M&A Trends in a Record Year for Switzerland

Global M&A flourished in 2021, leading to a record year in Switzerland. Generally, the M&A market and, in particular, the private equity market are in good shape, despite various uncertainties (eg, the Russia-Ukraine conflict, the fragile pandemic situation, and looming increases of interest rates). Switzerland remains attractive for investors, with various investment opportunities, and succession planning has become a very important topic for numerous SMEs. Approximately 80,000 SMEs will need to deal with succession planning in the coming years. In addition, Swiss companies continue to transform and reshape their portfolio through M&A transactions.

This overview aims to identify the drivers that have shaped M&A developments in 2021 and early 2022, and that are expected to continue to play an important role in the near future, as well as to highlight a number of headwinds that might also have an impact.

Acquiring digital and related tech capabilities became increasingly important amid the increased digitalisation during the pandemic. A high number of companies divested non-core assets via spin-offs, which, in turn, enabled them to invest in higher growth areas, and further spin-offs are expected in the foreseeable future. Based on the valuations and the keen interest of investors relating to innovative targets in particular, in the tech sector the authors believe that the demand for new technological capabilities and underlying innovation will continue to grow.

In the current market environment, there is significant participation not only from corporate buyers but also financial investors, venture capital and corporate venture capital. We have also seen greater value from add-on deals (in which investors buy and combine multiple platform assets to create scale). An excellent example of such a buy-and-build strategy is the Swiss IT Security Group, which was sold to Triton by Ufenau Capital Partners.

Furthermore, while special purpose acquisition companies (SPACs) are not a new concept (in particular, in the USA), a framework has been implemented in Switzerland and since December 2021, SPACs may be listed on the SIX Swiss Exchange and such "blank-cheque companies" have joined the Swiss "investor" landscape.

While 2020 and 2021 were record years for SPACs in the US market, Switzerland joined the SPAC party late. On 15 December 2021, the first and so far only SPAC in Switzerland was listed. Meanwhile, the hype in the rest of the world seems to be decreasing as the competition for good takeover candidates goes up, driving up multiples for sought-after assets. At the same time, US studies show that companies that went public through SPACs performed worse, accordingly dampening the trend. The general reception and success of that financial vehicle is yet to be explored.

ESG is rapidly becoming front of mind for investors, customers and employees, and rising to the top of corporate agendas as well. Energy and natural resources companies are especially focused on ESG deals.
Many view a well-devised corporate ESG strategy as a positive indicator for growth. The increased importance of ESG for investors has also had an impact on the legal industry, as clients require advisers to perform diligence on a target's ESG policies and assess ESG risks.

Activity on the Swiss M&A market remains strong. The recovery in deal activity after the first lockdown in 2020 continued through 2021, which saw a record year with regard to deal count: 604, as opposed to 363 deals in 2020. M&A deal flow and volume was particularly high in the TMT, industrial markets, and pharmaceuticals and life sciences sectors. The significant deals in these areas in the recent past were:

The regulatory environment in Switzerland is very investor friendly. To this day, there are no general foreign investment restrictions in Switzerland based on national interests and applying irrespective of the industry sector that would impose general notification obligations on foreign investors (this may change, as there is a legislative project under way concerning the implementation of a still-liberal investment control regime). Exceptions apply for certain industries and sectors (eg, banking, securities trading, insurance and real estate). Globally, the screening of, and regulations around, foreign direct investments have grown steadily and strongly over the past decades. By comparison, the UK's National Security and Investment Act only entered into full force in January 2022.

Although increases of interest rates have been announced, they are still low and the borrowing conditions remain generous, which promotes fundraising and puts pressure on investors to invest. Private equity investors, who tend to be highly leveraged, have heavily benefitted from this environment in recent years. However, rising energy prices have had a significant impact on headline inflation, prompting the US Federal Reserve to signal it will reduce its balance sheet holdings at a faster pace than initially anticipated. If central banks and governments phase in more neutral or austere fiscal policies, deal financing may tighten, and global M&A may level off. In such a scenario, spillover effects with an impact on the Swiss market may be expected.

While COVID-19 had a negative impact on certain economic sectors and citizens' social life, M&A activity in Switzerland experienced an unexpectedly fast recovery after the first lockdown in 2020 and M&A deal activity developed positively in 2021 as market participants adapted quickly to the new environment (eg, fewer physical and more virtual meetings, and remote signings and closings).
Despite geopolitical uncertainties and ever-developing new variants of COVID-19, the authors generally expect the Swiss M&A market to continue to be strong in 2022 and anticipate that the TMT sector will remain very attractive for investors (with corresponding high valuations).