M&A activity in 2023: Fewer acquisitions by SMEs

The number of mergers and acquisitions involving small and medium-sized enterprises (SMEs) from Switzerland has decreased compared to the previous year. This is shown by the new Deloitte study on M&A activities of Swiss SMEs. A record was set in acquisitions by Swiss SMEs abroad. Important drivers of this development are IT service companies, which are responsible for more than a quarter of all transactions.

M&A activity in various cantons: Where most acquisitions were completed. (Graphic: Deloitte Switzerland)

Swiss SMEs conducted fewer transactions overall in the first half of 2023 than in the first half of 2022, with the number of transactions falling by 18 percent in the first half of 2023 compared directly to the first half of 2022, resulting in Swiss SMEs being either buyers or targets in a total of 109 transactions, according to the latest Deloitte study on M&A activity by Swiss SMEs. Although overall merger and acquisition activity has declined, there has been a notable increase in acquisitions abroad. While cross-border transactions were primarily driven by inbound investments in recent years, a trend reversal toward more outbound transactions has been observed since mid-2022. This means that Swiss SMEs mainly acted as buyers of other companies and less frequently became the target of mergers or acquisitions themselves.

In concrete numbers, inbound transactions show a significant decline (-54% vs. H1 2022), while outbound transactions reached a record level in H1 2023 (+18% vs. H1 2022). The number of transactions involving Swiss companies as targets (62 domestic and inbound transactions) is one of the lowest since Deloitte began measuring the number of transactions in 2013. There are several reasons for this, explains Anthony West, Partner and Head of Corporate Finance Switzerland at Deloitte: "Currently, foreign investors are showing less appetite for Swiss targets. In addition, local entrepreneurs and owners are hesitant to sell their companies. However, Swiss SMEs are compensating for this by increasing their own buying activity abroad. The main factors influencing these developments are the resilience of the Swiss economy and the strength of the Swiss franc."

Graphic: Deloitte Switzerland

Foreign investors target Swiss IT companies

In terms of transactions, IT service companies lead inbound transactions in Switzerland. With over a quarter of all transactions (26% vs. 21% in 2022), Swiss SMEs in the IT services sector rank first among the various industries, relegating the industrial sector, which was still in the lead last year, to fourth place (13% vs. 22% in 2022). The Life Science & Health Care sector (19%, vs. 14% in 2022) ranks 2nd. In the first half of 2023, buyers of Swiss SMEs were predominantly European (67%) or North American (26%) companies, which carried out a total of 62 transactions. In terms of acquisitions from abroad, it was again Swiss IT SMEs that generated the greatest demand of all sectors.

While foreign investors are primarily interested in Swiss IT services companies, Swiss SMEs are mainly targeting companies in the industrial sector when buying abroad. The IT sector remained the most sought-after sector for acquisitions in the first half of 2023. Europe remained the most important target region for foreign acquisitions by Swiss SMEs, accounting for 83 percent of transactions. Our neighboring countries accounted for the lion's share, with Germany in the lead (36%). Swiss SMEs made the remaining acquisitions primarily in North America.

IT sector very attractive for takeovers

"The great interest in Swiss IT service providers is likely due primarily to the attractiveness of the location as well as the many newly emerging cloud and cyber companies," says Stephan Brücher, Partner Financial Advisory at Deloitte Switzerland. "Emerging IT companies that specifically drive the growth of the IT industry and provide solutions for businesses of all kinds are an important resource in our country. The very active start-up community in this industry is also strongly supported by ETH and EPFL, including through the creation of new start-ups, making Swiss IT companies extremely attractive acquisition targets."

The subdued takeover propensity compared to previous years reflects investors' cautious stance in response to uncertain and volatile market conditions. The first half of 2023 presented companies with numerous challenges, including rising interest rates to curb high inflation, continuing supply chain issues, the ongoing Ukraine war, the strength of the Swiss franc, and turbulence in the financial sector. Although the total number of transactions remains above pre-Corona levels, a trend is nevertheless emerging whereby foreign investors continue to complete fewer transactions in Switzerland.

Continued major challenges for domestic and foreign companies

This situation is unlikely to change much in the second half of 2023. "Sellers are cautious, and foreign investors show little inclination to seek Swiss companies. Swiss SMEs, however, are likely to remain very active and seek foreign acquisitions. The strong Swiss franc makes foreign targets attractive for Swiss investors, while Swiss companies become more expensive for foreign investors. Possible further interest rate hikes are likely to fuel this trend, which could lead to a further decrease in foreign investment in Switzerland," says Jean-François Lagassé, partner financial advisory and head of financial industry at Deloitte Switzerland. "Nevertheless, we remain cautiously optimistic and expect macroeconomic conditions to improve toward the end of the year or early next year. This positive development should then also pave the way for renewed acquisition activity by foreign companies in the Swiss market."

Source: Deloitte Switzerland

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