M&A transaction activity in 2022 wasn’t quite on par with 2021 but was still remarkably buoyant, according to Deloitte M&A partners Jan Fitzell and Anya Cummins
How was the M&A market in Ireland in 2022 v. 2021?
The 2021 M&A market was the most active M&A market in terms of deal volume since 2006. 2022 has remained exceptionally busy and even as compared to a record prior year and against the backdrop of Russia’s invasion of Ukraine, rising inflation and energy costs and significant economic uncertainty, 2022 will still be one of the busiest years on record for M&A.
We have seen the continued growth of private equity as acquirers of businesses in Ireland, together with international trade acquirers who have come through the Covid-19 period with strong balance sheets and a desire to grow into new markets.
While the market has cooled somewhat as compared to 2021, we are still seeing very strong levels of deal activity and appetite from buyers and investors remains very strong.
The second half of 2022 has seen a few more uncertainties as interest rates started to increase and inflation impacted on costs. However we are still seeing the quality businesses being competed for strongly, with financial services, TMT, energy and life sciences all particularly active sectors.
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US and private equity buyers have been the main drivers of M&A activity in Ireland in recent years. How did these hold up in 2022?
PE activity continued at very strong levels in 2022. We saw continued activity from all of the local funds and strong interest from the mid-market private equity community in the UK.
Notable deals saw Cardinal Capital acquire UForm who supply kitchen doors and components, Waterland take a majority stake in engineering firm MTM Engineering, and Bowmark acquire Xperience Group the IT Solutions company.
We’re also seeing PE portfolio companies pop up as regular acquirers of Irish businesses – this has been particularly relevant in the Insurance Broking sector where activity has continued apace in 2022.
Some examples have included Arachas’ acquisition of Glennons and a number of acquisitions by Innovu (previously owned by MML Capital) which was itself then acquired. We anticipate that this trend will continue as PE funds seek to push more capital out to market through their existing platforms.
While PE may not have been the ultimate acquirer, the majority of the larger sell-side deals on which we have advised have had PE (or their portfolio companies) in the process as an interested party and given the level of dry powder in the market, we expect this trend to continue.
US acquirers have benefitted in the latter half of 2022 from a movement in the exchange rate, which has made Irish targets relatively cheaper for them. We continue to see strong US interest particularly in the Technology, Healthcare, and Financial Services sectors.
What about UK acquirer interest – up, down or the same?
Acquisition interest from the UK has remained broadly similar with the prior year – we’re seeing UK based companies continue to look at expanding their presence into the Irish market, often as a bridge to the EU.
UK private equity interest in Irish businesses is about the same, if not a little higher – reflecting again the level of dry powder coupled with a relatively strong economic outlook and high quality businesses coming to market and seeking investment for growth.
We’re seeing Irish companies expanding into the UK market which is then raising their profile with would-be acquirers from the UK.
What sectors, in terms of active acquirers, are more resilient than others to the rising cost of capital?
We’re seeing the Technology, Financial Services, Healthcare and Services sectors as pretty resilient and areas where there continues to be strong activity.
Within these, there are particularly active sub-sectors – with resilience and the mission criticality of products and services as key themes and attractions for investors. For example, within Technology – software, IT managed services, and cyber security are particularly hot sectors given the wider macro trends which are positively impacting on these areas.
In business services more widely, any services that are seen as vitally important and therefore less likely to be negatively impacted by a recession are particularly hot – including for example data services, professional services and compliance services.
There is, in general, a strong premium with regards to valuation and investor appetite for robust and resilient business models; particular in the face of lower economic growth.
Businesses which face margin pressure, a challenge in passing on price or inflationary increases, where supply chain issues persist and/or where sales are subject to consumer demand are less active than in previous years; and we expect transaction activity will slow until margins and financial performance normalise.
We’re also seeing much greater focus now on companies that are generating profits and cash as opposed to companies who are targeting exceptional revenue growth. This is particularly evident in the software space when it comes to fundraising and growth capital.
What’s the M&A outlook like for Ireland in 2023 – better, worse, or the same as in 2022?
We’re optimistic on the M&A outlook for Ireland in 2023. There is still a huge amount of capital available both from PE and trade acquirers and we see both communities as interested in acquiring and investing in quality businesses.
We may see inferior businesses struggle to find suitors or ill-prepared businesses struggle to complete a transaction – we think it will bring into greater focus the need to prepare and get plans in place well in advance of talking to potential acquirers, so that when things do kick off the company retains control of the process.
We anticipate deal activity to be quite sector and business specific, and we do expect to see some valuation expectation gaps between buyers and sellers for certain businesses and sectors at the moment, though this can often be resolved via deal structuring.
Main photo: Jan Fitzell, M&A partner, Deloitte
