KPMG Reviews Swiss Mergers And Acquisitions During 2008

by Ulrika Lomas, Tax-News.com, Brussels

20 May 2009

The new KPMG ‘Merger and Acquisition Yearbook’ shows that M and A activity has been strongly affected by the current economic climate and uncertainty surrounding longer-term prospects. Many companies are revising their budgets, focusing on their order books and cost control rather than growth.

Within the yearbook, KPMG highlights the following trends during 2008:

• Swiss ‘outbound’ transactions outnumbered foreign ‘inbound’ transactions by a factor of 2 to 1, thus once again refuting the general concern regarding an 'Ausverkauf der Schweizer Heimat';
• Double-digit billion dollar deals have become rare;
• Average transaction values have diminished by 30% over 2007;
• Germany continues to be the most important transaction partner for both in- and outbound transactions.

The yearbook also notes the following for 2009 prospects:

• Swiss companies generally have strong cash positions and healthy balance sheets and are well positioned to benefit from market opportunities. As of December 31, 2008, Switzerland was the only developed country in Europe to have an overall net cash position among its largest quoted companies, putting it in an excellent position to take advantage of the current M&A market opportunities;
• Small and mid-sized companies are the backbone of the Swiss economy and expected to be the focal point of M&A activity in 2009;
• Given the difficulties for financial investors, there will be less need for auctions and, therefore, fewer auctions are expected in 2009;
• Due to the impact of the financial crisis, the desire of corporates to tread cautiously and preserve their cash reserves and the reluctance of financial institutions to finance large acquisitions, the number of multibillion dollar deals will continue to be depressed.

Deal volume was largely comparable to 2006 levels, when today's economic climate was largely unforeseen. Deal values, however, tell a different story. Only one transaction in 2008 exceeded the USD10bn threshold, and the aggregate value of deals announced in 2008 was USD50bn - roughly 40% below the nearly USD90bn aggregate value seen in 2007. It remains to be seen whether Roche's drawn-out battle for Genentech (announced in Q1 2009) is a one-off or indicative of a resurgence in major league deals.

The relative weakness of the US dollar during the first half of 2008 does not appear to have led to significantly more foreign acquisitions in the USA. A marginal increase in Swiss companies buying in North America compares to a drop of seven percentage points in North American companies buying in Switzerland. This suggests that dire economic conditions have significantly curbed their appetite for Swiss targets, with the strong Swiss franc being a possible further hurdle. The weaker Euro and British pound do not appear to have affected deals between Switzerland and Western Europe. While the strong Swiss franc is an obstacle for the heavily export-oriented Swiss economy, there remain a number of companies sitting on comfortable cash reserves. Of these, most will tread carefully until they can better assess the duration of the current crisis, though some will profit by using their war chests to make strategic acquisitions.

Industries

With the exception of Consumer Markets, deal volumes fell by between 20% and 50%, with the Chemicals and Processing Materials sector experiencing the steepest decline. Ironically, some of the sectors showing a sharp dip in deal volumes boast relative (Healthcare and Life Sciences) or even absolute (Chemicals and Processing Materials and Industrial Markets) peaks in terms of aggregate deal values. The latter two, however, were distorted by Swiss flagship companies (CIBA and Jet Aviation) being acquired by foreign buyers.

Geographical spread

Domestic Swiss M&A activity in 2008 fell back to 2006 levels, as did acquisitions of Swiss companies by foreign buyers. Swiss acquisitions abroad, however, remained at (high) 2007 levels. These patterns seem to reflect a combination of factors:

• The reasonably healthy status of the Swiss economy (with the possible exception of Financial Services) in the first half of the year while larger European or North American economies were impacted much sooner by the credit crisis;
• Strong strategic rationale;
• The strong Swiss franc and the weaker currencies of potential Euro or Dollar zone acquirers.

Only minor changes were noted in transaction volumes with Asia-Pacific, Russia/CIS and elsewhere.

Strategy focus and further consolidation

The 2007 trend towards core business focus and strategic portfolio enhancements continued in 2008. Distressed sales were rare, with strategic acquisitions dominating the scene. Going forward, growth and consolidation strategies will largely depend on the appearance of a silver lining on the horizon. In most cases, companies will manage their cash reserves very carefully, shoring up their liquidity until future prospects become clearer.

The role of private equity houses, sovereign wealth funds and activist shareholders

While the number of private equity deals declined by 20% compared to 2007 (remaining noticeably above 2004-2006 levels), total disclosed deal values slumped to approximately one third. 2007 saw five PE transactions exceeding USD one billion; there was only one deal of that magnitude in 2008. Private Equity houses may need to redefine their business models, while corporates may need to become more proactive in identifying targets given the lack of auctions. Sovereign wealth funds were heralded either as the saviours of the financial services industry in 2007, or feared as potential poachers in other strategically important sectors. A number of these players are now steering clear of the market, having lost a great deal of value in the stock market crash. Other than the CHF3bn (USD2.7bn) investment in Credit Suisse by the Qatar Investment Authority, sovereign wealth fund activity has been severely limited. Activist shareholder activity, be it by watchdog organizations or by hedge funds who had often assumed such a role, seems to have abated. With a number of hedge funds in acute difficulties of their own, it remains to be seen how they will react to the new economic climate.

Unsolicited takeovers

2008-2009 saw two major drawn-out take-over bids, with Xstrata's offer for Indophil being rejected, while Roche's bid for Genentech finally succeeded in January 2009. Laxey continue to eye Implenia and recent board changes at Sulzer have triggered speculation about whether Sulzer will play a role in the restructuring of OC Oerlikon. Overall, we expect the number of such takeovers to rise.

Outlook

'The impact on M&A of interventions by various governments in bailing out key domestic industry players is as yet unknown. Generally speaking, protectionism within EU member states and the USA could curb shopping sprees by foreign acquirers. Another open question is the effect of the government's agreement to comply with OECD taxation standards; private banks whose core business is in the offshore sector will likely need to rethink their strategies,' notes KPMG’s report.

'It is too early to assess whether the National Bank's efforts to maintain the Swiss franc's rate against the Euro and the US dollar at meaningful levels has any effect on M and A activity. The same applies to the Swiss government's efforts to boost investments in the infrastructure and energy conservation sector. Cantonal banks and similar institutions retain large pools of funds and are widely regarded as the main credit source for small- and medium-sized businesses. Nevertheless, many of these players - particularly those with extended research cycles, such as biotech companies - might turn to larger players for support, and we expect the number of distressed sales to increase. At this point, all eyes are looking for light at the end of the tunnel. Until there are vital signs of a potential economic recovery, it is difficult to forecast what 2009 will bring. Q1 M and A activity provides few clues to further developments in 2009, but we would expect further consolidation in the Healthcare and Life Sciences, Chemicals and Processing Materials, Financial Services and Industrial Market sectors - with domestic deal activity and Swiss acquisitions abroad dominating the scene,' concludes KPMG’s analysis.

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