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M&A activity should pick up in 2002, but challenges remain Back  
Leo Casey predicts Irish M&A activity in 2002 by deal type and industry sector and says that the level of activity should exceed 2001 levels. However, he highlights a challenge facing the large cap and traditionally acquisitive Irish plc's such as CRH and Kerry Group, who will find it difficult to identify increasingly large acquisition targets, which are becoming scarcer.
Predictably, the outlook for Irish corporate activity over the next year or so will be determined to a large extent by trends in the global macroeconomic environment and the fortunes of the US economy in particular. Although it is still early days, recent evidence in this regard is promising. Since the beginning of the year, there has been a considerable body of evidence pointing to a recovery in the US economy and the UK appears to have avoided a full-blown recession. At the time of writing, international stock markets have rallied somewhat reflecting this newfound optimism. Irish economic indicators have been less clear cut but there is more than a smattering of evidence to suggest that activity is improving in a range of sectors including the industrial, property, retail and banking sectors. In broad terms therefore, if the above trends persist, M&A activity in 2002 is likely to exceed the comparatively low levels we saw last year. The prevailing benign interest rate environment will also serve as a positive factor in this regard.
However, it is worth sounding a cautionary note to the above. The increasingly volatile situation in the Middle East, which has driven up oil prices in recent days, has the potential to derail any nascent global recovery with potentially serious knock-on consequences for the Irish economy. Moving from the general to the particular, the following sections consider the Irish M&A landscape by deal type and, where appropriate, by industry sector.

New issues
Having effectively stagnated during 2001, the IPO market is now showing tentative signs of recovery. There were more IPO filings in the US in the first two weeks of March than in any month since the last quarter of 2000, the tail end of the last IPO boom. Assuming an average IPO gestation period of 45 to 60 days, this points to a busy IPO calendar from Q2 2002 onward.
Of course, a burgeoning IPO pipeline of itself does not imply an imminent raft of new listings and institutional investor appetite for new issues clearly remains to be tested. Moreover, unlike many IPOs that marked the dotcom era, investor appetite for IPOs in the short term will almost certainly be restricted to more established companies with proven track records, which can stand up to greater financial scrutiny.

Public company M&A activity
As regards the outlook for public company corporate activity, we are likely to see the continuation of a number of trends that have become prevalent over the past few years, and in particular, since the introduction of the euro in 2000.
Looking at the small cap end of the market, the institutional neglect that has increasingly afflicted many Irish small caps since the introduction of the euro is likely to result in further take-overs over the next twelve months as relatively low ratings render many of these stocks vulnerable. The past two years have seen a number of small cap trade sales to domestic or international buyers such as Kerry Group’s take-over of Golden Vale and Barlo’s acquisition of Athlone Extrusions.
Take-out’s have also occurred by way of public-to-private buy-outs backed by financial buyers such as the buy-out of Adare Printing by Allen Maguire in 2000 and the Candover backed LBO of the Clondalkin Group in 1999. However, it is interesting to note that despite a long anticipated wave of such transactions taking place, the actual deal flow has been very modest and a number of the most recently attempted buy-outs have failed e.g. Dunloe Ewart, Green Property and Marlborough Recruitment. This trend is attributable to a number of issues including the fact that many small/mid cap companies are already relatively highly geared, which makes them less attractive as LBO targets. In addition, public-to-private’s are notoriously complex transactions to put together which results in a relatively higher risk of failure. Nonetheless, for the structural reasons referred to above, we are likely to see a further trickle of take-privates of Irish plcs going forward. Indeed, where historically there might have been a pricing gap as between buy-out consortia and incumbent institutional shareholders, as small cap neglect becomes still further entrenched (as is likely), we may see a softening of price expectations on the part of institutions with a consequent increase in activity.
Turning to the larger end of the market, the large cap and traditionally acquisitive Irish plc’s such as CRH, Kerry Group, Smurfit, IAWS and DCC are likely to continue to be active over the short to medium term as long as asset prices remain relatively attractive. However, a challenge facing many of these companies is that to maintain their historic growth rates, they need to identify increasingly large acquisition targets, which are scarcer and therefore harder to find. Nevertheless, companies such as CRH have successfully circumvented this challenge to date through the sheer volume of acquisitions they carry out year on year (CRH has completed a staggering 79 deals over the past two years).

Privatisations of state assets
It is probably safe to assume that any decisions regarding the possible future privatisation of state assets will be put on hold until some time after the forthcoming General Election. As such, given the long lead-time that such transactions typically involve, it is highly unlikely that any further privatisations will take place until 2003 at the earliest.
It is interesting to note that, in light of the Eircom legacy, the incoming Government may also increasingly seek to pursue alternative privatisation strategies to the traditional IPO route. The proposed search for a strategic partner for Aer Lingus late last year was a case in point.

Private company M&A activity
As a general observation, Irish private company M&A activity was relatively quiet in 2001, due to the general economic slowdown and the depressed nature of equity markets which led to fewer sales of private Irish companies to either trade buyers or MBO teams. However, the reasons for optimism articulated above should result in stronger deal flow over the next 12 months.
In particular, a combination of legislative and regulatory changes last year has resulted in certain sectors currently witnessing high levels of M&A activity. Specifically, an amendment to the BCI media ownership guidelines last year was the catalyst behind the current wave of interest in Irish media assets (especially newspapers and radio stations) among both domestic and foreign buyers. The landmark transaction in this regard was Scottish Radio Holding’s cash acquisition last year of the 76 per cent of Today FM not already owned by it. Further consolidation in this sector this year is a strong bet with assets likely to attract a premium for scarcity and strategic value. In addition, a stronger enforcement of environmental legislation in the waste management industry will almost certainly give rise to further consolidation in this sector in the short to medium term.
The prognosis is less encouraging for the private technology sector although it would appear that the bottom has been reached and that confidence is slowly returning to the sector. Nevertheless, in the short term, the availability of venture capital is likely to continue to be restricted to the few rather than the many and the pricing of private placements is likely to remain depressed.
In this difficult environment, and reflecting an international trend, many Irish technology companies are being forced to re-trench and raise sufficient funds to ‘get by’ as opposed to being able to raise the greater sums of capital required to position them to become fast growing leading international players. This in turn will have exit implications as many of these companies will remain relatively small in size and will therefore only represent modest trade sale candidates in the future. Of course, many other loss-making technology companies will fail to attract future funding at all so, unfortunately, further business failures are a distinct possibility. On the other hand, there is still a sizeable number of excellent Irish technology companies that have succeeded in trading well despite the downturn. These companies are continuing to raise substantial amounts of international venture capital at fair valuations and, should they continue to execute according to plan, they will represent attractive trade sale and/or IPO candidates in the medium term.

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