KPMG M&A Outlook: Dealmakers in buoyant mood for 2020

Activity in the Northern Ireland mergers and acquisitions (M&A) market will increase this year despite facing headwinds from the geopolitical and economic landscape, according to KPMG’s annual M&A Outlook.

The influential survey of Northern Ireland’s dealmakers found that 93% expect M&A activity to remain at or above 2019 levels, up from just 76% last year.

Participants noted a “definite sense of change”, although macroeconomic uncertainties look to be swaying sentiment in favour of buyers, with 17% viewing 2020 as a sellers’ market compared to 38% last year. This is markedly different from the Republic where 38% of respondents said 2020 would be a sellers’ market.

Russell Smyth, Deal Advisory Partner at KPMG, said: “Following a turbulent 2019, 2020 has started with the prospect of relative stability – a return of the devolved institutions, a stable conservative majority in Westminster and clarity that Brexit is at least going to happen. That said, US trade policy, exchange rate fluctuations and the uncertain implications of Brexit will ensure strategists, and corporate dealmakers, won’t have an easy time.

“The scale of available capital in the market has undoubtedly contributed to survey respondents’ optimism for the year ahead, which is equally optimistic among both NI & RoI respondents.  Private equity involvement and the robust lending market, with ever-developing debt options, will be key enablers for deals in 2020.”

Climate

The issue of climate change will be of growing importance to M&A strategy this year, according to two thirds of dealmakers surveyed. 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.

Russell Smyth said: “In 2019, climate change emerged as a dominant global issue. As a consequence, changing investor and consumer attitudes towards sustainability will be key factors for executive decision making in 2020. We predict 2020 will be the year where climate change moves from being an important social consideration to being a key policy and commercial driver.”

Sector activity

Technology is expected to remain busy with 31% of respondents pegging it as the busiest sector for acquisitions in 2020, while agribusiness & food (22%) and energy & infrastructure (17%) were placed second and third respectively.

Brexit

Brexit continues to have an influence on the M&A market. A large majority (85%) said any outcome which provides more certainty or one which sees the UK leaving the EU with a deal would prompt more activity in the M&A market 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 companies across the island, 2020 may still present an opportunity to acquire and build positions in the UK market through strategic acquisition.

M&A Strategy

When it comes to dealmakers’ approach to M&A strategy, Northern Ireland particpants in the survey take a multi-faceted approach. Most (61%) maintain awareness of potential targets while 46% rely on communication of transaction appetite to the M&A community, 41% take an opportunitistic approach and 15% have formally documented strategy. The latter result is a divergence from the market in the Republic where 25% have a formally documented strategy. When asked what the primary shareholder drivers for transactions will be in the year ahead, 34% say expanding their customer base or lines of business and one fifth (20%) for cost and operating synergies.

Deal failure

Valuation gaps continue to be considered the primary inhibitor of M&A activity according to respondents, with 44% identifying this as the primary reason why deals fail. This is followed by unexpected diligence issues (23%) and lack of readiness (20%).  From a seller’s perspective, the importance of deal readiness cannot be overstated.

Debt funding

Senior debt or cash flow facilities are expected to be the most likely form of funding for M&A activity in 2020, according to 56% of respondents, while 24% expect funding to come from alternative lenders or private debt funds. Interestingly, 20% expect funding to come from other asset-backed lending including invoice discounting and other forms, a significant differential from the 4% which this form of funding is expected to make up in the Republic.