Impact of a strong Swiss franc on the M&A activity: challenges & opportunities
The discontinuation of the minimum CHF/EUR exchange rate triggered significant market reactions. On the announcement day, the Swiss franc appreciated by 20% and the Swiss Market Index (SMI) fell by 8.7%, the largest daily percentage drop in the last 25 years. In addition, the Swiss Gross Domestic Product (GDP) growth prospects for 2015 were cut by half, from 2.0% to just under 1.0% (source: SNB)
Now six months after the initial shock the EUR has stabilized at around 1.04 CHF, still below the initial expectations of 1.10 CHF, and the SMI is back to pre-announcement levels. While the dust has somewhat settled down, the long-term effects of the Swiss National Bank’s (SNB) decision on the domestic economy are still much debated. This new situation creates substantial challenges but also opportunities for Swiss companies including those related to M&A.
Two opposite forces at play:
On the one hand, especially Swiss mid-sized companies with an important domestic cost-base and selling their products abroad are badly affected by these currency developments and have to now focus on operational issues. On the other hand, the strengthening of the Swiss franc against all major currencies is creating a unique opportunity to acquire strategically relevant targets abroad at a significant discount.
Impact of strengthening Swiss Franc on M&A activity – historical evolution (2009-2014):
Over the 2009-2014 period, while starting at a low point, the total number of transactions involving a Swiss party increased by 52.2%. At the same time the Swiss franc appreciated by 30.4%.
Outbound M&A (Swiss companies acquiring foreign targets) grew by 97.1% since 2009, outperforming the inbound and domestic investments. In 2014, outbound M&A accounted for two third of all cross-border deals.
While there are multiple factors influencing the M&A activity, looking at historical transactions of Swiss companies abroad, foreign exchange rate's benefits appear to be an important driver. However, the number of inbound transactions also increased by 71.2% over the same period. Higher prices have not deterred foreign players’ interest in the Swiss know-how.
|CHF/EUR evolution (2009 until now)||Nb of M&A transactions by investment destination|
Source: SNB, KPMG
2015 year-to-date M&A activity evolution:
During Q1 2015, 65 transactions were announced, which is 44.9% lower than in Q4 2014 and represent a 37.5% year-on-year decrease. At the same time, volume remained stable due to three large deals which accounted for 67.8% of the total volume in the first three months of 2015. In addition, the Swiss GDP declined by 0.2% in Q1 2015, the first time the economy contracted since Q3 2011.
Moreover, initial data coming in for Q2 2015 indicates a continued decline in terms of number of deals and volume; both dipping below long-term their historic average.
M&A activity per quarter (Q1 and Q4 only)
Source: KPMG, Ernst & Young
The sharp and abrupt appreciation of the Swiss franc appears to have negatively affected the domestic economy as well as the M&A activity in Q1 2015. Indeed, Swiss CEOs and CFOs have been busy trying to assess the impact of SNB’s decision on their companies’ profitability rather than focusing on external growth.
It has also created uncertainty putting off even experienced potential buyers, since it is unlikely they will sign a purchase agreement before they have fully understood the foreign exchange impact on margins and balance sheet of a Swiss based target.
Implications and M&A outlook:
Dealing with a strong domestic currency is a constant challenge for most of the Swiss mid-sized companies. Over the last five years, while the Swiss franc has continuously appreciated, businesses have shown tremendous flexibility. Thanks to important restructuring measures, they became leaner and more efficient allowing them to maintain sales and profitability levels as well as to generate positive cashflows. This increase in productivity combined with the ability of Swiss companies to procure goods and services from the Eurozone at a lower price helped the domestic economy to remain very competitive until now.
When the SNB decided to abandon the minimum CHF/EUR exchange rate, Swiss companies were taken by surprise and had no time to prepare for such a sudden and significant appreciation of the currency. This in turn led to a sharp decrease in the M&A activity.
However, top management will have to continue to optimize their portfolio in order to maintain competitiveness. Therefore, we expect that after an initial period of focus on operational measures, the situation will stabilize and M&A topics will again be part of Board’s discussions.
Indeed, the unique combination of negative yields on cash, favorable financing conditions and the fact that strategically relevant companies abroad have become significantly cheaper, creates a strong incentive for Swiss mid-sized companies to invest internationally:
- Historically low interest rates: underlying 12 months CHF LIBOR currently at -0.65%
- Strong price discount: 30% when compared to 2009 CHF/EUR exchange rate and still 15% to the Swiss franc fair value estimated at around 1.25 EUR (source: FT, RBC Capital Markets)
- Realization of operational improvements: rebalance domestic costs to cheaper locations and exploit new markets with higher growth potential – i.e. acquisitions abroad as long-term strategic measures to overcome problems caused by a strong domestic currency
As exclusive Swiss partner to Mergers Alliance, a strong international M&A network, we are in daily interactions with our colleagues and have access to attractive opportunities abroad in many sectors. We would be happy to continue the discussion and introduce you to potentially interesting ideas.