Corporate Finance

by

Prof. Dr. Dr. Joachim Häcker

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 0
M&A, Initial Public Offering and Going Private
Chapter

1. Initial thoughts on M&A, ECM and Going Private

2. M&A sales process
1. Initial phase
2. Contacting interested parties
3. Financial aspects of M&A
4. Legal aspects in M&A sales process
5. Lessons learned
6. Case study: Deutsche Telekom Cable
3. The importance of Equity Capital Markets as an alternative to M&A
1. Team Structure
2. Key offering consideration
3. Offering process
4. Lessons learned
5. Case study: Deutsche Post IPO
4. Going Private as an alternative to being quoted
1. Introduction
2. Market overview and market volume in Europe
3. Reasons for Going Private
4. Transaction structure
5. Lessons learned
6. Case study: Honsel

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 1
1.
1. Initial
Initial thoughts
thoughts on
on M&A,
M&A, ECM,
ECM, and
and going
going private
private
1. Initial thoughts on M&A, ECM, and going private
1. Reasons for choosing the relevant process from a seller’s perspective
Competitor’s pressure is increasing. Sale of company seems to be
Reasons for M&A
inevitable because company is facing serious problems like:
No access to new technologies and developments
Strong market entry barriers. Geographical presence could not
be enhanced
Badly positioned on the supply and demand side
Critical mass in core business could not be realised
No efficient utilisation of distribution capabilities
New strategic business units for future growth could not be
developed
Window of opportunity: Possibility to sell the business at an attractive
price
Further diversification of product portfolio

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 3
 Cash-in of money bound within an investment
Reasons for going public
Sale of the company
Using equity as an acquisition currency
Introduction of stock option and incentive programmes for employees
and top-management
Enhancement of fungibility of shares
Enhancement of public awareness
Incentives for high potentials. The reputation of being a CEO of a
quoted company is much better compared to a “Geschäftsführer of a
GmbH”
Reducing principal / agent discrepancy. Better monitoring of
management due to public awareness
Solving the issue “Nachfolgeregelung”
Risk diversification. An entrepreneur can take out some of his capital
and invest it outside the firm

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 4
 Capital markets issues:
Reasons for going private
Size of companies: Small companies get not the required analyst coverage and
investor interest. Low trading volumes make buying and selling of large share
blocks difficult. Publishing costs are for small companies over-proportionally high

Sector Rotation: Market climate is subject to sector rotation. Low coverage

companies tend to be undervalued, even if it is a strong growth company in a
unknown sector. Investors and brokers tend to spend not enough time on
understanding complex business models and niche products.

Valuation trap: Undervalued companies do not want to increase capital. They lack
therefore one financing possibility. Investment opportunities are limited for these
companies. Share price will drop further

Strategy:

Access to capital market: Limited access to capital markets for strategic

ambitions. Private equity investors can provide much more capital than capital
markets under certain circumstances. Additional debt capacity

Restructuring: The process of restructuring is much easier if free from pressure of

regular reporting and pressure from shareholders. Long-term strategic planning is
simplified since return calculations play a minor role

Platform strategy: Use of Going Private company as a platform for a merger with
further portfolio companies

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 5
2. Opportunities based upon life cycle

•Seed Financing IPO Acquisition Going private

•Start-Up Financing
Cash •1st Stage Financing (eventually trade Merger
sale or
Flow Trade Sale
acquisition)

Years

Introduction Growth Maturity Decline

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 6
3. Volume

European M&A volume, 1997-2002 ($ billion) European IPO volume, 1997-2002 (€ billion)

1400 120
1222
1200 100
100
1021
1000
80
69
800
609 60
600 529
470 481
38
40 32 31.6
400

