Buoyed up by mega-deals, the Swiss M&A market seems to be in good shape
Switzerland’s corporate market has been dominated this year by a handful of mega-deals. But below this level, what’s going on and how optimistic are lawyers about the future of M&A?
On the face of it, a three-fold increase in M&A value in the current climate is a good thing.
The combined value of M&A transactions with a Swiss target for 2012 so far – $84.1bn (£52bn) – has outstripped every year since 2008. This would be an encouraging sign of the market’s health were it not for the fact that the volume of transactions is considerably smaller than the past five years and will struggle to hit even the 2010 low of 373 deals.
The value figure is also massively skewed by the as-yet uncompleted merger between commodities companies Xstrata and Glencore. Both are headquartered in Switzerland and while the combination would create a business valued at around $80bn, the value according to Thomson Reuters is $45bn as this is the market capitalisation of Glencore, the smaller partner in the proposed deal.
Another deal that skews the figures is the June-announced takeover of Alliance Boots by US healthcare company Walgreen. The two-part transaction is valued at around $28bn, meaning that together with Glencore/Xstrata the two deals account for the bulk of deal value for 2012.
Alpine pastures new
Nevertheless, Swiss corporate lawyers observe that things have been reasonably busy in the year so far.
“It’s been more active than we expected and it’s still going at a good pace, but I wouldn’t say at top speed,” says Bär & Karrer financial services head Eric Stupp.
Homburger corporate partner Dieter Gericke adds: “I think generally you can see the year started promisingly.”
He says the markets have become used to the instability in the global economy, which can encourage strategic buyers to look at possibilities in a fresh way.
The Thomson Reuters data also focuses only on transactions involving Swiss targets, rather than transactions where Swiss acquirers are buying foreign assets. One recent example of the latter is the SFr860m (£565m) sale of Bank of America Merrill Lynch’s non-US wealth arm to Swiss private bank Julius Baer.
“Swiss companies have quite a lot of purchasing power abroad,” Gericke notes. He points to the continued strength of the Swiss franc, which has been held steady at €0.82 by the Swiss central bank for a year now.
The stability of the country’s economy is both a plus and a minus, says Walder Wyss’s corporate head Urs Gnos.
“They want to invest in Switzerland as it’s stable and has a strong currency,” he says. “Of course, the strong currency can be a problem for Switzerland and its economy, [making] acquisitions slightly more expensive.”
The largest Swiss transactions this year have come across a range of industries and featured acquirers from a number of countries, but pharmaceuticals and technology remain two of the most popular areas. Buyers are now as often from outside Europe as European, although Gericke notes that the country’s close relationship with Germany persists.
In particular, there is more Asian interest in Switzerland, notably from Japan at the present time.
“The Japanese like hi-tech and I think they also want to diversify,” observes Niederer Kraft & Frey corporate partner Philippe Weber.
Three of the biggest Swiss deals this year involve Japanese acquirers. UCC Holdings announced in April it had agreed to buy Swiss company United Coffee for $617m, Tokyo Electric spent $276m on the solar business of hi-tech group Oerlikon and packaging company Pago Group was taken over by Fuji Seal in a deal worth almost $125m.
Luxury goods such as watches are another draw. Although the major Swiss brands are unlikely to be up for sale, lawyers suggest that some of Switzerland’s smaller luxury goods companies could be good targets for Japanese buyers.
China is not as yet a major acquirer of Swiss businesses, but has the potential to be.
“If you talk to colleagues from abroad the interest there may be a bit higher [than in] Switzerland,” notes Gnos.
“I think we’re all waiting for the wave of Asian investment,” adds Schellenberg Wittmer corporate partner Jean Jacques Ah Choon.
However, Swiss firms, which are notoriously cautious when it comes to expansion, are unlikely to start opening offices in Asia in anticipation of any wave of investment.
“At the moment, most work from Asia is channelled through the UK,” Weber notes. “I don’t think the Swiss firms will open Chinese shops, but you want to stay close to your clients.”
The key for Swiss firms is to forge enduring and strong relationships with UK and US firms, who are still the primary source of corporate work. An element of luck is required to pick up the roles on the biggest transactions – having impressed on the opposing side in a previous deal, for example, or simply being instructed by the right client in an auction.
“It’s still the same group of players,” Stupp adds. “We don’t see structural change in the way this kind of work is distributed among Swiss and international law firms. In a small market like Switzerland with a limited number of players, particularly on the larger deals, it’s not that easy to see a tectonic shift.”
“You really have to be on these huge transactions,” he says. “The challenge for Swiss firms is to keep the quality that allows you to be in the lead in them. You’re facing competition from abroad because foreign firms service Swiss clients – you don’t need to be in Switzerland to service a Nestlé or Novartis.”
