Mergers and acquisitions (M&A) activity in Ireland remained remarkably resilient in 2023. “While the value of Irish M&A deals has decreased year on year, in volume terms the market is broadly in line with 2022, with activity levels increasing as the year progressed,” says Brian McCloskey, partner at law firm Matheson LLP’s corporate department.
Overall activity compares favourably with global markets, where there has been a marked downturn in both transaction volume and value terms.
Although Ireland has not experienced the same slowdown in M&A activity as other jurisdictions, the macroeconomic and geopolitical factors – inflation, increasing interest rates, recessionary fears, conflicts in the Middle East and Ukraine, greater regulatory and political intervention – are all relevant here too.
“In an Irish context the interest rate volatility experienced in Europe in the first nine months of the year, the continuation of a global trend which began in the first half of 2022, has certainly dampened activity levels, particularly for private equity (PE) funds which have over recent years become a core part of the Irish M&A market,” says McCloskey.
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“An increase in financing costs, a key feature of the larger PE-backed M&A transactions, arising from higher interest rates, has resulted in deal activity, particularly at the higher end of the market, being driven more by well-capitalised domestic and international corporate buyers rather than PE funds.”
The mid market, between €5 million and €250 million, is consistently the most active segment here, accounting for over 90 per cent of deals. That remained the case in 2023.
“The fact that mid-market deals are typically less reliant on debt funding goes some way to explaining why the Irish M&A market, in volume terms at least, has remained steady in comparison with M&A markets in the US, UK and Europe where highly leveraged, high value M&A deals are more of an important feature in those markets,” says McCloskey.
Another aspect of mid-market deal activity in 2023, driven in part by the higher financing costs in the leveraged buyout market, is that PE funds and their portfolio companies that would traditionally focus on the higher end of the market are increasingly looking at M&A opportunities in the mid market to deploy capital.
“The larger PE funds, many of whom are sitting on record levels of dry powder – investor committed but yet to be deployed capital – are motivated to put that money to work in order to generate returns for themselves and their investors,” says McCloskey.
“As such, they are showing a greater willingness to invest in businesses operating in the mid market. Those same funds can often finance mid-market deals solely by way of equity without the need for debt funding – often a competitive advantage when multiple bidders are competing for the same asset – with the option to introduce debt in the future if and when interest rates come down.”
The trend for consolidation in sectors such as nursing homes, insurance brokers and veterinary and dentistry practices, as well as professional services firms, has also driven significant levels of activity mid market.
“Businesses operating in the mid market are often founder owned, more agile and subject to less regulatory oversight than large cap companies and so can adapt quicker to a changing M&A market,” says McCloskey.
A well-functioning M&A market tends to be underpinned by consumer and corporate confidence, as well as a stable legal, regulatory and tax environment.
“We have seen in a number of key M&A markets globally, in particular the US and Europe, an increasingly interventionist regulatory regime which undoubtedly is influenced by geopolitics,” adds McCloskey. “Closer to home, next year will see the introduction of a screening mechanism for foreign direct investment into Ireland for the first time.
“This new regime will introduce another regulatory hurdle for non-EU buyers of certain Irish assets, whereby Government consent will be required in advance of completion, where critical infrastructure or critical technology assets are being acquired.”
In terms of activity, one of the biggest trend affecting activity this year has been the growth of “decarbonisation”. Solar panel or energy efficiency businesses – “anything that is helping companies to reduce their carbon footprint” – are of increasing interest to buyers, says Katharine Byrne, head of BDO’s corporate finance team and a member of BDO’s international M&A group.
Deal flow took longer this year as due diligence became more comprehensive. The rise of ESG (environmental, social and governance) reporting, not yet mandatory for SMEs, is already affecting the time it takes to get a deal over the line.
“SMEs don’t have ESG reporting requirements yet. But they will do, so they need to start gathering data now to support them,” says Byrne.
Values held up only if a seller came well prepared, while sell-side auctions, previously a feature of the market, became something buyers were increasingly reluctant to get into, she says.
While there will always be a competitive element for a premium asset, this year buyers became increasingly resistant to being pressurised into short time frames – understandably, given all the additional due diligence now required.
Both local and international family offices were active, while trade buyers were in evidence too. As well as anything in the renewables space, there was particular interest in services into data centres, construction and facilities management. Businesses selling into the pharma, energy, tech and medtech sectors, including precision engineering, were also in demand. By contrast, consumer-facing businesses struggled.
“Anything that is old-school retail has struggled, unless they have successfully managed to develop online, because of the threat hanging over consumer spending,” says Byrne.
Deal structures changed too, with more reliance on earn-outs, part sales and deferred considerations. More than ever, vendors needed to bear in mind Revenue rules around deferred payments, with capital gains tax payable on the full amount up front.
“That’s very hard for vendors to swallow, so good careful tax planning was key,” adds Byrne.
