Swiss M&a Market Slowing Down
The Swiss M&A market has experienced a slowdown in the second quarter of 2012 compared to the previous quarter and the second quarter of 2011.
When compared to Q1 2012 figures, the most recent count of M&A transactions announced in Q2 showed a decrease of 11 percent. Previously, accounting and business consulting firm Ernst & Young reported that the Swiss M&A market showed a strong fourth quarter in 2011 in terms of number of transactions as well as disclosed deal volume, which grew by over 150% compared to the previous quarter.
In terms of deal volume, figures declined by as much as 66 percent when compared to record-breaking Q1 2012. This is in contrast to the CHF 71 billion rise in deal volumes reported last May, 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.
However, when excluding the announced merger between Glencore and Xstrata, representing over two-thirds of deal volume in Q1 2012, deal volume increased slightly. Looking forward, Swiss M&A activity for the remaining quarters of 2012 is forecast to be fairly stable around its current level.
Jürg Stucker, Head Mergers & Acquisitions at Ernst & Young Switzerland, says: “When compared to Q1 12 figures, the recorded number of 141 M&A transactions in Q2 12 (compared to 158 in Q1) represents a decrease of approximately 11 percent.”
In terms of deal volume, figures declined by almost 66 percent to about CHF 24m, when compared to Q1 12. However, the significant decrease results as the Glencore/Xstrata deal was included in Q1 12 figures. Compared to the second quarter of the previous year, total number of transactions and deal volume decreased by almost 22 and 14 percent, respectively.
With a performance of negative 3.7 percent in Q2 12, the Swiss Market Index (SMI) lost grounds compared to the first three months of 2012, and closed with a 2.0 percent loss for the trailing twelve-month period. Although the index increased significantly towards the end of June with positive news and initiatives expected to emerge from the most recent European summit, held on end of June in Brussels, Belgium.
As in previous quarters, none of the industry sectors achieved a positive stock performance in the preceding twelve-month-period. The best performing industry was the healthcare sector, improving its performance by almost six percentage points in Q2 12, but still showing a negative performance of over 7 percent in the last twelve months. The weakest performance was recorded in the energy, transportation and utilities sector, as the industry remains influenced by legal issues, restructuring measures and environmental changes.
In the second quarter of 2012, media, technology and telecommunications was the most active industry in Switzerland for the fifth consecutive quarter, accounting for 22 percent of all deals. Industrial Goods and Services as well as Retail and Consumer Products followed with the second highest deal activity, with 16 and 14 percent, respectively. Together, these top three sectors accounted for more than half of all Swiss-based M&A transactions.
In terms of deal size, the share of large M&A transactions of more than CHF 250m increased to 39 percent of all announced transactions with disclosed transaction value when compared to the previous quarter, while the midmarket segment between CHF 50m and CHF 250m was able to expand its relative share from 24 percent in Q1 12 to 29 percent in Q2 12. As a consequence, the number of small transactions declined to 32 percent.
As the continuing economic uncertainty within the European Union continues to be a dominating force in European M&A activity, Swiss companies which were to profit from a strong Swiss Franc when acquiring new businesses may tend to wait for a clearer economic environment before conducting outbound transactions.
With ongoing restricted credit availability, companies that are able to finance acquisitions with significant equity contributions are expected to prevail as potential buyers in the current market environment. As Swiss companies are traditionally less levered, this might be an advantage in doing deals.
Overall, Swiss M&A activity for the remaining quarters of 2012 is forecast at Q2 12 levels. Nevertheless, as the Swiss economy continues to show signs of short term growth as well as stable economic indicators, we stay cautiously optimistic, especially if progress is made in resolving the European sovereign debt crisis.