200 20
11

0 0
1997 1998 1999 2000 2001 2002 1997 1998 1999 2000 2001 2002

European M&A volume European IPO volume

M&A volume in 2002 of around $ 480 bn IPO volume in 2002 of around € 12 bn

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 7
European M&A
European M&A volume fell 9% to $481 billion in
2002 after a 48% decline to $529 billion in 2001
The decline was concentrated in the category of
$10 billion-plus deals, in which volume fell 47%
from 2001 to $47 billion and the number of deals
fell from six to three
The volume of $1-10 billion deals increased 3%
to $220 billion from 92 deals, against 87 in 2001,
and the volume of sub-$1 billion deals fell by 6%
to $214 billion
Corporate Finance by Prof. Dr. Dr. Joachim Häcker
European IPO
The top 10 IPOs in 2002 accounted for 75% of
total offering value compared to 66% in 2001.
The London and Euronext exchanges together
accounted for the 3 largest IPOs in each year and
increased their combined share of the top ten 5 in
2001 to 6 in 2002.
The quarterly spread of IPOs in 2002 is consistent
with that in 2001. The second quarter saw the
greatest level of activity, and the fourth quarter
the last.
Overall, the trend is towards a lower average
offering value. This contributed to the relative
success of smaller companies markets,
particularly AIM in London.
Page 8
 European Going Private volume, 1997-2002 (€ billion) Going private transaction started in the mid 80s in
the US. In Europe, like in all private equity
16.0 35 segments, the English market was precursor
14.0 30
In the UK going private activities started with the
Kumuliertes Transaktionsvolumen (€ Mrd.)

12.0
25
buy-out of the foundry “William Cook” by Electra
Fleming for GBP 80m.

Anzahl Transaktionen
10.0
20

8.0 Since 1998, the number and the volume of going

15
6.0
private transactions increased significantly in the
10 UK as well as on the continent
4.0

2.0 5 In 2000 32 transactions have been carried out

valuing around €15bn.
0.0 0
1997 1998 1999 2000 2001 2002*

UK Germ any Other No. Trans actions

Going Private Volume in 2002 of around € 11 bn

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 9
4. Capital markets driving M&A, IPO and going private activities
The total value of equity trading in European markets showed a decrease
Where is liquidity? between 2001 and 2002 of 17% from €11,278bn to €9,394bn with no major
exchange showing a year-on-year increase
London and Euronext continued to dominate trading in Europe – together
accounting for 67% of all trading in 2002

Stock exchanges and market segments are currently undergoing structural

changes, alliances and M&A in an attempt to offer low cost trading and
settlement across all securities. The drivers of this change are increasing
Structural changes competition. Recent major developments in Europe include:
Euronext – a merger between Paris Bourse, Amsterdam Stock
Exchange, the Brussels Stock Exchange, and the Lisbon Stock
Exchange
Norex – an alliance between the Copenhagen Stock Exchange, the
Iceland Stock Exchange and the Oslo Stock Exchange
Newex – a new exchange operated jointly by Deutsche Börse and
Wiener Börse focusing on companies from Central and Eastern
Europe

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 10
Where is the value? The relative proportions of the total market cap of Europe’s major
stock exchanges remained broadly consistent in 2002 compared
to 2001, despite a 23% fall in the total market cap.

The exception to this general comment is the Deutsche Börse,

which saw its total market cap drop by 45%

Nasdaq experienced the greates reduction in trading in 2002

Comparison with US compared to 2001, while NYSE was relatively stable – reflecting
the nature of the equities traded on each exchange.

The level of liquidity on the NYSE is broadly equivalent to the

total liquidity on the European capital markets

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 11
2.
2. M&A
M&A sales
sales process
process
Agenda
2. Sales process

1. Initial phase
1. Pitch
2. Choice of process
3. Advisers
4. Mandate letter
5. Confidentiality agreement
2. Contacting interested parties
1. Documentation
2. Indicative offer
3. Financial aspects of M&A
1. Due Diligence
2. Valuation
3. Structuring
4. Financing
4. Legal aspects in M&A sales process
1. Negotiations
2. Binding offer
3. Closing
5. Lessons learned
6. Case study: Deutsche Telekom Cable

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 13
2.1.1 Pitch
Overview

Content of a pitch book Assessment of current situation at seller

Strategic, financial and competitive position
SWOT
'Gap' analysis

Assessment of options
Identification of a set of potential actions
Introduction to potential target(s)
Deal structure
Financial
attractiveness: Accretion / Dilution
Financing

Advise/Recommendation
Framework to analyse benefits/shortfalls of alternative
options
Deduction of recommendation
Next steps

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 14
2.1.2. Choice of process
Auction versus discrete approach (Overview)
Discrete approach