“I think outbound referrals are smaller compared to inbound referrals,” adds Gnos. “The issue is that to a large extent Swiss multinationals have very good links. If a big Swiss multinational has a request for legal advice in jurisdiction A they already have their contact in jurisdiction A.”
Weber points out that some of the largest deals, for example Xstrata/Glencore, actually have only a small Swiss element and are termed ‘Swiss transactions’ primarily because the companies themselves are headquartered in the country.
However, others have a more key Swiss element – for example a Swiss-law governed shareholder agreement – and these are even more critical for the local firms to pick up.
Below the level of the biggest deals there appears to be a small amount of mid-market activity, while private equity is also on the up, according to several firms.
“Private equity was never gone here, but big private equity came to a stop for some time,” says Gericke. “They’re on the lookout.”
One of the biggest recent private equity deals was Apax’s $2.14bn acquisition of Orange Switzerland from France Telecom, which completed just before Christmas last year. Also last year, PAI Partners spent $695m on Swissport, buying the airport services company from Ferrovial.
More such deals are possible, believe lawyers, although the financing models used in future may be different.
“Generally speaking, the number of targets is limited where you’ll get good financing,” says Weber.
He points to the high-yield market as an avenue of financing that is growing in popularity.
“While bank financing has become less attractive the high-yield market is becoming more interesting,” Weber says.
The issues in the banking sector, while being problematic when it comes to financing, are providing other opportunities. Many banks are disposing of real estate for regulatory reasons, notes Gnos.
Ah Choon thinks private equity companies are among those interested in real estate in Switzerland.
“I know that interest in the real estate market is picking up again,” he says. “They have a lot of cash to spend. In terms of the lifespan of the funds they need to do something with the money.”
The relatively healthy market in Switzerland does not prevent lawyers from feeling the same fee pressures as those in other countries – with one critical difference. While capped or fixed fees are now the norm in many Western jurisdictions, Switzerland remains wedded to hourly rates. This, notes Ah Choon, is partly because, according to the rules of the Swiss Bar Association, lawyers are supposed to charge by the hour.
But more importantly, the culture in Switzerland has not yet shifted away from hourly rates. Save for Ah Choon the lawyers interviewed for this piece, while agreeing that fee pressure was a reality, said that for M&A deals they were not seeing any demand for a move towards fixed fee structures.
“A number of clients are longstanding,” says Stupp. “They have a sense that we’re fair, we don’t exaggerate and we don’t infringe the terms.”
“I don’t think this much-predicted change will ever happen, frankly,” Gericke adds. “Not for M&A. In large M&A the fees of lawyers don’t play a significant role. Hourly billing guarantees high flexibility and quality for clients.”
“As a model I think the hourly fee will stay for a while,” agrees Gnos.
Ah Choon says some clients are beginning to look for some sort of cap on fees.
“All clients today are cost-conscious, wherever they come from – every client wants value for money so we feel the pressure, but it forces us to deliver what we’ve been hired for,” he says. “Probably Switzerland is still a little bit late in comparison to other markets in adopting hourly fees, but it’s coming to Switzerland as well and I don’t think we can escape it.”
Stupp says one thing protecting firms from the full extent of companies’ cost-cutting is that it can still be cheaper in the long run to instruct external counsel than have a large in-house department.
Clients are also being more cautious, he adds, taking longer to make a decision about a transaction and requiring more hand-holding and support.
“We see that clients become more hesitant to take decisions – it’s a lot of paperwork, but people take much more time to make a decision because of all of this uncertainty in the market,” Stupp explains. “Sometimes the smaller transactions are in terms of fees the more interesting ones. These clients need more support.”
He believes his can be a benefit for the legal profession over, for example, the banks, who do not get paid until a deal completes. The good news is that lawyers in Switzerland are confident deals that have been announced should complete.
Firms have been flexible in recent years with their staff to ensure transactions have enough lawyers on them. Several firms are putting more resources into areas such as regulation and internal investigations, both of which have hit Switzerland – particularly as a result of other countries, such as the US, putting more emphasis on the relationship between authorities in issues such as tax.
New EU regulations such as Solvency II and Basel III have also had an impact. Stupp predicts that EU law will become increasingly important in non-EU Switzerland and this will be yet another area for lawyers to turn their attention to.
While nobody is predicting an easy run for corporate practices in the months to come, the mood is cautiously upbeat and the additional complexity of the bigger deals makes for an interesting time for firms. The successful completion of some of the larger pending deals will also help with investor confidence in what remains a compelling market for the legal profession.
Swiss law firm of the year shortlist
The fourth annual European Awards see the best of Europe’s independent law firms recognised for their achievements. Submissions were judged by a panel of top general counsel and UK managing partners and winners will be revealed on 25 October.
Five firms are in the running for Swiss law firm of the year at The Lawyer’s European Awards which take place in Monaco at the end of October. The shortlisted firms include last year’s winner Bär & Karrer alongside four other strong entrants.
