Uncertainty is the new norm but it brings opportunities

For businesses looking to execute growth strategies through mergers and acquisitions, these are “interesting times”, as the old Chinese curse has it. But uncertainties are both a challenge and a source of opportunity.

"2017 is set to be an interesting year M&A," says Mark Collins, partner and head of transaction services at KPMG.

What with the Brexit vote and the election of Donald Trump, business is learning to expect the unexpected.

“Uncertainty is the new norm. Companies might find the challenges are becoming a bit more complex, but they are going to have to navigate around them if they are to progress because who knows when stability will return. Disruption seems to be the order of the day.”

Business has a way of getting on with business, however, and a recent KPMG and survey backs this up.

“It found a sentiment, among business internationally, that ‘we can’t hide behind these events, or wait and see what happens. We are just going to have to get on with things’. It’s important to remember that uncertainty doesn’t just bring challenges, it brings opportunities,” says Collins. “And in 2017 I think we are going to see M&A opportunities emerge in a number of sectors.”

These include technology. "Ireland, with the help of Enterprise Ireland, has been very good at developing tech companies that are seeing a lot of overseas interest, including in the area of fin-tech. We are seeing some very good EI supported start-ups emerging that are likely to be a target for larger financial institutions and private equity firms."

Activity in the aircraft leasing space is likely following Avolon’s $10 billion (€9.4bn) purchase of the Chinese CIT Group’s leasing business. “We are likely to see continued international interest in our aircraft leasing sector, which is a centre of excellence globally,” says Collins.

Overseas funds

Property deals are on the up too. “We saw a lot of activity in property three or four years ago from overseas funds coming in. These are now starting to look at exiting, which means a lot of secondary-deal activity is likely.”

KPMG's deal pipeline is "strong" for 2017. Says Collins: "Some of Ireland's traditional sectors will continue to do well this year, including med-tech, healthcare and agribusiness. And very large success stories such as Kerry and Glanbia will continue their overseas expansion simply because they can't get deals of sufficient scale at home."

Consolidation will continue to be a feature both at home and abroad. “We like to think M&A activity is all about growth, extending reach and customer acquisition. In fact it is as often about cost-base synergy extraction. A lot of the value is related to cost savings. We will continue to see consolidation in sectors that are fragmented in order to achieve efficiencies.”

The pause in deal activity that characterised Q3 last year followed the Brexit vote, and may augur well for 2017 if only because that hiatus will have led to pent up demand.

“2016 was a funny year in terms of M&A activity, not least because it was coming off the back of a bumper 2015, which was itself benefiting from pent up demand in a post-recessionary market where business owners had been waiting for both market conditions and funding availability to come right,” says Michele Connolly, partner and head of corporate finance at KPMG Ireland.

“By the time that happened, in 2015, there was a backlog of deals to go through.Some of that continued on into first part of 2016, but then ran into headwinds in terms of the Irish election, Brexit and then Trump.

“All of these caused nervousness in the market and activity levels fell. Market sentiment can count for a lot and, if a deal was felt not to be urgently needed, many pressed the pause button.”

Good year

Deal activity did, however, recover. “Things really picked up and we finished 2016 with a very strong Q4. So, with some ebbs and flows, 2016 ended up being a good year for M&A activity overall,” says Anya Cummins, partner and head of mergers and acquisitions at

Deloitte

.

Understandably, given the size of the market here, most activity centres on Dublin. 2016 was “slow enough” year for M&As in Munster, according to John Higgins, managing partner of EY’s Cork office and head of transaction advisory services.

Deals there included Phillips 66's sale of the Whitegate Oil Refinery to Canada's Irving Oil and UCC's acquisition of the Irish Management Institute. Last year did see the completion of a number of hotel sales across the country, he says, as well as a number of wind farm transactions. These included Gaelectric's multimillion euro sale to Chinese nuclear power company CGN.

“Quite a few shopping centres and apartment blocks changed hands, many as a result of Nama,” he says.

Despite the geopolitical speed bumps of last year, by the end of the year deal confidence was pretty well restored. "There was a notable pick-up in activity in the last quarter of the year as firms started to realise that they cannot wait for the outcome of Brexit," says Katharine Byrne, partner and head of the corporate finance team at BDO.

Larger deals

“2017 is expected to be similar to 2016 in terms of the volume of activity, but larger deals will increase as buyers will be focused on more transformational deals. Smaller businesses are likely to be more affected by market volatility,” she cautions.

“Due diligence continues to be very detailed, and the negotiation of the legals can be quite protracted as buyers look to heavy warranties and indemnities. Commercial due diligence has become increasingly important too as more international buyers enter the market, particularly in areas affected by government policy such as healthcare or energy.”

On the plus side there is no shortage of funds.

“Banks are under pressure to increase their loan books and are starting to move faster in credit decisions. And there is a significant amount of private equity funds now active in the Irish market, as well as alternative debt providers, which means access to finance is not an issue for mid-market transactions.”

SOME IRISH DEALS

M&A activity kicked off the new year with news that the shareholders of fresh fruit distributor Fyffes have approved a €751 million takeover by Japan's Sumitomo Corporation.

It follows a number of notable deals in 2016, including Dublin-based aircraft lessor Avolon’s mega-deal to buy the leasing business of Chinese CIT Group for $10 billion, transforming the Irish firm into the third largest aircraft-leasing entity in the world.

In August it was announced that Dublin-based truck-tracking company Fleetmatics is selling to US broadband telecommunications giant Verizon for $2.4 billion (€2.25bn).