It’s not long since we published our last insights into M&A industry trends, but certain developments emerging from the dust of COVID-19 merit a return visit. In a nutshell: dealmaking has slowed in the year ‘COVID-20’, but as 2021 dawns, it looks set to rebound with a vengeance.
A look back at 2020:
Deal volumes in Switzerland
Taking a recap on the effect of COVID-19 on deal activity in Switzerland, in 2020 we saw a major hit to value with a decline of 34.5% from 2019. One key driver behind this was a lack of megadeals (deals valued at over USD 5 billion); there were four such deals in 2019 with a combined value of USD 29 billion, while in 2020 this decreased to two deals and a value of USD 10 billion. While large deals and overall deal values declined, the total number of deals actually increased by 10% – showing that the appetite for dealmaking remained in Switzerland – but deals were much smaller in size and less transformational in nature. Average deal value decreased significantly from USD 490 million to USD 276 million1.
 Based on number of deals where value was disclosed. Volume in the chart includes all deals, including those where value was not disclosed.
If we look at the quarterly development, clearly deal activity came to a halt during Q2, the time of maximum uncertainty; but after that Q3 and Q4 saw both a catch-up effect in terms of processes that were delayed in Q2 and a return to pre-COVID-19 levels, albeit at a lower deal size.
Shifting to an industry lens, it’s clear that the financial services (FS) sector was an absolute standout performer in 2020: in spite of COVID-19, it actually outperformed 2019, with unprecedented levels of activity in Q3 and Q4. Health industries (HI) also outperformed 2019 in terms of volumes, but overall deal sizes declined. Industrial manufacturing (IM&A) value was up in 2020 driven by the USD 2.6 billion acquisition of certain assets from the bankrupt Garret Motion; excluding this, values were flat year on year.
Origins of deal activity: inbound vs outbound/private equity vs corporate
Now let’s take a look at where the deal activity came from. While volumes showed a consistent split, in terms of deal values there was a substantial shift in 2020. There was a relatively even split of activity between inbound and outbound during 2019 (inbound/outbound: 45%/45%), but 2020 saw a marked shift towards inbound activity (inbound/outbound: 65%/30%). This shift also came from the US, which continues to be the major cross-market. This is likely driven by the strong private equity base in the US versus the attractive corporate base in Switzerland. To illustrate what we’re seeing in terms of private equity (PE) versus corporate activity, Switzerland continues to be dominated by corporate activity, while the inbound value shift in the US is coming from the PE side.
Our expectations for 2021:
Recovery on the cards
Overall, while we saw volumes start to rebound during Q3 and Q4 2020, the return to larger deal values, let alone megadeals, has yet to re-emerge. But as we look further forward into 2021, we expect a continued level of improved volumes, but also a return to larger deals.
Distressed asset sales plus transformational dealmaking
What’s driving this expectation? The effects of COVID-19, naturally, are a major factor. For businesses hit hard and strapped for cash, deals may be the only way out of a tight spot. For others, the crisis has been a wake-up call and an opportunity to ‘fast-forward’ and see where transformation is headed. Many have realised that there are gaps in their skills and technological capabilities. These gaps may be best filled with dealmaking of a more transformational nature.
Rich sources of attractive financing
There’s certainly enough cash around to drive an upsurge in larger deals. Companies have substantial war chests, and the ability of many businesses in Switzerland to weather the crisis suggests cash reserves are bigger than meet the eye. Added to this is the unprecedented funding opportunities available: thanks among other things to interest rate levels and the continued rise of private equity, particularly in the larger deal space, this is unlike any other crisis in recent history in terms of the variety and depth of financing sources available.
Other important drivers
It’s not all about the coronavirus. The debate on the Swiss Responsible Business initiative has reflected a growing emphasis worldwide on environmental, social and governance (ESG) factors in the way companies operate and large investors decide who to back. Prominent regulatory initiatives, both domestic and international, promise to accelerate this trend, which will give more and more companies the incentive to realign their business with ESG imperatives. Digital and technology, of course, remain another major driving force.
In conclusion: it’s the fundamentals
All these factors mean that the deals market looks set to get fierce. A combination of distressed asset sales and the pressure to acquire digital and tech capabilities point to lively competition. Whether you’re on the buying or selling side you’re well advised to temper the urgency to act with a good understanding of the fundamentals – otherwise you risk leaving value on the table.