Mergers & Acquisitions: 2019 Outlook and Practicalities—An Overview by Katharine Byrne

21 February 2019

In The Irish Times’ recent Mergers & Acquisitions report*, Katharine Byrne, Corporate Finance Partner was invited to provide insight on various issues across the M&A market.

In the article ‘Outlook positive for 2019 despite uncertainties’, Katharine speaks about the key drivers in M&A activity. “While 2018 certainly was a successful year for M&A’s, a number of large transactions including the Takeda takeover, distorted the market somewhat.” Katharine points to mid-market activity (deals ranging from €5m to €250m) as the key drivers in M&A activity during 2018, despite the uncertainty surrounding Brexit. She lists other key drivers, such as the emergence of longer-term equity funds entering the market and pension funds focussing on asset-backed investments in nursing homes and student accommodation. She adds, “Midmarket private equity funds sought transactions in sectors that are still quite fragmented, such as insurance, leisure and IT services.”

Katharine predicts that 2019 will be a sellers’ market due to valuations continuing to rise. This is underpinned “by increased funding and competition from international and local buyers.” Katharine then explains that debt will be the main source of funding for deals, with attractive terms, flexible instruments and the presence of new leaders in the market. She concludes saying: “We expect to see an increase in private equity deals in 2019 as succession planning becomes the key focus for many Irish companies looking to secure a full exit within three to five years.”

In the article ‘Global upheaval has had little impact on M&A activity’ Katharine comments on  the factors driving M&A deals, this time in a global context.

Despite the geopolitical uncertainty around the world’s biggest economies, Katharine credits good access to capital, changing consumer needs and ongoing disruption of technology across all sectors as factors driving global M&A activity. “With record levels of dry powder [cash reserves or liquid assets available for use] available there is a lot of competition for good companies which is resulting in increased cross-border transactions, which is helped by the globalisation of both companies and the M&A dealmakers.”

She notes that due to capital markets having another year in decline, this slowdown is leading equity funds to seek returns in the M&A market. “We are noticing increased access to longer-term equity and pension funds which are looking to diversify their portfolios through direct investment to improve overall returns.” Katharine also reports that technology continues to be “the busiest sector for M&A as companies seek to buy tech businesses as a means of growth and to improve their own product or service.”

Katharine  describes the type of buyers and sellers that are leading the market. “Strategic buyers are still dominating deal flow and the processes are much more controlled. Sellers are looking to maximise value by running tightly controlled processes while ensuring they target buyers with the strategic need. This is resulting in increased use of vendor due diligence.” She also emphasises the importance of having an international adviser who understands their market. “The net effect is that deals are taking longer to complete and complexities of cross-border transactions need to be understood and managed.”

In the article ‘A number of UK companies looking to acquire Irish businesses as Brexit looms’ Katharine states that M&A forecasting has become more challenging as decisions within the Irish and UK market are put on hold while Brexit is still unfolding. She acknowledges that there is concern that a “hard” or no-deal Brexit will have a neutral or negative effect on deal activity this year. However, she also believes that when looking at Ireland’s inbound M&A, volumes are likely to improve with UK and international businesses viewing Ireland as a way of minimising risks.

Katharine is featured in the article ‘Management teams need to lead integration plan’ discussing issues that arise after the transaction is completed, i.e. the merger’s implementation strategy, integration plan, buyers familiarising themselves with the company and its people.

“No matter how well you plan the M&A transaction the success will always depend upon the implementation strategy and integration plan.” She admits that as a result of increasing use of vendor due diligence and controlled sales processes, “it is becoming much harder for buyers to spend time getting to know the company and its people.” She cites that “the loss of key people and failure to recognise the cultural difference” is the largest reason why mergers do not succeed. On a more positive note, Katharine insists that two different businesses can still plan to merge successfully if the can find some common ground. She says that consultants can take care of due diligence but management teams must take on the responsibility of driving the integration plan. Furthermore, the integration plan must be incentivised for success.

Katharine highlights three important pieces of advice that can guide businesses as they adjust to a newly formed merger:

  1. Have an integration team

Engage with the key people during the process to understand the strategic objectives of the deal and to agree on the identification and capturing of synergies. Do not leave it for functional streams to adopt their own approach.

  1. Good communication is crucial

Identify any potential cultural issues pre-completion and seek to ensure the optimal reporting structure and systems that support open communication from day one.

  1. Have a timeline

Project manage the period immediately post-completion. Be it the ‘100-day plan’ or a quarterly review, the focus should be on the cultural integration as much as on the financial targets in order to ensure continued success.

“No company will have exactly the same culture but if there are good areas of overlap and alignment, then there is a basis for the two companies to plan for a successful merger.”

 

To learn more about BDO in the M&A Market, visit BDO Deals.


*Content adapted from The Irish Times, February 2019

Articles

‘Outlook positive for 2019 despite uncertainties’ by Mimi Murray

‘Global upheaval has had little impact on M&A activity’ by Sandra O’Connell

‘A number of UK companies looking to acquire Irish businesses as Brexit looms’ by Mimi Murray

‘Management teams need to lead integration plan’ by Sandra O’Connell