COVID-19: The impact on M&A activity in Switzerland

COVID-19 continues to unleash structural and systemic changes on a global scale and it is widely expected that the recovery will be very different across sectors and regions. Most sectors will have to reinvent themselves in order to thrive and many will use M&A to accelerate their transformation. Existing trends such as the digitalisation of businesses (i.e. D2C, B2B), supply chain resilience and building a more agile and remote workforce have been accelerated by COVID-19. This is already reflected by both corporate and private equity M&A activity.

Swiss companies are using a unique combination of defensive and offensive M&A strategies to safeguard their markets, accelerate their recovery and position themselves for new market leadership. They are considering a wide range of inorganic growth strategies beyond traditional M&A, such as strategic partnerships with corporate peers or investments in disruptive technologies. In addition, robust post-COVID scenario planning has become a key M&A execution priority.

The Deloitte 2020 survey on M&A activity in the Swiss SME sector showed a clear drop in the number of transactions in the first half of 2020, either by SMEs or by firms targeting SMEs. However, the latest data from the Swiss CFO Survey conducted in September 2020 indicates that more than one third (36%) of surveyed CFOs are in fact planning to engage in M&A transactions, either buy-side or sell-side, in the next 12 months.

Considering the challenging environment, the internal and external factors that influence M&A decisions will need to be carefully considered and M&A objectives will need to be clearly prioritised for a successful transformation in a post-COVID environment.

Strong balance sheets in Switzerland, but less growth opportunities than in European countries

CFOs in Switzerland displayed an overall healthy level of confidence regarding factors they consider to be mostly within their own control: the strength of their balance sheets, their internal capabilities and the availability of credit.

The majority of CFOs in Switzerland (58%) are highly confident that their balance sheet is strong with adequate reserves of cash to finance M&A activity (see Chart 1). In this regard, confidence levels in Switzerland were on a par with Germany but still below Austria, whose CFOs are the most confident in the strength of their balance sheets. Nevertheless, confidence levels among CFOs in Switzerland were clearly higher than the European average of 45%.

In a further sign of confidence, almost one third (31%) of CFOs in Switzerland think that credit will be available at favourable conditions or that they have the right internal capabilities to execute on M&A deals and support the post-deal transformation process. Guy Semmens, Managing Director of Gyrus Capital, says:

With record levels of liquidity in the market and low interest rates, bank financing for quality assets and businesses seems to be widely available. Banks appear to be increasing flexibility in their terms, conditions and covenants as long as the underlying value of assets increases. This is expected to fuel M&A activity in 2021.

The availability of targets at attractive valuations drew mixed responses from CFOs in Switzerland. While 22% are confident that targets will be available at attractive valuations, which is above the European average, 17% were not confident about the availability and valuation of targets. This may be attributable to the fact that different sectors have been affected differently by COVID-19. Overall, however, it is clear that resilient businesses are trading in M&A transactions at a premium compared to pre-COVID-19, as investors once again value consistent cash flows.

It is worth noting that despite the high levels of confidence in strong balance sheets and internal capabilities and availability of both credit and targets, only a minority of CFOs in Switzerland felt highly confident that there would actually be growth opportunities in their sector (14% of respondents), or that the economy would recover within the next 12 months (6%). This is a clear indication of how COVID-19 has negatively affected confidence levels in many sectors in Switzerland. The assessment of both growth opportunities and economic recovery by CFOs was markedly lower than the European average of 28% and 12%, respectively. CFOs in Germany and Italy are most confident about growth opportunities in their sectors. Italy’s CFOs are also the most confident in Europe when it comes to economic recovery.

Given the mixed levels of confidence among CFOs regarding external factors, it is extremely important that companies’ M&A objectives are carefully considered and clear, and aligned with their strategic plans.

Acquisitions to fill portfolio gaps and accelerate digital transformation as a priority

Further evidence of the confidence that CFOs have in the strength of their balance sheets can be seen in the fact that most are developing their M&A objectives along offensive rather than defensive lines and focusing more on acquisitions than divestments.

The most strongly prioritised defensive strategy for more than half of CFOs in Switzerland (55%) is the acquisition of assets to fill gaps in their core portfolio (see Chart 2). This is in contrast to the much lower European average of 33%, with only CFOs in Sweden and Italy, as in Switzerland, considering filling portfolio gaps as a high or medium priority.

COVID-19 has highlighted the value of a balanced portfolio for businesses 
says Gyrus Capital’s Guy Semmens.

It serves as a reminder of how important portfolio management is to manage business risk and it is expected that this will significantly influence M&A activity in 2021.

Other defensive strategies like portfolio restructuring and divestment of non-core assets or sale of distressed assets to strengthen the balance sheet are not being prioritised in Switzerland.

