JOHNCRADDEN

Following a record-breakingyear for takeovers involvingIrish firms, the overwhelmingconsensus in the business com-munity here is that 2016 is setto be another stellar year,thanks to high levels of confi-dence and improved access tofunding.

Last year saw M&A activityhere break records both interms of value and volume.Data from Thomson Reutersshowed that Irish firms wereinvolved in takeover dealstotaling nearly ¤77 billion, wellahead of the ¤63 billion donein 2014, while the number ofdeals filed to the Competitionand Consumer ProtectionCommission (CPCC) rose to 78– 90 per cent higher than 2014.

However, measuring merg-ers and acquisitions activitytends to be an inexact scienceand can be skewed by a numberof factors. For instance, the val-ues of many deals are not dis-closed, while a lowering of re-porting thresholds for deals no-tified to the CPCC in 2014meant the number of deals re-corded in 2015 was always go-ing to be higher.

Michele Connolly, a partnerwith KPMG, acknowledges thisand says her firm measures ac-tivity in this space simply bykeeping eyes and ears to theground and gauging the senti-ment in the marketplace.

“What we see on the groundin 2015 is that activity levelswere definitely higher than2014 – across the board. Thesentiment and the positivity ofdifferent parties to doing a dealwas much improved in 2015.”

Indeed, a strong indicationof this positivity comes from anew KPMG survey of 100 sen-ior business leaders regarding

their M&A outlook, whichshows that no less than 98 percent expect activity to increasein 2016, and that nearly half ex-pect their “valuation multi-ples” to increase in 2016.

Last year saw agri-businessand technology emerge as themost active industry sectors,but this year it looks set to bethe turn of healthcare, pharma-ceutical and life sciences.

“Last year would have seen asmall number of large inver-sion deals, but also fundraisingactivity for pharma start-upswho over the course of the yearmay be snapped up by strategicinvestors,” says Connolly.

In general, Connolly notesthat until recently many busi-nesses were looking at M&Asas a way of “trading out of orleaving behind historical finan-cial difficulties” but, in linewith the rise in confidence andfunding availability, there hasbeen a return to using them asa legitimate tool to grow thebusiness and find new strategicpartners.

“Access to finance is improv-ing; it still remains challengingand expensive but the banksare very much back in the mar-ketplace lending again. Soonce you have market senti-ment in place and the availabili-ty of money with which to do anacquisition, it then comesdown to finding the right com-pany to buy or to sell yourselftoo.”

The KPMG survey also re-veals that 75 per cent of busi-ness leaders view a sale to a stra-tegic buyer as their preferredexit strategy for businesses thisyear.

And in terms of the primaryconsiderations for sharehold-ers in considering a takeover,only 16 per cent say the possibil-ity of securing an “opportunis-

tic target” would figure strong-ly for them.

“The larger firms always sawM&A as a way of growing anddiversifying whereas domesticIrish businesses were once in amore opportunistic space interms of targeting a possiblebuy,” says Connolly.

‘Suitable targets’The fact that the most common-ly cited factors that businessleaders felt would inhibit dealactivity this year were “en-hanced price expectations”(33 per cent) and “lack of suita-ble targets” (28 per cent) likelyalso reflects a shift towards us-ing M&A to achieve strategicgoals rather than as a opportu-nity to get one over on a rival.

“People are coming at themarket in an improving Irisheconomy and therefore auto-matically their view of the val-ue of their own business willhave improved because mar-ket sentiment has improved,”says Connolly.

David Tynan, corporate fi-nance partner at PWC, saysthat when businesses are sta-ble or growing, valuations aremuch easier for the purposes ofM&A. “It’s very hard to do busi-ness with companies that aredeclining because it’s very hardto judge what the underlyingvalue is. So when a company isstable or growing, it’s much eas-ier to put values on it and val-ues tend to be higher, so thepricing gap between buyers

and sellers has fallen throughthe period.”

Nonetheless, there will stillbe a few firms looking to re-structure over the course ofthis year. Darren Daly, corpo-rate partner and head of tech-nology at law firm Byrne Wal-lace, which has advised on anumber of high-profile takeo-ver deals last year, says he ex-pects to see managementbuy-outs (MBOs) continuing tobe a strong feature of the sectorthis year.

