M&A is flying - but into strengthening headwinds

Katharine Byrne, Head of Corporate Finance recently spoke to Sandra O’Connell from The Irish Times to discuss the M&A levels in Q1, why transactions have become more complicated and the increasing interest in the technology sector

Last year was a bumper year for M&A activity. It was always going to be a tough act to follow.

“All the predictions at the start of the year were that this would be another really strong year but with Ireland seeing a rebound in Covid at the start of the year, coupled with the Ukraine crisis, things definitely slowed up” says Katharine.

While Q1 saw deals that were already in train from Q4 last year progress, fewer new deal kicked off and some were paused.

“Q1 levels were much more like pre-Covid level -still high, but not as high as they had been at the end of 2020 and the start of 2021. But, 2022 so far, is still good,” she says.

While some ‘mega’ deals may have been placed temporarily on ice as a result of Russia’s invasion of Ukraine, and the subsequent deepening of what was already an energy crisis, there is still cash available which private equity investors in particular are keen to deploy in “good strong companies, particularly at mid-market level”, she explains.

The way those deals are being structured has become more complicated however, with both sides reassessing the likely impact of current headwinds and their implications on earn outs.

Sellers want to ensure they don’t lose a chunk of the sale price trying to chase targets that will disappear over the horizon in a more difficult economic environment. Buyers don’t want to pay over the odds.

To price those risks into the deal “a lot more due diligence is required, including vendor due diligence, making sure every situation is considered,” she says.

Those considering trade sales are typically able to sit and wait, to assess how the economy develops, and the impact of issues such as rising interest rates.

Private equity funds by contrast have money raised which must be spent within a particular timeframe. There are more private equity funds active here now than ever before, with funds raised and ready to go. Whatever goes on in the economy they will need to disburse it.

“They have dry powder that must be deployed and certain timelines to get the cash out the door. They are looking to more diverse portfolios as a result, developing a good spread of different types of business in different sectors,” she adds.

Technology is continuing to drive activity, with 40% of all transactions in Q1 being in the tech space – deals by value has been somewhat distorted by unicorns such as Flipdish and Wayflyer, both of which raises around $150 million in Q1.

“The appetite for technology business makes sense, seeing as how it is so broad ranging and covers everything from software to tech service. At the start of the year, we saw a lot of cyber security activity, on the back of all the cyber threats that have been taking place over the past year and a half, but also activity for businesses involved in the transformation of ecommerce, fulfilment and supply chain,” says Katharine.

Private equity funds are increasingly taking the kind of portfolio approach in other sectors that they took initially in MedTech and healthcare, she points out. That’s providing a boom for Irish businesses, providing them with the wherewithal to scale up and operate on a global stage.

“It’s still a seller’s market, but you can’t just bounce into it, you have to prepare. That means making sure the timing is right from a business point of view, that, for example, it’s not a busy time for the business. It also required dedicated to raise funds or sell a business.”

While valuations are not high on paper, the fact that both buyers and sellers want to price in risk ensures they are more complex than ever. Changes to the macro environment, whether supply chain issues, pandemic or war, don’t change the level of M&A activity, “it just changes your approach risk. You factor it into your modelling,” she concludes.

Content adapted from The Irish Times.