‘In our worldwide business, the volume of mergers is at a record high. However, in Switzerland we can talk about a stagnation of deals,’ says Guy Vermeil, managing partner of Lenz & Staehelin. His downbeat assessment of the domestic M&A market is supported by last year’s numbers. As the broader Swiss economy stalled with GDP growth of only 0.8%, KPMG’s annual transactional review labelled 2015 as ‘troubled for the M&A market in Switzerland’. Transaction volume declined 17% compared to 2014, from 420 to 350 deals, while the aggregate value of completed M&A with a Swiss component fell 55% to $84.9bn.
Benedict Christ, co-head of M&A at Vischer, identifies removal of the currency peg as a particular problem: ‘There was certainly no growth in M&A, that’s probably mostly due to the appreciation of the Swiss franc in early January [2015], which made it considerably more expensive for foreign investors. The hit we took from the appreciation was probably not as bad as it could have been, but this will certainly continue to have an effect on the markets.’
Cuckoo in the nest – a tight domestic market
In keeping with many aspects of the domestic economy, Swiss law firms are sophisticated and stable. The country’s 9,000 practising lawyers operate in a conservative, mature market ‘with little open space for newcomers’, according to Benjamin Humm, partner at BCCC.
Nicolas Killen, managing partner at Borel & Barbey, concurs: ‘It’s a very small market by international standards. Larger UK firms haven’t felt the need to be physically present in Switzerland.’
But while the magic circle have never made a Swiss footprint, CMS (through CMS von Erlach Poncet) and Dentons (in association with Bloch & Partner) provide a full commercial offering in their Swiss offices, while Charles Russell Speechlys (Geneva and Zürich) and Withers (Zürich) both compete with local firms in private client work.
‘It’s changing a bit, foreign firms are here in niches,’ observes André Gruber, DGE’s managing partner. ‘More international law firms want to come to Switzerland, but they have small offices, focused on specific activities for the time being,’ adds Schellenberg Wittmer partner, Caroline Clemetson.
And beyond the private client specialists, the focus is almost exclusively on international disputes work. Of particular note are the Geneva branches of Sidley Austin (opened 2002) and White & Case (2009). Their initial strategy of focusing on World Trade Organization disputes work has since broadened to a wider international arbitration offering. But for some international firms, the Swiss path has not been easy.
Hogan & Hartson also opened in Geneva in 2005. Immediately prior to Hogan’s merger with Lovells in May 2010, Akin Gump Strauss Hauer & Feld took over its seven-lawyer office to launch its own Swiss practice.
And last June, Orrick, Herrington & Sutcliffe hired Vanessa Liborio Garrido de Sousa, Akin Gump’s disputes partner, to head its new Geneva office that focuses exclusively on arbitration. Liborio had previously been a senior associate with the Hogan & Hartson team in Geneva.
‘Many firms are thinking about pulling back in Geneva but for us it’s a logical market to be in, based on Vanessa’s skillset and the focus of her clients,’ said Orrick chairman Mitchell Zuklie when Liborio’s move was announced.
Proof of his words came the following month when Winston & Strawn announced that it would shut its Geneva office in September 2015, and instead look to service arbitration work from London and Paris. The firm’s local capacity had earlier been diminished when former Geneva managing partner Marc Palay left in 2010 to join Sidley Austin as global co-head of international arbitration.
Another firm that opened in Geneva in 2010 was Holman Fenwick Willan (HFW). However, last January, partner Matthew Parish left the firm with a team of four lawyers to set up his own boutique, Gentium Law. Its primary focus is on international arbitration, notably in commodities. Parish had previously joined HFW in 2011 after four years at Akin Gump’s Geneva office.
‘In local arbitration, the largest firms are undoubtedly being squeezed on hourly rates,’ says Parish. ‘While Switzerland is something of a closed market, there are a few of us international lawyers hanging around whom the Swiss welcome with open arms as we’ve done our time here.’
