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Boom time for sellers, and buyers Back  
Pat Gorman analyses the economic and accounting factors impinging on M&A
Irish M&A activity reached a new peak in 1998 amid very favourable conditions in the Irish economy. Despite a temporary lull between August and October arising from the emerging markets crisis, a new record was also set in 1998 for worldwide cross-border mergers and acquisitions. In Ireland, much of the activity focused on financial services, pharmaceuticals, construction, food and drinks sectors, while international activity was fuelled by financial services, telecommunications and the oil and gas sectors.

Great time for sellers
1998 was a boom time for sellers of Irish businesses. The favourable factors that created this environment - like high valuation multiples, a 20 per cent capital gains tax rate, buoyant business confidence, low interest rates and the ready availability of financing to purchasers - still exist. As a result, there is a very positive outlook for Irish entrepreneurs thinking of selling their businesses in 1999. This view is strengthened by the fact that UK companies, despite the sluggish growth in the economy, were the world’s biggest buyers of foreign businesses in 1998. Among the sizeable purchases of Irish private companies by UK businesses during 1998 were the acquisition of Walsh Western Logistics by NFC plc, Connacht Court Group by Johnson Services Group plc and the sale of the Northern Ireland-based Unipork Limited to Unigate plc. The indications are that this strong acquisition focus by UK companies will continue. While Irish companies may lack the scale of continental businesses, they have many attractions for UK purchasers such as exposure to a booming economy, participation in Euroland, a similar business and regulatory environment, language and cultural similarities.

Great time for buyers?
So has it been a good time for buyers too? For buyers with the ability to add value to acquired businesses, whether through management expertise, improved purchasing power, expansion of distribution channels or sustainable cost reductions, there is a clear rationale for acquiring businesses that help to fulfil their strategic objectives. In addition, the cost of capital has been falling for some time, thereby enabling acquirers to pay higher prices. While prices may be very high in some sectors, there are still individual companies that offer value for a suitable acquirer. Heiton Holdings’ first move into the competitive British market was the acquisition of a niche player, Cooper Clarke Group plc, rather than a general merchanting business in which scale and purchasing power in Britain are critical for success.

Impact of the euro
The impact of the euro on Irish M&A activity is difficult to assess with any degree of certainty. However, it is clear that overseas interest in Irish businesses from non-Euroland companies has intensified - while some of this interest may be attributed to other factors, such as the strength of the Irish economy, some is undoubtedly due to a desire to gain exposure to companies in a euro-denominated country. On the acquisitions side, there is very little evidence that EMU prompted a significant change in the resources spent by Irish companies on continental European businesses. In fact, acquisition activity was dominated by domestic purchases and acquisitions in the UK and US.

The euro will, in time, have the effect of increasing M&A activity as price harmonisation takes effect across Euroland. Company comparisons will become easier and relative profitability more transparent. With no currency exchange risk , this should lead to a greater level of mergers between Irish and other Euroland companies.

To float or not to float?
There has been a lot of publicity about the focus by investment analysts on the larger Irish quoted companies post euro. The ratings now being given to a number of the smaller quoted companies are undoubtedly low, a factor which may generate acquisition or management buy-out activity. This is not a new or a uniquely Irish phenomenon - smaller quoted companies in the UK have been experiencing this relative lack of interest by institutions for some time and many have been taken private for this reason in the last eighteen months. It leads to an important strategic issue for the owners of many private companies with strong growth prospects, some of whom may now need to re-evaluate a long-held objective of floating on the stock exchange. A key consideration is whether the company, if it were quoted, would have the ability to develop the scale and critical mass necessary to be regarded as a large business, not in an Irish but in a European context. If this is not likely, owners of private companies should consider options other than a flotation. These may include strategic alliance, venture capital funding or a trade sale.

New considerations for finance directors
Finance directors now have a new issue to consider when embarking on acquisitions. Financial Reporting Statement 10 requires that any goodwill associated with an acquisition be amortised through the profit and loss account, thereby reducing earnings per share (‘EPS’). For companies in which EPS is one of the headline indicators for evaluating performance, this requirement may lead to a reluctance to pay a high premium over net assets even if the economic fundamentals indicate that a deal would increase shareholder value. However, this is likely only to be a short-term effect because of the increasing application of shareholder value (‘SV’) and economic value management (‘EVM’) principles in Irish companies. SV and EVM focus on cash and ‘look through’ non-cash items such as goodwill amortisation. As a result there will be a reducing emphasis on accounting-based performance indicators such as EPS, in coming years.

Outlook for 1999
Takeover activity is expected to continue to gather momentum because the outlook for the key determinants of activity such as business confidence, funding costs, tax rates and economic growth remain strong, and further industry consolidation and a drive to achieve greater critical mass should help to generate a considerable level of M&A activity during 1999.

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