“Many large corporate enti-ties need to divest non-corebusiness units to reduce debtpiles or manage creditor situa-tions, and this is leading to anincreased level of groupre-structuring which can ofteninclude a spin-off of divisionsor groups by way of an MBO,”he says. “It is difficult to predictwhat portion of overall M&A ac-tivity will be constituted byMBO deals but it does appear

likely that these deals will forma greater proportion of the mar-ket given the tightening restric-tions on ‘inversion’ type deals.”

Looking at the broader pic-ture, 2015 was a tumultuousyear for the global politicallandscape, so it is no surprisethat business leaders will bemonitoring events like theforthcoming elections hereand in the US very closely, notto mention the referendum onthe UK’s EU membership.

“[Brexit] looms quite large,but from talking to a lot of com-panies they would see it assomething to consider but notsomething they are panickingabout or saying that it stopsthem doing a deal,” says Con-nolly. “But it’s a factor that theyneed to look carefully at.”

At least the funding picturelooks to be relatively stable.The proportion of availablefunding from cash reserveslooks to have risen significant-

ly, according to the KPMG sur-vey, while the banks are defi-nitely back in business in thesector, although they’re not ex-actly offering loans at rock-bot-tom prices.

“It’s expensive but its comedown and come down quitequickly, although the compli-cating factor is probably theterms and conditions on whichyou will get the debt are moreonerous than they would havebeen prior to the recession andthat’s more of an issue than theabsolute cost of the debt,” saysConnolly. “It’s more reflectiveof a more cautious bankingenvironment.”

Tynan agrees that banks’conditions are much more rig-orous, but they remain muchmore open to new transactionsin principle today than theywere even in 2007, and compe-tition between is helping todrive the costs of debt down-wards.

On the equity side, a numberof funds have been set up, suchas the Carlisle Cardinal Fundand the Development Capitalfund that look set to boost fund-ing for small and mid-sized eq-uity transactions here. “Thereis also a huge amount of moneyfrom the London private equi-ty community coming into theIrish marketplace,” he says.

Key investorsSo how can firms be sure to getthemselves noticed by keyinvestors?

“If you have got a productthat has an international ap-peal that can be rolled out glob-ally, that’s the type of businessthat attracts the bigger fundsand corporates,” says Tynan.

Companies that are focusedonly on the Irish market – evenif they have the potential togrow quickly – can be harder tovalue, he says. “If you have gotsomething that can grow over-seas and scale overseas, youcan look to get a comparablemultiple that someone mightpay for a business overseas, butwhen you are totally relying onthe Irish market there’s a kindof cap on the valuations forthose sort of companies.”

Tynan also notes that thespeed at which deals are beingdone is much faster, with largedeals being done and dusted insix months rather than 12. How-ever, he is a little concernedabout possible backlogs for reg-ulatory approval given the high-er number of deals that have tobe filed with the CPCC.

“The [reporting] thresholdshave come down so that rela-tively small, innocuous dealsare going into the system andslowing it down, so it’s some-thing that we just have to factorinto our budgeting that transac-tions will take that bit longer.”

In general, there are few con-cerns about the regulatory envi-ronment, according toKPMG’s survey. “People justdon’t see it as an inhibitor, theywill clearly factor in whateverapprovals are needed into thedeal’s timelines at the outset,”says Connolly. “They know thatis a hurdle that they’ve got tocross, so it’s not something newand different – it’s just onemore factor that needs to getaddressed in the deal.”

[People]will clearlyfactor inwhateverapprovals areneeded into thedeal’s timelinesattheoutset‘‘

SANDRAO’CONNELL

With a combination of in-creased investor confidenceand improved market condi-tions, it’s small wonder 98 percent of respondents to KPMG’sM&A Outlook 2016 survey an-ticipate an increase in activity.

“For the past 18 months ithas been all systems go,” saysMark Collins, head of transac-tion services at KPMG. “One ofthe biggest trends we are see-ing is vendors coming to us ear-ly –12 months or more out – andasking, ‘What do we need to doto extract the most possible val-ue from the sale of our busi-ness?’”

That’s good because the ear-lier you prepare the better.“Getting your house in order iscritical,” says David Tynan, cor-porate finance partner at PWC.At the very least, you should beable to show an upward trajec-tory in terms of performance.“It’s too hard to establish a prop-er valuation if your revenuesare falling,” says Tynan.

DelvingdeeperIt’s not just your accounts thatneed to be right either. “A lot ofprivate equity houses will lookfor a commercial report as partof their due diligence, delvingdeeper into your market, tofind out if, for example, you’rea price maker or a price taker,or where your business standsin relation to technology.”