Meanwhile, the most significant recent development among domestic firms has been Zürich firm Walder Wyss opening offices in Geneva and Lausanne, achieved by hires from established player Froriep. The Geneva office opened in January 2016 with a team of seven lawyers, while a further five joined in Lausanne.
This is Walder Wyss’ latest opportunistic step, following new offices in Berne (2009) Lugano (2013) and Basel (2014). ‘That’s the history and DNA of Walder Wyss, we’re always open for talent and personality to enhance our practice teams. We have attracted high-calibre lateral moves in the past and were able to integrate those in our practice teams,’ says partner Hans Rudolf Trüeb.
Bigger plans lie ahead. ‘We’ve grown faster than other Swiss firms,’ adds Trüeb. ‘In the mid-1990s, the firm was around a dozen lawyers, now the headcount is 150. Further growth is expected. A solid size for a firm in the Swiss market is approximately 250 lawyers.’
‘Size is not a value in itself, while quality and hard work is,’ he observes. ‘But size induces gravity: the larger the mass is, the more it attracts – that’s a principle of physics. So gravity is what moves us forward. Gravity means that clients will take note of you. Gravity also attracts new talent who are willing to join the firm. So yes, if you want to be successful, there’s no way around size.’
BCCC partner Benjamin Humm adds: ‘There are many investors looking at Switzerland, desperately looking for targets, really looking hard for good Swiss businesses. But frankly, there are not many being sold – with the exception of transactions involving Asian investors, who are quite active.’
‘There are many investors really looking hard for good Swiss businesses. But there are not many being sold.’
Benjamin Humm, BCCC
Of course, in a relatively small market, one sizeable deal can easily distort the data. In 2014, the €40bn Lafarge-Holcim merger was one such deal in Switzerland: Bär & Karrer advised Lafarge and Homburger, led by managing partner Daniel Daeniker, represented Holcim. This deal between two global cement giants made 2014 a notably outstanding year for Swiss M&A. It completed in July 2015.
To meet the approval of assorted competition authorities, the Lafarge-Holcim deal required divestments across several jurisdictions. In May 2015, Irish building material giant CRH bought assets from the company for €6.5bn, as a pre-condition for merger approval. Homburger advised Holcim on related corporate governance matters and in co-ordinating negotiations with various national competition authorities.
‘I would actually call 2015 a rather busy year in terms of M&A activity,’ says Daeniker. ‘There were quite a large number of mid-sized deals of all shapes and sizes. We were pretty close to the peak of the cycle last year.’
At Niederer Kraft & Frey (NKF), managing partner Philippe Weber agrees that 2015 was still very active: a year that saw the firm advise GlaxoSmithKline on an asset swap and joint venture with Novartis.
‘It’s a very small market by international standards. Larger UK firms haven’t felt the need to be physically present in Switzerland.’
Nicolas Killen, Borel & Barbey
Data sets can lie – or at least not give the full picture. It rather depends on whom you ask. And for many, 2015 will be a blip – a run of deals could materialise in 2016.
Upward trend
By far the largest deal in 2015, and the only one to exceed $10bn, was the $28.3bn merger between ACE and Chubb, creating one of the world’s largest insurance companies. Bär & Karrer advised ACE, domiciled in Zürich, while US-based Chubb turned to Lenz & Staehelin.
‘It was a very significant and legally complex deal,’ says Christoph Neeracher, M&A partner at Bär & Karrer. But it was not his firm’s largest project last year: that position was taken by the UBS restructuring, involving the separation of its domestic and international businesses. Neeracher also points to broader consolidation in the Swiss finance sector as more Swiss banks settle with the US Justice Department over their management of undeclared accounts of US citizens.
‘We certainly see more transactions, but there are also some targets that are high risk – so it’s not a given that every company will find an acquirer and a new home,’ he says. ‘There’s definitely a high level of consolidation, and we have also seen the first liquidations in the banking industry. In Lugano, they had 50 asset managers, it’s now down to 15. They need to co-operate with each other because they can’t be profitable – if you have higher risks from the past then you can’t survive any more.’
