Buying a business abroad: appealing from a Swiss standpoint
Corporate acquisitions are an attractive option these days. Interest rates remain at a low level, which means companies can borrow money at lower rates, so an acquisition is more affordable than it once was.
The conditions are particularly good for Swiss companies not only because interest rates are low, but because the Swiss franc is strong too. This puts Swiss companies in a very good position to make acquisitions abroad, because the Swiss franc is worth more in many foreign currencies. As a result, the number of acquisitions by Swiss companies has been on the rise in past years.
Currency hedging for acquisitions abroad
Foreign acquisitions and sales also have risks, however. Just because an exchange rate is good today does not mean it will be in the months ahead. What's more, acquisitions take time. Depending on company size and corporate structure, months or years can pass from the time of contract signature to closing.
A lot can happen in this time! For instance, the exchange rate on a given day may be much worse than at other times due to price fluctuations, or a currency may lose value in general. That is why it's worth hedging currency risks on a transaction or on currency purchases for a company acquisition.
Hedging transactions when buying or selling a company outside Switzerland
However, corporate acquisitions always carry the risk that the deal may not even close. For instance, the competition commission in one country may block an acquisition to avoid a monopoly. Joint-stock companies require the consent of their shareholders, and do not always get it. There are other reasons an acquisition might fail.
"Experience has shown that this type of risk can quickly add up to tens of millions even if the markets are not very volatile," as Albert Angehrn, Head of Large Swiss Corporates Switzerland at Credit Suisse explains in an interview on currency hedging. This is why it's important to hedge, especially if there is a risk that a transaction may be blocked. However, the usual currency hedging measures are usually not enough for corporate acquisitions.
Currency hedging with deal-contingent hedging
Credit Suisse offers deal-contingent hedging. It is tailored to the needs of companies wishing to buy or sell a business in a foreign country. Notably, companies incur no costs if the deal does not close. Rather, the costs are covered by the bank. If the deal does close, the deal-contingent hedge is converted to and performed as a spot transaction on the transaction date. Only then does the company incur the hedging costs that were agreed to in advance. Other strategic transactions, such as debt financing, refinancing, capital increases and IPOs, can also use deal-contingent hedging. Learn more here!
Buying or selling a company outside Switzerland? Remember to hedge!
Buying or selling a company always bears a residual risk. External factors that both companies involved cannot influence directly, but which still occur regularly, can cause a strategic transaction to fail. These are hedged systematically with a deal-contingent hedge.
Failure is impossible to predict, but good currency hedging allows company owners to at least protect themselves from foreign exchange risks — even if the deal does not close.