Among CFOs in Switzerland, acquisitions to accelerate digital transformation (54%) are the most prioritised offensive M&A strategy. This is much higher than the European average of 31% and reflects to some degree the increasingly important role that technology will play in a post-crisis environment.

Given the impact of COVID-19 on the competitor landscape and the potential availability of targets, competitor acquisition and strategic alliances also feature strongly among the offensive M&A strategies. Almost every second CFO in Switzerland – far more than in most other European countries – considers the acquisition of competitors to accelerate consolidation in their sector and/or pursuing strategic alliances with corporate peers and ecosystem start-ups, a priority. Only CFOs in Italy prioritise competitor acquisition more strongly.

While the offensive M&A strategy of acquiring disruptive innovation assets to enter new growth segments is of higher priority in Switzerland than in most other European countries, 54% of CFOs in Switzerland nevertheless say that this strategy is currently not a priority. This may, in part, be explained by the lower levels of confidence about growth opportunities among CFOs in Switzerland.

Acquiring assets to drive the sustainability agenda is a lower priority in Switzerland than in all other European countries. Almost every second CFO in Switzerland does not consider acquisitions to drive sustainability a priority. This is surprising in light of the fact that the post-pandemic M&A environment is widely expected to be materially different, with much stronger links between sustainability and commercial success presenting new opportunities for market leadership. Guy Semmens of Gyrus Capital comments that:

Businesses with a positive sustainability and societal impact (ESG) are high on the wish list of private equity and corporates. Private equity likes their future-proof character, while corporates seem to appreciate the positive reputational value. COVID-19 is accelerating this trend.

In a further indication that 'responsible business' remains a key topic in Switzerland, it is worth noting that despite the Responsible Business Initiative, which aimed to ensure that companies uphold human rights and environmental standards in their operations and throughout their supply chains, being recently rejected in a nationwide vote, the result was very close and shows the increasing resonance of the topic. The less stringent counter-proposal, which still insists on certain reporting requirements, will now come into force.

Robust post-COVID scenario planning a key M&A execution priority

In a clear indication of the impact of the pandemic on M&A activity, robust post-COVID scenario planning is, unsurprisingly, regarded as the highest M&A execution priority for CFOs in Switzerland (59%). CFOs in Austria and Italy also see it as a high priority and it emerges as clearly important across other European countries as well, with a European average of 47% (see Chart 3).

Accelerated post-merger integration and realisation of synergies is ranked as either a “must have” or of “high importance” for more than half of CFOs in Switzerland. With 31% also indicating they have the right internal capabilities to execute on M&A deals and support the post-deal transformation process, they should be well positioned to achieve success in this regard. Jean-Romain Falconnet, M&A Director at Galderma, confirms that:

Once a certain valuation threshold is achieved, the priority for corporates can shift to a smooth transition and a fast and clean exit, giving preference to a buyer that lays out clear plans to take good care of the business and the people.

The highest “must have” priority of CFOs in Switzerland (20%) is effective remote deal diligence and risk management process. This – together with the fact that more than half of CFOs in Switzerland regard confidence in financial projections and growth plans of targets as a top priority – clearly reflects the heightened need in an increasingly uncertain environment for accurate information, clear risk assessments and well-managed due diligence processes. Confidence in financial projections and growth plans remains a clear and consistent priority across Europe, with CFOs in Germany and Austria, in particular, also strongly prioritising remote deal diligence and risk management. According to Galderma’s Jean-Romain Falconnet:

A well prepared and highly competitive M&A sell side process can be a major source of value generation in M&A for a seller. COVID-19 did not materially impact the way cross-border M&A processes are run since virtual processes and use of technology have become the norm in M&A over the last decade already.

Guy Semmens from Gyrus Capital adds that:

COVID-19-related restrictions are challenging in-person interaction, which remains a critical component not only to source, originate and negotiate transactions, but also to create trust between a buyer and the target’s management team.

Re-emphasising the importance of trust, more than half of CFOs in Switzerland (53%) ranked establishing trust with stakeholders such as regulators, governments and consumers as a highly important priority. Slightly more CFOs in Austria were of a similar opinion. This aligns with the view that in the aftermath of COVID-19 building trust across a wide coalition of stakeholders will be a key part of deal-making. Surprisingly, prioritising stakeholder trust was a markedly lower priority across the rest of Europe.

In a clear nod to the rapid change in work models as a result of COVID-19, cultural integration amid changing working patterns is ranked as a “must have” by 11% and as highly important by 31% of CFOs in Switzerland. This is much higher than the European average of 35%. However, safeguarding against threats of cyber-attacks and deal leakages was ranked as of “low importance” or “no importance at all” by one third of CFOs in Switzerland. With the exception of Austria, countries across Europe also indicated that this was a low priority.