Mergers and acquisitions (M&A) are a key part of doing business, often with larger companies acquiring smaller ones, or two companies of equal size merging to create something larger. Here three experts offer their takes on M&A consolidation, key trends from last year and how 2023 is likely to shape up.
New ownership, new energy
An M&A transaction can occur for a number of reasons, says Alan Kelly, managing director (M&A), Focus Capital Partners.
“From a buyer’s perspective, a buyer may identify strategic growth opportunities through acquiring a target. They might be motivated by the opportunity to enter new markets, obtain new customers or access a strong management team with efficient operational practices. Another motivation for a buyer may be to avail of cost synergies,” says Kelly.
“From a seller’s perspective, a transaction is an opportunity to cash out. In a partial sale or a private equity-type investment, a seller may be motivated to avail of growth capital coming into the business to fuel growth, strengthen the management team or to do an acquisition. New ownership can bring new energy into a business and can give a business a new lease of life.”
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Kelly says the cons for a buyer are that sometimes there can be unforeseen challenges in the post-merger integration due to culture clashes, personality clashes or different work practices.
“For a seller, the loss of control and certain restrictions on how the company operates can sometimes be a challenge. Where there is an earn-out component to a transaction it is important that this is structured in a way that doesn’t lead to a misalignment in how the business operates as this can often cause conflict,” he says.
“An M&A transaction can be a major distraction for both a buyer and seller if it is not managed efficiently.”
Reasons to sell… or buy
Mark Quealy, partner M&A at William Fry, says the reasons for mergers and acquisitions activity can vary from sector to sector. Reasons why buyers pursue M&A transactions can include economies of scale and/or synergistic savings which can be achieved by combining several smaller industry players to create one large player.
“The ability to obtain ownership of a strategically important piece of technology or intellectual property portfolio [or similar] through an acquisition of the business which developed it, rather than instead having to develop one’s own competing product or offering,” is sometimes a motivator, Quealy says.
In terms of technology, the Irish ecosystem is maturing, which has resulted in more companies reaching a scale that makes them attractive to acquisition
— Morgan Pierse, Maples Group
Other incentives can include access to new geographical markets, strategically important customers (or suppliers), or talent.
“From a seller perspective, apart from the fact that a sale of the business may be a financially compelling opportunity, reasons to explore a sale can include: an opportunity to accelerate the development of the business, product or team that the seller has created to date, as part of a larger and perhaps more internationally focused organisation; the disposal of a ‘non-core’ business line or product offering, which will allow the seller and its team to focus their efforts on the element of the business which they retain; and retirement or succession planning,” says Quealy.
Challenges to overcome
While it may seem that selling a business can only have positives, there can be challenges. Possible challenges or downsides sometimes associated with M&A activities are varied and often case-specific, says Quealy, but can include a reduction in the level of competition in the relevant product segment or geographic market (particularly if significant market share is already concentrated in the hands of just a few players). The Competition and Consumer Protection Commission has an important role to play in this respect.
“Occasionally, the strategic interests of the buyer may not necessarily be aligned with those of the people who built the business initially or may even give rise to geopolitical considerations,” Quealy says. “For example, recent years have seen increasing focus by the EU and many national governments on ‘foreign investment screening’ – essentially a process of reviewing proposed M&A deals to evaluate the intending purchasers of companies/assets which may be of strategic or political importance. This has affected sectors such as tech and AI, food, utilities and renewables.”
A look back at 2022
In 2022 technology and private equity-backed acquisitions dominated, says Morgan Pierse, partner at Maples Group.
“In terms of technology, the Irish ecosystem is maturing, which has resulted in more companies reaching a scale that makes them attractive to acquisition. Strategic buyers continue to be happy to pay for innovation, new revenue or new geographic expansion. Most Irish technology companies are built to be sold, so there is a happy alignment there,” says Pierse.
“On the private equity side, there is a proliferation of funds looking for quality assets. We are still at the relatively early stages of the evolution of private equity as a liquidity solution for profitable Irish companies moving from family ownership, and we are also seeing an increase in the number of private equity-backed businesses coming to market.”
Mark Quealy noted a continuing trend of activity in the healthcare and life-sciences sector, including some large deals.
“The biggest example of this was Amgen’s $28 billion (€26.17 billion) offer for Horizon Therapeutics, which was announced in December 2022 and is expected to complete later this year,” he says.
Another sector which performed strongly included financial services, especially the insurance and payments sub-sectors.
According to Quealy, the global tech sector suffered a challenging 2022.
“This had an impact on M&A activity in the sector. Certainly, many technology companies did change hands during the year but the performance of publicly quoted tech stocks internationally had a somewhat chilling effect on valuations in the private M&A market.
“This was good news for buyers seeking good-value acquisition targets but was not a welcome development for would-be sellers of tech companies. This created some gaps in parties’ expectations when it came to the pricing of deals.”
What does 2023 hold?
Alan Kelly says buyers are active on some mandates in the engineering services, medical supply and the IT managed service provider (MSP) sectors.
“The quality of Irish engineering services business is continuing to attract overseas buyers. The medical supply and distribution sector continues to be attractive for private equity and we are seeing overseas demand for IT managed service providers, particularly from US buyers.”
Morgan Pierse believes that the increasing institutional ownership of Irish private companies will inevitably drive more activity during 2023, as venture and private equity-backed companies alike trade to bigger institutional buyers.
“Both VC [venture capital] and PE [private equity] funds have prescribed time frames in which they can sell investments to align with their fund rules, so there will be pressure to sell some assets even in a somewhat depressed market,” he says.
“I think the intersection of technology and life sciences with private equity will be a very interesting place to be in 2023 and might drive more transactions than more basic leveraged plays for PE investors. I think the nature of our cohort of scaling private companies here in Ireland will drive continued activity.”
As well as Irish companies buying other Irish companies, or international corporates or investors buying up Irish companies, much of the M&A activity which affects Ireland consists of international entities acquiring other international entities which have a presence in Ireland, says Quealy.
“This is one of the reasons why the Irish M&A market – and the Irish economy more generally – is so sensitive to trends and developments in international M&A.”