One-to-one private Simultaneous bilateral

discussions with a series of negotiations
interested parties Private discussions Controlled competitive
conducted with one or more auction
interested purchasers Carefully controlled Full public auction
programme aimed at creating
a competitive bidding Public announcement that the
environment company is for sale followed
by controlled competitive
One bi
dder auction process

Public
annou
nceme
nt

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 15
Discrete approach
Advantages Disadvantages

May be completed in limited time frame Limited ability to compare different proposals
Easily terminable Risk of ending up with a relatively low value
Maintains element of exclusive sale Limited negotiating leverage due to lack of
competition
Minimised impact on employees
Most confidential and controllable process

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 16
Simultaneous bilateral negotiations
Advantages Disadvantages

A certain level of competition is guaranteed Value will not be maximised because seller will
accept first adequate offer
Confidentiality still is maintained
Easily terminable
Minimised impact on employees

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 17
Controlled competitive auction
Advantages Disadvantages

Confidentiality still maintained Readiness for sale is in the market

Seller has most control over terms of transaction Potential for leakage
Increasing value Management can not effectively be shielded from
the process
Enhances perception of fairness

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 18
Full public auction
Advantages Disadvantages

Value maximisation Not discrete

Most competitive environment is being created Potential damage to business due to wide public
awareness about sale
Enhances perception of fairness
If sale process fails, decrease of enterprise value
Limits uncertainty for personnel
Less flexibility to terminate the process

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 19
2.1.3 Advisers
Advisers in an M&A sales process Accountants
Review of documentation and verification
Seller Investment bank of financials in information memorandum
Development and implementation of tax
efficient disposal structure
Key decisions (selection of
potential buyers and Preparation of accounts (IAS, US-GAAP)
preferred bidder) Project management Support due diligence and preparation of
Supervision of process due diligence report
Valuation
Management of employee
issues Preparation of Lawyers
Participation in preparation Information
of selling documentation Memorandum Preparation of legal documentation
Public communications
Preparation of transmittal Legal review and implementation of sale
Involvement in structure and related issues
negotiations letters and other process
documentation Preparation and management of data room
Supporting additional due diligence of
Preparation of purchasers
management presentation Consideration of antitrust position of
Potential buyer potential purchasers
Management of and
communication with Examples of other advisers
Provision of information on potential purchasers
the business Actuarial – review/report on actuarial
Primary responsibility for assumptions
Confirmation of views on
valuation and potential negotiations Building/engineering – review/report on
terms of building tenure and survey
purchasers
Environmental – review/report as required
Management presentations by buyers

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 20
2.1.4 Mandate letter
Core elements of a Mandate letter in a sales process

1 Subject matter and objective of the agreement

The Client intends to fully or partially divest “Company A” (hereinafter referred to as the “Target
Company”). The Target Company is also comprised of its direct or indirect subsidiaries and participations.
Definition of transaction
Client hereby appoints “the Investment Bank” to advise him in respect of negotiations relating to the
Transaction

2 Principal Obligations and Services of an investment bank

The investment bank shall – in co-ordination with Client – render the following advisory services:
Familiarise itself with the Target Company and its business and financial situation
Prepare a list of potential buyers, open up negotiations with potential buyers in close collaboration with
Client and advise and support Client within the scope of conducting such negotiations
Advise Client on the transaction structure
Advise and support Client within the scope of establishing the main financial terms of the Transaction.
Assist Client in the preparation and execution of presentations relating to the Transaction

3 Remuneration

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 21
Core elements of a Mandate letter

4 Ancillary Obligations of Client

During the term of this Agreement, Client shall exclusively retain the Investment bank to perform the
services under this Agreement
Upon request of the Investment bank, Client shall furnish to the Investment bank all information and
documents and make all disclosures, which could support or be useful
Client shall only enter into talks with the buyer, his direct or indirect stockholders or shareholders in
connection with the Transaction upon prior co-ordination with the Investment bank
Client agrees that the Investment bank may use and utilize publicly available information to perform this
Advisory Agreement without making its own review of the contents for correctness and completeness
5 Liability

The Investment bank shall only be liable for damage caused by willful default or gross negligence

