Interest in mergers and acquisitions (M&A) activity shows little sign of abating but making a deal work for all parties requires more than just ensuring there’s enough investment available.
Managing the total costs and what that investment entails is fundamental to the process. Establishing the cost of capital involved is a clear first step, this involves balancing the mix of different sources of capital.
“If a transaction requires debt and equity, the weighted average cost of capital should be considered,” says Michael Lalor, head of debt advisory and managing director at Focus Capital Partners. “In the case of debt, understand what the business can afford to take on in terms of leverage and repayment capacity. In terms of equity, this will have a dilutive impact but it’s best advised to assess the partnership benefits that an equity provider can bring.
“Equity can help businesses at all stages of their life cycles but is particularly advantageous where a debt option may put too much short-term pressure on a business. Debt can be flexible, is non-dilutive and relative to equity it’s a potentially cheaper source of finance.”
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There are macro factors to take into account when making such decisions, ranging from interest rates to the impacts of geopolitical matters.
“Interest rates have increased substantially and more importantly quickly in the last number of years. Business models have needed to cope with that, and higher rate assumptions prompted acquirers to run the numbers again on acquisitions or consider more equity coming into the deal,” Lalor says.
“Now that interest rates have stabilised, expect to see a more supportive funding environment. The emergence of private credit, since the global financial crisis, has been a significant development and has changed the funding landscape. Sources of capital have become more nuanced and diverse with increased activity from asset managers, debt funds, pension funds and insurers, family offices and bespoke working capital and asset finance firms.”
While there are two wars within a medium haul flight of Ireland, the most clear and present consideration on a geopolitical level is the change in government in the US. This will require far more attention from Irish investors, according to Michael Armstrong, EY Ireland director for capital and debt advisory.
“Uncertainty surrounding potential shifts in US fiscal policy remains and challenges in Europe’s big economies will prompt lenders to recalibrate their risk appetite and exposure to more volatile markets,” says Armstrong. “Given the abundance of liquidity in bank and private credit markets, sponsors should be confident in the availability of funding to support M&A activity.”
There are key steps that businesses can take which are within their control. These include sourcing the correct advice to manage legal and regulatory hurdles surrounding M&A activity.
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“Onboarding experienced corporate finance and legal advisers early in the transaction process, who can advise you on how best to structure the finance and corporate aspects of the M&A transaction, will save you time and money in the long run,” says Mary Kiely, partner for corporate and commercial at Eversheds Sutherland.
“Experienced advisers will help you understand your funding requirement and what funding structure will work best for your funding needs.”
The overall outlook for Ireland is positive, with investors taking a keen interest in the potential here. That’s aided in part by the availability of more innovative financing options such as mezzanine financing.
“As a subordinated debt instrument, mezzanine financing offers adaptable repayment structures, incorporating cash pay, payment in kind and hybrid options. This has helped to expand funding sources beyond traditional debt constraints, making it an attractive option for companies pursuing M&A deals,” says Armstrong.
“Recent years have seen a proliferation of asset-based lenders and credit funds servicing the mid-market. Flexibility will continue to drive debt markets as bank and credit funds increasingly learn to coexist alongside each other in transactions or strategic joint ventures or partnerships.”
Armstrong says that these more innovative options enable greater control for businesses taking on investment.
“Flexible financing presents the opportunity for businesses to optimise their capital stack while maintaining operational control.”
Still, despite the broader range of options available, Armstrong urges careful planning from all parties involved in M&A activity.
“Given the potential for interest rate markets to revise their expectations to combat the unknowns that emerge in 2025, borrowers would be well served when assessing their treasury and hedging policies to reflect their own appetite for risk rather than play roulette with the markets,” he says.
Kiely advises strong time management and planning for buyers to ensure an efficient process.
“Buyers should give themselves sufficient lead-in time to explore and settle their funding arrangements. More and more, particularly in competitive M&A processes, buyers are required to deliver evidence of committed finance at an early stage in order to participate in the transaction process,” she says.
“To avoid any delay to the M&A transaction, heads of terms should be agreed with any third-party financiers. A delay in M&A financing could mean a deal opportunity is missed.”
On the side of those seeking to attract investment, Lalor advises thorough research with a broad scope.
“The right partner is key and particularly for equity, ensure that the strategic objectives of the business and investment timelines are aligned. It is always best advised to test the market when looking for new funding partners and to broaden the search internationally.”
