Swiss SMEs

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M&A activity of Swiss SMEs in 2020

From fall to rebound

After a significant drop in the M&A activity of Swiss SMEs over the first 9 months of 2020, M&A transactions returned in force in the fourth quarter and Switzerland recorded a moderate decline in its M&A activity volume (-4.6% ).

The global M&A market in 2020 was a year generally characterised by a sharp dichotomy due to COVID-19. The first half was severely impacted by the arrival and rapid spread of the virus internationally and marked by the uncertainties that this created. From the start of the third quarter, the confidence level recovered and companies became more pragmatic in initiating mergers and acquisitions, or resuming transactions interrupted earlier in the year.

As a result, the global M&A market quickly rebounded at the end of the year to reach $3.6 trillion in 2020 - a moderate decrease of -5% compared to 2019 (-3.8% in volume). The same scenario has unfolded on the Swiss market, with a moderate contraction in the number of transactions (187, or -4.6% compared to 2019) conducted by or targeting Swiss SMEs.

In July 2020, at the time of publication of our study analysing the first half, the finding was clear: a historic fall in the M&A activity of Swiss SMEs amid the turmoil of the COVID-19 crisis (-24.2% in volume). An entirely different story unfolded in the second half, with a less marked slowdown in the third quarter and a noticeable catch-up effect in the fourth due to the creation of a backlog of transactions that had the effect of limiting the decline in activity over the year.

M&A activity of Swiss SMEs in 2020

Key points of the survey

Evolution of the number of transactions since 2013

Acquisitions of Swiss SMEs: a stability masked by the interest of Swiss buyers and the caution of foreign investors

Private Equity: record involvement in 2020

M&A activity (sales and purchases) involving a private equity fund reached a record level in 2020, both in absolute (83 transactions) and relative (44% of transactions) terms.

Outlook for 2021

The quarterly analysis says a lot about how far we have come in the midst of the pandemic. This activity, saved by a frenzied year-end, confirms that new mergers and acquisitions opportunities are emerging for companies and investment funds in 2021.

Today’s environment is disrupting how businesses are run and supplied, how employees work and how people consume. These trends existed before COVID-19, but have been greatly accelerated this year in response to the fight against the pandemic. COVID-19 has stepped up the already existing trend towards digitalisation at companies, which have had to quickly strengthen their skills to locate their consumers or simply to keep them. In order to shorten the value chain, companies have also begun conducting more local transactions in order to secure their supply. The COVID-19 pandemic likewise reiterated the importance of a diversified portfolio of assets for companies and investment funds. This highlights the value of resilient cash flows and the significance of effective business portfolio management to manage business risk.

This context will likely fuel M&A activity in 2021, with restructuring programs and portfolio reviews operated by both the winners and losers of the pandemic. The recovery that began in the fourth quarter of 2020 is expected to gain momentum, and the hardest-hit companies may consider more divestments. The outlook is brightening, with high levels of liquidity, persistently low interest rates and an unprecedented amount of cash for investors. Bank financing is also accommodating buyouts of quality companies, and the accumulation of uncompleted transactions in 2020 should act as a stimulus in 2021. These reasons for optimism are still mitigated by the renewed lockdowns currently taking place in several countries and the delays in vaccination campaigns.

We expect some sectors to benefit from the pandemic, with accelerating transactions in the financial services, technology, healthcare and industrial sectors. Valuations are likely to remain high for quality assets, with intensifying competition. The way in which transactions are conducted is also changing, with more selective transactions, rapid decision-making and sellers valuing the certainty and conditions to complete a transaction rather than maximising the price. Similarly, companies and sectors affected by the pandemic and undergoing restructuring could sell for lower prices. Investors could thus benefit from the COVID-19 crisis.

Confidence in financial projections and growth prospects are the highest priority for buyers now more than ever given the uncertain environment. Therefore, earnouts could have a heightened importance and their periods may be extended. Working capital will also be under close scrutiny, with the upheaval in payment cycles and inventory management in the current environment.

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