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Part 2 of the PwC series
Winning through M&A in uncertain economic times
Just as the economy rises and falls in cycles, so have the volume and value of mergers and acquisitions in Switzerland. And as the economic expansion that began in mid-2009 has remained resilient, M&A has achieved new heights. The uptick in deals activity in recent years is the third such wave in the last three decades, and this wave has lasted longer than each of the previous two.
PwC analysed data on mergers, acquisitions, leveraged buyouts, minority stake purchases and other investments disclosed by Swiss acquirers from 2000 to 2019. This analysis is important for understanding how M&A volume and value have behaved historically, as some cyclical trends are likely to endure.
But M&A is also seeing significant structural changes. These include an unprecedented amount of capital and diversity of funding sources for deals. They also include deal strategies that have shifted more capital investment toward emerging technology as the Fourth Industrial Revolution (4IR) continues to unfold. These changes are key to our view that the next M&A cycle will be different, especially as the economy ebbs.
What happened in recent M&A waves
In a typical M&A cycle, deal volumes and values initially decline in line with an economic downturn, often prompted by an exogenous event, like the outbreak of coronavirus (COVID-19). Company management and boards of directors often hesitate on big investments, wary of extending their organisations in a weaker economy.
As companies, private equity (PE) firms and other investors reassess portfolios and strategies, opportunities to buy starts to grow as others decide to sell. Lower valuations for targets during the cycle improve the chances for acquirers to see higher returns. With a greater supply of targets, M&A activity accelerates. This momentum eventually slows as more companies regain confidence and economic footing and valuations again climb, reducing the number of acquisition targets and the prospects of strong returns.
As this trend played out in recent M&A waves, the sectors that have seen brisk deal activity have varied, and the funding for deals has shifted over time, especially as the combined wealth in the world has grown.
1992-2000: Tech deals during the dot-com boom
The rise of the internet follows the 1990-91 recession and the end of the Cold War. Technology, financial services and telecommunications see heavy interest from investors. With the equity market funding a big chunk of M&A, deals include the UBS-SBV merger, UBS’ acquisition of Paine Webber and Credit Suisse’s purchases of Swiss Volksbank, Winterthur Group and Bank Leu. Annual Swiss deal volume more than doubles during this wave, and deal value more than triples.
2002-2008: Financial deals rise
After the burst of the dot-com bubble and the 2001 recession, deal activity in the financial sector and pharma sector increases. Megadeals include the AXA Winterthur merger, Swiss Re’s acquisition of GE’s insurance practice (GEIS), and Merck’s purchase of Serono. Private equity joins the public equity market as a growing source of funding. PE-related deal volume picks up speed, and deal value surges to an all-time high, paced by SIA’s investment in UBS and QIA’s investment in Credit Suisse. Annual Swiss deal value triples during a wave that is shorter than the previous one, while annual deal volume doubles.
2010-2019: Long recovery from the global financial crisis
The global financial crisis and the worst economic recession since the Great Depression spur new regulations that contribute towards a shift in M&A funding. As the equity markets finance a smaller percentage of deals, more corporate cash and borrowing enter the picture. Deals include Glencore’s acquisition of Xstrata, the merger of LafargeHolcim and Novartis’ acquisition of Alcon. PE deal volume grows as investors scour the landscape for returns. Energy and healthcare draw more interest from dealmakers. The increase in Swiss M&A volume and value hits an alltime peak and remains high. More money in the market enables even larger deals.In short, the last three decades have brought fundamental changes in both the players involved in M&A and the money they’ve invested in deals. The mix of capital has evolved, with public financing and bank financing increasingly joined by more privately-funded transactions – all of which has created a historically large pool of capital overall.
How companies that made deals during downturns have fared
Between M&A surges, companies still made deals, with many likely eyeing longterm growth. For deals with available data, PwC analysed public companies’ shareholder returns following their transactions during the last two recessions—how their stock prices changed from the day before the transaction was announced. We then compared those changes to the percentage change in the relevant sector index for each acquirer’s sector over the same periods. Deals are not the only factor in shareholder returns, but measuring an acquirer against its industry mitigates factors that affect the industry as a whole.
Our analysis found that investors who are opportunistic in a downturn can benefit. In the recession from March to November 2001, marked by the dot-com bust, the median shareholder returns for companies that made acquisitions outpaced their respective industries in the following months, rising as high as 7% one year after the transaction was announced. PwC analysed more than 900 companies that made 1,600-plus deals during that recession. In several sectors—including consumer durables, insurance, media and entertainment, and healthcare equipment—the median returns for those acquirers after a year were higher than the overall sector by double digits, our analysis found.
Why deals could continue, with positive returns possible
The buying power for potential deals is not spread across all businesses and sectors. The largest companies generally control the most cash and are best positioned to maintain the pace of deal activity. Some firms will be more stable or even stronger in the downturn. Others will still struggle. The latter could boost the supply of targets, with divestitures occurring as companies recalibrate—similar to previous downturns. Historically, company valuations have been lower in recessions.
The difference from past cycles will be demand, thanks to the strong capital position that will keep the valuations of sturdier companies from tumbling. Some management teams still might hesitate; previous downturns saw weaker CEO confidence, and a recession after a historically long expansion naturally could bring pause. But the next part of Winning through M&A in uncertain economic times explains the unprecedented amount and mix of capital that has increased the ability to do deals in a downturn and set a path for M&A to remain active as the economy slows.
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Contact us
Claude Fuhrer
Partner, Deals Strategy & Operations Leader, PwC Switzerland
Tel: +41 58 792 14 23
Director, Business Restructuring Services, PwC Switzerland
Tel: +41 58 792 21 60