Wider horizons– latest Swiss legislative developments
Swiss law allows for any issue to be put to a referendum so long as 100,000 citizens sign up for it. Unsurprisingly, several of these popular initiatives have discomforted the Swiss legal community. ‘It’s inevitable that a couple of times a year you have a silly initiative to vote on,’ says Daniel Daeniker, managing partner at Homburger. ‘But with one exception, every single initiative that would have been contrary to a sensible economic agenda has been rejected by Swiss voters.’
Some initiatives, notably on immigration, have generated bad international publicity for Switzerland. ‘They create unnecessary uncertainty,’ says Georg Umbricht, managing partner of his eponymous firm. The passing of a popular initiative ‘against mass immigration’ in February 2014 remains unresolved with the EU (see box, ‘Staying in neutral’).
But last June, Swiss voters delivered a clear message when they rejected an initiative to introduce a federal inheritance tax with a thumping majority of 72% and every one of the 26 Cantons rejecting it.
‘It’s a very good signal that it was massively rejected,’ says André Gruber, managing partner of DGE, ‘because that could have cost a lot to high-net-worth individuals and to Swiss families.’
Bär & Karrer partner Christoph Neeracher suggests that: ‘On the private client side, it was an important decision: Switzerland wants to continue to attract foreign high-net-worth individuals, but also to secure the wealth generated within the country.’
Others see the potential of increased investment. ‘It’s a very positive development,’ comments Nicolas Killen at Borel & Barbey. ‘Together with the change in corporate tax laws (under which the rate will substantially reduce to 13% or 14%), this should attract new entrepreneurs into Switzerland who will develop new business.’
Daeniker takes a slightly different tack: ‘For private client practices, the inheritance initiative would only have worked for people residing in Switzerland when they die, covering the Phil Collins and Tina Turners of this world. What it really means is that the Swiss electorate has restored the country’s reputation for being predictable and pro-business.’
However, BCCC managing partner, Manuel Bianchi della Porta, remains circumspect: ‘The problem now is with foreign tax authorities, increasingly eager to act against their citizens who have settled in Switzerland. It’s no longer sufficient to be domiciled here to benefit from Swiss tax inheritance law. More countries around Switzerland are acting like the US. They care less and less about the Swiss domicile: France taxes the estate according to French law when the heirs have been domiciled in France for at least six of the last ten years.’
Elsewhere, Switzerland continues to enact new legislation. As Lalive managing partner Michael Schneider comments: ‘In terms of key regulatory developments, the recent enactment of the Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) are worth highlighting – they are a significant step forward towards providing greater security in the provision of financial services and financial instruments in Switzerland.’
FinSA and FinIA were both enacted last November. The Financial Market Infrastructure Act (FMIA) then came into operation in January, regulating derivatives trading.
Philippe Weber, managing partner at Niederer Kraft & Frey comments: ‘The FMIA is the Swiss equivalent of EMIR [European Market Infrastructure Regulation] in the EU. It’s one of those examples where Switzerland, through autonomous implementation of EU-like provisions, seeks to get reciprocity and mutual recognition.’
Some see FMIA positively, with Schellenberg Wittmer partner Caroline Clemetson observing that it brings more transparency in the derivatives market. In her view, it is important for Switzerland to have regulation equivalent to the EU, meaning it can apply Swiss law when dealing with counterparties abroad.
Urs Klöti, managing partner at Pestalozzi, adds: ‘New Swiss banking law will provide a lot of work for law firms, but also for the audit firms that are becoming their main competitors because they do the regulatory stuff.’
But Guy Vermeil, managing partner of Lenz & Staehelin, cautions: ‘For smaller banks, it’s a big challenge because it’s a huge task, very expensive. Also, from a legal perspective, law firms must specialise more and more.’
