In 2011, smaller transactions carried out both for consolidation and succession reasons made a key contribution to the positive trend on the M&A market. During the second half of the year, however, larger transactions involving higher financing needs and greater risk appetite were rare.
The number of mergers and acquisitions rose markedly last year, although the overall volume fell slightly. Nevertheless, a greater number of large-scale transactions was recorded in 2011.
In the previous year, the largest deal had a volume of USD 4.2 billion – with the exception of the Novartis-Alcon deal worth USD 28 billion. Two very large transactions were carried out in 2011, both of which were in the Pharmaceuticals sector: Johnson & Johnson’s USD 21.3 billion acquisition of Synthes and Takeda Pharmaceutical’s purchase of Nycomed for USD 13.7 billion. Both of these transactions were completed during the first half of 2011.
The waters of the European markets in 2011 were stormy, causing firms to reset their course on an ongoing basis due to the lingering uncertainty and market volatility. Moreover, the political and financial policy effects of the Eurozone crisis continued to unsettle and ultimately stall M&A markets. The search for growth often took place beyond the saturated markets in Europe, enabling companies from the BRIC countries and the group of the 11 next-largest growth markets, the so-called “Next 11,” to increase their levels of activity.
The strength of the Swiss Franc made business for export-oriented sectors such as manufacturing much more difficult. However, inbound M&A activity did not suffer greatly as a result, with figures showing acquisition activities to be at their highest levels for a few years. The intervention of the Swiss National Bank, introducing a EUR/CHF exchange-rate floor, also helped to calm the situation. These measures enabled positive effects to be achieved last year both for the Swiss economy as well as M&A activity.
Last year, M&A transactions were mainly recorded in high-growth markets, such as China, India or Brazil, although they were certainly not confined just to these three. The “Next 11,” which includes Turkey, South Africa, Indonesia and South Korea, will also play a leading role in future as these countries become ever more attractive destinations for transactions carried out by Swiss companies. Nestlé’s acquisition of a major stake in Chinese sweets manufacturer Hsu Fu Chi and Takeda’s purchase of Nycomed are extensive deals that underline this trend. The buyout of Nycomed is also the largest inbound deal into Europe in Japanese corporate history.
Those industries suffering from the saturated markets at home in Europe will remain very interested in high-growth markets as many will see them as a means of survival.
A glance at individual industries reveals universally dynamic M&A activities that are, for the most part, on the increase:
- A fundamental change took place in the Healthcare & Life Sciences sector. Swiss pharmaceuticals companies were involved in the two biggest M&A deals of 2011. The negative effects of expiring patents and falling returns began to make themselves felt among healthcare providers. This will increase the pressure on firms, which will look to M&A activities as a means of generating growth.
- The many outbound activities show that Swiss Chemicals companies are still a major force. These companies adopt a particular strategic focus on expansion and building up their capacities in the major emerging markets. The chemical industry’s outbound activities will continue to dominate the market in 2012.
- In the Financial Services sector, the second half of 2011 in particular saw significant levels of M&A activity. Although the average value of transactions fell year-on-year, the transaction volume in 2011 was the highest level recorded since 2007. As a result of the difficult regulatory climate and the challenging general conditions, the long-expected wave of consolidation gained momentum. 2012 will prove to be an eventful year for both the Financial Services and Insurance industries.
- Export-oriented Industrial Markets underwent many changes in 2011 as a result of strong levels of M&A activity, although this slowed in the fourth quarter. The uncertain markets mean that firms will continue to err on the side of caution in 2012. Better prices, however, will create good conditions for further M&A deals. Asian companies in particular will continue to invest in much-sought-after Swiss technology.
- M&A activity in the Consumer Market was also stable in 2011, recording a slight increase on 2009 levels, albeit a decrease on 2010. The largest acquisition here was once again in the food sector. In strategic terms, this will show highly promising growth potential in the coming year. In the Luxury Goods sector, Swiss and foreign buyers were active in equal measure. The increase in outbound deals allowed Swiss specialist retailers to establish themselves globally in 2011.
- Despite difficult market conditions, activities in the Information, Communication and Entertainment sector have increased further. In particular, technology companies with e-commerce and software products are recording growing levels of interest. The primary concern of media companies in 2011 was to adapt and consolidate their product and service portfolios. For their part, telecom companies are investing in new capacities and supplementary services.
- The Real Estate sector was able to take advantage of the volatility on equity markets; in 2011, the number of apartments exceeded the average figure for the last decade by some 7,000. A regional overheating of the mortgage market, however, cannot be ruled out. The authorities will continue to introduce new regulations, which could see the number of M&A deals tail off.
- Other sectors such as the Energy industry – primarily renewables – and the Commodities industry should not be underestimated. These are likely to continue recording significant M&A activities in 2012 as the importance of renewable energy sources has increased hugely since the Fukushima disaster. Investments in offshore wind parks are also expected.
- The Private Equity industry posted strong M&A activity in the first half of 2011 especially, although this slowed in the second six months as banks tightened lending. The strength of the Swiss Franc and the continued pressure on banks will have an impact on deals in the Private Equity industry until well into 2012.
The strained global economic situation and margin pressures across various industries look set to boost M&A deal activity in 2012. For instance, KPMG expects to see further consolidation in Private Banking, where national and international regulatory trends are exacerbating squeezed margins.
Following a period of realignment and divestments, companies’ balance sheets have recovered. Swiss companies across a range of industries are displaying low levels of gearing and high liquidity, enabling them to continue pursuing large transactions both domestically and abroad. There will also be more deals done in sectors such as Chemicals or Technology, although companies here are likely to spread their spend over a number of smaller, strategic acquisitions.
Overall, pricing and multipliers are expected to remain firm as the year progresses. Developments in the Eurozone as well as in other European and North American economies will have a major influence on this outlook, as will impetus from the global growth markets mentioned above.
Many firms will wait for economic conditions to improve before embarking on mergers and acquisitions. Nevertheless, the next few months are likely to see an increasing switch on their part to the active pursuit of attractive targets. All in all, KPMG therefore believes that M&A activity will begin 2012 on a positive note.
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