SWON vs CRAYN, Synergies or not?

SWON synergies in previous years - there are none

In our 2 letters to the market, we have discussed excessive «adjustments», and far too high level of «internal developed IT system» in SWON. They are together creating an «illusion of superior profitability». It also leads to wrong future consensus estimates from analysts (like JPMorgan, UBS, BNP and others) via Bloomberg on EBITDA.

In this letter 3 we discuss the targeted 80-100 MCHF cost synergies plus income synergies. If they do materialize, you create values sized one of the two companies or more (1+1>3). Let’s have a look at the history of SWON on synergies. According to a lot of research mergers often fail. Most studies conclude with a failure rate between 50-80% and "merger among equals" (we are close to such a situation here) are considered the most difficult ones. There are many possible reasons but here are 5 that could be/are relevant in this situation (not including pricing that obviously always is on a top 5 list); Cultural differences, power struggles, increased complexity, employee resistance and cost creep upwards that reduces (or eliminate) synergies.

The question now is "Why is it different this time"? Let's look back and check the facts on previous M&A's.

Synergy case nr 1: In 2019 SWON bought Comparex (and another 5 companies).

Comparex had 80% of SWON’s volume, lower adj Ebitda margins and 2500 employees. Synergy targets were 40 MCHF reduced cost and 20 MCHF income synergies. The following 2 years it was reported that everything went "according to plan“. Can we find evidence in figures to back up the positive statements post the Comparex merger in 2019?

Conclusion case nr 1: I think it's fair to say that we cannot see any synergies from the Comparex deal at all. You are flat on Gross profit and flat on margins in a very strong market where competitors are doing very well. In constant currency you do slightly better on volume but remember the other 5 M&A’s that happened in 2019.

Synergy case nr 2: The next years you had around 20 M&As, many small but 2 with some size.

Accumulated you invest 267 MCHF and you look for cost- and income improvements. Let's check the facts.

 *Organic growth is a Hvaler Invest estimate. 

As you can see from the table CCY growth looks acceptably good in 2021 and 2022 (around 10%) but everything is M&A driven and synergies are on the negative side since the market is growing more. When M&A investments are reduced in 2023 and in 2024 growth is moving towards low single digit, again lower than market. If you compare 2024e growth in SWON and CRAYN you are at 2,2% in SWON vs 16,5% in CRAYN. Profitability is also rapidly shrinking both on adjusted Ebitda and reported Ebitda in SWON.

Conclusion case nr 2: There are no signs of neither volume synergies nor profitability improvements (read synergies).

"Why is it different this time"?

Of course, if we are wrong on synergies and the 2 boards right (not a stupid idea), the final question is - who benefits from the merger?

SWON shareholders, CRAYN shareholders or both? We’ll cover that in our next letter after meetings in Switzerland today and tomorrow.

Stay tuned.

Disclaimer:
Hvaler Invest is a significant shareholder so you cannot trust us (or perhaps you can?)

All the best,

Sverre and David

Hvaler Invest AS

Lillestrøm, Norway

20.01.25