Caroline Clemetson, banking partner at Schellenberg Wittmer, says that her firm is heavily involved: ‘There is consolidation in the sector that is expected to accelerate and intensify – we advise clients buying and selling banks and asset managers, private banks merging or doing asset deals. We have a number of current deals.’
‘There is huge pressure on the banks due to the margins and regulatory pressure, which makes it much more difficult for them to make money.’
Benedict Christ, Vischer
In recent years, Switzerland has seen a complete overhaul of regulation in banking and financial services, bringing its domestic regulation in line with the EU (see box, ‘Wider horizons’). Christ highlights the squeeze in the sector: ‘There is huge pressure on the banks due to the margins and regulatory pressure, the increased compliance costs and the negative interest environment, which makes it much more difficult for them to make money.’
Not only has the banking overhaul provided a substantial boost to regulatory and compliance work for law firms, but a rash of mergers and divestments have taken place in the sector, particularly in private banking. Last year provided a high-profile example: The Royal Bank of Scotland (RBS) sale of Coutts International (its private banking and wealth management business) to Swiss bank Union Bancaire Privée (UBP). Homburger advised RBS while Lenz & Staehelin advised UBP.
‘The Chinese are not only looking at traditional businesses, but at regulated businesses.’
Philippe Weber, Niederer Kraft & Frey
Vermeil anticipates further consolidation of the sector because small banks are unable to cope with the new regulatory requirements. ‘It will certainly continue and we have several transactions in the pipeline. In the short term, it creates a lot of work for law firms, but in the long term there will be fewer clients,’ he says.
Urs Klöti, managing partner of Pestalozzi and a banking lawyer, also sees continued growth in work from private banks consolidating: ‘With the US/Swiss banking programme and the tax issues we have with the EU, the private banking sector is tremendously affected, which means that for some banks, their business models just collapsed. Of course, they still have clients that are attractive for banks which want to grow, but it’s very difficult to just take over such clients because you never know what legal issues you have. This continues to provide a lot of work for law firms.’
Two other sizeable deals worthy of note in 2015 happened outside of the finance world, both in the travel sector. First was the Swiss-listed Dufry, which acquired Italian-based multinational travel operator, World Duty Free, for $3.9bn. In a deal that creates the world’s largest travel retailer, Italy’s Benetton family sold its stake in World Duty Free. Bonelli Erede Pappalardo advised Edizione, the Benetton family’s holding company. Alongside a cluster of international firms, Homburger advised Dufry on the Swiss law aspects of the deal: another element of the firm’s ‘rather busy year’.
Second was HNA Group’s acquisition of Swissport International (Swissport). The largest privately owned air transport company, and in terms of fleet size, China’s fourth-largest airline, HNA bought airport luggage handler Swissport from private equity firm, PAI Partners SAS for $2.81bn. Lenz & Staehelin advised HNA while PAI was advised by DLA Piper.
Asia moves
Until recently, Chinese investment in Switzerland has been relatively modest compared to larger European neighbours, with companies such as Italy’s Pirelli being acquired by the state-owned chemical group China National Chemical Corporation (ChemChina). ‘We have been talking for five years or more about the Chinese standing at our doors with chunks of money – it has materialised slower than we expected. But it will grow,’ says Christ.
‘What western Europe has experienced for a while – Asian companies buying industrial assets – has hit Switzerland.’
Daniel Daeniker, Homburger
But Weber argues: ‘An important trend for Switzerland is that the Chinese have arrived.’ By way of evidence, he points to last year’s acquisition by China’s property and cinema conglomerate Dalian Wanda Group of Swiss sports marketing company Infront Sports & Media. It was bought from the private equity group Bridgepoint for $1.2bn. Dalian Wanda was advised by Reed Smith; Bridgepoint by NKF; and Infront management by Homburger.
But by far the largest Chinese arrival, and one which will supercharge the 2016 M&A data for Switzerland, is the $43.8bn takeover of the Swiss agribusiness giant Syngenta, in a further acquisition by ChemChina. The all-cash deal, announced in February 2016, is the largest ever and the most ambitious takeover by a Chinese company to date. The deal underpins one of this year’s emerging trends: successive Chinese companies bidding for US and European assets in the largest cross-border deals.
