Corporate finance specialist Joe Devine looks back on the deals, mergers and acquisitions that made the headlines during 2003.

The past year began in a similar vein to 2002 on mergers and acquisitions (M&A) with a number of take-private transactions fuelled by cheap market valuations and easy money.

Activity quietened around the time of the Iraqi conflict, becoming busier in the second half as businesses began "right shaping" leading into an expected upturn with the First Active sale to Royal Bank of Scotland (RBS) undoubtedly being the deal of the year.

The year ended with a flourish, especially in the food and food services sector, where six deals were agreed in December.

Although the value of deals in 2003 was €7.5 billion compared to €12.4 billion in 2002, the number of disclosed deals actually rose from 153 in 2002 to 205 in 2003.

The past year was marked by a number of significant deals but unlike 2002 there were no multibillion-plus deals like Smurfit, Green Property and Allfirst.

The first half was slow, affected by the uncertainty of the Iraqi conflict and other economic influences. Since May, however, the trend has been positive and the €2.3 billion worth of deals in the last quarter of 2003 was up significantly on the €800 million worth in the comparable quarter in 2002, and was the most active quarter in 2003.

The 10 largest deals accounted for 68 per cent of the total activity and were:

the taking private of Arnotts (€255 million) and Riverdeep (€320 million);

the €887 million First Active sale to Royal Bank of Scotland;

CRH's €693 million acquisition of Cementbouw - its biggest acquisition yet;

the sale of €913 million worth of assets by Elan;

Galen's acquisition of certain Pfizer assets for €326 million;

C&C's sale of its Italian assets to Campari for €220 million;

the sale of Minmet's Peruvian assets for €321 million.

In 2002, the 10 largest deals accounted for 79 per cent of deal value. The strategic rationale for deals varied from consolidation in various sectors like financial services - i.e. RBS/First Active - to the continuing exploitation of growth strategies through large and bolt-on acquisitions by CRH, Kerry and Grafton.

The trend of taking public companies private where management teams wish to capitalise on assets undervalued by the market continued apace with Conduit, Alphyra, Riverdeep and Arnotts all disappearing from the Irish Stock Exchange list.

The demands to reduce debt and crystallise value were the prime motivators behind the Green Property and Elan disposals although for very different reasons. Elan's moves were in response to the difficulties experienced in 2002 whereas Green's were in response to a reduction in the debt funding of their take private deal in 2002.

Sectorally, building construction and property accounted for 28 per cent of the total value of deals, health and pharmaceutical 18 per cent, financial services 14 per cent and these three sectors accounted for 60 per cent of the total deals disclosed in 2003.

Underpinning the larger deals is a rise of 35 per cent in the number of small to mid-size transactions. In 2003, there were 194 deals in the sub €200 million category compared to 143 in 2002.

These deals were in sectors like IT and telecoms, food and media - deals like the Alphyra and Conduit buyouts, the sale of Massana to Agere, the continuing acquisition activity of Kerry and IAWS and the continuing rationalisation and consolidation of regional media assets typified this trend. The trend of a greater number of smaller deals when compared to last year looks set to continue in the Irish market. There is also some anecdotal evidence of further significant Irish deals in the making.

The climate is still opportune for good management teams to take advantage of reasonably depressed corporate asset valuations allied to cheap debt in a highly competitive Irish debt market and an abundance of private equity in Europe. Expect MBOs, consolidation plays and a few more public-to-private deals in 2004.

We do not believe the M&A environment reflects any changes in the fundamental M&A drivers that led to the record- breaking deal levels in recent years - we expect these drivers to continue over the next year and beyond. The lower level of activity reflects the fact that most of the more obvious take-privates have been completed.

Looking forward there is much scope for further restructuring and consolidation of Irish corporate activity with the financial and agribusiness sectors the most obvious areas for major change. Several firms are now indicating that they have come towards the end of their restructuring programmes and may now begin focusing on larger strategic acquisitions.

It is clear that optimism is returning to markets and this should prompt more acquisitions by larger traditional businesses, such as the Royal Bank of Scotland's purchase of First Active.

There will also be significant change in support services as Ireland catches up with the US and Britain in the scope and nature of delivery of all functions deemed non-core by the corporate and public sectors.

As predicted by Ion Equity, the Irish support services sector features prominently in 2003. Although the value of these deals remains fairly low, there seems to be renewed interest from foreign companies wishing to gain a footprint in the Irish market, as well as fresh evidence of Irish firms seeking to acquire sectoral expertise abroad. As the economy in general continues to move to a greater services base, there should be plenty of opportunity for growth and consolidation.

Groups such as Kerry, CRH, Grafton and IAWS will continue to make acquisitions during 2004.

While mid-cap quoted companies will need to grow by acquisition to get the interest and attention of institutional investors. Family and privately owned businesses must continuously review their growth and exit strategies, particularly given the cost of funding and the renewed appetite for foreign buyers of Irish assets.

Perhaps 2004 will be the year that the long-awaited assault on the autonomy of the large remaining Irish financial institutions takes place with Irish Life & Permanent, Bank of Ireland and AIB all at relatively undemanding valuations

Joe Devine is a corporate finance specialist and director of Ion Equity.