6 Confidentiality
The Investment bank undertakes to keep confidential all information received from Client in connection with this
Agreement. This shall not apply for information available to the public
The Investment bank shall only publish or make confidential information avail-able to third parties upon Client’s
consent unless a broader disclosure is required under mandatory provisions of law or the disclosure has been
ordered by a government agency or a court of law
Corporate Finance by Prof. Dr. Dr. Joachim Häcker
Page 22
Core elements of a Mandate letter

7 Termination
This Agreement may be terminated by either party at any time The notice of termination shall require
written form. Should the notice of termination be based on good cause, this fact and the ground for good
cause must be disclosed in the notice of termination

8 Applicable Law and Dispute Settlement

This Agreement shall be governed by the laws of the Federal Republic of Germany
The place of arbitration is Frankfurt am Main. The language of the arbitral proceedings is English

9 Miscellaneous
This Agreement contains all of the agreements made between Client and the Investment bank with respect
to this matter. No other written or oral side agreements exist
Should individual clauses of this Agreement be or become void, invalid or un-enforceable in whole or in
part, the validity of the other clauses shall remain unaffected. The void, invalid or unenforceable clause
shall be replaced by a clause which comes closest in commercial terms to the void, invalid or
unenforceable clause

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 23
2.1.5 Confidentiality agreement
Confidentially agreement
Purpose of the confidentiality agreement is to allow
Purpose potentially interested parties access to some non-public,
confidential, or proprietary in nature information
The information is required to specify interest in the
company further
Generally speaking, the company wants to give as little
information as possible away, the interested party wants to
have access to as much information as possible

Confidential information is not allowed to be passed on to

Core elements other parties except in the case they join the confidentiality
agreement
Direct contact with target company staff is not permitted
All information obtained by the target company must be
returned upon request by target company, latest after
termination of interest
Confidentiality agreement guarantees no transaction
Interested party has to refrain from hiring target company
staff in a period after termination of confidentiality (1-2
years)

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 24
2.2.1. Documentation
Information memorandum
The information memorandum is the key sales document
Purpose
and can be used as a reference document throughout the
process
Key issues to consider
Precise definition/description of business to be sold The main purpose of the memorandum is to answer the
Sufficient disclosure to allow informed decision
Confidentiality to preserve the value of the operation critical questions any interested buyer would seek to know
What information will be distributed now, what later
and it will form the basis on which buyers will be requested
to submit indicative offers

The level of disclosure in the memorandum should be

Setup balanced, such that the serious interested parties can make
preliminary offers on an informed basis (including a
Content preliminary valuation), while no sensitive information is
Management Summary given away that would harm the value of the assets to be
Company profile
SWOT-analysis sold
Market and competitors
Products und distribution
Personnel and organisation Given preparatory work already carried out, the information
Financials memorandum can be written in a period of around three
weeks in co-operation with the management

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 25
2.2.2 Indicative offer
Core elements of an LOI
Issues
Language of the LOI
Corporate Finance by Prof. Dr. Dr. Joachim Häcker
The terms “letter of intent”, “memorandum of understanding” and
“indicative offer” and “non-binding offer” are all used vive versa in
practice
Brief outline of the structure of the transaction, which may entail the
payment of cash or stock for certain assets and the assumption of certain
liabilities of the target company
Certain conditions such as an agreement that selected personnel of the
target company will not compete with the combined companies for some
period of time if they should leave
The purchase price may be expressed as a specific € figure, as a range, or
as a multiple of some measure of value such as operating earnings or cash
flow
Specification of types of data to be exchanged
Duration of the due diligence
The buyer usually demands exclusivity for the further consummation for
the process
A well written LOI contains language that limits the extent to which the
agreement binds the two parties. Price or other provisions are generally
subject to closing conditions, such as
the buyer having full access to all of the seller’s books and records
completion of the due diligence
the ability of the buyer to obtain financing and approvals including
both boards of directors, stockholders, and regulatory bodies
Page 26
2.3.1 Due Diligence
Overview
Due Diligence is the process of taking reasonable care for possible risks in
Definition an acquisition
Deliberate, systematic and professional analysis of the strengths and
weaknesses of running acquisition negotiations
It is intended to overcome information asymmetries before signing a
contract

Collection of data and information on the target company

Preparation
Checklist with detailed questions and requirements for documents to be
passed on to management of target company and shareholders

Collection of internal company information, which can be accessed by the

Dataroom potential acquirer
Additionally: Management interviews
Result: Preparation of a detailed Due Diligence report that can be used as a
basis of a refined valuation and which is used to phrase the guarantee clauses
in the sale and purchase agreement

Due Diligence can be divided into four topics: Legal, Financial, Tax and
Topics of Due Diligence Strategic Due Diligence
Important: In a hostile takeover bid, there is no possibility for a Due
Diligence process!

