FOCUS: Strong Swiss Franc Seen Spurring Swiss Firms Into M&A
02 February 2011 - 12:03AM
Dow Jones News
The strong Swiss franc is expected to fuel more merger and
acquisition deals in 2011, as cash-flush Swiss companies exploit
the currency's buoyancy in pursuit of euro- and U.S.
dollar-denominated targets, experts and companies told Dow Jones
Newswires.
They expect the flurry of fourth-quarter deal-making to continue
into 2011, in large part because the strong Swiss currency makes
deals in the euro zone and the U.S. particularly enticing. The
fourth quarter saw a spurt of deal-making, including major
transactions like Novartis AG's (NVS) $38.7 billion purchase of
Alcon Inc. (ACL) from Nestle SA (NESN.VX), ABB Ltd.'s (ABB) $4.2
billion bid for Baldor Electric Co. (BEZ) and CVC Capital Partner
Ltd.'s $3.5 billion purchase of Sunrise Communications AG from
Danish telecommunications provider TDC A/S (TDC.KO).
The rise in the value of the franc makes it much cheaper for
Swiss firms to conduct deals overseas. The currency gained around
16% against the euro and 7% against the dollar last year, partly
due to its status as a safe haven for investors.
"With this development [strength of the Swiss franc],
mergers-and-acquisitions activity is anticipated to remain strong,
in line with the fourth quarter of 2010," said Juerg Stucker, head
of Swiss M&A at Ernst & Young.
Having stockpiled cash during the financial crisis, when
financing was far tougher to come by, many Swiss companies are
sitting on ample war chests that can be put to use for deals, and
will be pushed to do so by shareholders, predicts Ernst &
Young. Many Swiss companies have already started to look beyond
their borders for M&A targets, particularly in emerging
markets.
"The currency situation makes some companies act because they
don't want to miss out while the franc is strong," Howard da Silva,
head of corporate finance at Deloitte in Zurich, said.
Swiss chemicals company Sika AG (SIK.EB) aims to spend around
200 million francs ($213 million) on acquisitions this year.
"We suffer a bit when we translate money back into francs, but
it helps when it comes to buying things. It means we can buy a bit
more with the same amount of money," Sika spokesman Dominik
Slappnig added.
Because domestic demand is moderate, many Swiss firms like Sika
are hunting for growth outside Switzerland's borders, and have the
cash to do so. Strong balance sheets and the currency situation
give companies confidence to do deals, Deloitte's da Silva said,
with many buying companies to access emerging markets or to add new
technology or products.
However, E&Y said deal-hungry Swiss firms are also taking a
bet on currencies, even if the strong franc is making targets
cheaper.
"Firms are also buying cash flows in these currencies [euros,
U.S. dollars], which begs the question of whether they will recover
or not--it can be a bit of a gamble on currencies," said Louis
Siegrist, Zurich-based head of transaction advisory services in
Switzerland with Ernst & Young.
Healthcare, energy and technology are specific sectors where
experts such as fund managers are betting on an increase in
takeovers globally," Dexia Asset Management's Ludovic Ferras
said.
Debt markets are stable enough for more companies to bolster
their cash piles, should need be, while a gradually recovering
economy provides a more confident backdrop for companies to pursue
deals, according to Dexia's Ferras, and low prices provide an extra
incentive to hunt targets.
For services-based companies like SGS, on an acquisition tear in
recent weeks as part of 2014 targets, deal-making based on the
strong franc ends up being a zero-sum game because revenue and cash
flow being bought are eventually translated--unfavorably--into
Swiss francs, SGS executive Jean-Luc de Buman said.
"It depends what you're buying: if you're an industrial
company--not a services one like we are--and machinery, equipment
and similar assets form the largest part of your acquisition, then
it's cheaper at the moment. But for service-based companies, it's a
zero-sum game," de Buman said.
Travel company Kuoni concurred, saying that while the strong
Swiss franc isn't reason alone to hunt for acquisitions, its
buoyancy certainly helps.
"For instance in auctions, it becomes more obvious that the
strong Swiss franc affords us the opportunity to put a little bit
more in, which can be an advantage even if it's not the deciding
factor on whether we do a deal," Kuoni spokesman Peter Brun
said.
To be sure, there is little indication companies will return to
the levels of deal-making seen before the financial crisis.
Winterthur-based oil and gas industry supplier Sulzer AG (SUN.EB),
which wants to spend up to CHF1 billion on acquisitions this year,
with a particular focus on emerging markets, said its deal focus is
still firmly on what fits strategy, not currency.
-By John Revill and Katharina Bart, Dow Jones Newswires; +41 43
443 8042; john.revill@dowjones.com