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Mid market M&A to remain strong Back  
Mid-market M&A activity levels were strong throughout 2007 and this trend is likely to be maintained throughout 2008, says Pat Gaynor managing director of Bank of Ireland Corporate Banking. Gaynor says the Irish M&A market is less exposed to the impact of the credit crunch than the larger international markets.
The past nine months have been challenging. The market has changed substantially and bankers and clients are adjusting to the new reality. While some market segments are more directly affected than others, trading businesses with strong management teams continue to attract both buyers and banks albeit with lower multiples used in valuations and leverage. Bank of Ireland Corporate Banking remains open for business with a consistent appetite for risk and capacity to deliver a first class service proposition to the mid and wider corporate market.

While the dislocation in credit and money markets is resulting in a rise in credit spreads, a tightening of credit standards and an increase in the cost of borrowing for some corporates, the good news is that this very dislocation has also transformed the outlook for monetary policy. Central Bank rates have already fallen in the US and the UK and now look to have peaked in the Euro area. In addition, well-managed mid market businesses continue to attract support from banks for M&A activity that is responsibly structured and has strong strategic rationale.
Pat Gaynor

Impact of the credit crunch on Irish mid-market M&A
It is important to stress that the Irish M&A market is less exposed to the impact of the credit crunch than the larger international markets as the deal sizes tend to be sub €100 million. The larger leveraged buy-out end of the market is currently facing the bulk of the market’s indigestion and reluctance to lend. However, it cannot be said with certainty that there will be no ripple effect to Irish mid-corporate transactions.

Mid-market M&A activity levels were strong throughout 2007 and this trend is likely to be maintained throughout 2008 but the implication for Irish business of the credit crunch is that credit structures have changed and a rebalancing of the terms and conditions and the quantum of debt in transactions will now take place. This in turn has fed into asset prices and a more realistic approach to raising finance and debt for M&A has resulted. Furthermore, more detailed due diligence is being undertaken by acquirors and that is elongating deal timeframes.

Purchase multiples are being examined more closely reflecting the fact that, to date, the financing package for the deal may be less generous than before and more expensive to service. This reappraisal of asset values comes as a “reality check” for the market and has been broadly welcomed as a necessary and timely correction.

Despite this set-back for financial markets, it is important to point out that the Irish corporate sector has not been impacted significantly in the short term due to the fact that the banking relationships established over a long number of years have sustained through the uncertainty. It is at times like this that the value of a long-term solidly based banking relationship built on solid business fundamentals is realised.

The outlook for the economy & midmarket M&A
The Irish economy grew by 5.3 per cent in 2007, exactly in line with the post-millennium trend. Growth dipped below potential in the second half of the year, however, and this pattern looks set to continue through 2008 and into 2009 with GDP set to expand by 3 per cent this year and 4 per cent in 2009. Ireland has experienced cyclical slowdowns before (most recently 2003-2004) and no doubt will again but each cycle has a different driver with the prime factor behind this cyclical slowdown being falling residential construction.

Despite the dampening of activity, the fundamentals of the Irish economy remain strong which is reflected in Bank of Ireland Corporate Banking’s strong pipeline of Irish mid-market transactions. During quarter one of 2008, domestic M&A activity declined by value from the corresponding period in 2007 but actually increased by volume (up by 20 to 54) demonstrating the ongoing robustness of the market.

Bank of Ireland Corporate Banking expects deal activity to remain strong throughout the remainder of the year driven by a broad range of factors including investor diversification, succession issues, wealth extraction, moderating valuations, maturing/consolidating sectors and the ongoing interest of international buyers who view Ireland as an attractive investment location.

This dynamic is compounded by the fact that Irish and UK equity markets have experienced a sharp de-rating over the last twelve months. This is likely to result in an increase in the number of public-to-private transactions particularly for small and medium cap companies with strong underlying operating fundamentals whose overall value is not prohibitive to debt financing in the current market. Already this year, companies such as Horizon plc and Iona Technologies plc have been the subject of takeover approaches.

Bank of Ireland Corporate Banking has built a business on the premise of strong relationships both old and new and these are showing very significant resilience at present. In addition, the current uncertainty inevitably leads businesses to seek out quality financial service providers and that has also ensured a strong flow of new business opportunities from a range of sources during the past nine months. Indeed, the current debt environment has facilitated the entrance of companies such as Burdale Financial Limited (a wholly owned subsidiary of Bank of Ireland) into the Irish M&A environment through their comprehensive asset based lending product as evidenced by the recent MBO funding of the Glanbia Meats business from Glanbia Plc.

The key message is that the economy continues to grow despite the turbulence on the macro front and some uncertainty/reassessment of asset values. However, the salient lesson of the current Credit Crunch is that Ireland is part of a globalised economy making us vulnerable to events apparently unrelated to our own economic performance. For now it would appear that we are in for a period of correction but well managed businesses with sustainable business models will continue to thrive in any circumstances and will continue to get support from banks.

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