Next, look at your manage-ment team. “You don’t neces-sarily have to have them all inplace, but do at least be able toidentify gaps,” says Tynan.

Don’t let the sales processdistract you from running thebusiness. “It’s very importantto ensure that it’s business asusual throughout the negotia-tion. It’s too easy to take youreye off the ball and for yourbusiness to suffer as a result,”says Tynan.

Engaging a professional ad-

viser not only frees you up to dothis but she or he also acts as abuffer between the parties.

“This can be particularly im-portant if you intend to contin-ue working in the businesspost-sale, because negotia-tions can be heated and youdon’t want any bad blood tobuild up. Much easier to let theadviser take the flak and blamehim or her for areas of dis-pute,” says Tynan.

Keep emotion in check. “Buy-ers will look at things in a differ-ent way and can come in andcriticise how things are done.That can be quite hard to hearbut don’t let that show becauseit weakens your position. Youhave to keep your emotionsout, even if it is like selling yourbaby.”

Ironically on the buyer sideone of the most common pit-falls is to be overly determinedto buy. “Companies can getinto an ‘acquisition mode’, justbecause they want to achievegrowth, but may not have aclear enough, strategic ration-ale behind it,” says David O’Fla-nagan, corporate finance part-ner at Deloitte.

Here too emotion can leadyou astray. “People get se-

duced into buying bigger, andget carried away, without hav-ing identified their ‘walk away’point. The tendency is to over-estimate the synergies of adeal, in order to justify a higherprice.

“Sometimes the acquisitionis just too big for the buyer, thelevel of debt too onerous.”

The post-merger phase iscrucial. “Too often businessowners don’t put enough effortinto integration. Synergiesdon’t just happen, you have towork at them. And if you’vepoor people managementskills, people can take frightand you’ll see very senior peo-ple leave,” says O’Flanagan.

To avoid a culture clash youmust first be very conscious ofthe culture of the business youare buying or merging with,working carefully to make it asingle, cultural entity.

For the seller who agrees tostay on as part of the deal, bewary about “earn-outs”, amechanism whereby you deferpart of your payment until a lat-er date on foot of key mile-stones being reached.

“Make sure these are calcu-lated in a watertight basis,”says O’Flanagan. “I’ve seen

very many incidents where,two or three years down theroad, parties fall out over thecalculation of earn-outs, oftenending up in court. They mustnot be open to manipulation orinterpretation after the event.”

It’s a risk a good lawyer willguard against. “The holdingback of some element of theprice in an escrow account tocover potential warranty or taxclaims is quite typical,” says Col-in Sainsbury, corporate part-ner at law firm Byrne Wallace.

“This by definition creates fi-nancial risks for sellers as op-posed to situations where allthe cash is paid up front. It isthe lawyer’s job to effectivelymanage these risks throughthe negotiation process.”

DelicateissuesDeal structures come in manyforms, many highly financiallyengineered, he says. “Oftenthere are external stakehold-ers that need to be carefullyconsidered and delicate issuesaround HR, customer and sup-plier relations and bank and eq-uity funders.

“On other occasions difficul-ty liability and risk allocationquestions have to be negotiat-ed. Ultimately, the lawyer has toensure that a transaction is han-dled safely, efficiently, and lim-iting to the absolute minimumany future risks for the client.”

Even if you have no plans tosell your business or buy a newone, it’s something every own-er should consider once in awhile.

“Every few years it’s worthsitting down and saying, ‘Whatis our strategy’, particularly inSME or family businesses, be-cause businesses change, cir-cumstances change and fami-lies change,” says Michele Con-nolly, partner at KPMG. “Eve-rybody needs to stand backfrom time to time and look stra-tegically at where to go fromhere.”

Howtosellyourbusinessoracquireanotheronewithoutsheddingtears

Mergers&Acquisitions A Special Report

Positivesigns for2016M&AactivityKPMGsurvey finds98%of senior businessleadersexpect increase in activity levels

At the heart ofbusiness in Ireland

The KPMG name and logo are registered trademarksor trademarks of KPMG International

■ Last year sawM&A activityhere break records both interms of value and volume.PHOTOGRAPH: THINKSTOCK

Access to credit and increasedmarketsentiment linked togrowth in takeovers

■ Engaging a professional adviser frees you up, and he or shecan act as a buffer between the parties. PHOTOGRAPH: THINKSTOCK

THE IRISH TIMESFriday, January 22 , 2016 9

Telecoms,media and technologybusiestareas forM&Aactivity athomeandabroad

SANDRAO’CONNELL

Ireland hit the headlines lastyear when US drugs giant Pfiz-er merged with Irish-based Bot-ox maker Allergan, changingits tax address and slashing itstax bill in the process.

