Wall of capital drives M&A appetite but deals are taking longer

Top 1000: After a stellar 2021, mergers and acquisitions activity came back to earth somewhat in 2022

This year’s deal activity is taking place against a backdrop of stubborn inflation and rising interest rates. However, despite the headwinds the mood is upbeat.

“While overall the headlines state that 2022 M&A levels were lower than the record-breaking levels of 2021, the actual volume of transactions in Ireland remained at similar levels but with a reduction in the number of larger-value mega-deals,” says Katharine Byrne, partner in corporate finance at BDO.

Appetite for M&A remains strong but buyers are more cautious and as a result transactions are taking longer.

“The key for companies looking to sell is to be well prepared for the process and to ensure that they have clear understanding of the potential purchaser’s own timing and strategy,” says Byrne. “There is definitely a lowering of valuation expectations, especially in sectors which were attracting much higher multiples in prior years, but this a simply a return to more sustainable levels, with increased focus on cashflows and maintainable earnings.”


As interest rates rise the structuring of deals is also changing, with lower leverage and greater need for equity, as well as increased use of deferred consideration and earn-outs.

“With significant levels of ‘dry powder’ to deploy, private equity (PE) is now representing an increased proportion of M&A, especially in mid-market transactions as the PE deal structures are more flexible and can enable vendors to crystallise their shareholder value while also maintaining a share in the upside potential of the business,” says Byrne.

A lowering of vendor expectations is evident.

“The froth has gone from the market a little so there are more reasonable expectations in relation to price. Trade buyers are finding assets are more reasonably priced now than they were in 2021 or 2022, which is why we’ve been busy on both buy and sell side,” says Patrick Dillon, partner and head of corporate finance at Grant Thornton.

So far 2023 has been characterised by a significant uptick in deals in the tech space.

“We are seeing some really niche Irish businesses attract strong interest from the UK, and from UK private equity in particular,” says Dillon. “At the same time a lot of Irish tech entrepreneurs are looking to scale and to bring in that expertise.”

It isn’t all smart tech and software. Some of the hottest tickets right now are “tech adjacent”, such as heating, ventilation and air conditioning (HVAC).

“There has been a big flurry of activity in HVAC businesses this year, particularly those active in the data centre sector. A lot of Irish businesses have built up core competencies in data centres and are attracting a lot of interest from buyers,” says Dillon.

Engineering businesses with strong competencies, teams and balance sheets are also coming under the buyer microscope.

“Traditional engineering businesses are attracting good interest. Typically the common elements in such businesses is that they operate in sectors with high barriers to entry, have sticky customers and strong management teams,” says Dillon.

That goes for ancillary business services too, from fire-safety solutions providers to facilities management. “We are seeing a huge amount of activity in these areas. Anything that is regulated is highly attractive at the moment,” he adds.

What buyers are perhaps less inclined to do this year is take a punt. “There is a marked flight to quality. There is no shortage of money out there but buyers are more discerning and fussier, so quality assets are attracting the most interest,” says Dillon.

The picture isn’t wholly rosy. While the economic consequences of Russia’s invasion of Ukraine lumber on, fresh challenges have appeared internationally in the form of banking failures. Although the damage both in the United States and, closer to home, at Credit Suisse, has been well contained, the sooner it settles the better, says Dillon, “because it makes people nervous”. So far, however, not so nervous as to put the dampeners on appetite.

“Things are happening. Nothing has stopped but deals are probably taking a little longer. Cost inflation and energy are still headwinds but people feel we are over the hump in terms of inflation. And while increases in interest rates are making deals a little more expensive, sentiment is in a better place than it was last year,” he says.

Given the impact both variously and cumulatively of Brexit, Covid and Ukraine on supply chains, not to mention the blockage of the Suez Canal by an errant ship, anything relating to supply chain management, logistics and warehousing has seen demand rise.

“Five years ago logistics was the last item on the board agenda. Now it’s first or second,” says Dillon. “Since Covid and Brexit the management of stock is really important and there is a lot of interest in that. These days it’s not ‘just in time’ stock management, it’s ‘just in case’.

“We believe there has been a 10 per cent increase in stock being held by companies – and that’s not just supermarkets, that’s across the board. And we are seeing a lot of activity in logistics and warehouses as a result.”

M&A demand is always stronger for B2B (business-to-business) companies, particularly those that operate on the basis of juicy customer contracts that can span up to three years as they offer predictability.

Business-to-consumer companies are more volatile, yet there is still demand in sectors such as sustainable food and health and wellness, where the fundamental trends are strong, says Anya Cummins, head of Deloitte Private and a partner in Deloitte’s M&A advisory team. A veteran dealmaker, she has had a busy 2023.

“Activity levels are good. The market saw a pickup in deal activity in the first half of the year and there are lots of preparations ongoing for transactions where people are planning to sell later in the year. We’re busy helping those clients who are thinking of exiting,” she says.

Selling conditions are good for the right business at the right stage of preparedness. “There is still a wall of capital out there driving deal activity and we expect to see this play through this year, with big demand from the domestic private equity market. All the Irish funds are well capitalised and are actively deploying their capital, and that’s on top of strong appetite from both the UK and US,” says Cummins.

While the banking sector has caused some jitters people are “pushing ahead and getting transactions done”. she adds.

“In particular, those who have been through these cycles before are not holding back. They are looking to go out and do deals,” says Cummins.

That’s especially so in sectors such as tech and tech-enabled services, digitisation and digitalisation – which only sound like the same thing – fintech and, Cummins says, “any software that helps the chief financial officer’s office”, as well as renewables, all of which are growth areas. Opportunistic consolidation is also taking place.

“Beyond that, what buyers want is evidence of resilience and predictability of sustainable earnings,” says Cummins. “They also want to know what the impact of cost inflation is on the target. For example, some businesses will have hedged energy costs so buyers want to know where does that stabilise, what is the ability of the business to pass on cost increases and, if this is the cost price coming out of Covid, what is normal? It’s not a simple question any more. Pre-Covid normality was easier to gauge.”

In the past, whether buying or selling a company, past performance was a much greater predictor of future performance. Now not so much. “What that means is that you have to do a lot more work both as a seller and a buyer,” says Cummins. “Deals are more complicated and due diligence is taking longer and is harder to do.”