Going Stateside

With the globalisation of most industries, never before has the US been so important to corporates. This is particularly the case with large Irish companies who are faced with a relatively small local market and the need to look abroad for both organic growth and opportunities to grow profitably by acquisition. In this regard, the US has provided more opportunities than one might at first think.

Of the 10 largest Irish publicly quoted companies, no fewer than six count the US as either their first or second most important market, whereas only one counts Britain as being within the same category. With a strong and politically stable economy, no language barriers and a large market that can be strategically targeted, the US is an attractive area in which to do business.

However, most large corporates with US markets in their sights have found that, in order to meet their objectives, a physical presence in the country is required. This has led to a number of significant acquisitions by Irish companies in the US.

In 1996, of the £3 billion acquisitions made by Irish companies, £1.2 billion related to US targets, £1 billion related to acquisitions in Britain and only £200 million related to transactions in Ireland. Indeed, at the larger end of the scale, of the five largest acquisitions ever made by Irish companies up to the end of 1996, three were US-based.

AIB's recent acquisition of Dauphin, the largest acquisition ever by an Irish company, increases this statistic to four out of six.

The demand for acquisitions by Irish companies has, in recent times, been very strong. This demand has been driven by the strength of the economy which has enabled many companies to reduce their debt levels. Coupled with the strength of the equity markets, this has given quoted companies added capital resources with which to effect acquisitions. In addition, many companies see acquisitions as one of the key elements in a profitable growth strategy.

In the current low inflation and competitive environment where there is little opportunity to increase prices, management are often left focusing on reducing costs in an effort to improve earnings. While many costcutting exercises have been successful they produce a finite benefit. Acquisitions, on the other hand, can be used successfully to increase profits and to enhance shareholder value over the long term.

However, acquisitions need to be of a significant size in order to have the potential to produce the desired effect. The difficulty facing larger Irish companies is that, due to their own size and market position, there are few, if any, significant opportunities of size to be pursued on this island.

This is particularly the case when account is taken of the fact that most companies on the acquisition hunt have identified their core business as the focus of their preferred acquisition strategy, indicating a far more selective approach than was the case in the 1980's. Looking overseas many have found the US to be a good hunting ground but, given the sheer size of that market, a focused approach has been an essential ingredient for success.

AIB's experience in the US is a case in point where its recent acquisition represents the third key step for the group in that country. It is over 13 years since AIB first focused on the US market by taking a 43 per cent stake in First Maryland Bank. At that stage AIB was one of the first foreign banks to make a major purchase of a regional bank. Foreign banks before this time had largely concentrated on acquiring operations principally located in the major cities.

Furthermore, the decision by AIB in 1989 to increase this stake to 100 per cent was key also in that, from then on, there were no local shareholders. ABN Amro has also developed a similar type of strategy by focusing on the mid-west and this approach has served it well. On the other hand, there are numerous examples of failures resulting from focusing on the bright lights of the large cities.

Dauphin operates a strong retail, small business and commercial franchise in an attractive market. It is a high quality bank with a consistent record of strong earnings and strong assets. Combined FMB and Dauphin is the largest financial institution in the Harrisburg/Baltimore corridor and one of the three largest in its catchment area. The acquisition makes FMB the 45th largest bank in the US.

Dauphin is an excellent fit for AIB and matches the Group's US strategy of solidifying its franchise in the mid-Atlantic region. It has a similar profile to FMB with a strong franchise in its local market. In addition, there is very little branch overlap and considerable opportunities for cost savings. The acquisition also improves the business mix of the Group's US business.

Other major Irish companies have also been very focused and have followed the approach of building up a presence in the US, identifying growth areas before targeting large acquisitions which will compliment their existing businesses and secure future profitable growth.

CRH's acquisition of Tilcon for $329 million did not represent a change in strategy but rather the acquisition of a number of local businesses which were an excellent strategic fit with CRH's existing north-eastern Materials Group which is the leading regional producer of aggregates, asphalt and readymix concrete in the northeast and mountain states. The acquisition, which resulted in significant synergies, provides CRH with a powerful base to service their target markets.

The acquisition of Athena in 1996 for $600 million transformed Elan into an integrated drug delivery and bio-pharmaceutical company by adding research, marketing, sales and distribution capabilities to Elan's expertise in drug delivery and development. As a result Elan, using Athena's infrastructure, is able to market products directly to providers.

Kerry's acquisition of DCA in 1994 for $400 million was the result of the group's strategic focus on the global food ingredients sector. The acquisition established Kerry as a leading specialist global ingredients supplier with the ability to achieve further long term growth in that sector. DCA also brought with it the benefit of new technologies and ingredients applications.

The last of the super deals by Irish companies in the US to date was Irish Life's acquisition of Guarantee Reserve for $163 million. This was made on the basis that it would strengthen that group's existing business in the US and open opportunities to grow the business further. Having acquired Interstate in 1988 and First Variable in 1994, Irish Life is offering a broad range of personal financial products through a variety of access channels. The acquisition of Guarantee Reserve should add an important new distribution capability to Irish Life's US business.

The US has been targeted by companies for many reasons, including the sheer number of opportunities which arise there, its stability and culture, and, most importantly, its ability to provide further opportunities for future profitable development over the long term.

The common thread running through successful US acquisitions by Irish corporates, however, is that having identified the US as a desirable target area, a focused strategy allowed acquisitions to be made which built on an existing presence and should ensure future profitable growth over the long term.

Alan Doherty is a director of AIB Corporate Finance which advised AIB on its acquisition of Dauphin