Bär & Karrer
The Zurich-headquartered firm rejigged its board of directors last year, expanding it by one member. The board includes senior partner Daniel Hochstrasser and four partners, in charge of infrastructure, finance, HR and business development issues respectively.
Bär & Karrer also launched an employment, migration and social security team to advise clients on issues such as relocating staff to Switzerland and employment-related tax matters. The team is led by partner Thomas Stoltz from Zug.
Another new initiative was the extension of the firm’s successful training programme for associates, the Bär & Karrer College, to in-house lawyers for some clients.
The firm continues to pick up work on Switzerland’s largest deals, advising Apax Partners on its acquisition of Orange and acting for market services expansion group DKSH on its March 2012 IPO. The company was valued at SFr900m (£594m) following the listing.
Niederer Kraft & Frey
Niederer Kraft & Frey continues to be more transparent about its financials than its peers, announcing 10 per cent turnover growth to €45m last year. The firm has 100 lawyers and last year celebrated its 75th anniversary.
Like its rivals, Niederer Kraft & Frey has looked to strengthen its position in the field of pensions and employment, picking up pensions specialist Hermann Walser as of counsel in November 2011.
The firm has also put investment into training and last year launched a training programme for trainees and associates involving bi-weekly sessions run by partners. It is also intensifying efforts to send associates on overseas secondments with its foreign referral partners.
Pestalozzi had a somewhat turbulent year in 2011, seeing the breakaway of most of its Geneva office after differences arose over the firm’s strategic direction. (The breakaway, Lachenal & LeFort, has since merged with Zurich firm Meyerlustenberger).
The slimmed-down Pestalozzi continues to have a small presence in Geneva, but its management board is based in Zurich. The firm reorganised its management structure at the end of 2011, with new chair Michael Kramer and managing partner Urs Kloeti replacing Robert Furter, who had previously held both positions.
The stand-out piece of work for Pestalozzi is its advice to Glencore on Swiss law-related issues over its landmark $10bn flotation in May 2011.
Schellenberg Wittmer’s focus on strategy and development has helped it to continued growth in headcount and turnover in recent years. The firm’s practice group heads meet regularly to ensure alignment between the teams and this has led to the development of life sciences, internal investigations and commercial real estate and construction practices, bringing together disciplines such as M&A and litigation.
Litigation and restructuring have been among the most active areas at the firm recently. Schellenberg has picked up instructions on the restructuring and sale of oil refining company Petroplus, and is also advising the Czech Republic on a Swiss fraud case.
Schellenberg puts a lot of emphasis on training and diversity issues, with part-time working to encourage the retention of women. It is also improving its partner-level gender balance.
Walder Wyss is, along with Niederer Kraft & Frey, the only other major Swiss firm to release financial information. It recorded turnover growth of 8 per cent last year, up to €41m.
The firm has focused heavily on arbitration in the past year, as well as establishing sports, public sector and private client practice groups.
Like some of its competitors Walder Wyss has also invested in its younger lawyers with the creation of a professional development programme. The programme focuses on both soft skills and legal skills, and is aiming to enhance what the firm calls its “biggest asset” – junior lawyers.
GDP (2011): $635.7bn
Annual inflation (Jan 2012): -0.5%
Population (Dec 2011): 7.9 million
Life expectancy at birth: 82
Unemployment rate (Q2 2012): 3.7%
Source: World Bank, Swiss Federal Statistic Office
Where to eat in Zurich
Rosso is a trendy and funky place in an old industrial site right next to the Prime Tower and many clubs and galleries. It serves Italian food – reportedly the best pizza in tow – but also good meats and salads. It’s always packed, so a reservation is needed. Clouds is on the top floor of the Prime Tower (in which we have our offices – the tallest building in town). It has a great view over Zurich and the lake of Zurich to the Alps.
Kronenhalle is a brasserie with class, great atmosphere and classic cuisine. There’s always some celebrity to be spotted.
Zeughauskeller is all fun and sausages, while Chez Cretol has the best fondue and raclette in the world – probably.
For coffee and tea try Sprüngli (Paradeplatz), the garden of the Hotel Baur au Lac or the Hotel Uto Kulm in Üetliberg – a great view and hiking is possible, but not required.
Dieter Gericke, Homburger
Restaurant Reblaube is my favourite, while Bindella In Gassen serves good Italian food and I’d also recommend Zunfthaus zur Waag.
Philippe Weber, Niederer Kraft & Frey
Bärengasse has good beef and excellent wines, in the centre of Zurich’s financial district. Conti serves good Italian food, close to the opera. I’d recommend Mesa for its good service, good kitchen and nice atmosphere and Casa Aurelio for its very good Spanish food and excellent wines.
Urs Gnos, Walder Wyss