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Credit crisis impact on private equity to hit M&A Back  
Merger and acquisition activity is likely to be hit in 2008 because of the drying up of private equity deals, due to tightening lending criteria. The credit crisis is expected to impact upon private equity firms’ ability to raise capital to finance deals, paving the way for deals by trade buyers to retake main stage. The deal aims to make more efficient use of the bank’s capital.
The expansion experienced in corporate finance as a result of merger and acquisition (M&A) activity, driven in part by an aggressive private equity market, is coming to an end as private equity firms may struggle to raise sufficient capital to finance deals.

Brian O’Kelly, head of corporate finance at Goodbody Stockbrokers, feels that 2008 will benefit trade buyers rather than private equity firms. ‘Looking out to 2008 we believe that trade buyers will return to the fore in M&A as the global credit crunch impacts on the leverage available to private equity. This will inevitably reduce their ability to compete on price with buyers who can extract synergies and/or strategic benefits from particular acquisitions,’ he said.

Not withstanding the drying up of private equity deals, Alan Doherty, managing director of AIB Corporate Finance, expects the corporate finance sector to remain buoyant in 2008. ‘The Irish corporate finance market activity is set to remain buoyant in 2008 given the relatively strong fundamentals in place. In particular, although going through a steep change, the Irish economy remains a strong performer conducive to investment with above-average forecast economic growth rates. Secondly, many Irish corporates have significant cash resources on their balance sheets and coupled with very strong management teams with strong track records encompassing acquisition-led growth have the ability and desire to pursue further acquisitions,’ he said.

According to Doherty, the majority of Irish M&A activity is likely to be driven by domestic competitors as many international firms are not interest in deals of less than €250 million. ‘Many of the International private equity houses will only look at deals with a value in excess of €250 million, thereby excluding most of the M&A opportunities that arise in this country,’ he said.

Another reason for less international competition in the corporate finance sector will be the reduced availability of credit in the markets, as a result of the credit and liquidity crisis. ‘At all ends of the market, valuations will likely to be somewhat lower than has been the case up until recently reflecting the change in the overall environment. While the credit crunch will have an impact on M&A, particularly as a result of stricter lending criteria, this is unlikely to significantly impact those medium-sized deals that are most common in the Irish market. As regards the larger deals, while there will be some reassessment and restructuring many of the aggressive ones are likely to be postponed, said Doherty. O’Kelly has also noted the evolution of the private equity market in Ireland from a buyer to a seller.

‘As the private equity sector has developed, it has become a seller as well as a buyer. So just as eircom and Jury’s Hotels were taken private last year, 2007 saw those companies sell off businesses to other investors – eircom sold Mastco for €155 million to a joint venture between Goodbody Private Clients and Threefold called Towercom, while Jury’s sold off Jury’s Inns to Quinlan Private,’ he said.

However, that is not to say the private equity is no longer a buyer, said O’Kelly, ‘Private equity was also a buyer – one notable transaction was the sale of Mater Private Hospital to Capvest. This, as well as the sale of Mastco, reflected one of the sectoral trends - an interest in infrastructure assets in the widest sense.’

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