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Private companies to remain the key driver of Irish corporate activity Back  
The current business environment provides a strong platform for a continued increase in corporate activity amongst Irish companies, writes Ted Webb, and with a relatively benign interest rate, high-growth environment and significant market confidence, he expects recent high levels of M&A activity to continue. Moreover, he believes that privately-owned companies will continue to be key drivers of this activity.
Ireland’s public companies might get most of the publicity given the doubling in value of the Irish stock market over the past three years, but Ireland’s stellar economic performance is firmly rooted in the success of the country’s burgeoning ranks of private and family-owned companies.

And the recent Mergermarket survey of such companies with annual turnover of up to €150 million conducted for IBI Corporate Finance, Bank of Ireland Private Banking, A&L Goodbody and Kennelly & Twomey shows that confidence among Irish private companies remains high. Fifty-eight per cent of the respondents to the survey expressed confidence about the next 12 months while almost 75 per cent said they believed that the value of their company will grow over the same period.

There is a strong appetite amongst Irish private companies to become involved in corporate deals with almost one-third of the respondents indicating that they expect to engage in M&A activity over the next three years. The survey also shows that Irish businesses have little fear of doing deals with international businesses and there are a sizeable number of highly acquisitive local companies who will continue to build market share, diversify and look for access to new markets through acquisitions.

Family-controlled entities account for a high portion of Irish privately-owned companies and most employ professional management teams. The mix of family ownership and professional management gives such companies a strong sense of identity and continuity, as well as adding an outside perspective and depth to management.
The ownership profile of a company can have a significant bearing on succession issues, particularly for family businesses. Of the companies surveyed, a significant majority (55 per cent) noted the likely transfer of ownership of the business to a third party in a disposal scenario.

In our experience, the disposal of a family business can be a highly emotional event, particularly where ownership is transferred to an external party. In an increasing number of instances, alternative disposal options are being considered, including management buy-out transactions or partial disposals. These options can give a greater level of continuity to a business and ease the transition process.

Merger, acquisition & disposal activity amongst private companies
With strong macro-economic fundamentals and an open, pro-business environment, Ireland attracts significant interest from international companies looking to grow organically or by acquisition. Cross-border acquisition activity is typically driven by strategic rationale or the degree to which synergies can be extracted from the acquisition.
Over the past year, a number of major Irish privately-owned companies have been acquired by international consolidators, including Brindley Advertising (acquired by Aegis Group plc), Stockbyte (acquired by Getty Images, Inc.), Sterile Technologies Group (acquired by Stericycle, Inc.), Conduit (acquired by InfoNXX, Inc.) and Needahotel.com (acquired by Cendant Corporation). Over 50 per cent of the business leaders surveyed identified foreign companies as potential buyers of their businesses with the UK and the US the most likely sources of buyers.
Domestic corporate activity remains strong as a number of highly acquisitive local companies continue to build scale, diversify or seek access to new markets. The media, food & beverage, retail and construction sectors in particular are currently the most active sectors from a mergers and acquisitions perspective. And remember, for every private company deal that is publicly announced, there are many others that never reach the business pages.
Almost one-third (29 per cent) of all business leaders surveyed expressed a ‘very likely’ intention to participate in merger and acquisition activity over the next three years. This will ensure that future activity continues at recent levels. We are aware of a significant number of Irish private companies with ambitious, acquisition-based expansion strategies who intend executing them over the short-term.

Valuations will be a key driver of merger, acquisition and disposal activity going forward. Seventy-one per cent of respondents to Mergermarket’s survey expect valuations to increase over the next year. Valuations in general have improved over the past three to five years driven by a number of factors, including improvements in business earnings, ready availability of bank debt, a bullish private equity community and improvements in the macro-economic backdrop.

The disposal of a private company
There are a number of reasons why businesses are sold, including succession issues, wealth extraction or change of lifestyle. As well as these internal-focused issues, market forces, such as valuation, consolidation, increased competition, legislative changes or an unsolicited approach, may also have a part to play.

While a sizeable portion of companies are sold to trade buyers, the sale of a business to an incumbent management team can also be an attractive option. While the mechanics of a sale to a management team are broadly similar to a trade sale, there are certain features of a management buy-out that are noteworthy. As a general rule, as the management team is fully aware of the operations of the business, the ownership transition is typically smoother.

While the level of consideration agreed for the business in a disposal scenario is important, the structure and timing of the payments are of equal importance. Private company disposals often involve the payment of an agreed amount up-front with further payments conditional upon the business achieving agreed financial targets. In circumstances where the value of the business being sold is benchmarked against future performance, contingent payments may actually be in the best interests of the shareholders as they enable them to extract maximum value from the disposal process.

One of the key objectives in the disposal of a business is to maximise value for the company shareholders. Critical to achieving this is the upfront identification of potential issues in the process. Preparation can greatly add to the valuation achieved and facilitate a more streamlined process and the smooth transition to new ownership.

Most shareholders in privately-owned companies will only participate in a company disposal process once; therefore, taking external professional advice is very important in order to achieve the best possible deal. The best result (i.e. highest valuation on the most favourable terms) will always be obtained from running a tightly managed sales process.
As the results of the survey illustrate, an experienced corporate finance adviser is critical to the success of private company mergers, acquisitions or disposals. The results also highlight the benefit of having an adviser who ‘knows your business’ (with 90 per cent of respondents highlighting the importance of an established adviser relationship); in our experience, strong adviser/shareholder relationships are critical to ensure a favourable outcome in any corporate transaction.

But the survey also shows that Irish family-owned companies need to devote more time to succession planning with more than three-quarters of respondents indicating that they do not have a definite succession plan in place. This can leave businesses potentially highly exposed to legal and tax risks - and not least potential conflict between family members.

The current business environment provides a strong platform for a continued increase in corporate activity amongst Irish companies; with a relatively benign interest rate and high-growth environment and significant market confidence, we expect recent high levels of M&A activity to continue. With a central role in Irish business, we believe that privately-owned companies will continue to be key drivers of this activity.

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