Rising interest rates are putting the brakes on Irish mergers and acquisitions this year as the end of cheap funding is making buyers look harder at potential returns from deals.
New data from EY shows a slowdown in Irish M&A transactions in the first four months of the year, as inflation, the war in Ukraine and ongoing trade disruptions are contributing to a decline in activity.
Deal volume fell 24pc in the year to April from record levels in 2021, in line with global and European trends, although the UK has suffered a steeper decline.
The changed environment is hitting valuations especially hard in the technology and pharmaceutical sectors, where some of the biggest recent Irish deals have happened.
“A decade of cheap finance has had an impact on dealmaking and the corporate sector where everyone had to make acquisitions to grow or earn yield,” said Grit Young, EY M&A partner in Dublin.
“Rate increases are obviously going to impact cashflow. Even 2pc has a huge impact on returns, so the threshold for deals is now higher.”
With $1trn in funding raised by investment firms and other companies last year, buyers haven’t disappeared from the market, but they are being more selective than in recent years, she said.
“There is a lot of dry powder out there, but private equity is looking for cheaper valuations. Tech and pharma have come down steeply.”
Nonetheless, rich deals for companies such as Wayflyer, Global Shares and Version 1 this year have dominated flow, with the tech sector accounting for 63pc of deal value on only 27pc of deal volume, according to EY.
Ms Young said there was still a lot of “unexploited opportunity” in Ireland with dedicated pharma, tech and financial services funds still on the hunt for companies.
She also said consolidation plays in areas such as dental practices and independent brokers were likely to continue as the Irish market catches up to trends evident in the UK during recent years.
She said activity levels were still strong compared to the five-year average, even if deal flow had slowed in 2022 following a record year for M&A globally in 2021.
“What happens beyond this year depends on the macro outlook,” she said.
“Energy transition is a huge area of opportunity and lots of companies are rethinking supply chains and ‘friendshoring’ operations. Ireland is well-placed for these trends.”
Yesterday, European Central Bank (ECB) President Christine Lagarde gave the clearest indication yet that interest rate rises are imminent and will be substantial.
In a blog post on the ECB’s website Ms Lagarde outlined a path for what she called ‘normalisation’ of interest rates in response to the shift to expected higher inflation over the medium term
“Against the backdrop of the evidence I presented above, I expect net purchases under the APP to end very early in the third quarter. This would allow us a rate lift-off at our meeting in July, in line with our forward guidance. Based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter,” she said.