The $160 billion (¤146 bil-lion) tax inversion reverberat-ed through the US primarieswith presidential candidate Hi-lary Clinton calling such movesunpatriotic and Donald Trumpbranding it “disgusting”.

Inversions constitute a tiny

part of the international forcesshaping the M&A landscapehere however. For a start Irishbusinesses are themselves onthe global acquisitions trail. Al-most a third (31 per cent) of re-spondents to KPMG’s M&AOutlook 2016 survey identified

the UK as the most likely loca-tion for overseas acquisitionsthis year followed by the rest ofEurope, North America andemerging markets. Major IrishPLCs are seasoned overseasbuyers, forced to travel to finddeals of sufficient scale.

When overseas buyers runthe slide rule over Irish targets,it’s more than our tax appealthat drives them. “There arefair winds in our favour,” saysMark Collins, head of transac-tion services at KPMG. “For astart, there is currency. If youhave a dollar- or sterling-de-nominated business, currencyswings alone have added 10-15per cent to your buying power.”

He sounds a cautionary noteregarding the impact on invest-ment decisions relating to re-cent macroeconomic events.These include concerns over aslowdown in China, volatility inglobal equity markets, de-pressed oil prices and the weak-ening of sterling.

“Upcoming elections in Ire-land and the US as well as aprobable vote on a British exitfrom the EU in 2016 could alsoinfluence M&A sentiment,”says Collins.

On the plus side, there ismoney out there. “Last yearsaw a lot of international fundsraise funds and they work in10-year cycles, so for the nextfew years we’ll see a lot of buy-ing,” says David Tynan of PWC.

“At the moment we’re in an‘up’ cycle, so it’s a good time ifyou have a good business, in a

stable market, where you canshow scalability.”

It’s not just Irish companiesin the high-profile tech or phar-ma sectors that stand to bene-fit. “It’s more the characteris-tics of the business than the sec-tor that counts,” says Tynan.

“International buyers arelooking for very stable business-es with predictable cash flow.UK private equity houses in par-ticular are looking for business-es they can understand, notones that just sound great.”

Interest from overseas is af-fecting the sales process here.“The type of investor you aretalking to today has lots of dif-ferent deal options passingacross their desk every day,which can make it hard to gettheir attention,” says MicheleConnolly of KPMG.

“They don’t want to be partof a traditional process where-by the seller has identified 10possible buyers and wants tonarrow it down to a shortlist.These buyers want a short,sharp process, so a scattergunsales approach doesn’t work.”

On the plus side, the numberof possible buyers is set togrow. “Deal-making is becom-ing more and more cross bor-der and international. These in-clude trading business lookingto get a platform business thatprovides access into Europe,not just for tax-planning rea-sons but for expansion,” says

Katharine Byrne, corporate fi-nance partner at BDO.

“On top of that we are seeinga lot of US funds arriving,thanks to the growth of the USeconomy and increased re-quirements from US investorsto look overseas as a result ofthe strong dollar. US valua-tions are at an all-time high, sothere is better value to be foundin Ireland.”

Mid-market deals, such asAvoca’s sale to US foodservicecompany Aramark, may not at-tract global headlines but lookset to gather pace.

“Very good businesses withpotential to expand both na-tionally and internationally arevery attractive to US buyersand will continue to be soughtafter,” says Byrne.

Mergers&Acquisitions

BARRYMcCALL

The environment for M&A ac-tivity in Ireland during 2015was strongly favourable andthis is reflected both in the sen-timent revealed by KPMG’sM&A Outlook 2016 Survey andthe level of transactions in sec-tors such as financial services,food, tech, pharma and health-care.

“Our survey show that thereis a very favourable environ-ment for M&A at the moment,”says Mark Collins, head oftransaction services at KPMG.

“The number of big funds inthe market, the strong dollar,the very favourable tax regime,availability of debt, number ofequity funds competing witheach other for assets – all thesethings combine to make it a per-fect storm for M&A . . .

