“International buyers are very keen to acquire the know-how of Swiss SMEs”
According to Deloitte’s half-yearly report on mergers and acquisitions (M&A) of Swiss Small and Medium Enterprises (SMEs), the number of SMEs acquired by foreign companies jumped by nearly 38% in the first half of 2018 compared with the first six months of 2017. The total number of mergers and acquisitions involving Swiss SMEs increased by 6.4%. Jean-François Lagassé, M&A Deloitte Partner, answers some questions.
This interview by Piotr Kaczor was first published in L’Agefi on 11 July 2018. (Translation by Deloitte.)
The number of mergers and acquisitions involving Swiss SMEs increased by 6.4% in the first half of 2018. Is this development in line with a continental trend?
Yes, there is a trend across the continent and it is more or less in line. In Europe the value of transactions increased in the first half of 2018 but their number was lower.
Do you explain this renewed interest in Swiss SMEs as a clear sign of their strength and attractiveness?
The strength of the Swiss franc in the recent past had led to a decline in acquisitions of Swiss SMEs by foreign companies. We need to go back to the first half of 2014, when the franc was still capped at 1.20 against the euro, to experience the same level of transactions. Indeed, it is only recently, with the rise in the value of the euro against the franc, that acquisitions by foreign companies have resumed.
So the sharp appreciation of the Swiss franc did not encourage Swiss groups to make advantageous acquisitions abroad?
That's right. Instead of taking advantage of the strength of the Swiss franc to make acquisitions, in the EU for example, Swiss companies were busy managing the impact of the franc’s strength to protect their international competitiveness by carrying out internal restructuring.
But you are cautiously optimistic about second half of 2018 and the 2018 financial year as a whole?
Several factors explain why we are only moderately optimistic about the second half of 2018. There are several reasons for this. One is the current rise in trade tensions between the United States, China and the EU. These are creating political and economic uncertainty, and it has been observed in the past that such conditions do not constitute a breeding ground for company acquisitions. A second factor is the rise in interest rates in the United States, which is having a knock-on effect in other financial centres where financing costs are rising. This is all the more detrimental as a growing proportion of acquisitions – more than 35% in Switzerland – are carried out by private equity firms, a sector that relies heavily on debt to finance buy-outs. Prices will therefore be under pressure. Finally, geopolitical tensions such as political instability within the European Union do not favour M&A activity.
Valuations for corporate stocks are at a record 9.5 times EBITDA on average. What is your view about this?
This average multiple applies to all transactions involving Swiss SMEs in the first half of 2018. Since the first half of 2017, the multiple has increased from 9 times to 9.5 times EBITDA. This is the highest level since we first conducted our study. In 2008, this multiple had even fallen to 5.2 times EBITDA.
Industry has been the main sector affected by M&A. Isn’t this surprising for a service economy?
Business services are still in second place. In my opinion, industry has the leading position because Switzerland has a number of companies that are world leaders in niches within their respective industrial sectors. The Germans in particular want to acquire the know-how of Swiss SMEs because of the precision and high technology they use, and which is not found anywhere else.
There has also been an increase in transactions in the TMT sector....
New technology in the TMT (Technologies, Media and Telecommunications) sector, such as artificial intelligence, will drive business growth. In the coming years, we can therefore expect to see a large number of acquisitions of SMEs in Switzerland in this sector, particularly of companies likely to cause market disruption.
The Financial Services sector ranks only third in terms of the number of transactions....
Industry, services and consumer goods together account for more than half of M&A transactions. In financial services, the wealth management sector has seen strong consolidation in recent years. This trend has now slowed down because the exit of foreign banks from Switzerland is coming to an end. Even so the private banks Gonet & Cie and Mourgue d'Algue & Cie recently announced their intention to merge and a large number of other transactions are currently being negotiated in this sector. We ourselves are working on about ten transactions in Switzerland in the field of wealth management and asset management. Swiss companies are merging or seeking to expand their networks within the EU, following the failure by Switzerland to negotiate an agreement for access to the EU market. With the approach of Brexit, some Swiss banks with subsidiaries in England are looking to acquire new entities within the EU to serve their European customers.