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Thursday, 18th April 2024
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Boom to doom or just a soft landing? Back  
David O’ Donnell reviews activity in the Irish corporate finance market over the past year and examines the outlook for 2003, where he forecasts merger and acquisition activity will remain steady as bidders look for real value at the bottom of the market.
The global economic slow down has forced the Irish economy to climb down from the dizzy heights reached in 2000 to a more realistic pace. After almost a decade of hectic growth the Celtic Tiger has caught a cold but has not gone in to meltdown.
A favourable corporation tax regime, well educated workforce, the switch from a reliance on manufacturing to high tech and international financial services and the return to Ireland of experienced Irish professionals from all over the globe, are among some of the factors that have contributed to the growth of the economy.
As we head towards the end of 2002, the year can be best described as a wake up call for all participants in the Irish corporate finance market. Activity in the merger and acquisition, venture capital and stock exchange sectors has grown steadily since the early 1990s with a slowdown becoming evident from around mid 2001. There were no IPOs in 2002 but a healthy stream of candidates ready to abandon the markets. Venture capitalist concentrated on their existing portfolios. Distressed sales and restructurings were the order of the day.

Public to private
Ireland’s largest ever takeover of a public company took place in 2001, at a price of E2.92 billion. This involved the former state-owned telco Eircom. Eircom was floated by the Irish government in 1999 with the sale of the state’s 50.1 per cent, with a major windfall for the state’s coffers. After demerging its cellular network to Vodafone for E4.4 billion, in the largest private deal of the year, Eircom was back on the market in 2001 attracting significant interest from international players. In the final shakeout the Valentia consortium (headed by the former Heinz boss Tony O’Reilly) backed by the private equity from Goldman Sachs, Providence and Soros won the day.
With Eircom setting the stage in 2001, public to private transactions became the only game in town in 2002. Jefferson Smurfit the paper giant went private when acquired by the Chicago private equity based house Madison Dearborn in a deal worth E3.7bn. Green Property also left the market in a management buy out deal worth E1.05 billion.
Educational software player Riverdeep is now also in management buy-out (MBO) mode with the search on for a private equity house to back the existing chief executive. Riverdeep, which for the past two years have been under attack from short sellers, recently left the NASDAQ exchange in a surprise move.
In the same week as the announcement of the Riverdeep MBO, management at Alphyra, the electronics transactions group, announced it’s intention to take the company private. Media speculation suggests that numerous small-caps are about to exit the Irish Stock Exchange on a management buy out ticket. All the indications are that private equity players will be kept busy in 2003 in public to private transactions. This presents real opportunity for foreign players in light of the dearth of Irish private equity houses with capability to fund big-ticket buyouts.
Ireland is a particularly deal-friendly environment, especially when it comes to public-to-private deals. The squeeze-out percentage is 80 per cent, as opposed to the 90 per cent in the UK, and offers can be structured so as pre-existing holdings can be used to get to the 80 per cent. In addition, it is possible to structure a deal by way of scheme of arrangement, which is pretty much the same as in the UK.

Merger and acquisition activity
Foreign companies continue to see Irish businesses as a good buy especially state-owned undertakings. Acquisitions from the state in 2001 included Bank of Scotland’s purchase of ICC bank, the US based petroleum company Tosco’s purchase of the Irish National Petroleum Corporation and the Dutch Rabobank purchase of ACC bank. In 2001 US acquirers are estimated to have spent in excess of E3.53 billion on Irish acquisitions with UK companies spending in excess E500 million.
Foreign acquirers remained busy in the Irish market in 2002. The German multinational Gehe acquired Unicare, an Irish chain of pharmacies for the sum of about E110 million and the Dutch group VNU bought a majority stake in the directory company Golden Pages for E185 million. Irish companies were also busy on the acquisition trail with CRH spending more than E630 million in the first six month of the year. The retail group Musgraves spent E367 million on acquiring Budgens.
AIB is about to complete the disposal of the now infamous AllFirst Bank to M&T Bank and as part of this deal AIB will end up with just over 20 per cent of M&T Bank. This year Bank of Ireland touted a merger with AIB and made an approach to acquire Abbey in the UK but neither of those proposed deals materialised.
2002 followed the pattern of slow down experienced in the second half of 2001. Valuations fell, fund raising on the public and private markets collapsed and many companies were squeezed tightly especially those in the technology sector. Those companies that did not react quickly found themselves having to restructure or going in to receivership and/or liquidation. Many companies in this environment became potential acquisition targets for those in the business of feeding at the bottom of the market.

