Borrowing costs are already dampening mergers and acquisitions as the ECB hints at rate hikes

Rising interest rates are holding back Irish mergers and acquisitions this year as the end of cheap financing prompts buyers to look more closely 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 contribute to a slowdown in activity.

Transaction volume fell 24 per cent from record highs in 2021 in the year to April, in line with global and European trends, although the UK has suffered a sharper drop.

The changed environment is hitting valuations particularly hard in the technology and pharmaceuticals sectors, which have seen some of Ireland’s biggest deals in recent memory.

“A decade of cheap financing has impacted dealmaking and the corporate sector where everyone has had to make acquisitions to grow or generate returns,” said Grit Young, EY’s M&A partner in Dublin.

“Rate increases will obviously impact cash flow. Even 2pc has a huge impact on returns, so the threshold for deals is now higher.”

With $1 trillion in funding raised by investment firms and other companies last year, buyers have not disappeared from the market, but they are more selective than they have been in recent years, she said.

“There’s a lot of dry powder out there, but private equity is looking for cheaper valuations. Tech and pharma are down sharply.”

Nonetheless, rich deals for companies like Wayflyer, Global Shares and Version 1 have dominated the flow this year, with the tech sector accounting for 63% of deal value at just 27% of deal volume, according to EY.

Ms Young said there were still many “untapped opportunities” in Ireland as specialty pharmaceutical, technology and financial services funds were still looking for companies.

She also said consolidation games in areas such as dental practices and independent brokers were likely to continue as the Irish market catches up with trends seen in the UK in recent years.

She said activity levels are still strong compared to the five-year average, even as deal flow slowed in 2022 after a record year for M&A globally in 2021.

“What happens after this year depends on the macro outlook,” she said.

“The energy transition is a vast area of ​​opportunity, and many companies are rethinking supply chains and “friendshoring” operations. Ireland is well positioned for these trends.”

Yesterday, European Central Bank (ECB) President Christine Lagarde gave the clearest indication yet that rate hikes are imminent and will be significant.

In a blog post on the ECB’s website, Ms Lagarde outlined a path for what she called “normalising” interest rates in response to the shift towards higher inflation expectations over the medium term

“In light of the evidence presented above, I expect net purchases under the APP to end very early in the third quarter. This would allow us to raise rates at our July meeting, in line with our forward guidance. Based on the current outlook, we will likely be able to exit negative rates by the end of the third quarter,” she said.