Switzerland is flexing its muscle.
The Alpine nation, with about 2 percent of the U.S.’s population, is running neck-and-neck with the world’s biggest economy in global dealmaking this year with a combined $48 billion of takeovers, including the largest: Glencore International Plc (GLEN)’s $38 billion planned purchase of Xstrata Plc. (XTA)
Underpinned by solid earnings and balance sheets, Swiss companies from drugmaker Roche Holding AG (ROG) to engineering company ABB Ltd. (ABBN) are stepping up acquisitions, taking advantage of the 7 percent gain in the Swiss franc against the euro in the past year and the relative weakness of European competitors stymied by the debt crisis. Nestle SA (NESN), Novartis AG (NOVN) and Syngenta AG (SYNN) are among those with cash to spend on deals.
Swiss corporations “see this window of opportunity to go for acquisitions,” said Lorenz Reinhard, who manages 5 billion francs ($5.5 billion) in Swiss equities at Pictet & Cie. in Geneva. Strong balance sheets and the strength of the franc have combined to produce “a unique situation,” he said.
Glencore’s planned takeover of Xstrata, Roche’s $5.7 billion hostile bid for diagnostics company Illumina Inc., and ABB’s $3.9 billion acquisition of electrical circuit-maker Thomas & Betts Corp. are the three largest deals out of Europe this year, with the latter targets in the U.S. In total, Swiss deals account for 59 percent of the $81 billion of takeovers announced by all western European acquirers, according to data compiled by Bloomberg.
Switzerland’s 20 biggest listed companies have an average profit margin of 18 percent, almost double the 9.3 percent average of the 309 European companies listed on the Euro Stoxx Index, according to Bloomberg data. They also have big cash piles to tap after boosting cash and near-cash items about 43 percent to 214 billion francs since 2009, based on the latest company filings.
More deals are in the pipeline. Vevey, Switzerland-based Nestle, which has more than $8 billion in cash, is vying with Danone SA for Pfizer Inc.’s infant-nutrition business, which may fetch more than $10 billion, people familiar with the situation said this month. ABB Chief Executive Officer Joe Hogan said the company could make acquisitions of up to $8 billion over the next three years, according to Swiss weekly SonntagsZeitung.
Basel-based Syngenta, the world’s largest producer of agricultural chemicals, has a “full mergers and acquisitions team working continuously” on targets of different sizes, Chief Financial Officer John Ramsay said on Feb. 8, while drugmaker Novartis, with about $4 billion in cash reserves, has signaled it’s also planning acquisitions.
Stock Market Strength
“There remain plenty of Swiss firms with sufficient firepower to pursue large transactions both domestically and abroad,” Patrik Kerler, head of mergers and acquisitions at KPMG in Switzerland, wrote in the auditing firm’s annual M&A Yearbook published last month.
Swiss stocks are performing strongly, too, avoiding some of the volatility holding back mergers elsewhere. After falling about 20 percent, the SMI has recovered all of the losses that followed Greek bailout talks last July and has risen almost 8 percent above its level at the end of that month as of Feb. 20. Germany’s benchmark DAX index remains 2.9 percent below its July level and France’s CAC is 5.4 percent lower, while the U.K.’s FTSE-100 is up just 2.2 percent.
“Swiss companies benefit from a perception of stability from investors, who also understand that they need to be aggressive internationally to grow,” said Lilach Nachum, a professor of international business at the City University of New York’s Baruch College.
Big Swiss companies are among the region’s most internationally oriented, with Nestle getting more than 80 percent of its revenue outside Europe. ABB, Roche and Novartis all receive about 60 percent of their sales on other continents.
Following deals in Asia, like Nestle’s $1.7 billion acquisition of Chinese confectioner Hsu Fu Chi International last year, Swiss companies are now more likely to make acquisitions in the U.S., where they “see some gaps,” Pictet’s Reinhard said.
Swiss takeovers abroad have been boosted by the surge in the value of the franc, which has climbed against the euro in the last year as investors seek refuge from economic turmoil. That’s spurring Swiss companies to accelerate international expansion as overseas targets get cheaper. The currency’s gain to near-parity with the euro prompted the Swiss central bank to declare an exchange ceiling of 1.20 francs per euro last year -- its first such intervention since the 1970s.
“A strong currency and balance sheets as well as the need for growth abroad make Swiss companies buyers,” said Juerg Glesti, a partner in corporate finance at Deloitte AG based in Zurich.
To be sure, the Glencore-Xstrata deal is only Swiss in name. The all-stock merger that makes up 81 percent of Switzerland’s deal volume is set to take place between two corporations with roots elsewhere that have been lured, along with other companies in the energy and commodities industries, by the country’s low taxes. The result, Baruch College’s Nachum said, is that Switzerland accounts for a disproportionate share of international M&A.
Transocean Ltd. and Weatherford International Ltd., oil- services providers born in Louisiana and Texas, respectively, and the commodities trader Vitol Group, which traces its origins to the Netherlands, have made Switzerland their home. Louis Dreyfus Holding BV, a commodities trader that had its headquarters in France for most of its 161-year history, has also consolidated trading in Geneva. In a 2009 biography, its late CEO Robert Louis-Dreyfus cited tax reasons for the move.
While both Glencore and Xstrata are run by South African citizens and listed in London, the companies have their headquarters just two miles apart in the mountainous canton of Zug -- an area with lower corporate tax rates than others in Switzerland. Their proposed deal, combining mining and trading assets in places as far-flung as Australia and Argentina, is thus officially an all-Swiss affair.
The basic rate of corporate income tax in Zug is 15.4 percent, compared with 25 percent in the U.K. Tax policies like that “have been shown to do remarkably well in attracting international businesses,” Nachum added.
Goldman Sachs Group Inc. is the leading adviser to Swiss acquirers over the last 12 months, followed by Morgan Stanley, Citigroup Inc., Deutsche Bank AG and JPMorgan Chase & Co., according to Bloomberg data. So far this year, Goldman and Citigroup are tied for first.
Despite the sovereign debt crisis and risk of recession in Europe, optimism for Swiss deals remains high, with KPMG predicting “a brighter year” for M&A in 2012.
Swiss companies’ newfound confidence was on full display at this year’s World Economic Forum at the Davos ski resort, an event at which the global business elite typically discuss deals far removed from their snowy host country. Instead, delegates arriving for the first day of the Forum were greeted with a surprising headline: Roche’s unsolicited bid for Illumina.
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