Top Irish dealmaker says Irish M&A ‘significantly down’ on last year
Gavin McLoughlin IRISH mergers & acquisitions (M&A) activity is “significantly down” on last year and is likely to remain below 2015 levels for the rest of the year, according to the chief executive of one of Ireland’s top corporate finance houses.
Tom Godfrey, chief executive of IBI Corporate Finance, told the Sunday Independent that uncertainty surrounding the Brexit referendum had a negative impact on Irish deals.
“I can see that the volume and value is down significantly on 2016 (in Ireland), and who knows what will be the end result but it is significantly down,” Godfrey said.
He said IBI was set to conclude more transactions in the second half of the year than in the first.
“We’re heavily weighted this year, just as it happens, towards the second half so more of our transactions are going to conclude in the second half than in the first half. We can’t deny that Brexit is going to have a significant impact on activity in Ireland just by virtue of the close ties. So 2016 is going to be more muted, but it’s not the end of the world, it’s not a financial crisis. It’s just we happen to have had the Brexit vote in 2016.”
He said that for M&A activity to pick up, there needs to be more certainty around Britain’s future relationship with the EU.
“The reality of the situation is that nobody wants a bad outcome from Brexit... I think it’ll be more or less ok. My only worry is that it takes a while to get there.”
WHEN Irish businesspeople want to get a deal done, Tom Godfrey is likely to get a call. Godfrey, the chief executive of IBI Corporate Finance, has spent his whole working life with the same company.
He’s been involved in some of the most high-profile transactions in the history of Irish business, including the State’s sale of its stake in Aer Lingus and the merger of Paddy Power with Betfair.
But it’s not always the biggest deals that provide the most satisfaction.
“I keep talking about the purchase of a stake in Birmingham International Airport to anybody who talks to me about these things,” Godfrey says.
“We bought a stake in that company on behalf of Aer Rianta from seven district councils in Birmingham, and they were only selling it because they were required to do so, in that Government regulations at the time indicated that they had to raise money themselves from then on. So they had to go out reluctantly to get a shareholder in Birmingham Airport and I think it was a 40pc stake but Aer Rianta at the time didn’t have sufficient resources to conclude a transaction of that quantum, so we got NatWest Ventures, which became Bridgepoint subsequently, in to partner with us ... it was a complicated enough transaction.
“It was absolute hell negotiating a purchase with seven county councils, all with different views, so I think the sheer relief of getting the thing done, and the nature of the transaction itself, was very pleasing. And I think most interestingly, exactly 10 years after we bought that on behalf of Aer Rianta, we sold it as well, and they made a 30pc IRR (internal rate of over 10 years), which is unprecedented. So because we bought it and we sold it, and it was a hard deal, and it was a great deal in the end that the State benefited from, it’s a transaction that I think very favourably about.”
Just are there are ups, there are downs. Godfrey says experience has taught him that in every transaction, there’s something that goes “chronically wrong” at some point.
“I really am a very firm believer in proceeding with a transaction at the quickest pace that you possibly can, because again, experience teaches you that things happen,” Godfrey says.
“I’ve more scars on my back, as indeed anybody in this game will have, of transactions that just took too long. Just something happened, there was a stock market meltdown, or an interloper came along and stole the deal from under you, or something happened that you hadn’t anticipated when you kicked off the deal.
“The one I think with the most scars on our back is we were endeavouring to do a take-private of Barlo, the radiator company — it must be more than ten years ago. It was an MBO (management buy-out) effectively and we were pulling together the equity for that transaction. We pulled together the equity and we pulled together the debt, but it was a hard slog to do it.
“And then, at the very last minute, Sean Quinn came in and bought stock from IIU (Dermot Desmond’s International Investment & Underwriting) which had a significant stake, and the whole thing was over in the space of five minutes. So having worked very hard to produce the transaction — and it wasn’t the biggest transaction there ever was — to have it just snapped from underneath you like that is something that you don’t forget easily.”
A native of Blackrock, Godfrey went straight into IBI from the BComm in UCD, as part of the company’s first foray into graduate recruitment. He had studied a corporate finance module and liked the idea of doing deals for a living.
“I was very young, I was 21 or 22 when I came in, and at that age you really spend your time just learning the ropes and trying your best not to speak at meetings, because you’re too nervous, and you don’t know what you’re talking about anyway.
“You’re just there listening to what your elders and betters are talking about and finding it incredibly different to understand how they’re talking about these things, and to penetrate how they get to the conclusions they reach so quickly. But I had some really fantastic teachers, Richard Hooper, who was the doyen of corporate finance in this country for many years, and also Danny Kitchen who worked here for many years was a guy I worked directly with — he’s one of the smartest guys I’ve ever come across,” Godfrey says.
“What I’ve discovered over the years is actually it’s experience that enables you ... there’s no shortcut, it is about putting years under your belt, understanding the various types of things that might happen with a transaction, and having seen it all before at some stage or another, heading into those memory banks, it is experience that counts in this business really.
