M&A activities in 2017: SMEs make strong purchases
Swiss SMEs are healthy and were keen to make acquisitions in 2017: The number of mergers and acquisitions rose to 201 in 2017 compared to the previous year, according to Deloitte's new study on the M&A activities of SMEs in Switzerland.
SMEs remain the most important driver of M&A activity in terms of numbers. In 2017, Deloitte recorded 201 M&A transactions involving Swiss SMEs, an increase of 5.2% compared to the previous year. The upward trend observed in 2016 is thus continuing, although the number of transactions is still relatively clear below the levels of 2013 and 2014, according to the study published on January 29. "Since the franc shock three years ago, many SMEs have increased their efficiency, invested in innovation and quality, and made their prices more competitive. They are also generally profitable and have little debt. Their focus on growth has stimulated the transaction market and will continue to fuel it," explains Jean-François Lagassé, Senior Partner Financial Advisory at Deloitte Switzerland.
North American companies love Swiss SMEs
Last year, 141 Swiss SMEs gave up their independence to competitors or investors, each of which took over the majority of the capital. This is an increase of eight percent, which is mainly attributable to domestic buyers (71 transactions, +16%). SME acquisitions by foreign companies increased minimally from 69 to 70 transactions. "Entrepreneurial families without successors like to sell to Switzerland. Many foreign investors acquire Swiss SMEs because they want to position themselves more internationally and benefit from the location and know-how in the long term," explains Jean-François Lagassé. Foreign buyers came mainly from North America (17 transactions, +89%) and Germany (15 transactions, +88%). French (8 transactions, -58%) and especially Chinese buyers (1 transaction, -66%), on the other hand, held back in 2017. "Chinese investors have never occupied a significant position in SME transactions in this country in recent years. Rather, they have invested in larger companies. After the Chinese government exhorted companies to be more cautious in their investments last year, the significance has decreased even further. Swiss SMEs are still a bit far away for Chinese investors," says Stephan Brücher, Partner and Head of Corporate Finance Advisory, assessing the situation.
Swiss tech companies go into foreign hands
Companies from the technology, media and telecommunications sectors gained strongly in attractiveness in the course of the M& activities, with 17 transactions (previous year: 9, +89%). "In many industries, digitalization promotes growth and increases productivity. Foreign SMEs want to actively exploit the potential of new technologies and invest in Swiss companies to develop further. We have a world-class research hub here, offer a top-class talent pool and still development-friendly framework conditions that are very attractive to foreign investors," says Stephan Brücher. Also, several Swiss fintech companies have grown strongly in the past year and were able to close large financing rounds. This puts them on the radar of international private equity firms or large financial services providers. "Some Swiss fintech companies could be bought back or attract new strategic investors in 2018," is Jean-François Lagassé's assessment.
Swiss SMEs are also increasingly buying companies abroad
Despite the significant increase in domestic transactions, local SMEs continue to cultivate M&A activities abroad as well. The number of foreign investments fell only minimally to 60 after last year's record of 61. Swiss SMEs buy what they know and what is close to them: 82% of acquisitions were made in Europe and 57% in Switzerland's neighboring countries. Germany remained the preferred destination with 25 acquisitions (42% of all transactions). "Despite the devaluation of the Swiss franc, the still brisk purchasing activity abroad proves that local companies are seizing external growth opportunities in Europe and beyond. The still high level of foreign investment reflects the robustness of Swiss SMEs and the encouraging growth prospects in the euro area. Swiss SMEs are thinking long-term and continuing to diversify into further regions and sectors," comments Stephan Brücher on these figures.
There seems to be no shortage of capital and liquid assets, and many investors are intensively looking for profitable investments: quite a few are buying Swiss SMEs in this situation; foreign funds in particular took hold in 2017: in 2017, 28 Swiss SMEs were the target of a majority capital takeover by private equity funds (+23%). Of the funds, 32% originate from Switzerland, 61% are based in the rest of Europe. American funds made only two acquisitions, Asian funds stayed away from the market as in the previous year.
Clear increase in M&A activity expected for 2018
Three years after the franc shock, the economy has recovered. The decline of the franc against the euro gives companies room for higher profits and boosts the confidence of export-oriented Swiss SMEs. "The year 2018 should develop promisingly for Swiss SMEs. The prospect of a stable currency at around CHF/EUR 1.20 is stimulating exports and encouraging a willingness to invest. In particular, many need to expand manufacturing facilities and modernize operations," Jean-François Lagassé elaborates.
Nevertheless, great caution is called for, as currency fluctuations can hardly be predicted. "The SNB could follow in the footsteps of the ECB and the US Federal Reserve to quickly normalize its monetary policy. That would abruptly end the depreciation of the franc. In addition, it is also important for Swiss SMEs that the reform of corporate taxation moves forward quickly and that the relationship with the EU is regulated in a forward-looking and business-friendly manner," says Lagassé.
