment dampen valuations and attract bargain hunters?
As mentioned earlier, the rising cost of financing has impacted what people are willing to pay, and this will continue to feed into valuations. I wouldn’t call them bargain hunters, but corporates with strong balance sheets will be at a strong advantage. If the strategic fit is right, they will want to invest. I believe that businesses that have shown resilience over time will attract good valuations in this environment.
Although the cost of financing a deal is going up, there is a lot of money out there looking for good opportunities. Crises will happen again, and investors will build that into their investment theses. Businesses that have a track record of growth over recent years will be considered resilient. It is inevitable that shocks will occur again, and private equity funds will want companies with resilience in their portfolios.
Is there any advice you would give?
Good preparation is critically important if you are thinking of going to the market either to raise funding or sell your business. The more prepared you are, the easier you make it for a trade buyer or private equity fund to understand your business and requirements from a deal. This will increase the likelihood of a successful outcome for you as a business owner. It really is a partnership; chemistry is important, so spending time and asking questions about how the PE funds operate will help. Do your own due diligence on the PE funds and ask them to introduce you to other management teams and founders they have worked with. It’s a process, and a good advisor will be able to guide you through it.
Read the Irish Times special report, Deal or no deal? Experts upbeat about M&A for second half of 2023.
If you are seeking to grow or transition your company through M&A, please contact a member of our corporate finance team.