Last year was a bumper year for M&A but this year has been much quieter. A more robust approach from the US regulators towards international M&A — witness the collapsed Pfizer-Allergan deal — has combined with the uncertainty before and after the Brexit vote to stymie potential transactions, Godfrey says. His industry seems like it’s full of drama but Godfrey comes across as a calm fellow.
“2016 has been a much slower year than 2015 but I’m not surprised that that is the case. I thought it would be the case. I felt to a certain extent that you just couldn’t repeat that, and I also felt to a certain extent that valuations had got a little bit high to be perfectly honest with you.
“I can see that the volume and value is down significantly on 2016 (in Ireland), and who knows what will be the end result but it is significantly down.
“We’re heavily weighted this year, just as it happens, towards the second half so more of our transactions are going to conclude in the second half than in the first half. We can’t deny that Brexit is going to have a significant impact on activity in Ireland just by virtue of the close ties. So 2016 is going to be more muted, but it’s not the end of the world, it’s not a financial crisis. It’s just we happen to have had the Brexit vote in 2016 and that’s going to cause things to be a little quieter.”
IBI celebrates its 50th anniversary this year and is hosting a celebratory bash for the business community next month. The number of deals discussed at that dinner will provide an insight into how Ireland Inc is doing. “When the Irish economy’s doing well we’re doing well. And when it’s not doing well, we can do okay because there’s companies that need some help on those occasions,” Godfrey says,
“I think people underestimate the improvements that have happened over the last number of years. I know that M&A activity in 2016 is off from 2015 and that’s fine. But notwithstanding Brexit, and notwithstanding the very strange figures that have come out in relation to GDP, if you think about what commentators are saying about the underlying growth of GDP ... these are significant growth figures they’re talking about. “The problem I think has been that for the vast majority of people they haven’t seen this in their pay packet. But I think we are going to see that happen. So I’m very positive about the Irish story. I think there’s more to go. I think we shouldn’t be down in the mouth about Brexit, we should be looking at the opportunities that might arise as a consequence. There’s no point crying over spilled milk.”
He’s relaxed too about the EU Commission’s decision on Apple’s tax bill.
“I think it’s worth noting that it does not impact Ireland’s corporate tax system generally which is a key driver of our attractiveness as a location for FDI. We need to keep a sense of proportion in that no other companies in Ireland are subject to this decision.
“I am sure Ireland’s focus will remain firmly fixed on continuing to attract and retain FDI which is crucially important to the Irish economy. This decision is unhelpful in that regard but is not in my view catastrophic.”
IBI is owned by Bank of Ireland, and is based in the bank’s headquarters in Dublin’s Burlington Plaza. I ask Godfrey how IBI’s relationship with the bank — and its chief executive Richie Boucher — works. Does Godfrey have to report to Boucher about what’s going on?
“The key point with Bank of Ireland, and this has always been the case, is that we have an independence policy, the bank respects that independence policy and supports it, recognising that we have to act in the best interest of our client — whoever they are at any particular moment in time,” Godfrey says.
“We must act in their interests and their interests solely. And when we act in the bank’s interest we act in the bank’s interest solely. But they understand that and they recognise that and the independence policy is critical to our success.
“I would meet Richie in a client-facing context really. To the extent that there is something that the bank needs assistance on, we will give them that assistance. So my relationship with Richie is more of a client-type relationship.
“And then I report into Michael Torpey (chief executive of the bank’s corporate and treasury division) from a P&L perspective, and he may not see all of the pieces of the jigsaw that make up the P&L because some of them will be confidential. But it works very smoothly and we’ve never had a problem with it.”
IBI’s fee model is “very success-orientated,” according to Godfrey. Typically it charges clients a “work fee” for ongoing work, and then a “significant” success fee if a deal proceeds.
“If the thing doesn’t happen, we’re kind of significantly out of pocket. And that works from the client’s perspective in that you only get paid if you get the result at the end of the day. And it is a negotiation. The smaller the deal the bigger the percentage because there’s a certain limit, you have to pay people. And the bigger the deal the smaller the percentage, generally speaking.”
For fee volume to pick back up in line with M&A activity, Godfrey believes there needs to be a restoration of certainty around Britain’s relationship with the EU.
“The reality of the situation is that nobody wants a bad outcome from Brexit, Europe doesn’t want a bad outcome from Brexit, the UK doesn’t want a bad outcome from Brexit.
“And yes, after the vote there was a bit of Britain-bashing by Europe, but I think the reality of the situation is the Germans are going to want to sell their BMWs into the UK, and reciprocity indicates the UK will want to sell their stuff into Europe.
“So fundamentally I think what’s going to happen. And this isn’t a Bank of Ireland view or anything, there’s going to be some sort of associate membership of the EU with a fudge on immigration ... I think it’ll be more or less okay. My only worry is that it takes a while to get there.”
‘It’s worth noting that the Apple case does not impact on Ireland’s corporate tax system generally...’ As chief executive of IBI corporate finance, Tom Godfrey has been the brains behind many high-profile transactions. He spoke to Gavin McLoughlin