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Bear market will trigger different reasons for M&A Back  
Opportunities for M&A in the international context still abound, but the switch from a bull to a bear market means that the drivers for making the deal have changed. According to Ivan Murphy the rationale now will be more on restructuring to save costs and improve performance to weather out the storm.
These are turbulent times for those involved in the M&A business. The last few years have seen a dramatic upsurge in both the number and value of M&A transactions internationally. The total value of deals rose to $3.5 trillion last year from $3.3 trillion in 1999. This level is unlikely to be repeated this year for a number of reasons.

The main factors behind the decline in the current year are the fall in share prices and the consequent reduction in corporate valuations together with the tightening of the credit markets. However the M&A market tends to carry on regardless of economic conditions and in a downturn, it is not the absolute volume of transactions that is effected but rather the type of deal that becomes different.

While it is difficult to generalise on such a wide subject, some of the issues currently impacting on the M&A market are set out below.

IPO market
Companies typically go to the public markets to access capital to fund development. This is a market that has been hit hard. First quarter 2001 IPO market statistics make for some sobering reading. In the US only 17 companies came to the market in the first three months of this year while 78 companies who had filed pre-registration statements withdrew their filings. Even for the seventeen who actually got away it has been a rocky ride. Many were forced to cut the size of their IPO and 11 of the 17 finished the quarter below their IPO price.

The upshot of this is that there are less companies in a position to pursue well-funded acquisition strategies or indeed to use their equity as currency. Companies for whom the IPO window may be closed for at least the next six months may consider merging or selling to strategic partners as an alternative.

Cash rather than paper
A feature of the M&A market last year was the extensive use of highly rated equity to fund transactions. Approximately 60 per cent of all mergers in the US were completed this way, most notably the big AOL/Time Warner merger. Deals like this will be less common as corporate equity is no longer as attractive a currency particularly in TMT sectors which accounted for 40 per cent of global mergers in 2000.

This year companies with strong cash flow are well positioned to acquire others while conversely, those with low price-to-book ratios and private companies needing funding are the most likely targets.

Reduced credit availability
Banks who seemed happy to bankroll large corporate acquisitions have now pulled in their horns and are less likely to fund highly leveraged proposals. At the end of an extended bull market run, the banks are tending to pull back with credit lines and to seek to refinance wherever possible with money market instruments. This means that raising huge amounts of cash for the big deal is increasingly difficult, particularly in an environment where there is uncertainty over corporate earnings.

US accounting changes
The proposed rule changes on the amortization of goodwill, the treatment of intangible assets and the elimination of pooling should all have a positive effect on the M&A market and the ability of US companies to acquire competitors. The current proposals appear to provide an incentive for companies to grow by acquisition and merger while boosting profits as they will no longer be required to amortize goodwill.

The issue of EU involvement in the regulation of mergers has become a sore point with many corporates and corporate finance practitioners. Strong antitrust enforcement has lead Brussels competition watchdogs to cause problems for some of the largest M&A deals in Europe in the last couple of years. Typically companies and their advisers prepare meticulously to try and second guess any regulatory obstacles that may arise. However one can never be absolutely sure in advance.

How is Europe different?
The European M&A market is somewhat different to that of the US. Despite the introduction of the euro and the drive towards regulatory harmony, the EU is still essentially a collection of different states where different customs, business practices, fiscal regimes and of course languages still restrict the development of cross-border M&A.

The biggest deal in Europe in 2000 was the hostile bid by Vodafone for Mannesman. This was the first successful hostile bid by a UK company for a German counterpart. The notable feature here was that a prized German national asset could be taken over with only a very small amount of political resistance. However it appears to have been a once off-in the sense that it has not sparked a wave of similar type bids for German companies by foreigners. The biggest deal announced in Europe so far this year was the •23.4 billion agreed takeover by Allianz of Dresdner Bank.

Implications for Ireland?
What does all of this mean for the Irish market? Clearly any general reduction in corporate valuations does eventually translate itself into the Irish market. If widget manufacturers generally were trading on 20 times earnings last year but only 15 times this year, then an Irish business owner in that industry can expect that the valuation of his business has reduced by the same quantum. In some industries this is more pronounced than others.

M&A in an Irish context usually means the sale of private companies and for those companies it is common for single digit exit multiples to apply and although these may vary up and down over time the variance may not be huge, regardless of stock market volatility.

Taxation considerations have a big impact here and the introduction of the 20 per cent capital gains tax has made it more attractive to business owners reaching retirement age to sell the company. In Germany the equivalent charge is 50 per cent although this is due to be eliminated next year.

For the larger Irish corporates such as CRH and Elan, the focus tends to be on acquiring outside of Ireland. Each company has a successful history in this area and no doubt will continue to find targets in their respective industries. To date the largest acquisitions of Irish companies have been in the telecoms sector with ESAT and (assuming ratification by Eircom shareholders) Eircell going to larger European players.

The M&A market is clearly effected by the more unsettled stock market environment at present. However a bear market produces its own particular drivers of M&A activity not the least of which is the need for restructuring, refocusing and disposals of non-core activities. Thus there will be no shortage of deals.

The question of whether a bid for any of our large quoted companies is likely to be forthcoming has been speculated on at length in the media here. The popular assumption, that a bid for one of the banks for example, would be ‘politically unacceptable’ has yet to be tested. What is clear after the Mannesman takeover is that in an EU context it is difficult for individual states to throw up the national interest argument as an effective defence strategy. Sacred cows ain’t what they used to be!

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