More acquisitions likely in larger market

It is tempting, but misleading, to pronounce that the advent of the euro is going to lead to a sudden change in the level and nature of corporate finance activity. In practice, business people have seen this coming for a long time and have already started to address the potential implications.

The last three years have seen an unprecedented level of corporate finance activity and undoubtedly some of it has been driven by companies trying to position themselves for life in the euro zone.

An obvious implication of the euro is that over time prices across Europe become much more readily comparable and transparent. A likely result is the highlighting of inefficiencies and/or high margins leading ultimately to the demise and/or acquisition of the inefficient and an evening- out of margins, i.e. cost competitiveness will become even more important.

All this suggests that acquisitions which can achieve real synergies through cost reduction will become even more of a feature of mergers and acquisitions activity. However, the extent to which this is allowed to happen will largely depend on the attitude of regulators.

Will they adopt a narrow definition of the market and prohibit the creation of companies which can compete on a European scale because of the dominant position this might give the enlarged entity in the Irish market or can the Irish market be looked at in a European context? The Avonmore-Waterford merger was a helpful precedent in this context.

For listed companies in euro zone, size is likely to be an advantage for other reasons too. Hitherto a foreign investor probably (a) decided whether he or she wanted to invest in the Irish market (i.e. take the currency risk and buy the Irish economic story) and, if he or she did, (b) selected specific stocks based on their performance/value relative to other Irish stocks.

In the euro zone, with no currency risk, the investor is now likely to compare Irish companies with other European stocks in the same sectors. The implications are fairly clear - firstly, performance and value relative to other companies in Europe rather than Ireland will be much more important, and, secondly, as the number and time of investment analysts is limited, they will focus on the larger stocks. So to attract a decent rating, one will need to perform well relative to one's European peer group and be big enough to get on the analysts' "radar screen".

This has and will affect the ratings of smaller companies. A number of them are already on very modest ratings. Unless they grow significantly they are likely to become take-over or MBO candidates. At the current ratings of some of them, it looks possible to pay a reasonable premium and finance a transaction with a significant debt component.

Mergers and acquisitions activity over recent years shows that in some sectors the importance of scale has already been anticipated. Financial services is an obvious example. There have been some signs of it in the agri-business world but perhaps less than would have been expected.

And unquestionably, there is evidence of it in the distribution sector where one can anticipate a rapid restructuring to address the impact of the arrival of UK multiples and to provide an all-Ireland approach to distributing consumer foods.

This all-Ireland approach has already lead to some restructuring of the sector in the North - driven mainly by southern-based players; I see no reason why this restructuring should not continue notwithstanding Britain's absence from EMU.

Apart from the distribution sector, there has been relatively little consolidation in the North. Indeed, the small scale of indigenous companies in the North, the fact that most of them are privately owned combined with sterling's absence from EMU suggest that some of them may find life more of a struggle post-EMU.

Of course, the advent of EMU is only one of the factors behind the upsurge in activity - deregulation, the Tiger Economy and the relentless focus on shareholder value are just some of the others.

Whichever way one looks at it, the likelihood is more corporate acquisitions rather than less, under a number of headings - industry restructurings; acquisitions designed to achieve scale; synergies or market penetration; and the takeout of undervalued situations. The global investment banks will inevitably feature in the cross-Border transactions and the local players will have to fight even harder for their piece of the action.

Richard Keatinge is managing director of IBI Corporate Finance