Mergers &

Acquisitions

Winter Term 2020/2021

Prof. Dr. Stefan Stein

Prof. Dr. Thomas Kotulla

Stein/Kotulla Mergers & Acquisitions

Introduction
Prof. Dr. Thomas Kotulla

2002-2011: Master’s and Ph.D. studies in the fields of business and economics
BiTS, Iserlohn | Harvard University, Cambridge | ESCP Europe, Berlin
2002-2017: Activities in the fields of management, strategy, and finance,
lastly as consultant, department head, and managing director
Bosch, Johannesburg | Porsche, Stuttgart | Kraft Foods, Bremen
TBWA, Düsseldorf | BBDO Consulting, Düsseldorf | Wertikale, Berlin
PE Automotive, Wuppertal | Stiftung Bildung.Werte.Leben, Berlin
Since 2017: Professor of value-based corporate management and finance
University of Europe for Applied Sciences, Berlin
Contact:
[email protected]

11 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Mergers & Acquisitions is often perceived as the
“supreme discipline” in business management

“Business mergers change organisations, industries and local and global

markets. They exert a fascination on practitioners and theorists because of
their appeal to our instincts: money, power and love.”
Stephan A. Jansen, Professor of
Strategic Organisation and Finance

2 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Literature

• Baetge et al.: Darstellung der Discounted-Cashflow-Verfahren (DCF-Verfahren) mit Beispiel,

in: Peemöller (ed.), Praxishandbuch der Unternehmensbewertung.
• Brealey/Myers/Allen: Principles of Corporate Finance.
• Gaughan: Mergers, acquisitions and corporate restructurings.
• Jansen: Mergers & Acquisitions.
• Löhnert/Böckmann: Multiplikatorverfahren in der Unternehmensbewertung,
in: Peemöller (ed.), Praxishandbuch der Unternehmensbewertung.
• Martynova/Renneboog: A century of corporate takeovers: What have we learned and where do we stand?,
in: JoBF 32, pp. 2148-2177.
• Müller-Stewens (ed.): Mergers & Acquisitions.
• Pearl/Rosenbaum: Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions.
• Picot: Handbook Mergers & Acquisitions.
• Wirtz: Mergers & Acquisitions Management.

3 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Contents

1 M&A Fundamentals 4 Due Diligence

1.1 Concept 4.1 Concept
1.2 Forms 4.2 Due Diligence versus Annual Audit
1.3 Process 4.3 Buyer/Seller Due Diligence
1.4 Market Development 4.4 Integrated Financial Due Diligence
1.5 Buyer- and Seller Motives 4.5 Normalizations, Adjustments, and Reclassifications
1.6 Regulatory Environment
5 Transaction Structures
2 M&A Finance 5.1 Asset Deal
2.1 Financing Structures, Tools, and Techniques 5.2 Share Deal
2.2 Investors
6 Purchase/Selling-Price Determination
2.3 Indebtedness Potential
6.1 Discounted-Cash-Flow Method
3 Hostile versus Friendly Takeovers 6.2 Multiples Method
3.1 Takeover Tactics and Defense
7 Empirical Results regarding Success and Failure of M&As
3.2 Case Example

4 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

M&A concept
No uniform definition in the literature or in practice

Willers/Siegert 合资企业
“M&A means any form of external growth, with the integration options ranging from joint ventures, strategic
alliances to participation models, to 100% buying a business.”
Behrens/Merkel
“Mergers and acquisitions (M&As) are amalgamations with and takeovers of companies or their sub-divisions or
subsidiaries.”
Müller-Stewens/Spickers/Deiss
“M&As are transactions that, in addition to the transfer of property rights, are primarily concerned with the transfer of
control and executive powers of companies.”
Achleitner
“The term mergers & acquisitions (M&As) refers initially to transactions in the market for companies, parts of
companies and participations. However, M&A is generally limited to buying and selling companies, parts of
companies and shareholdings and its integration into the acquirer’s group of companies as a subsidiary (acquisition)
and the amalgamation of two companies with or without prior acquisition (merger). [...] Generally, M&A does not
include [...] the acquisition of shares which do not grant any power of control (for example non-voting preference
shares). The acquisition of even larger shareholdings exclusively for passive financial investments is as well not
categorised under the term M&A.”

