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Corporate Finance Review & Outlook: MBOs and public to privates dominated deals in 2003 but will 2004 mark the return of the IPO ? Back  
MBOs and de-listings by Alphyra and Riverdeep, amongst others, dominated the headlines in 2003, writes David O’Donnell, and he expects this trend to continue into 2004, adding that despite many pundits predicting the return of the IPO sometime this year, he believes that it won’t happen just yet.
FFor those doing deals (whether as principal or intermediary), 2003 was a perplexing year. Iraq and an ailing global economy did not create the best environment for creating deals. Deal flow on the whole was slow early in the year, catching up later. What marked the year were public-to-privates and MBOs.

Public to privates
The exodus from the Irish Stock Exchange continued unabated in 2003. Names such as Conduit, Alphyra, Riverdeep, Arnotts and Sherry Fitzgerald dropped their listings. Other companies, especially at the small cap level were the subject of actual or imagined interest. This was unwelcome news for the Stock Exchange but did keep those in corporate finance busy. Many of these departures were in the form of some guise of MBO.

Management felt that the companies would fare better in the short to medium term away from the regulations and perceived short-termism of the public markets. In the case of Arnotts, management and employees responded to the unwelcome approaches of an outside bidder. Riverdeep, under attack from short sellers and the management, was sold to the management. Management had offered to sell its shareholding to anyone who would pay 10 per cent or more than management was offering for the company. The management at Alphyra did not embrace the US First Data

Corporation but opted instead to work with Benchmark to do an MBO.
Irish banks have shown an increasing appetite to finance these transactions. From management’s perspective, bank debt has proved an attractive source of finance with the current low rates of interest. Typically the debt is leveraged on the assets of the target group. It remains to be seen how quickly some of these leveraged deals will have to be refinanced.

Any private equity or VC investors will, as always, be looking for an exit within a defined time period and whether this is by way of trade sale or a return to the stock markets remains to be seen. In the short term, a return to the stock markets looks unlikely.

Will there be more quoted companies going down the delisting route in 2004? Who knows, but, if statistics over the last two years are any thing to go by, there should be another half a dozen public-to-privates on the horizon.

Management buy-outs and buy-ins
In the context of private companies, both management buy-outs and buy-ins were in vogue in 2003. You won’t necessarily read about all of these deals in the newspapers as they often happen without much fuss and publicity at the request of the parties.

Many of the deals are driven by the need for successful Irish businesses to find new owners whether from existing management (MBO), outside management (MBI) or a combination of both (BIMBO).

The businesses are very often family-owned or owned by a single individual who wishes to cash in after many years of running and owning the business. There may be no family member to step forward and run the business. The MBO/MBI concept if carefully structured may produce a neat solution to the succession issue and allow the owner to reap the rewards for the years of toil. These deals require significant planning from the perspective of both parties as the issues can be varied and complex. The process can be stressful and sometimes protracted for the principals involved.

The buy out/in process is not for the faint hearted but with the right advice and planning they can be a rewarding experience for management. Many of the pundits predict continuing and increased activity in the MBO sector for 2004.

IPOs
2003 was bereft of any IPOs. Depending on which of the commentators you believe, there may be some IPO activity or none at all in 2004. Obviously the return of the IPO would herald a return in confidence to the Irish stock market and would be music to the ears of the investment bankers.

Prospective candidates might include the likes of Aer Lingus, C&C, Eircom and Smurfit. Aer Lingus is back in the black and the timing might be just right for the State to realise the asset. C&C, Eircom and Smurfit have all private equity backers who will no doubt seize the opportunity to exit by way of flotation if the opportunity arises.

The return of IPOs to the Irish stock market is largely dependent on the appetite of institutional investors and whether there is a revival in confidence on the public markets in Wall Street and London.

Venture capital
VC investment remained slow and picky in 2003 with the scars of the dotcom era still showing. Portfolio weeding is the name of the game with follow-on investment rounds for the chosen few companies and the liquidator’s den or fire sale for the remaining companies.

There are some indications that investment levels in technology companies are on the increase in the US. If so, this may serve as a stimulus for the Irish venture capital market going back in to the tech section.

Another sector that is much talked for early stage investment is biotech, but investment to date through venture capital funds has been slow. Biotech is a long-term play, requiring deep pockets, as well as patience, for funding of follow-on rounds.

There are no indications that VC investment in early stage companies will increase significantly in 2004 despite there being significant VC funds available for investment. Perhaps VCs might take a more active involvement in early-stage companies from the time that the investment is made.

Admittedly this approach has a certain cost to it in terms of the venture capitalists time but perhaps that is what the early-stage companies may need more than money.

Legislative developments
2003 saw two important Irish legislative developments affecting the corporate sector.
Part 3 of the Competition Act 2002 came in to force on 1 January 2003. In brief, the Act provides that a merger or acquisition that comes within the scope of the Act must be notified to and cleared by the Competition Authority. One needs to be careful to examine every transaction to ascertain whether or not it is caught by the requirement to notify. What may look like a co-investment in an early stage company might come within the parameters of joint venture and depending on the circumstances may require notification.

The Companies (Auditing and Accounting) Act was finally enacted in late December 2003, with significant revisions from what was first published. The Act requires the directors of all large Irish companies to complete an annual compliance statement, confirming the company’s procedures for compliance with all relevant regulatory legislation and regulations. The auditors now have a duty to review this directors’ compliance statement each year and state whether in their view, the compliance statement is fair and reasonable. Most observers of the law (perhaps with the exception of auditors) have come to the view that the new law puts form on the substance of the pre-existing law rather than imposing new duties on company directors.

The EU Financial Services Action Plan continues unabated, with the EU Commission aiming to finalise the financial market rules before the accession of the new Member States. Two key Directives were adopted in 2003 (Market Abuse, Prospectus), and two more key Directives (Investment Services, Transparency Obligations of public companies) are expected early this year.

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