“It was very favourable in2015 and will be even more soin 2016. But it’s not at a pointwhere it gets frothy. We wouldhave to be concerned aboutpricing if it got to the pointwhere it is no longer competi-tive.”

He points to a number of out-standing deals in 2015 involv-ing Irish companies. “The Pad-dy Power-Betfair merger is afantastic deal for lots of rea-sons,” he says. “They are bring-ing together two complementa-ry businesses in the online andretail spaces with very talentedpeople at the forefront of the in-dustry. This will create hugesynergies and a companywhich will lead the market and

create value for shareholders.”At the lower end of the scale

he says One51 is an excellentstory as well. “Here you have avery talented managementteam which has turned the com-pany around over the past fourto five years and has done anumber of deals of late includ-ing plastics business IPL in Can-ada, which could be a spring-board for growth throughoutNorth America. This is a verygood Irish story. The food andagri sector also continues to bevery strong, with Kerry, Glan-bia, and Aryzta all very active.”

RealismSome of this activity is fuelledby the availability of acquisi-tion targets coming to market.“We are increasingly seeingPLCs willing to hive offnon-core or non-performing as-sets,” Collins notes. “That usedto be seen as a sign of failurebut there is now a sense of real-ism and companies are muchmore ruthless and pragmaticwhen it comes to this.”

According to Deloitte corpo-rate finance partner DavidO’Flanagan, the overall M&Afigures require close scrutiny.“There’s kind of four ways tolook at what’s reported: Irishbuying Irish; Irish buying over-seas; overseas buying Irish;and overseas buying overseaswith an Irish connection. Theinversion deals are essentiallyUS or global deals with only atangential link to Ireland.About ¤35 billion of the ¤67 bil-lion quoted for 2015 is proba-

bly the actual figure for Irishtransactions. There wereabout 40 purely domestic dealslast year worth ¤800 million.Irish companies making acqui-sitions overseas accounted forabout ¤19 billion in 78 deals.These included DCC, GraftonGroup, Horizon Pharma, Ker-ry Group, Glanbia did a fewand the CRH-Lafarge dealwhich, at ¤6.5 billion, was thebiggest deal ever done by anIrish firm.”

Standout deals involvingIrish companies being ac-quired by overseas buyers in-cluded Eirgen, a cancer drugmanufacturer, bought by US

drugs company Opko for $135million; Realex bought by UScompany Global Payments in a¤115 million deal; Avoca sold toAramark for ¤60 million; To-paz acquired by Canadian-list-ed Couche-Tard in a deal esti-mated at more than ¤450 mil-lion; and China’s Bohai Leasingtaking over Avolon for ¤6.5 bil-lion.

ConsolidationO’Flanagan points to 27 dealsworth ¤3.5 billion in the tele-communications, media andtechnology (TMT) sector; eightin construction worth ¤8.6 bil-lion; four in oil and gas worth

¤3 billion; two in aviation for¤7.3 billion; and 15 in food andbeverage for ¤1.3 billion.

BDO corporate finance part-ner Katharine Byrne notesTMT continues to be the busi-est sector both globally and inIreland, with steady consolida-tion in media seeing Setantasold to Eir, and the sale of UTVand TV3. “There have alsobeen some interesting interna-tional deals completed during

the year including the sale ofTrustev to TransUnion LLC,the sale of Fintrax to EurazeoSA and the sale of Realex.

“Consumer-led sectors alsomade a comeback with Irish ho-tel deals exceeding ¤1 billionand an increased internationalfocus on Irish businesses suchas Aramark’s purchase of Avo-ca and Levine Leichtman’s in-vestment in CJ Fallon. Health-care continues to attract invest-ment, both locally and interna-tionally, due to our ageing popu-lation and the country’s needfor improved services.”

HealthcareEamonn Hayes, managing di-rector of Capnua, also seesgrowth in activity in health-care. “This is an area where de-mographics will drive growthand not just in nursing homesand the infrastructure side.The other side is the distribu-tion of products, primaryhealth centres, and the provi-sion of services like home care.Businesses in this sector arestarting to scale and there willbe an inevitable consolidationin future which will drive M&Aactivity.”

