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The stars are well aligned for a bumper mergers and acquisitions market in 2005 Back  
All the ingredients are in place for a bumper mergers and acquisitions market this year, writes Peter Crowley, as confidence, liquidity, and the desire to exit or expand ventures conspire to create the ideal environment for deal making. He says that the primary driver of activity is undoubtedly the combination of a 'hot' LBO debt market, with an unprecedented ‘wall’ of private equity, both institutional and private.
Even though it feels like we have not drawn breath in IBI for the last four to five years we are gearing up for what promises to be a hugely active 2005.

Peter Crowley

The last few years seem to have gone by in a flash as we witnessed the dramatic rise and fall of the technology bubble. This was followed by a wave of take-private transactions where the market hangover post the dotcom bubble created many opportunities for private equity firms to back management and promoter teams. This saw many household names such as Smurfit, eircom, Green Property and Arnotts exiting the public company arena. While this trend has largely dissipated as markets have recovered, further take-privates cannot be ruled out as deal hungry private equity firms continue to aggressively seek homes for their money. Last year, the global markets recovered their composure in the wake of the Iraq conflict and SARS. The Irish market in particular witnessed a surge in confidence, with the ISEQ beating all major indices and posting a 26 per cent gain in 2004. The IPO markets re-opened after a prolonged period of inactivity with the successful flotations of eircom and C&C.

This renewed mood of confidence has also fuelled an increase in M&A activity. Banco Santander’s audacious ?8 billion take-over of Abbey National and Proctor and Gamble’s US$57 billion bid for Gillette stand out as landmark deals in this regard. The domestic market has been no exception, with Grafton Group’s acquisition of Heiton Holdings and Den Danske Bank’s take-out of National Irish Bank.

So what does all this say about the outlook for 2005? I believe the ingredients are in place for a bumper level of activity due to an almost perfect alignment of what I see as key ‘stars’ for deal-making, namely:
• Confidence – both at investor and corporate management level which encourages boldness of thought and action;
• Finance – both debt and equity (particularly private equity) markets are awash with an unprecedented level of liquidity, more of which below;
• Deal flow – quite apart for the potential for large scale public market deals, the impact of Tigers I and II has created a swathe of large scale private Irish companies backed by people keen to either expand or exit.
This development, allied to a generational change such as that evident in the Superquinn case, means that there are plenty of exciting opportunities of scale coming down the track in the private company arena. This is a new and growing phenomenon.

In my view, the primary driver of activity is undoubtedly the combination of a ‘hot’ LBO debt market with an unprecedented ‘wall’ of private equity, both institutional and private.

The specialist LBO debt providers are reflecting their healthy past experience and current confidence in stretching debt packages to historically large multiples of EBITDA. In some cases this is being accompanied by creative solutions in terms of pay and non-cash pay mezzanine/high yield strips outside the traditional syndicated debt structure. 2004 saw unprecedented levels of LBO debt (over €45 billion was raised in Europe, almost three times the quantum raised in 2000).

Equally on the equity side of the equation the lights are green. The increased allocation of institutional portfolios to the private equity market has created a veritable ocean of available capital. This in turn has driven down expected returns and made the large-scale private equity houses competitive purchasers against both corporate buyers and the IPO market. Of more interest locally is the fact that the emergence of new sources of high net worth (HNW) private equity has more than offset the closure of some of the traditional private equity providers (with ICC in disposal mode and Hibernia closed down). These HNW investors either operate directly (Sean Quinn, for example), via accumulators such as the private banks and brokers or alongside ‘dealer principals’ such as Lioncourt Capital, Quinlan Private and Boundary Capital. In certain cases, HNW money comes together via ad hoc consortia such as that put together to finance the Superquinn deal. While heavily property orientated, this HNW capital is increasingly attracted to the returns available in situations where there is a greater degree of operating risk as opposed to pure property plays.

Irish candidates
While the IPO market remains open there may not be a long list of Irish candidates in the near term – though in time many take-private candidates of size, such as Smurfit, are likely to return to the market. In addition, with a less bureaucratic admission process and more relaxed regulatory process, the Alternative Investment Market (AIM) has emerged as a viable market for smaller Irish companies seeking the benefits of a listing.
The Irish Stock Exchange is responding to this phenomenon with the re-launch of its own smaller companies market.

In summary, all of this creates a very strong environment for vendors of businesses to realise a good price. Equally for purchasers with a clear idea of where value can be unlocked and who do not listen solely to the ‘siren’ calls of the debt market in selecting and pricing deals, the availability of a wide range of financial instruments enables the creation of attractive equity returns despite the competitive nature of the market. As always, an adviser with a cool head, and strong execution skills can make the difference! Roll on 2005.

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