5 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 M&A concept
No uniform definition in the literature or in practice

Vogel
“The term mergers & acquisitions includes all transactions, including related services, which involve the transfer of
strategically induced and actively exercised control and management powers to companies or the corresponding
rights and obligations in contractual cooperation.”
Lucks/Meckl
“[...] M&A [can be] used as a generic term for transactions that are characterised by the transfer of authority and
control of companies to other companies. The distinction between merger and acquisition according to legal
terminology [...] only applies if there are relevant differences for the M&A process.”

6 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Forms of business combinations

Business combinations
in a broader sense

Business combinations
Business cooperations
in a narrower sense

Cooperations Additional forms of Acquisition/

Merger
(strategic) corporate combination
(operational)
Integration 收购 并购
合资企业 战略联盟 For example,
Merger by
Joint
venture
Strategic
alliance
interest groups,
business associations,
Asset
deal
Share
deal
Merger by
absorption
new
formation
新 成⽴ 饼
consortia and cartels

The companies work together voluntarily and remain

The companies lose their economic
legally independent and financially independent
in the areas not affected by the cooperation and possibly also their legal independence

Source: Wirtz (2003)

7 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 SeuerdsengesfBusnesscomb.name
Further classification of business combinations
in terms of value-chain activities
Business combinations
in a narrower sense

p 企业集团
Horizontal
⽔平 Vertical 垂直 Conglomerate

With product Without product Backward Forward

New business fields
expansion expansion integration integration

Industry A:
采购 Industry A: Industry A:

Company 1 Procurement Production Marketing Procurement Production Marketing Company 1 Procurement Production Marketing

Industry B:

Company 2 Procurement Production Marketing Company 2 Company 1 Company 3 Company 2 Procurement Production Marketing

Company 1 acquires a competitor from the Company 1 takes over an upstream (supplier) or Company 1 from industry A takes over company 2 from
same industry and may gain access to adjacent downstream company (dealer/buyer) in the same industry industry B and enters completely new business fields
market/product segments (product expansion)

8 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Worldwide M&A volume 1995-2019

Deals of a recently very high volume

In billions of dollars

5.000 Global
Europe
4.000

3.000

2.000

1.000

0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Statista 2019

9 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Historical development of the M&A market
Merger waves
11,013 cases
($1,235 bn.)
Number of cases 11,123 cases
with the participation ($1,268 bn.)
of US companies

7,411 As of 2006/10/09:
($442 bn.) 7,709 ($927 bn.)

1. “Industrial Revolution” leads to monopolies 5. Globalisation, liberalisation, deregulation, single European

2. New antitrust laws lead to vertical integration market, mega mergers, mergers of equals, shares as
3. “Conglomerate era” based on diversification theory currency, shareholder value, internet (“click & mortar”)
4. “Merger mania”, liberalisation and deregulation
Source: Günter Müller-Stewens, “Die Fusionswelle hält an”, in: io new management No. 11/2006, p. 16.
10 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Importance of national and cross-border transactions

100%
Cross-border National

80% 75% 73%

70% 68% 66% 66% 70% 69% 70% 69%
67% 65%
63% 62% 62% 63% 65%
60% 60%
60% 55%

40% 45%
40% 38% 38% 40%
37% 35% 37% 35%
33%
30% 32% 34% 34% 30% 31% 30% 31%
20% 25% 27%

0%
2000 2001 2002 200320042005 2006 2007 20082009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: M&A Review 2019, J.P. Morgan Global M&A Outlook 2019, European Central Bank 2020.

