In our start-of-year outlook for M&A activity globally and in Switzerland we spoke of cautious optimism about global economic growth and strong dealmaking activity going forward. Then came the war in Ukraine. Despite the ensuing knock-on effects on economic confidence, however, many parts of our prediction were accurate: headwinds such as supply chain disruption, commodity price increases, a scarcity of skilled labour and the global semiconductor shortage have all intensified, and could create both challenges and opportunities for dealmakers in the second half of the year.
Tech, ESG and portfolio optimisation driving the agenda
We were also on the money when we foresaw a focus on assets around technology and ESG. Businesses across the IM&A space who view technology as key to gaining a competitive edge will continue to engage in deals. We are now seeing more instances of closer convergence across sectors. This includes collaboration between the automotive and energy industries to develop technologies to power e-mobility. Examples include electric, hydrogen-powered and autonomous vehicles, batteries and charging stations. As companies seek technologies to transform their business models, we anticipate further tech-related deals in areas such as automation, digitalisation, next-gen materials and production powered by renewable energy.
As for the environmental, social and governance (ESG) side of the equation, wage inflation, skills shortages and growing stakeholder scrutiny of diversity, inclusion and wellbeing are prompting companies to place a greater emphasis on their people. This has a bearing on dealmaking because with the success of any transaction dependent on having the right talent, workforce matters have become a priority in deal due diligence.
We also see portfolio optimisation as a main M&A trend in the second half of the year as companies review their businesses with an eye to divesting non-core assets, allowing them to focus on investing in growth areas of their portfolio.
Headwinds dictating the terms
Considerable headwinds will continue to affect mergers and acquisitions, creating both challenges and opportunities for dealmaking as the year progresses.
COVID-related lockdowns in some Chinese cities have slowed manufacturing output and disrupted exports from Asia-Pacific. The Russia-Ukraine conflict is also dictating the agenda, exacerbating the considerable stress under which supply chains already find themselves and diverting management attention from strategic priorities such as M&A as they try to deal with sanctions or exit Russia. This is likely to continue, at least in the short term.
And then there are the effects of volatile and high energy and commodity prices. These continue to hit the industrial manufacturing and automotive sectors, both of which are heavily reliant on energy and raw materials. Other sectors such as business services, aerospace and defence which seem less seriously affected should remain attractive areas for mergers and acquisitions.
“Despite all the challenges out there, the current environment also provides an opportunity for buyers to take advantage of a situation where competition might not be as keen to do deals anymore. For sellers, the timing to go to market with a good asset can still be right, provided that it can demonstrate that it has a resilient business model able to master the current storm."
What are the M&A trends in the Swiss industrial manufacturing and automotive sector?
Industrial manufacturing companies are by definition heavy users of energy and are therefore particularly exposed to the steep increase in energy prices resulting from Russia’s war in Ukraine. It therefore comes as no surprise that currently the number one topic for both sellers and buyers is how to deal with this issue. Industrial companies involved in a sale process need to rethink whether their business plans are still valid in view of energy prices that in some cases have increased fivefold or even more within just months. The key question there is whether they can be passed on to customers. Buyers, in turn, need to rethink their valuation approach to adapt to the new situation. Moreover, they need to ask themselves to what extent their own profitability is at risk under these circumstances, and consequently whether they are still able to act on M&A at all.
This is also having an impact on deals where Swiss industrial manufacturing and automotive companies are involved, with deals with Swiss targets and sellers down by 30-40% compared with record-high H1 2021 numbers, and deals involving Swiss buyers down by almost 50%, back to the level of H1 2020 when the pandemic hit the deals market. Despite all the challenges out there, the current environment also provides an opportunity for buyers to take advantage of a situation where the competition might no longer be as keen to do deals. At the same time, there is still a lot of capital out there desperately waiting for investment opportunities, and financing markets are also still functioning properly, despite slightly higher interest rates. Therefore, the timing to go to market with a good asset can still be right, provided that there is demonstrable evidence of a resilient business model able to master the current storm.
Looking ahead: enough positives to ensure healthy dealmaking
While recent global macroeconomic and geopolitical events have detracted from the growth prospects and profitability of many IM&A sectors, there are a number of positives. Businesses are focused on value creation, there is still capital available for mergers and acquisitions, and companies in the sector continue to seek technology-enabled and data-driven assets with the potential to transform their business models. All this points to a healthy level of dealmaking over the remaining months of 2022.
Mid-year outlook: healthy M&A activity despite lack of economic and sociopolitical certainty
Despite an unpredictable operating environment dominated by economic and sociopolitical uncertainty, M&A activity in the health industries will remain lively. PE funds have significant dry powder at their disposal, and large corporates are still endeavouring to achieve growth through deals and softer biotech valuations might fuel M&A from big pharma to fill their pipeline. With PE and corporate capital competing to acquire innovative small and medium-sized businesses with new technologies and digital capabilities, dealmakers are in for a busy time in the remainder of 2022.
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