Deal flow in the healthcaresector has also been noted byPWC corporate finance part-ner, David Tynan. In addition,he says: “The renewable ener-gy sector continues to be activein areas like wind farms and bio-mass; there are a couple of lightengineering transactions ongo-ing; we have also done somestuff in the waste space and ineducational services; there isalso activity in financial servic-es and in the healthcare spacehere in Ireland. Overall, dealsare getting quicker to completebut are still taking around sixmonth longer than they did be-fore the recession.”

One of the highlights of theyear for Davy corporate fi-nance director Nicholas O’Gor-

man came in the energy sectorwith the sale of Dragon Oil tothe Emirates National Oil Com-pany ¤5.7 billion. “The othertransformational deal of theyear was CRH, and we werealso involved in the funding ofthe deal and helped arrange a¤1.6 billion placing,” he says.

Other major Irish deals wereDCC’s purchase of Butagazfrom Shell for ¤464 million inthe firm’s biggest-ever acquisi-tion and Dalata’s takeover ofmost of the Moran Bewley’s Ho-tel Group’s assets for ¤455 mil-lion.

Byrne Wallace partner ColinSainsbury points to the cross-over in sectors such as health-care and technology, which isdriving overseas interest inIrish firms.

“We advised 3D4 Medical, aleading Irish innovative medi-cal technology company, andsome of its shareholders on thesale of a 38 per cent sharehold-ing for $16.4 million toIrish-based global life sciencescompany, Malin Corporation.The company specialises in thedevelopment of medical, educa-tional and health and fitnessapps for healthcare profession-als as well as for students and pa-tient education.”

In pharma, the firm acted forNexvet Biopharma in relationto the successful closing of itsfully underwritten US$40 mil-lion initial public offering.

And the consensus belief isfor 2016 to be as good if notstronger than 2015 for IrishM&A. “The prospects are verygood”, says Mark Collins. “Allthe things that should be inplace are there; demand andsupply is there, indeed demandslightly exceeds supply; wehave stable capital markets; thefunding is there; and we have astable economy . . . As long asthe political environment re-mains positive here sentimentshould remain positive.”

‘‘

ASpecialReport

We’re in an‘up’ cycle so

it’s a good time ifyou have a goodbusiness

It’snot justourtaxappeal that isbringbuyers toIreland

■Currency fluctuations can add to businesses’ buying power

Expertspoint to continuinggrowth inmergersandacquisitionsacrosssectors

GETTINGDEALS DONE

*Deals of the Year - FINANCE DUBLINPlease contact:

Paul Keenan: pkeenan@capnua.com or Eamonn Hayes: ehayes@capnua.comPhone: 01 605 0002, Website:www.capnua.com

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Sale of Londisto BWG

MBO of Ardmac

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(Mid Market)€87M Refinancing of Uniphar

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Elverys MBO & Financing

(Mid Market - Ireland) Advisers on thesale to GNC

SALE OF BUSINESS

SALE OF BUSINESS

SALE OF BUSINESS

BDO is authorised by the Institute ofCharteredAccountants in Ireland to carry on investment business. BDO, a partnershipestablished under Irish Law, is a member of BDO International Limited, a UK company limited by guarantee, and formspart of the international BDO network of independent members firms. BDO is the brand name for the BDO Internationalnetwork and for each of the BDOMember Firms.

BDOCORPORATE FINANCE

DRIVINGDEALSFORWARD

Talk to our M&A and funding expertsKATHARINE BYRNE, Partner, at kbyrne@bdo.ieCONQUIGLEY, Partner, at cquigley@bdo.ie

or +353 1 470 0521

Advisers to theshareholders on the saleto ARM Holdings PLC

SALE OF BUSINESS

Financial due diligenceadvisers toOctopus

Investments

TRANSACTION SERVICES

Advisers to the companyon its fundraise fromMMLGrowth CapitalPartners Ireland

Financial advisersto the company onthe acquisition ofProTek Medical

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Advisers on the saleto Levine LeichtmanCapital Partners

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Advisers on equityfundraisings

FUNDING

Advisers on the saleto Virtus Health PLC

‘‘

TheCRH-Lafargedeal, at¤6.5billion,was thebiggestdeal everdonebyan Irish firm

■ Irish companies buyingoverseas accounted forabout ¤19 billion in 78 dealsin 2015. PHOTOGRAPH: THINKSTOCK

Conditions favourable forstrongIrishM&Asin2016

10 THE IRISH TIMESFriday, January 22 , 2016

JOHNCRADDEN

Irish firms have been involvedin some of the biggest globalmergers and acquisitions overthe past few years, thanks main-ly to strong US links and our cor-porate tax regime, while in do-mestic terms activity has beendriven by the tech sector andsuccessful attempts at debt re-structuring.

