M&A sector watch with Peadar O’Reilly

Peadar O'Reilly, a regional director with Venture Structured Finance, gives his views on the current state of the M&A market and what sectors to watch out for in the coming months.

What are your thoughts about the current M&A climate?;

Obviously it remains very challenging, but there are definitely some signs of improvement. I know it sounds like a total cliché, but deals these days take forever to put to bed. For example, I have been working on a re-finance deal which I initially got involved with over Christmas and New Year, but we have only just closed that deal this week. That does not really have anything to do with the structure of the deal, it is systematic of the market and the world in general.

But it has markedly improved and there is more activity out there with a greater amount of corporate divestments, albeit a lot more trade interests which doesn’t necessarily lead to a funding interest, but is a pick-up in activity.

Are there any sectors which you think are showing particular promise?

Bizarrely enough the construction products sector has been relatively decent in terms of deals getting done. I have worked on a couple which both ended up going to trade. It seems to be active while other sectors are not. I think this trend is largely based on a lot of acquisition activity in the sector pre-credit crunch, and they are now streamlining their operations and focusing on core businesses, so deals have been spinning out of that.

Additionally, a few old-school manufacturing sectors have been prospering as these tend to work very well for our funding structure as they have a lot of assets to attach to. I also think that pharmaceuticals is doing fairly well, although it does tend to be sporadic. In that area the deals done are either relatively modest, such as a few million, or very very large.

However at this kind of time it is quite hard to monitor sectors and predict how they are going to behave with any kind of conviction.

What do you think its driving deals right now?

The streamlining angle is one component, but there is also a degree of retirement or exit sales which are based on current owners not really seeing economic improvement over the coming years. So as a result they believe the value they could get for their businesses now is not altogether different from what they could expect to achieve three years down the line. As a result they are thinking it would be more worthwhile to cash their chips rather than carrying on to just get the same value.

Are you confident about deal activity picking up?

I wouldn’t quite go that far, but I would say that in relative terms it is better than it has been in recent times. Interestingly I think the whole issue of confidence (or more accurately lack of it) is still what’s keeping deal activity from reaching its full potential. We really need to be able to build on the improvements this year but we are unfortunately still coming in late in the day.

There is hope of the horizon of a shift though – speaking to advisors they are seeing a big uptick in activity which will probably filter through to deals in Q1 or Q2 next year.

Do you think there is any truth to the feeling that businesses are now sitting on a bit more cash than they have had before and don’t necessarily need debt funding?

I would say that there is some truth to that, certainly a couple of deals which I have lost out on where I have been backing management teams or smaller corporates trying to do an acquisition and they have been trumped by trade buyers able to pay all cash, so they do seem to have more cash on their balance sheets. A recent poll we’ve conducted found that 39 per cent of accountants said that their clients now retain larger cash reserves than in 2007.

There’s no doubt that there have been some valuable lessons learnt in the last few years but I think the pendulum has perhaps swung too far towards risk averse and caution and it might be time to take brave steps towards investment towards the future.

Todd Cardy

Todd Cardy

Todd was Editor of GrowthBusiness.co.uk between 2010 and 2011 as well as being responsible for publishing our digital and printed magazines focusing on private equity and venture capital.

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