‘Impressive’ Swiss M&a in 2012 Despite Global Challenges
While the number of transactions in Switzerland remained constant in Q1 2012, deal volume increased significantly to CHF 71b, driven in no small way by the announced merger between commodities trading company Glencore International and mining company Xstrata, one of the largest transactions in Swiss M&A history.
According to Ernst & Young’s latest Capital Confidence Barometer, the outlook on global M&A activity is rather cautious. However, Swiss industry structure and a slightly improved domestic economic outlook are forecast to contribute to modest growth in Swiss M&A activity, as compared to 2011.
The Swiss M&A market recorded an exceptional first quarter in 2012 as disclosed deal volume reached almost CHF 71b, representing total disclosed deal volume of the previous three quarters combined. This significant rise in deal volume compared to the previous quarters is mainly attributable to the announced merger between Glencore International and Xstrata. If completed, the CHF 49b transaction would rank among the largest Swiss deals in recent years.
Louis Siegrist, Head of Transaction Advisory Services at Ernst & Young Switzerland, says: “Even when excluding the merger of Glencore International and Xstrata, total deal volume rose to approximately CHF 22b. That’s an impressive start in 2012.”
With an increase of almost 5 per cent in the first quarter of 2012, the Swiss Market Index (SMI) continued to regain losses incurred mostly during the third quarter of 2011, but still closed with a negative performance of 2 per cent over the twelve month period ended 31 March 2012.
The increase in stock prices is viewed as a positive sign that may indicate a stabilization of the Swiss economy, first signs of which were also noted by the Swiss State Secretariat of Economic Affairs (SECO).
Similar to the last quarter of 2011, none of the industry sectors achieved a positive stock performance in the preceding twelve-month period. The best performing industry was the “Retail & Consumer Products” sector, improving its performance by 5 per cent in Q1 2012, but yet showing a negative performance of 8 per cent over the last twelve months.
The ongoing negative stock performance of the “Energy, Transportation and Utilities” sector is mainly attributable to changes in the industry environment, legal issues and restructuring measures.
‘Media, Technology and Telecommunications’
In terms of industry activity during Q1 2012, “Media, Technology and Telecommunications” was the most active industry in Switzerland for the fourth consecutive quarter. In terms of number of M&A transactions, the sector contributed 26 per cent to all announced deals.
Together with “Industrial Goods and Services” as well as “Energy, Transportation and Utilities”, reaching 15 and 11 per cent respectively, these top three sectors accounted for half of all Swiss-based M&A transactions.
Return to large deal volumes
In the first quarter 2012, large M&A transactions were on the rise and accounted for 29 per cent of all announced transactions with disclosed deal value, up 14 percentage points from Q4 2011.
As small transactions remained fairly constant at approximately 46 per cent, the number of deals in the mid-market segment declined from 38 to 24 per cent. Based on these figures, the increase in total deal volume for the most recent quarter is largely attributable to the shift towards larger transactions.
For the remainder of 2012, the outlook on worldwide M&A activity is cautious, based on Ernst & Young’s latest Capital Confidence Barometer, a survey of corporate executives conducted globally.
Only 31 per cent of those surveyed expect to pursue an acquisition in the next twelve months, the lowest figure since the barometer launched in late 2009. Consequently, caution rather than confidence is driving global M&A sentiment.
With better access to credit and large cash piles, companies have the means and the methods to do deals but their motivation is tempered by concerns over the strength and permanence of the global economic recovery. Concerns over what they see in the short-term are also clouding the longer-term view on critical M&A matters such as valuations.
In terms of industries, “financial services” and “life sciences” are among those industries expected to be most active in executing M&A transactions globally.
Jürg Stucker, Head Mergers & Acquisitions at Ernst & Young Switzerland, says: “As these sectors are well represented within Switzerland’s industry structure, domestic M&A activity may benefit from a continuous deal flow. Nonetheless, with caution prevailing among executives and existing economic uncertainty, the overall outlook for Swiss M&A activity in 2012 remains cautiously optimistic.”
Focus on Asian and Pacific markets in the financial services industry
The Financial Services M&A Breakfast in Zurich, held on 12 April 2012, focused on developments in the Asian and Pacific markets.
The APAC region offers a lot of further penetration opportunities. This in particular for wealth management banks and life insurance, due to a growing base of high net worth individuals and a continuously high savings ratio in many APAC countries.
For Global banks capital concerns remained high on the list of priorities, cost management is moving further up, while acquisitions have moved down. Stock market valuation levels at the end of 2011 were below those in 2008 and show significant regional differences, with a price to book multiple of 1.14x for APAC banks vs. 0.49x for European banks.
Successful growth strategies in APAC are pursued by DBS, Standard Chartered, and HSBC.
Swiss wealth managers are well positioned to take advantage of opportunities which arise, as the Swiss brand stands for stability and remains strong.
Successful players will need to have a presence in both Singapore and Hong Kong. For insurance companies, significant opportunity exists, as insurance penetration is still low and the increasing requirement for mandatory insurance coverage is boosting volumes, particularly in the non-life segment.