The year 2015 looks like itwill be hard to top in terms ofdeal values, with Irish firms in-volved in some ¤77 billionworth of transactions.

Darren Daly, corporate part-ner and head of technology atlaw firm Byrne Wallace, saysthe Irish tax regime has madeIreland a favoured outboundtarget for US firms and has re-sulted in a high number of

so-called “inversions” (or re-verse mergers), particularly inthe pharmaceutical sector.

For instance, in 2011 US firmJazz acquired Dublin’s AzurPharma in a ¤452 million dealthat saw the company move itscorporate HQ to Ireland, whileanother US multinational Alk-ermes did the same when itbought Irish drug firm Elan.

“Both these and other inver-

sions such as the recently an-nounced Pfizer-Allergan dealhave resulted in significant addi-tional corporate and operation-al activity in Ireland.”

One large pharma mergerthat took place last year thatwas not a tax-based inversionwas Dublin-based Shire’s re-cently completed ¤29 billiontakeover of Baxalta to gain con-trol of its drug portfolio. Othertransactions involving US multi-nationals have had a significantimpact on Irish operations suchas the EMC/Dell transactionwhich was announced last Octo-ber, says Daly.

Another merger thatgrabbed the headlines wasIAG’s takeover of Aer Lingus,which was approved by the Eu-ropean Commission last July,while Betfair’s takeover of Pad-dy Power was a high-profile stra-tegic deal that was driven by in-creased globalisation andchanges to online gambling reg-ulations.

StrategicmergersCloser to home, Daly says therehas been an increasing numberof deals with healthy valua-tions, involving Irish tech com-panies such as FeedHenry(bought by Red Hat in 2014 for¤63.5 million), Cork-basedTrustev (bought last month byUS firm Transunion for ¤40 mil-lion) and Nexala.

“This is very encouraging fortech company founders andtheir venture backers, and weare likely to see further activityin this sector of the market inthe coming year,” said Daly.

Last year, Topaz bought overEsso’s fuels and conveniencebusiness in a deal thought to beworth about ¤75 million shortlybefore Denis O’Brien sold To-paz to Canadian retail giant Ali-mentation Couche-Tard for aprice speculated to be about¤450 million.

Michele Connolly, a partnerwith KPMG, says debt restruc-turing has freed up many do-mestic firms to engage in strate-gic mergers.

“One of the most criticalthings I think has happened inthe last two years would havebeen that a lot of loan sale activi-ty where good businesses of thelikes of Topaz and TV3 [boughtby the Virgin Media Group for¤80 million last year] were con-strained from growing becausethey simply couldn’t sort outtheir debt but through variousdifferent banks selling on theloan, it has enabled them to putthemselves on a sound financialfooting to make them an attrac-tive play for an acquisition.”

BARRYMcCALL

The sale of a company can bemotivated by any number of fac-tors. Where the sale price is theabsolute priority, a trade sale isvery often the best option forthe shareholders.

The company is effectivelyput up for auction with the high-est bidder taking the prize. How-ever, there can be circumstanc-es where a sale to the firm’s ex-isting management team can,even at a reduced price, be pref-erable.

“The current managementshould know the business bet-ter and should be in a positionto pay a fair price for the busi-ness,” says KPMG partnerMichele Connolly.

“But they need to have a fund-ing partner on board to backthem. MBOs can also be quick.The management team shouldbe able to get a funder morecomfortable with the issuesquite quickly. Smaller deals willbe far quicker. One of the thingsshareholders will be looking atis trust in the managementteam to protect their legacy af-ter the sale of the business.”

Speed, reputation and confi-dentiality tend to be the key ad-vantages of MBOs from a ven-dor’s perspective.

“If you have built up a success-ful business over many yearsand you are part of the commu-nity where it is located and youhave no children or others to

pass it on to, you may want tosell it to the management at pos-sibly a lower valuation than youmight get from the trade to guar-antee the continuity of the busi-ness, the local employment itsupports as well as your ownreputation,” says Davy corpo-rate finance director, NicholasO’Gorman.

The fact that the businessowner doesn’t have to share lotsof commercially sensitive andpossibly personal informationwith would-be trade buyers canalso be very attractive.

