Debt finance, private equity and corporate investors to the fore for financing M&A deals |
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Respondents were asked the folowing question: ‘Please rank in order of importance the sources of new funds for M&A/ corporate finance transactions of the type covered by this survey’. |
ABN AMRO
• Debt Finance
• Corporate Investors
• Pension Funds
• Government Agencies.
AIB Corporate Finance
• Debt finance from banks
• Reinvested profits
• VC / Private equity / equity fundraisings
• Government agencies
• New corporate bonds
BDO Simpson Xavier
• Corporate Investors / Venture Capital
• Debt finance from banks
• Reinvested Capital Gains
• Private Investors
• Government Agencies
• Pension Funds
• New Issue Corporate Bonds
• Insurance companies
The most important source of funding is venture capital. Venture capital has been great for stimulating deals. With over E500 million of Irish venture capital available currently, excluding external UK or US investment capital, I believe they are going to be the key driver in M&A activity over the next two years.
The second most important form of funding is debt finance from banks. Irish banks have recently become aware of the benefits of cash flow lending to grow businesses and to indeed grow their own margins and fee income. This will be a critical factor in maintaining the momentum in the economy.
Private investors I believe can be overrated. They are an unreliable form of funding moving with the shifts in the stock market or indeed their own view of the economy.
CFM Capital
• Debt finance from banks
• Private investors/VC
• Corporate investors
• Reinvested capital gains
• New issue corporate bonds
• Government agencies
• Pension funds
• Insurance companies
Davy Stockbrokers
• Debt finance from banks
• Pension funds
• Insurance companies
• Corporate investors
• Reinvested capital gains
• New issue corporate bonds
• Private investors
• Government agencies
As a general comment in most M&A transactions the acquiror will seek to finance as much as possible by way of debt rather than new equity which is generally more expensive. Corporate bonds are a realistic alternative but to date have been relatively infrequent in the Irish market. Loan notes are often used as partial consideration to mitigate immediate CGT consequences.
Goodbody Stockbrokers
• Corporate investors
• Debt Finance from banks
• Private investors
• New issue corporate bonds
• Government agencies
• Reinvested capital Gains
Corporate investors (including institutional investors which encompass pension and insurance funds) and debt finance will continue to represent the main source of funding for Irish companies over the next 12 months. Private investors have represented a significant source of funding for technology companies in the last 2-3 years, however in the current environment we expect the level of private funding available to fall over the next 12 months.’
Ernst & Young
• Debt finance from banks
• Corporate investors
• Reinvested capital gains
• New issue corporate bonds
• Private investors
• Pension Funds
• Insurance Companies
• Government Agencies
ICC Bank
The importance of the sources of new funds depends on which markets are most suitable for the particular transaction involved. The sources for NASDAQ quoted companies would be different to those with a full listing on the London Stock Exchange, and again would be different for private companies in Ireland.
The list of sources of funds should include venture capital, and is incomplete without this. Venture capital is quite an important source of funds for growing businesses. Venture capital facilitates M&A activity, increases scope for shareholder investments and exits, and can contribute quite significantly to acquisition and MBO financing. The availability of risk capital, along with market attributes that enable realizations (like ease of entry/exit, like low taxation rates, like interest rate and currency stability), are cornerstones for a vibrant and thriving investment economy. In the case of traditional ‘old economy’ type businesses, retained profits and strong cash flows are important. They encourage financiers to provide borrowing facilities. In most transactions outside the high tech sectors, debt finance usually would provide between 50 per cent and 60 per cent of the transactions requirements, with the balance coming from equity finance. Each form of finance has a role to play, however, in terms of importance, greater risks attach to equity (borrowings tend to be secured), and accordingly also equity also ranks higher in terms of reward.
The role of government agencies can also be important, in terms of fostering and nurturing enterprise, and lobbying for a climate that can facilitate economic development and growth. The IDA and Forbairt have contributed to the growth of businesses generally, and have been supportive for such growth to derive from mergers and acquisitions.
Pension funds and insurance companies adopt risk profiles within their investments appropriate to their requirements. Generally, this embodies preferences for established businesses with consistent performance and lower downside risks. Increasingly in recent years, they have been allocating resources via participations in institutionalized funds raised by specialized venture capital operators. They tend to rely on the skills of the venture capital firm to manage, invest and obtain returns on such funds.
Corporate investors, in the sense where they are the vehicle making an acquisition, are the engine which drives M&A activity. A healthy capital market requires M&A activity, to enable capital to flow towards the most efficient users of capital.
New issue corporate bonds are not very common in the Irish market. They have been used particularly in the United States successfully to raise capital. The tenor and pricing depends on the markets perception of risk. They can be attractive to certain issuers because they do not require redemptions during their term, and by nature have a bullet redemption. In most cases companies seek to replace such bonds with on-going issues. Pricing for some sectors has increased in early 2001 - this looks likely to continue in the current year.
KPMG
Most Irish acquisitions are made by established companies and are financed by bank debt or from the company’s own resources. Over the past few years, we in KPMG Corporate Finance have seen an increasing trend of private investors, who have realised gains by selling a business, re-investing some of the proceeds in new ventures.
NCB Stockbrokers
In terms of importance, we would rank M&A funding sources as follows:
• Debt finance
• Internally generated funds
• New equity
• Corporate investors (trade investors)
• Corporate bonds
The majority of M&A transactions have been funded using a mixture of the acquirer’s own reserves and new debt. In recent years we have been seeing more sophisticated quasi equity products enter the marketplace. Corporate bonds have not become widespread in Ireland, primarily due to scale.
If the economic climate deteriorates we will see lower levels of senior debt funding and movement towards greater equity or quasi equity funding.
PWC
New funds are readily available in Dublin’s capital markets in the form appropriate to the risk profile of transactions being undertaken. Bank debt remains the most important source of finance for acquisitions but there are some signs of increased selectivity among lenders. Many plcs are constrained in their acquisition strategy by the low ratings placed on their stock. Equity funding for technology deals has virtually dried up. |
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Article appeared in the April 2001 issue.
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