Level of M&A activity to remain high

Comment: Last year was an exceptional one for mergers and acquisitions activity (M&A) in Ireland. An independent survey of the market published earlier this month reported that 162 deals worth more than €5 million each were announced in Ireland during the year. The total value of these deals combined was estimated at approximately €9.5 billion - a very substantial figure for an economy of our size.

Inevitably, this value figure was inflated somewhat by a small number of very large deals such as the Jurys Doyle and Meteor transactions. However, what's perhaps more interesting is the growing frequency of smaller but still substantial deals now being undertaken almost as a matter of course, with almost 60 per cent of the deals above valued at less than €50 million each.

This is in contrast to prior years, when larger public transactions tended to dominate the market. Looking forward, the factors that drove corporate activity last year still prevail and it's likely that 2006 will see another strong performance.

A number of different positive influences lie behind these headline figures. Overseas buyers pursuing geographic and product expansion are attracted by the strength of the Irish economy, low inflation, low interest rates, strong consumer demand, the near full employment rate Ireland enjoys, together with the demand benefits that inward migration brings to the economy in general.

Macroeconomic factors make Ireland a good place to invest and this has been shown by the 54 M&A transactions (one-third of the total) involving overseas buyers in 2005.

On the selling side of the equation, potential sellers who previously held very high expectations of the value of their businesses have now come to accept that, even within a buoyant economy, there is a limit to what buyers will pay. The inflated price expectations of just a year or two ago have given way to more realistic expectations, making deals more achievable.

Many companies, especially family-owned ones, are sold because there is no clear succession in place, and in some cases, the next generation does not want to become involved.

Some owners will seek to extract personal wealth from their companies, whether it be for retirement or to buy other businesses. Competitive pressures will see further consolidation in various sectors as domestic and international companies endeavour to build scale, while some multinational companies will also take advantage of strong valuations to unload non-core subsidiaries.

The Irish stock market, which has seen a series of high-profile departures in recent years, is now trading at record levels and these valuations may tempt some companies to list their shares.

Over the past year, there has been an indication that smaller companies are comfortable with the concept of a public listing, with 13 such companies listing on the Irish Stock Exchange's new IEX market and 15 listing on the London Stock Exchange's AIM market (most Irish companies opt for a dual listing). The reduced regulatory and compliance burden of these newer stock markets means that others are likely to follow suit over the next 12 months.

Other factors are important, too. On the financial side, there is ready availability of low-interest debt and equity funding for transactions and this positive environment for deal financing is likely to continue in the coming year.

Banks will continue to compete aggressively for the debt financing of deals, while cash-rich private equity funds and high net-worth private investors will also provide a ready supply of funding for leveraged buy-out transactions. We expect to see increasing competition among private equity houses for investments in Ireland, as opportunities in other regions become exhausted.

Among high net-worth investors, there is an identifiable trend of diversifying their investment portfolio away from the current high concentration on property. Asset-supported acquisitions are undoubtedly attractive to such people.

It remains to be seen whether 2006 will see a repeat of the multi-million M&A transactions such as the Smurfit/Kappa merger and the Superquinn acquisition, to name just two from last year.

But whether it does or not, it's clear that deal numbers will remain high, with entrepreneurs in sectors as diverse as financial and business support services, retail, media, leisure and medical devices exploring what options they might pursue to transform their businesses.

As for the sectors to watch out for, the most important thing to recognise is that the high level of M&A activity is not sector-specific. It's a phenomenon that is evident across the economy.

However, this week's news about CanWest's proposed sale of its stake in TV3 is a timely reminder of just how much action is taking place in the media sector in Ireland.

We expect that level of activity to continue this year. Beyond that, we anticipate that competitive pressures amongst retailers will drive further industry consolidation in this sector as players look for greater economies of scale.

And we also expect that the significant growth levels in the financial and business support services sectors will propel these areas to the forefront of investors' minds when considering deals in 2006.

Ted Webb is a director of IBI Corporate Finance.