Capnua Corporate Financeexecutive chairman PaulKeenan agrees. “Sometimesyou might have to take a dis-count of 10 per cent to 20 percent in an MBO but you mighthave to pay that to managementanyway to keep them on boardafter the sale. You also mightnot want your legacy to go to atrade buyer, particularly if it’s afamily business and you want toprotect your name and reputa-tion,” he says.

DownsidesAnother example of where anMBO might be appropriate isthe case of a subsidiary of a larg-er firm which might be difficultto sell as a stand-alone entity.

“The management knowswhere the value is,” says PWCcorporate finance partner Da-vid Tynan. “This could be a situ-ation where the vendor doesn’tbelieve there is a lot of value or

where the management actual-ly is the value in the business.An advertising agency would bea good example of that.”

There are downsides as well,of course, and chief amongthese is the fact that the pricepaid is usually lower than atrade sale – and sometimes itcan be a lot lower. Problems canarise where the managementplays a role similar to a sittingtenant in a house for sale andtries to put off prospective buy-ers in an effort to secure it at alower price.

There are ways to safeguardagainst such risks, as BDO cor-porate finance partner Kathar-ine Byrne points out.

“The appointment of sepa-rate advisers to the sellingshareholders and to the MBOteam is key to safeguarding the

interests of all stakeholders. Italso helps dilute the ‘emotion’of the deal and helps protect thebusiness from a long drawn outprocess,” she says.

Feargal Brennan, partnerand head of corporate with By-rne Wallace, says: “The goodnews is that competent and ex-perienced professional adviserswill be able to guide an MBOteam through the process.

“Several strands of negotia-tions are required and manag-ing multiple stakeholders’ ex-pectations – including internalparties and third party subordi-nated and senior funders –means that without good advicethe scope for missteps is signifi-cant.

“Effective project manage-ment is a large part of the en-deavour and having experi-

enced professionals on boardgreatly reduces the margin forerror. While the community ofprofessionals in this field is rela-tively small, those involved in itdo tend to be very experiencedand capable.”

SuccessfulconclusionDeloitte corporate finance part-ner David O’Flanagan recom-mends separating manage-ment bids from other interest-ed parties.

“It is better that the manage-ment case be looked at in isola-tion from the wider process as itcan be riven with conflicts other-wise. If the management is al-lowed to step into the process,they can put trade buyers off. Ifyou have a situation without acompetitive tension, it’s hard tomake the best price.”

The other risk is that the man-agement bid fails with a conse-quent souring of relationship.

“It depends on whether theMBO is being done with thebacking of the shareholders,”Connolly says. “If you have a sit-uation where it is a consensualarrangement it is always goingto be much easier. Where it getstricky is when the managementlaunches a bid in competitionwith others. The managementis expected to try to continuerunning the business while put-ting together a bid. It can alsobe very tricky if their bid fails.”

This can require the skills of adiplomat to both guide the pro-cess to a successful conclusionand ensure that relationshipsbetween the parties are notdamaged by a failure to make adeal.

“Nothing worth doing is easyand MBOs are certainly are noexception,” Brennan says.

“Navigating through the com-peting interests of manage-ment, sellers and various class-es of funders can require Kiss-inger levels of negotiationskills.

“While the rewards can betremendous, the managementteam has to ensure that through-out the process the target busi-ness doesn’t suffer because ofthe inevitable disruption theprocess itself can cause.”

It is better that themanagementcasebe lookedat inisolationas it canberivenwithconflictsotherwise

Mergers&Acquisitions

MBOsare tricky, so it canbeworthwhilegettingprofessionals toguide theprocess

A forward thinking law firm.

Catherine GuyManaging PartnerDirect: +353 1 691 5678Email: cguy@byrnewallace.com

Feargal BrennanHead of CorporateDirect: +353 1 691 5276Email: fbrennan@byrnewallace.com

www.byrnewallace.com

“These lawyers are outstanding -responsive and practical in their

advice.”*

*Source: Client quote from Chambers & Partners, 2015

‘‘■Navigating through thecompeting interests ofmanagement, sellers andfunders can require highlevels of negotiation skills.PHOTOGRAPH: THINKSTOCK

Irishfirmsinvolvedin¤77bnofdeals

ASpecialReport

TheprosandconsofsellingtomanagementEven if sale is concludedata reducedprice,therearebenefits for businessowners

THE IRISH TIMESFriday, January 22 , 2016 11