On January 15, 2015, the Swiss National Bank (SNB) shocked global financial markets when it made an unannounced move to end its long-standing cap of the Swiss franc. The currency soared and markets fell – and while the move’s long term effects on Swiss M&A activity are not as clear, a strong franc will likely lead to greater M&A activity involving Swiss businesses.
The currency ceiling
The SNB originally pegged the value of the Swiss franc against the euro in 2011 and created a ceiling for the currency at 1.20 francs per euro. The ceiling was in response to the rising franc relative to the euro and US dollar as a result of the ongoing European and US debt crises. Investors were purchasing francs as a safe alternative to euros and dollars, thus pushing up its value. Citing concerns of “massive overvaluation” of the currency, the ceiling was imposed by the SNB in an attempt to prevent deflation and to protect its economy.
Removing the ceiling
When the SNB finally abandoned the ceiling on January 15, 2015 and simultaneously reduced the interest rate, the impact was immediate. The franc immediately appreciated by as much as 30% against the euro, while the Swiss stock market responded with a 13% drop. Investors likely foresaw the impact a rising currency would have on Swiss businesses. Swiss exporters would encounter a decreased demand for Swiss products in the face of higher prices for foreign consumers.
Impact on M&A
What does a strong currency mean for M&A? For Swiss businesses, the sudden rise of the franc may open a window of opportunity for currency arbitrage in the M&A context. The cost of acquiring foreign companies or assets now comes at a relatively cheaper price. In addition, as a result of the low interest rate environment, Swiss businesses may prefer to spend their cash on M&A in hopes of a better return than interest. They may also want to hedge against the downsides of a strong currency by moving some of their costs outside of Switzerland.
From the perspective of a foreign buyer, some Swiss companies may become attractive targets due to the recent drops in equity prices. The environment of macro uncertainty, market volatility and unpredictable profit margins caused by the removal of the franc ceiling may cause some Swiss companies to become undervalued. As a result, the rise of the Swiss franc may be a driver of M&A activity for both inbound and outbound investment of Swiss businesses.