2019: The Isle of Man M&A year in review Part 1 – Why is it significant?

2019:  A Standout Year for Foreign Investment

The offshore M&A sector as a whole had its busiest start to a year for five years in 2019, with more than 1,500 deals announced that involved offshore targets.

The Isle of Man was no exception.  24 deals involving Isle of Man companies were announced in the first half of 2019, worth a cumulative USD560 million – 64% more deals than in the second half of 2018 – which was pleasantly surprising given the Brexit-related uncertainty at the end of the first quarter.

Although the figures for the second half of 2019 were not available at the time of writing, the general feeling is that continued Brexit uncertainty – combined with macro factors such as the US-China trade spat and the UK general election – weighed on deal making in the last six months of the year.

What Does this Mean for the Isle of Man?

Readers whose knowledge of the world of corporate buyouts goes no further than Harvey Specter’s machinations in Suits might, understandably, wonder what this all means for the Isle of Man more generally.

A Vote of Confidence

The first consideration of any corporate buyer is whether its investment will increase in value.  Investors are more likely to invest in a country if they have confidence in its economy, so the increased interest in Isle of Man companies is a positive sign; it shows that international investors continue to have confidence in the Isle of Man’s economy.

Experience

Overseas buyers often bring a level of experience that benefit the target company’s operations.

This could take the form of commercial experience, as exemplified by KKR’s acquisition of Ballasalla-based Prometic Bioseparations last November.  As a major global investment group that has made hundreds of investments over more than four decades, KKR will give Prometic Bioseparations access to some of the world’s most savvy investment professionals.

It can also take the form of operational experience.  LV Care Group, which operates six care homes in Jersey, bought the Crovan Court care home in Ramsey last September.  Crovan Court’s residents will benefit from the new owner’s experience of operating care homes in another similarly-sized jurisdiction.

Investment

M&A activity can also boost investment into the Isle of Man, helping to maintain the competitiveness of the Island’s economy.

For example, when Basalt Infrastructure Partners acquired Manx Telecom last May, Manx Telecom’s chief executive stated that the financial strength of the new owner put Manx Telecom in a better position to invest in communications infrastructure, including fibre-to-the-premises networks, which the National Broadband Plan highlights as essential for the Isle of Man’s future prosperity.

Are there any Downsides?

It is often assumed that buyouts are bad news for a target company and its employees.  Concerns include the risk of redundancy, the relocation of the business overseas and the stripping of assets, all of which were reflected to some degree in the local headlines in 2019.

It is worth pausing to consider the accuracy of these concerns.

Redundancy Risk

Most M&A deals involve successful businesses.  Redundancy, on the other hand, is more often associated with struggling businesses.

When a company is growing, and its revenue/profits are increasing, a buyer will usually be more focused on continuing to drive that growth than on reducing costs.  So redundancies are unlikely to be at the top of the to-do list of the buyer of a growing company, especially if the company’s employees are responsible for its success.

That being said, however, the risk of redundancy can never be dismissed for any business.  Changes of ownership are sometimes followed by some headcount reductions, particularly in the case of distressed businesses.

Relocation

The most memorable illustration of this concern in 2019 followed Flutter Entertainment’s announcement that it was to merge with The Stars Group.  This prompted a number of headlines declaring that The Stars Group’s entire Isle of Man operation was moving to Dublin.  But they overlooked the fact that major global businesses often have numerous companies, and operational bases, in different countries.

It is worth recalling that Canada-based Amaya Inc. bought The Stars Group’s Isle of Man operations in 2014, but those operations did not immediately move to Toronto.

The Stars Group subsequently clarified that it expects the Isle of Man to “remain an important operational hub for the foreseeable future”.

Asset Stripping

Asset stripping is the practice of financial buyers, such as private equity firms, acquiring a company and then selling off its assets to fund dividends or debt repayments.  The term carries negative connotations since it can inhibit a company’s performance.

However, this type of practice is less common now than it was 30-40 years ago.  Today’s private equity funds are more interested in a company’s recurring cash flow than the liquidation value of its assets.  European private equity firms are actually prohibited from asset stripping in the first two years after they buy a company.

Final Thoughts

One of the key outcomes set out in the Programme for Government 2016-2021 was for the Isle of Man to have a diverse economy where people choose to work and invest.

The diversity of the Isle of Man’s economy can be seen from the fact that 2019 saw the acquisition of local companies in sectors including biotech, social care, natural resources, eGaming, telecommunications and corporate services.

The increase in inward investment in 2019 also demonstrates that people are choosing to invest in the Isle of Man.