Mergers and acquisitions to continue market dominance

Recent weeks have witnessed several corporate transactions in the Irish market place. Irish Life & Permanent announced the terms of its offer for TSB Bank and this transaction seems almost certain to succeed.

Bank of Scotland announced that it had agreed to purchase the ICC Bank. Finally, Barlo Group announced an offer for the entire share capital of Athlone Extrusions.

A common thread running through the background to these transactions is the very harsh environment that exists for small capitalisation companies. Even for a sizeable company, such as TSB, a stock market flotation had clearly become a very unattractive option.

One need only look at the experience of First Active since its flotation as testament to the lack of investor interest in small capitalisation financial stocks and to the difficult trading environment faced by these companies as independent entities.

The story in respect of industrial shares is similar and the takeover of Athlone Extrusions by Barlo is symptomatic of an ongoing trend of mergers and acquisitions among smaller quoted companies.

Athlone's life as a quoted plc has proved to be short lived and unhappy since its flotation in early 1998. The share price steadily declined from its placing price of €1.16 (91 pence) and, in the months prior to the offer from Barlo, the share price traded in a range of 65-85 cents. Although the takeover priceearnings ratio (P/E) was a relatively modest 10.5, the likelihood was that Athlone would have continued to trade on a low single-digit P/E in the absence of the Barlo takeover.

Despite the recent improvement in the Irish stock market, the environment for small capitalisation stocks remains difficult. The majority of companies with market capitalisations of €500 million or less are trading on single-digit P/Es.

These companies would seem to fall into two categories. The first is companies that seem to have sufficient resources to grow big enough to generate interest from institutional investors. Good examples of two companies that have succeeded in this respect are DCC and IAWS. Both of these companies now have a market capitalisation that is close to €1 billion and trade on respectable P/Es of 11.7 (DCC) and a 17.4 (IAWS).

There are a small number of companies that are capitalised about €500 million and that could succeed as independent entities in the long term. Jurys Doyle Group, Greencore and Kingspan would fall into this category. Nevertheless, of these three companies, only Jurys Doyle Group enjoys a double-digit P/E of 11.7. Greencore trades on a lowly P/E of seven, while a recent run-up in Kingspan's share price has only just lifted its P/E to 10 times this year's earnings.

The second category of small capitalisation stocks consists of those companies with a market capitalisation that is significantly below €500 million. The relative under-valuation of these companies' shares makes it very difficult for them to grow through acquisitions.

For example, the once acquisitive IWP International is now trading on a lowly P/E of less than six so that the option of a share issue to fund an acquisition is non-existent.

A management buyout, merger or takeover by another company would seem to be the only long-term viable option for many of these companies. Therefore, the stage seems set on the Irish market for a prolonged period of merger and acquisition activity.