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Irish M&A deals double in value Back  
M&A activity continues at a fast pace, yet research indicates that almost 50 per cent are not successful. Pat Gorman highlights some common features of the successes.
Irish, European and global mergers and acquisitions activity continues to boom. The most active sectors in Ireland during the first six months of 1999 were financial services, food and drink, and building materials. Some of the larger transactions are listed in the accompanying table and include the Irish Life & Permanent merger, BC Partners’ purchase of C&C and the acquisition of Saville Systems by ADC. The value of Irish M&A transactions in the first six months of 1999 was more than three times the value of deals in the same period in 1998. This is heavily influenced by the Irish Life & Permanent merger, which accounted for over 40% of the value of all deals in the first half. Even after excluding this transaction, the value of M&A deals has almost doubled compared with 1998. It is also significant that the increase in activity is broadly based and not just limited to the top 10% of deals.

Factors Influencing the Inter-national Boom

The factors leading to the record level of international M&A activity include:

l sustained favourable economic performance, particularly in the US.
l the realignment of corporate strategy to focus on core businesses;
l the drive for increased size, which itself is influenced by globalisation and increased competition;
l deregulation of certain industry sectors in Europe and the introduction of the Euro.

For example, M&A activity in the European financial services sector has been gathering pace over the past five years as financial institutions have sought to gain greater critical mass and benefit from technology, branch network and other savings. To date, the activity has been more focused on domestic, rather than cross-border, consolidation as banks vie to become the pre-eminent player in their local market and position themselves for subsequent European cross-border consolidation. This year has seen the much-publicised three-way merger battle between BNP, Paribas and Societe Generale in the French market. There has also been significant banking consolidation within Italy, Spain, Greece and Portugal. Cross-border mergers and investments have been less common. The collapse of the proposed merger between Bank of Ireland and Alliance & Leicester indicates that some difficult regulatory and “soft” issues will need to be carefully handled before there is large-scale cross-border activity in the sector.

Factors Influencing Irish Activity

The favourable factors that facilitated the strong level of Irish M&A activity include the international influences set out above as well as “local” factors such as strong corporate earnings growth, the buoyant economy, a relatively low cost of capital and a low rate of capital gains tax. To date, the poor stock market rating of some second line stocks has not generated significant activity as quickly as had been expected although the buyout bid by the Clondalkin Group management team may lead to more public-to-private deals.

Lots of activity but... 50% of mergers don’t work

International research from a number of sources indicates that about half of all mergers and acquisitions are not successful. In this context, success is defined as increasing shareholder value for the organisations involved. Acquisitions that are successful have a number of common features (apart from the obvious one of not overpaying).

Firstly, a clear strategic rationale is essential - the acquisition may provide greater regional or global presence or provide access to new technology, products or processes. For example, the airline industry has seen a range of alliances designed to provide the participant airline companies with access to global route networks. A similar process is underway in the telecommunications sector. Pharmaceutical companies frequently use mergers and acquisitions as a method of gaining access to new technology and innovative research and products.

Secondly, a concentration on “core competencies” - sticking with business sectors that are known to the acquirer. This core business focus has gained increasing importance in recent years as the ratings of diversified companies have suffered. Fund managers, who essentially determine the ratings for quoted companies, can achieve their own diversity by investing in a portfolio of shares in different sectors - there is now a clear preference for individual companies to concentrate on single business sectors. Many companies which haven’t done that have been downgraded. For example, United Biscuits (UB) recently announced a decision to sell Ross-Youngs, its frozen foods business which it acquired in the mid-1980s and focus on its core business of making McVitie’s biscuits. That decision virtually completes the reversal of the diversification policy started by UB in the 1980s. While the diversification policy was initially successful, problems emerged during the early 1990s and the share’s rating suffered as a result.

Thirdly, a well-planned integration programme must be put in place. In many cases, this process is started too late and is given insufficient attention. The planning and documentation of the integration should be commenced in parallel with the deal process itself. It needs to consider and address issues such as harmonisation of culture, senior manager retention, integration of information technology platforms, differences in operational processes and quality standards. A due diligence process dealing not just with financial issues but also marketing, operational, human resources, production and other areas is an essential ingredient. Committing sufficient company resources and assigning clear responsibility for the implementation of the integration plan are also critical success factors.

Will the M&A Boom Continue?

I think that the most important potential adverse influence on current Irish and European merger activity would be a hiccup in the US economy and stock markets. There have been signs that the boom in US stock markets, buoyant consumer expenditure and very low levels of unemployment are leading to a pick-up in the rate of inflation in the US. The Federal Reserve increased interest rates by 0.25% on 24 August in a move to stifle inflationary pressures. While most market commentators welcomed both the decision to increase rates and the size of that increase, there is a contrary view among some analysts that a larger increase in rates was justified based on US economic conditions.

If the latter view proves to be correct and a number of further US interest rate increases are needed in the months ahead, the US economy may experience the “hard landing” that the Federal Reserve has been trying to avoid. Such an eventuality would have a knock-on effect on the US and other world stock markets. In turn, the level of M&A activity in the US, Europe and Ireland would, most likely, begin to moderate arising from lower company valuations, a lower level of business confidence and higher interest rates. Any such scenario would only begin to impact on M&A activity by mid-2000. In the meantime, 1999 looks like being another record year for merger activity.

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