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 27
Main topics
Check of legal fundamentals and legal risks within the target company as
Legal Due Diligence well as internal and external legal structures
Examples
Shareholder agreement
Relevant boards and bodies
Commercial register
Required administrative decisions
Legal risks from current or possible law suits as well as from existing
contracts and agreements
Binding of key staff
Basic agreements for revolving contracts

Financial Due Diligence
Object of investigation: Annual reports from last years and current quarterly
reports as well as corporate planning
Additionally: Audit reports, strategic and financial planning, protocols of
shareholders meetings
Aim: Analysis of balance sheet politics in order to check consistency of
applied methods

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 28
Main topics (cont’d)
Tax Due Diligence Object of investigation: Tax declarations and tax statements, audit
reports by fiscal authorities, documents for fiscal planning
Approach: Comparable to an advanced fiscal auditing
Examination of possibility for using potential losses carried
forward

Business plan issues: Object of investigation: Forecast P&L and

Strategic Due Diligence
balance sheets as well as liquidity and cash-flow forecasts.
Market appraisal, competition, products and expected costs
Critical check of essential forecast assumptions
„Stand-Alone“-analysis in comparison to strategic aims of
acquirer

Management presentation Seller’s management carries out a sale side oriented management
presentation. Potential buyer is given the opportunity to discuss
due diligence issues with management.

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 29
2.3.2 Valuation

Will be lectured separately

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 30
2.3.3 Structuring
Horizontal vs. Vertical Integration

Automotive supplier
Vertical Merger/Acquisition

Backwards integration

Daimler-Benz Chrysler

Forward integration

Automobile
distribution
organisation

Horizontal Merger/Acquisition

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 31
Merger

Newco AB

1.

2.
Company A Company B

1. Companies A + B are brought in an merged into new company (Newco AB)

2. Company A is merged into Company B or vice versa

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 32
Consolidation

Holding
Company

50 % 50 %

Company A Company B

Companies A & B are subsidiaries of Holding Company and co-exist as legally separate entities

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 33
Acquisition/Merger via share exchange
Company AB
Net income 400,000
No. of shares 150,000
Company AB EPS 2.67
after merger Share price 40.00
P/E ratio 15
MCAP 6,000,000

1.

Company A Company B

2.
Company A Company B
Net income 200,000 200,000
No. of shares 100,000 100,000
EPS 2.00 2.00
Share price 40.00 20.00
P/E ratio 20 10
MCAP 4,000,000 2,000,000

1. Company A acquirers Company B via share exchange

(exchange ratio of 1 to 2 assuming no takeover premium)
2. Company B is merged into Company A

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 34
2.3.4 Financing
Developing the financing plan
Financing is an important issue for the buyer, who has to fund the
Introduction acquisition
Sellers might also want to understand the financing for two reasons:
Checking the seriousness of the potential buyer
Establishing a comparison with other bidders, who have
different sources of financing

The final activity of the phase “financial framework” is to develop

Sources
balance sheet, income and cash-flow statements for the combined
entities in accordance with HGB, US-GAAP or IAS
Unlike the financial projections of cash flow made to value the target
company, these statements should include the expected cost of
financing the transaction
This activity is a key input into the determination of the purchasing
price, as it places a practical limitation on the amount of the purchase
price the buyer can offer the seller

Based on priority and time frame, especially two types of financing

Types of financing are emphasised:
Bridge or interim financing
Mezzanine financing

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 35
 ? Is there an optimal capital structure?
Let’s ask the traditional thesis: Interrelation between cost of capital and level of debt

RoE

k RoE
i
k

i RoE: Return on Equity

i: Cost of debt

k: WACC

Optimal level of debt

D/E

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 36
Is there a optimal capital structure? Let’s ask business practice

