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M&A activity for 2020 - opportunity in an uncertain trading environment

  • Survey conducted with many of Ireland’s leading executives and M&A advisors
  • 90% predict 2020 deal volume to be at or above 2019 levels
  • 67% say climate change will impact 2020 M&A strategy
  • Technology predicted to be the most acquisitive sector
  • Brexit certainty key for greater deal activity 

KPMG today published the results of its annual M&A Outlook with a strong response from many of Ireland’s leading M&A executives and advisors. The majority (90%) expect Irish M&A activity for 2020 to be at or above 2019 levels, despite a challenging trading environment. Prevailing macro-economic uncertainties may, however, be impacting the market in favour of buyers in 2020 as just 38% of respondents consider 2020 to be a “sellers” market compared to 60% in 2019. 

Wider environment

Perhaps unsurprisingly, climate change and decarbonisation is on the minds of Ireland’s M&A leaders, with 67% saying it will be a factor in M&A strategies in 2020. With increasing focus nationally and globally on sustainability issues, and expected movement of capital flows away from carbon intensive industries towards green investments, it is expected that deal makers will use M&A as a tool to pivot their business models.

Certainty regarding a Brexit outcome is considered crucial for deal activity in 2020. A large majority (83%) citing any outcome with certainty or the UK leaving the EU with a deal as key facilitators for greater deal activity in 2020.  A key issue for deal makers in 2020 will be whether a new Free Trade Agreement will be agreed before the transition period ends at the end of 2020. For more opportunistic Irish companies, 2020 may still present an opportunity to acquire and build positions in the UK market through strategic acquisition. 

Sector activity

Technology, healthcare & pharmaceuticals and agribusiness & food were identified by respondents as the sectors likely to see the most acquisitions in 2020 – the third consecutive year that technology tops the list. This is perhaps reflective of the continued success of Irish technology companies in attracting the attention of strategic buyers globally. Investor appetite for technology solutions and capabilities is likely also fuelling investment in the sector.

M&A strategy

When asked what the primary shareholder drivers for transactions will be in the year ahead, one third (33%) say expanding their customer base or lines of business and one quarter (24%) for cost and operating synergies reasons. The survey found that just one in four respondents (25%) consider their M&A strategy to be formally documented, while almost half (45%) consider their strategy to have an ‘opportunistic approach’.

Working capital management emerged as another key theme for respondents, with over one third (36%) saying they have encountered ‘significant room for improvement’ in working capital management when evaluating target companies in the past, both operationally and in a deal context. From a buyer’s perspective, working capital inefficiencies can represent an opportunity to release cash from a target business post acquisition. These inefficiencies may also serve as a warning during diligence when assessing the capability of a target’s finance function.

On the other hand, vendors taking a focused approach to working capital management protect their intrinsic value in a transaction context and importantly enhance their net cash position on a business as usual basis.

Deal failure

Valuation gaps continue to be considered the primary inhibitor of Irish M&A activity according to respondents, with 41% identifying this as the primary reason why deals fail. This is followed by unexpected diligence issues (26%) and lack of readiness (16%).  From a seller’s perspective, the importance of deal readiness cannot be overstated. 

Other key findings of the report include:

  • Debt funding - a significant majority (69%) consider senior debt / cash flow facilities as the primary source of transaction funding in 2020, rather than alternative lenders / private debt funds (27%)
  • Deal making – awareness of targets and speedy access to finance are considered the top two factors to enable greater deal making in Ireland in 2020
  • Buyer types – respondents expect strategic buyers / sellers to close more deals in 2020 than financial buyers / sellers – 57% compared with 43%

Commenting on the findings, Mark Collins, Partner and Head of Deal Advisory, KPMG in Ireland said: “The survey findings show that despite endemic turmoil in the geopolitical landscape, deal making fundamentals in the Irish market remain strong. The scale of available capital in the market has undoubtedly contributed to our M&A leaders’ optimism for the year ahead and we predict that private equity dry powder and the robust and attractive debt markets will be key enablers for deals in 2020.”  

David O’Kelly, Partner, Corporate Finance, KPMG in Ireland, said “Changing investor attitudes towards sustainability will be an area to watch in 2020, as we expect this agenda to be factored heavily into executive decision making. We also expect to see sector convergence to continue, with technology, financial services and energy / utilities likely to see increased activity.”