The Swiss Are Coming! The Swiss Are Coming!John Templeman
They're Swiss. They're rich. And they're snapping up American companies.
First came Swiss pharmaceutical giant Roche Holding Ltd.'s stunning $5.3 billion all-cash bid for Syntex Corp. on May 2. Then, almost three weeks later, Sandoz Ltd., another Swiss pharmaceutical giant, offered $3.7 billion for Gerber Products Co. And there's likely to be plenty more to come.
Why are Swiss giants rushing--wallets open--overseas? With the greenback weak, U.S. companies look cheap to Switzerland's giant multinationals. More important, Swiss companies are eager to spend money fast. Why? Well, the International Accounting Standards (IAS) are about to change dramatically.
LONG WAIT. As of Jan. 1, European companies will have to write off goodwill--the difference between the value of the assets they are buying and the price they are paying--over 20 years. Under current regulations, when Swiss and other European companies make acquisitions, they can write off goodwill against taxes the year they make the deal. U.S. companies, on the other hand, have to capitalize goodwill and write it off over 40 years.
The changes could set off a spate of dealmaking by companies across the Continent. But the Swiss are likely to be outbidding everyone else--mainly because they have more cash. Six of Switzerland's largest and most predatory companies had a total of nearly $40 billion of ready money on hand at the end of 1993 (table).
Swiss acquirers' sights are already trained on potential targets. Nestle is still digesting its Source Perrier deal and is also munching on a $710 million buyout of Finitalgel, an Italian ice-cream maker. Even so, say Swiss stock market mavens, if a company such as Chicago's tightly held Wrigley Chewing Gum Co. came into play, Nestle would pounce. Peter McDougall, a drug analyst at London's Barclays de Zoete Wedd, says drug giant Ciba-Geigy is scouting for generic-drug companies. And holding company Richemont is looking for luxury-goods companies to complement its Cartier and Karl Lagerfeld units.
big hill of beans. All this because of an accounting-rule change? It might look like bean-counting arcana to nonspecialists, but the shift will fundamentally change the math of European mergers and acquisitions. Take Sandoz' bid for Gerber. Because Gerber only discloses net shareholders' equity of $350 million, Sandoz has a potential $3.2 billion write-off. That, says Claudio Werder, a pharmaceuticals analyst at Zurich's Bank Vontobel & Co., is enough to ensure that Sandoz' earnings won't be diluted this year, even after it lays out all that cash for Gerber.
And there's another wrinkle. The goodwill write-offs make the acquiring companies look much more profitable than they would under U.S. rules. Because its assets are reduced by the amount of the write-off, a company's return on assets (ROA) looks a lot higher. Swiss food giant Nestle, for example, showed an ROA of 16% on its 1993 accounts. Had it followed U.S. accounting practices for past acquisitions, such as France's Source Perrier and the U.S.'s Carnation Co., Vontobel analysts calculate, its ROA would have been a decent--but much slimmer--9%.
This financial legerdemain explains why Swiss companies are ready to pay what U.S. analysts consider loony prices. Sandoz, for example, is offering a 53% premium over Gerber's last prebid trade. Syntex went for an even larger 57% premium.
Not surprisingly, U.S. sellers are happy to entertain Swiss bids. The Swiss spurn fancy financial engineering, instead plonking down good old-fashioned cash on the barrel. "Big Swiss companies are simply cash machines," says Hans Kaufmann, head of research at Zurich's Bank Julius Baer. "Every few years, the war chest is full. Then, they go for an acquisition."
When a target becomes available, the Swiss companies' huge cash piles mean they can move at warp speed. "They don't have to talk with 10 banks to put a deal together," says a Swiss banker. Sandoz had eyed Gerber for a decade--then tied it up in less than a month after hearing it was for sale.
Call 1994 the Year of the Swiss. And stand by for a lot more noisy, quick-fire takeover moves.
TABLE: SWITZERLAND'S MONEYBAGS Cash hoards of Billions major Swiss companies* Roche Holding Drugs $10.3 ABB Engineering 5.7 Sandoz Drugs 4.4 Ciba-Geigy Drugs 5.1 NestlE Food 3.6 Richemont Tobacco, luxury goods 3.5 *Cash and marketable securities DATA: BANK VONTOBEL &CO.