Equity ratio of DAX 100 companies

Analysis of 77 companies of DAX100

Kumulative
CumulativeAnzahl Unternehmen
number (Rechte Achse)
of companies
Excluded were financial services
14 90
13 13 Anzahl Unternehmen
Number of companies(Linke Achse)
provider (incl. insurances and asset
80
12
11 management companies as well real
70
estate companies
10
9 60
German equity ratio for DAX 100
8 50
companies stands at 31%
6 6
6 40
5 5
European equity ratio (measured via
30
4
3 3 EuroStoxx) stands at 38%
20
2
2
1 10
Practice supports a conclusion, which
lies in between Traditional thesis and
0 0
bis bis bis bis bis bis bis bis bis bis bis bis bis Modigliani Miller thesis:
10% 15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70%
In practice, one can see a (relatively
large) band of optimal equity ratio

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 37
2.4.1 Negotiations
Major issues
Negotiation tactics Common negotiation threats

Separate between people and problems Lack of authority

Focus on interests rather than positions Psychological pressure
No winners or losers Personal attacks
Generate options in mutual interest Good guy / bad guy
Avoid “positional” conduct of negotiations Untruth
Establish objective criteria Refusal to negotiate
Price and Corporate Governance usually as final Delays
issue
Uncompromising partner
Time limits
“Last word”

Personal credibility of negotiators is key

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 38
2.4.2 Binding offer

A binding offer is typically submitted in open auction processes

Reasons for binding offer
A binding offer results into legal liabilities opposed to an indicative
offer

A binding offer contains all elements from the indicative offer as well
Key elements
as:

Guarantees to be issued

Non-compete clause

Time frame for signing a sale and purchase agreement

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 39
2.4.3 Closing

The closing phase consists of obtaining

Elements of closing phase
Customer and vendor contracts

Regulatory approval

Shareholder approval

In the closing phase previously minor issues seem to resurface on a

more complex scale. Sometimes this happens because the parties did
not realise the significance of an item until the last minute

Sometimes, however, this happens because one party intentionally

takes a hard line on an issue as the closing date approaches in the
hope of gaining a negotiating advantage.

Wrong strategy: Resulting confrontation and dissolution of trust

(which was built up during the process) may ultimately force one
party to walk away from the transaction

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 40
 In a purchase of assets, many customer and vendor contracts cannot
Customer and vendor contracts
be assigned to the buyer without receiving written approval from the
other parties

Approval from the licensor must be given and they can also be a
major barrier to a timely closing if not properly planned in advance

Eg. at the end of the acquisition process of an IT company a major

software vendor might demand a substantial increase in royalty
payments before they would transfer the license to the buyer (if the
vendor is aware that the software is critical for the ongoing operation
of the business)

Ensure that the transaction is in full compliance with antitrust laws

Antitrust laws

Many transactions require approval by the shareholders of both the

Shareholder approval
acquiring and target companies before ownership can be legally
transferred

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 41
2.5 Lessons learned

Access to new technologies and developments

Reasons for M&A
Overcome market entry barriers
Achieve critical mass in core business realised within manageable
timeframe
Develop new strategic business units for future growth
Enhance geographical presence and rapid penetration of new
markets
Efficient utilisation of distribution capabilities
Enhance market position on the supply side
Elimination of future competition
Reduce “costs of goods sold” with higher capacity utilisation
Window of opportunity: Possibility to acquire a business at an
attractive
price from a seller disposing a non-core asset
Enhance market position on the demand side
Further diversification of product portfolio

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 42
2.5 Lessons learned (cont’d)

The milestones of an M&A process are

Milestones of the M&A process
Initial phase (pitch, mandate letter, choice of process,
confidentiality agreement and the selection of advisers)

Contacting (documentation, indicative offer)

Financial aspects (Due Diligence, valuation, structuring,

financing)

Legal aspects (negotiations, binding offer, and closing)

Is there an optimal capital structure? Theory does not offer a

Optimal capital structure? clear answer to the question of capital structure. Practice
supports an optimal capital structure of around 30% equity ratio
in Germany (holds for listed companies)

Corporate Finance by Prof. Dr. Dr. Joachim Häcker

Page 43