Merger & Acquisition deals on the up?
Activity in the world of mergers and acquisitions is often dictated by the global economy. Rebecca Kincade looks at how the market is faring in the current climate
The mergers and acquisition market in Northern Ireland has been noticeably patchy since the economic downturn, as the difficulty in obtaining funding for acquisitions has taken its toll. With confidence levels hitting an unprecedented low during this time, businesses were understandably more reluctant to make investments and to take on debt in order to fund acquisitions.
Most recently we have seen the sovereign debt crisis in the Eurozone and the USA, together with prolonged stock market volatility, creating increased uncertainty and encouraging further hesitancy in decision making. With only a 50% success rate in M&A companies, such caution is only to be expected.
Although there is no evidence of any significant increase taking place just at the moment there is a growing awareness that there are now deals to be done, as people adjust to these changed economic circumstances.
Neasa Quigley, Head of Corporate finance at Carson McDowell is already noticing a shift in the potential for the M&A market.
“The general consensus is that, globally, valuations are now at a level which is likely to mean we see a significant increase in M&A in the coming couple of years. At a global level large companies have lots of cash on their balance sheets and bank lending is continuing to improve.
“Both of these are important ingredients for global M&A to increase.”
An increase in M&A activity now would be in keeping with noticeable merger waves which have been tracked by economists since the 1890s. These waves are based on the activities of the business world and the last wave of acquisitions was characterised by easy access to cheap finance. Banks were willing to lend, businesses were willing to borrow and sellers were willing to dispose of their assets for a healthy price.
Richard Gray, a Partner in the Corporate practice at McGrigors in Belfast, has been involved in several high-profile M&A cases in the past 12 months, including the landmark £67m purchase of Tate and Lyle's molasses business by Northern Ireland's W&R Barnett. He has noticed a change in the way M&A cases have been dealt with throughout the recession. “In the past, a buyer would often be required to stump up the cash upfront and the seller would sail off into the sunset having turned a healthy profit.
“Nowadays, buyers are more cautious and the price will often be set based in part on the future performance of the business. There is now a greater emphasis on deferred consideration and earn-out provisions.”
Optimistic about the future of the M&A market in Northern Ireland, Mr Gray has already recognised potential growth through some of the cases he has been working on and put this, in part, down to several sectors which have remained relatively unscathed by the economic downturn.
“We have already seen some bright spots, particularly where cash-rich businesses are seeking to take advantage of a buyers’ market, both in Northern Ireland and beyond.
“Certain sectors, such as energy and commodities, have remained relatively buoyant because they are less exposed to struggling economies.”
Mr Gray feels that at the moment businesses have plenty of reasons to consider M&A investment, as several strong factors combine to create the perfect buyers’ market.
“Asset prices have reduced so companies with access to funds can buy good businesses more cheaply than they could in the past. Businesses may also see opportunities to swallow-up competitors and increase their market share, giving them more commercial muscle.
“In some sectors, notably renewable energy, there remains a pressing need to increase supply in order to meet UK and EU targets, which is creating opportunities.
“Businesses may also choose to do deals from a more defensive perspective, merging with competitors to save on fixed costs and overheads and in turn increasing profits for the combined business.”
While M&A can be seen as a gamble for investors, much of the risk can be removed if the process if planned correctly and the transactions are properly executed.
Mr Gray is keen for investors to realise that the rewards can be great where synergies between buyer and target are realised.
“There are many instances of businesses which have expanded successfully and rapidly, generating huge profits in the process. A proper M&A strategy should be key to the subsistence and growth of any responsibly run business. From a legal perspective, the most important part is having a ‘warts and all’ appreciation of what you are buying.
“That means doing extensive due diligence to check on any risks or exposures which you might not otherwise expect.”
It is hoped that if the UK can emerge from the current turmoil as a “safe haven”, as the Westminster government suggests, it could give businesses and consumers more confidence to go ahead and make investment decisions.
For Northern Ireland, an increase in foreign direct investment on the back of a reduction in corporation tax would also create opportunities for growth in M&A activity in the local economy.
Northern Ireland has the potential to present opportunities to outside markets, not only in terms of local companies looking for M&A opportunities, but also from overseas investors purchasing NI companies. Further investment of this kind will then serve to generate speed for overall economic growth.
“Northern Ireland has some very attractive assets which have already encouraged investors to consider the opportunities available.
“The acquisition of Longford Retail Park for around £50m by Scottish Widows Investment Partnerships shows that there are still some GB investors who see real opportunities in Northern Ireland and are willing to do deals,” said Mr Gray.
Ultimately the M&A market will continue to react to the changing economic climate and the decisions of the business world on a global scale.
What is certain at the moment is that the potential is very much there for serious growth to take place over the next couple of years as a strong buyers’ market emerges and an increase in confidence drives forward investment.