Bär & Karrer is representing Syngenta while ChemChina has instructed Homburger – the same duo that advised in the Lafarge-Holcim merger. Last August, Bär & Karrer helped Syngenta defend an ultimately failed $45bn bid for the company by US giant Monsanto.
In value terms, the deal represents just over 50% of total Swiss M&A last year. But if the Chinese have eventually ‘arrived’ in Switzerland, Daeniker’s language is more sober than exuberant: ‘ChemChina’s takeover offer for Syngenta is one of a recent series of China outbound transactions hitting the Swiss market,’ he says. ‘It seems that what western Europe has experienced for a while – Asian companies buying industrial assets – has now hit Switzerland as well.’
Staying in neutral: a Swiss perspective on EU membership
While the EU departure of the UK is a real possibility this year, with some polls showing a clear lead for the ‘out’ campaign ahead of the June referendum, Switzerland has never been an EU member. Indeed, the ‘Swiss option’ is one being mooted as a possible exit strategy for Britain, should the electorate vote to leave the EU: essentially enjoying some of the benefits and responsibilities of membership through a series of bilateral treaties. Switzerland subscribes to the four fundamental freedoms of EU membership: the free movement of goods, capital, services and labour.
‘It works for Switzerland being outside the EU and it could certainly also work for the UK,’ says Vischer’s Benedict Christ. On the other hand, another Swiss lawyer anonymously comments: ‘I would be happy if the UK shared more of our concerns with the EU, but I wouldn’t be very happy to see Britain leave.’
According to Niederer Kraft & Frey managing partner Philippe Weber, the bilateral route has worked quite well: Switzerland benefits from many advantages of the single market. ‘The disadvantage as a small country is that you only have limited leverage. We participate in certain freedoms, but Swiss banks do not benefit: they can’t easily establish branches abroad or do cross-border business.’
Lawyers’ opinions inevitably polarise. But ask them about Switzerland’s relationship with the EU and how effectively bilateral treaties work, and their uniform focus is on one issue: free movement of people.
Adopted on 9 February 2014, an initiative, ‘Stop mass immigration’, was approved by 50.3% of voters. It states that Switzerland will autonomously regulate immigration, restrict residence permits through annual quantitative limits and quotas, while businesses must give Swiss nationals priority when hiring staff. Implementing it (by February 2017) puts the country on a collision course with the EU: perhaps heartened by the concessions given to Britain, Swiss politicians must hope that their EU counterparts will compromise.
‘The referendum has an impact on all the bilateral treaties: Switzerland and the EU need to find a solution. It’s a challenge,’ says Caroline Clemetson at Schellenberg Wittmer. ‘It targets the frontaliers – people living at the Swiss border on the French or German side – those people are fundamental for our businesses,’ argues BCCC’s Manuel Bianchi della Porta.
‘Bilateral agreements work, now the main issue is the free movement of people,’ adds André Gruber, DGE’s managing partner. ‘The immigration vote is a clear violation of those agreements. They have until February 2017 to implement this into law. We still have no idea how we’re going to do this, and how Europe is going to react.’
Daniel Daeniker, managing partner at Homburger, provides perspective: ‘The Swiss-EU bilateral treaties have benefited the Swiss economy immensely. The free movement of people has led to an increased professionalisation of the workforce – it’s been an engine for economic growth in our country. There’s recently been a net influx of about 80,000 foreigners into Switzerland per year, most of them skilled and well educated.
‘There was a bit of an anti-immigrant backlash in the initiative, which, if implemented, would suspend the free movement of labour between Switzerland and the EU. Our government is trying to find a pragmatic solution, a face-saving exit without the EU having to terminate bilateral agreements. The Swiss are always pragmatic at implementing popular initiatives.’
