Swiss SMEs with record takeovers abroad despite M&A decline

Overall, Swiss SMEs carried out significantly fewer transactions in 2023 than in the previous year. Between January and December 2023, there were a total of 211 transactions (2022: 244 transactions), which corresponds to a decrease of 13.5%. These are the findings of the latest Deloitte study on M&A activities by Swiss SMEs. The main negative driver was inbound transactions - i.e. those activities in which Swiss SMEs were the target of foreign takeovers. These fell by more than a third to 64 transactions (-34.7% vs. 2022). This is the lowest level since 2015.

The picture is more positive for those takeovers in which Swiss SMEs acted as buyers of foreign companies. This is a trend that had already begun in 2022: while cross-border transactions were primarily driven by inbound investments in the past, more outbound transactions have been observed since mid-2022. As a result, Swiss SMEs mainly acted as buyers of foreign companies and were less frequently themselves the target of mergers or acquisitions by foreign investors. At the already high level of 2022, the number of M&A activities by Swiss SMEs abroad increased again slightly in 2023 (+1.3% vs. 2022). In total, Swiss SMEs acted as buyers of foreign companies in 76 cases. This is the highest figure since Deloitte began its survey in 2013.

Meanwhile, domestic transactions, i.e. takeovers of Swiss SMEs by domestic companies, remained unchanged at a total of 71, which is roughly the average compared to the last 10 years. Looking at 2023 as a whole, M&A activity among Swiss SMEs slowed from the first to the second half of the year. For Anthony West, Partner and Head of Corporate Finance Switzerland at Deloitte, there are several reasons for this development: "For Swiss SMEs, the strong Swiss franc makes foreign companies attractive takeover targets - this explains the continuing rise in the figures here. The situation is different for foreign investors: Significantly higher inflation, fears of recession and difficult economic conditions resulted in a more cautious attitude on the part of these companies and investors, leading to a sustained downturn in mergers and acquisitions in Switzerland."

Intensive takeover activities in industry and IT

German-speaking Switzerland accounts for the largest share of all inbound M&A activity at over 81%. With 40 transactions, companies from the canton of Zurich are the main drivers of M&A activity in Switzerland. European investors are particularly interested in Swiss SMEs: they are responsible for almost three quarters (73%) of all inbound transactions. The most important single market is Germany, followed by the USA (see chart 2). The fact that Germany remains the largest single market is particularly noteworthy, as the country fell into recession last year.

The focus on the sectors in which foreign investors are interested is also significant: in 2023, industrial companies and IT and software companies were the main targets of takeovers (both 21% each), followed by companies operating in the life sciences and healthcare sector (16%). While foreign investors were primarily interested in Swiss industrial and IT service companies, Swiss SMEs targeted companies in the industrial (28%) and life science and healthcare sectors (20%) when acquiring foreign companies.

"These figures are a seal of quality for Swiss industry and local IT and software companies," says Stephan Brücher, Partner Financial Advisory at Deloitte Switzerland. "The high level of interest shown by foreign investors in these sectors underlines the importance of the Swiss SME landscape and start-up community. They offer IT and software services and manufacture products, for example in medical technology, which are global leaders and therefore very attractive to foreign investors. However, the sharp decline in foreign takeovers shows that Swiss SMEs are becoming increasingly unaffordable for foreign buyers, particularly due to the strong Swiss franc. In the long term, this can lead to a lack of urgently needed investment in companies, for example for product development," warns Brücher.

Decline in private equity activities

Private equity (PE) funds operate away from the stock markets and often acquire companies in order to transform them and later sell them at a profit or float them on the stock market. There is also a trend towards more domestic transactions in company takeovers by PE funds, with a simultaneous decline in investments from abroad. In 2023, PE takeovers fell by 18% to a total of 77 transactions (vs. 2022: 94 transactions). This mainly relates to inbound transactions by foreign buyers. However, takeovers of Swiss SMEs by Swiss PE funds have risen sharply. These now account for 42% of all takeovers, which is the highest level recorded since 2013. This last point can be explained by the relatively low financing costs (interest rates) that still exist in Switzerland.

Tense situation allows only cautiously optimistic outlook

Figures from the State Secretariat for Economic Affairs indicate slight economic growth of 1.1% for the current year. This is well below the historical average and is due to the long-term effects of the pandemic on the one hand, and geopolitical developments and, at best, hesitant economic developments and reform backlogs in key sales markets on the other. Investor sentiment is also being hit by the effects of monetary policy tightening to reduce inflation and possible savings efforts in view of the high level of debt and a still very slow-growing economy.

The decline in M&A transactions in 2023 has piled up investment potential for the current year. Jean-François Lagassé, Vice-Chair and Head of Financial Industry at Deloitte Switzerland, comments: "The Swiss M&A market could show signs of a slight recovery in 2024. This cautious optimism is based on the expected interest rate cuts by central banks in the industrialized countries and the backlog of transactions from 2023, coupled with very modest economic growth forecasts."

Source: www.deloitte.com