Irish Tech M&A and Fundraising
AIB Corporate Finance is a leading Irish corporate finance adviser. The team advises leading companies, dynamic management teams and new or established entrepreneurs on how to unlock strategic transactions, including mergers and acquisitions (M&A), fundraising and disposals.
John O’Dwyer (Head of Technology, Media and Technology, AIB) recently sat down with Mark Reid (Director, AIB Corporate Finance) to speak about the Irish tech M&A market, fundraising and the role that an AIB Adviser can play in transactions.
Mark, you’re very active in the Irish tech M&A market. Can you give us an update on how it’s doing at the moment?
Last year there were around 90 M&A transactions in Ireland across all sectors. When I say M&A activity, I mean when one company comes in and essentially buys a controlling stake in another operating company. Technology companies accounted for about 25% of those 90 deals, which means a quarter of all Ireland’s investments and takeovers are to do with the technology sector. This is an incredible statistic and demonstrates how vibrant the Irish tech sector is.
Why are tech purchasers interested in Ireland?
A lot of the purchasers, rather than the fundraisers, come to Ireland from the US. There are a number of reasons they pick Ireland. The number one reason is that they have a technology gap. Irish tech companies and CEOs are very good at identifying a technology gap and developing the correct technology and the teams and company around it, to fill that gap. This works for the large multinationals; they can come in and effectively buy a solution rather than spending time and money developing one themselves. Large companies aren’t as dynamic and nimble as smaller companies and management teams, which often is where the real value is. You’ll see a lot of technology companies that say “Company X, a division of Capita or SAP etc.” These are the smaller companies that have been nimble enough to supply a good brand and technology to a larger parent company.
You see a lot of business plans and fundraising and information memorandums. What would you say some of the common pitfalls are?
The first thing is that you must know the type of fundraising you are going for because it’s very easy to go down the wrong avenue. The cheapest form of funding for a company is debt rather than equity. The key issue with debt is you can’t secure it unless the company is cashflow positive. If the company is pre-revenue, loss-making or cash-burning, which is perfectly normal for a technology company in the early stages of development, you can’t raise debt against that. That’s why it’s very common for early stage companies, which are not cashflow positive or which are pre-revenue or don’t have any contracts in place yet, to go out and do equity fundraising. However, equity fundraising is a lot more expensive than debt. Equity fundraisers will be looking to hold that investment, they will be looking for part ownership of the business. They’ll be looking for a return of two-four times their investment over a period of three-five years.
Sometimes there might be some reticence in using an advisor in a transaction. What advice would you give to tech CEOs and CFOs on trying to make that decision?
I can’t remember any situation where we haven’t brought substantial increase to the value or the terms of any deal that we have undertaken – whether fundraising, an exit through an M&A or an acquisition where we have advised one company to purchase another company. In terms of us bringing value to the table, one of the first things is that the value of your company will greatly depend upon getting access to the right audience. As one of the leading banks in Ireland, AIB has a fantastic network of contacts within the tech market. We introduce the right acquirer to the right person from the management team – that’s stage one.
Stage two is that we know what investors and purchasers want to see in terms of the equity story and the clarity of the management vision. A lot of the time companies are focused on the immediate future and don’t see the wood from the trees. Purchasers and investors want to see granularity –“What’s the vision for the next five years?” With the rate of change in the tech market, it’s hard for companies to know what the vision is for the next six months, but you still have to have that vision or people won’t know what they are investing in. We help define the equity story and put that into the marketing materials.
Moving through the transactions, we’ll also do the negotiations. If you think about when you go through a transaction or sell your business, you want someone on your side, to negotiate for you, to be your right-hand man and supporter to get you what you want in terms of the structure of the deal, in terms of earn-outs, in terms of deferred considerations, in terms of management role of their equity etc. We’re the people that negotiate that on behalf of the shareholders and the management teams.
Finally going through the legal documentation there is a myriad of pitfalls. We sit alongside the lawyers to advise on the commercial terms – the warranties, the indemnities, the escrows, the baskets etc. We are the ones who negotiate that, we know what is market standard and we know what is acceptable so you have peace of mind that you have been properly advised and nothing comes back to haunt you.
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