And he sees more to follow: ‘Bear in mind that the Chinese are still sitting on a gigantic cash pile of currency reserves, which traditionally were invested in US treasury bills and Swiss treasury bonds, and now are increasingly being used for industrial investment throughout the world. This is not only a Swiss phenomenon, it has happened worldwide.’
‘With the US banking programme and the tax issues we have with the EU, the business models for some banks just collapsed.’
Urs Klöti, Pestalozzi
Bär & Karrer partner Susanne Schreiber, who advised Syngenta on tax aspects of the deal, comments: ‘This is a landmark transaction that will definitely impact the whole agro-chemical market. The remarkable point is that it is a pure cash transaction, which shows the power of Chinese players in the M&A market. Chinese buyers are developing a track record and, like ChemChina, a reputation as being a wanted partner or shareholder.’
Weber adds: ‘The Chinese are not only looking at traditional businesses, tech and industry, but we also see more interest in regulated businesses. So you now have China Construction Bank (which received a Swiss banking licence last October) opening in Switzerland, and we also see Chinese special funds and companies that are looking at investing into Swiss regulated entities like banks and securities dealers.’
The growth of Chinese investment into Switzerland could encourage more local firms to target inbound and outbound investment by Asian investors more assiduously and they might well look at opening Asian offices. Schellenberg Wittmer opened a Singapore office in 2014, while Wenfei Law broke away from Wenger & Vieli in 2006 to go it alone in Beijing and Shanghai.
‘We won’t do that,’ says Weber. ‘What we do is to make Swiss clients aware of the particularities of dealing with Chinese parties in M&A deals. For example, we organised a seminar with the Asian team of a large global bank in Switzerland for listed companies and other large companies, which was very well attended.’
Vermeil suggests: ‘It is feasible, but we will probably never do it – because for the large law firms we receive much more inbound work than we are able to send to law firms outside of Switzerland. A large part of our work is referrals from the largest law firms in London, in the US, in Hong Kong, in Shanghai, and if you establish offices in those countries you might enter into competition with those firms, which we don’t want to do.’
Nothing to see
China is not the only source of interest in Switzerland. Last month EQT VII, a fund of the Swedish private equity group EQT Partners, announced that it had agreed to acquire Kuoni Travel Group in a $1.36bn deal that would take the Zürich-based company private. EQT was advised by Bär & Karrer, while Kuoni turned to Homburger in a team led by Daeniker.
For medium-sized Swiss firms seeking to do more big-ticket M&A work, Weber suggests that there are problems: ‘Switzerland is a relatively small market. That means the number of deals is limited and it is very difficult to build a level of expertise for these transactions if you do not work on as many as possible. In Switzerland, NKF and the few other large tier-one law firms have built a level of expertise which makes it quite difficult for emerging players.’
‘For Swiss industry, the story of 2016 will be probably be stagnation.’
Guy Vermeil, Lenz & Staehelin
Nonetheless, Neeracher sees continued private equity (PE) interest across different industry sectors – industrial companies, healthcare, fintech, life sciences – and everything in the digital economy is certainly of great interest for acquirers. He observes that PE investors are highly appreciated by typical Swiss entrepreneurs. There has been increased interest in public-to-private transactions and he adds: ‘We are expecting more to come.’
Co-publishing features
Beneficial ownership in Swiss PE acquisitions
– Christoph Neeracher & Luca Jagmetti, Bär & Karrer
Compliance obligations: genetic resources
– Andri Hess, Homburger
As for the rest of 2016, Vermeil says that interest in pharma and life sciences will continue. Following an increase of transactions coming from Asia – 2014 saw one large deal, whereas in 2015 there were 14 – he says there are rumours in the market that there might be another large deal in the offing for 2016, in addition to Syngenta.
However, he adds the following caveat: ‘For Swiss industry in general, we believe that the story of 2016 will be probably be stagnation, like in 2015.’
A downbeat – or some might argue pragmatic – viewpoint once again. But for many, the indicators suggest that this year might just be a little more dramatic than he lets on. LB