IPOs
Initial public offering (IPO) activity was non-existent in 2001. The proposed flotation of the national airline carrier Aer Lingus never got off the ground although the Government had invested significant time and money in the project. The only equity listing on an Irish equity market in 2001 was Conduit on the ITEQ (the technology market of the Irish Stock Exchange). Conduit had already listed on the Neuer Markt in June 2000 raising E56 million to fund its information service and software businesses.
The first half of 2002 has not been by any means a good few months for the Irish Stock Exchange. The two candidates for flotation namely Cantrell & Cochrane (a major Irish drinks company) and Spectel (video conferencing) both failed to get off the blocks being jilted at the IPO altar. There is a major shortage of new companies coming to the Irish Stock Exchange. There has been a significant number of companies de-listing over the last few years, eleven having de-listed last year. This trend does not look like it will be reversed in the short term.

Irish Stock Exchange
Originally a unit of the old International Stock Exchange, the Irish Stock Exchange is now fully independent of London, but uses the UKLA Listing Rules with some local rules in its ‘green pages’.
Ireland has its own Takeover Panel, established by statute in 1997 and active on that basis since 1 July 1997. Its rules (‘the Green Book’) resemble the City Code ‘Blue Book’ with some differences of substance as well as of presentation. For example the notes to the rules are not presented with the rules themselves, but are in separate orange pages at the back of the rules.
The key substantive difference between the London Panel and the Irish Takeover Panel is that the Irish Panel is established by statute and is expressly subject to judicial review. It also means that a mandatory Rule 9 bid can be enforced by court order.
Many of the companies listed on the Irish Stock Exchange seek a dual listing on the UKLA with technology companies opting for their dual listing on Nasdaq or the Neuer Markt. Recently however there has been a trend in secondary stocks dropping their UKLA listing and in the case of Riverdeep leaving NASDAQ.
Whilst sceptics may well question, in light of globalisation, the long-term feasibility of the Irish Stock Exchange for quoted Irish companies, it is worth noting that the Irish Stock Exchange is now recognised worldwide as a leading centre for the listing of investment funds.
So where is the Irish Stock Exchange headed? As the European stock markets embark on a consolidation process, its difficult to see how the Irish Stock Exchange will remain attractive for its listed companies who want to reach a wider market.

Prospects for corporate activity
Public quoted companies, mostly in the technology and property sectors have experienced a significant drop in their share prices due to trading conditions and are now potential acquisition targets at bargain prices. Many quoted companies are trading at a discount to net asset and are not showing any signs of making any meaningful returns to investors.
In the private company sector, casualties of the technology downfall are being purchased at prices that are significantly lower than the valuations that they procured on their last round of funding. There will be a busy market in this graveyard sector as the technology industry consolidates in some key areas and existing investors call it a day in those companies.
Growth through acquisition will no longer be the preserve of the big players. Medium size companies can now consolidate their position by buying their weaker competitors and thus acquiring new customer and product bases with revenue stream. There may be a real opportunity to grow rather than waiting for organic growth. Management buyouts will be used to purchase non-core or struggling businesses. Such businesses once unshackled from the central overheads allocation of the big company can focus on delivering real return. Merger and acquisition activity looks set to remain steady in 2003 with bidders expecting real value at the bottom of the market.
It is highly likely that the government will privatise some of the State’s companies in 2003. Revenues generated from such privatisations will be welcomed in the government’s coffers to meet anticipated projected deficits for 2003 and 2004. Candidates include ESB, Bord na Mona, Aer Rianta and Aer Lingus which now appears to be emerging from troubled waters. The method of privatisation remains to be seen but its unlikely to be a high profile flotation like Eircom. A program of privatisations will generate significant activity for all involved in this arena.

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