11 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Objectives and motives for M&A decisions from the
buyer’s perspective
实现
协同
.si
Objectives and motives for M&A decisions

效应 不
~O~ Realising synergies Market power
Exploiting
market
inefficiencies
Correcting goals
and behaviours
of management
器繴
⾏为
、

• Control systems • Manager behaviour

• Labour markets • Agency problems
Operational Financial
synergies synergies • Capital markets • Market for
corporate control
• Economies of scale • Improved access
to capital resources
• Economies of scope
• Risk reduction
• Economies of through
vertical integration diversification

12 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Economies of scale 规模
Benefits from larger business units

• With increasing company size and correspondingly higher production volume per period,
the unit cost decrease
- Fixed-cost degression
- More efficient production facilities 更有效的 ⽣产设备
- Potential for stronger specialisation among employees
- Elimination of duplicate work

• Economies of scale not only in production, but also, e.g., in the areas of R&D, marketing,
administration, ...

13 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Economies of scope 范围
Benefits from complementary businesses
经济
• Acquisition of complementary (especially intangible) assets: company name, management capacities,
technical know-how, technologies, R&D, ...

• Finding new regional areas for sales

• Completion of product lines

• Manufacturing systems that can produce different products without major switching cost

• Cross-selling: The information obtained about the customer when a particular service is sold
can be used to create additional services for the customer

14 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

垂直 整合
Economies of vertical integration 集成 ~o~

Saving on transaction cost by internalising service relationships through vertical mergers

• For example, with regard to the cost of initiation, agreement, settlement, control, subsequent
adjustment of contracts
• Avoiding delivery bottlenecks
• Ensuring quality standards
• ... Pre-integration Post-integration
(less efficient) (more efficient)
Company Company

S
S S
S
S

S S S

• But: Over-integration can have the exactly opposite effect!

15 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Financial synergies 财务 协同 效应
Improved access to capital resources

• Expanding the credit- and capital base by reaching critical volumes

- New instruments
- New markets/investors

• More economical management of capital resources

- For example, in cash management

• Strengthening the trust of the capital providers (especially of the creditors)

- More stable cash flows reduce credit-default risk

Detinaton.Finaneidgergyisuhnthcomb.int
Moftuotmstogether
16 Stein/Kotulla
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esultsemgeor
University of Europe for Applied Sciences
vduetuiftyweretooperat
saremostfenvduedintcooxt.at
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Mergers & Acquisitions

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Financial synergies
Risk reduction through diversification 通过 "

多样化 减少 ⻛险

Business combinations are often justified by the argument of reducing financial risks.

• Lower fluctuations of the overall firm cash flows

unnnni
• Expected total return corresponds with the weighted average of the individual projects’ returns
预期总收益对应于个别项目收益的加权平均值
• The expected overall risk falls below the average risk of the individual investments

预期的总体风险低于个⼈投资的平均风险

17 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Capital market theory views the diversification motive critically
“Investors should not pay a premium for diversification since they can do it themselves.”
(Brealey/Myers/Allen)

• Shareholders can diversify themselves through the selection of their equity portfolio;
cheaper and faster than M&As

• Management has limited skills and knowledge

• The expertise to successfully manage a company in one industry does not necessarily imply
to be successful in any another industry

• Coordination problems

T.in

18 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

企业集团
7Empirical findings on conglomerate discount
经验 wrrrre
:

19 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Avoiding a conglomerate discount in the context of the Evonik IPO (I)
Initial situation 2008 赢创 上市
• Evonik’s portfolio comprised three fundamentally different business units.

Chemistry Energy Property

Share in sales 73% 23% 2%

Capital cost 9% 7.5% 2%

Regional focus Globally leading National Regional (NRW)

Sales of business units necessary to avoid conglomerate discount.

Source: Pellens 2013.

20 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Avoiding a conglomerate discount in the context of the Evonik IPO (II)

Solution

• Focused portfolio strategy and concentration on specialty chemicals

Chemistry

Share in sales 73%

Expanding the Involving a Deciding to sell

Decision
growth business strategic partner the majority

Selling the energy

Bolt-on acquisitions and Selling the majority stake in
subsidiary Steag to a
growth investments Vivawest-Wohnen GmbH
municipal consortium
Source: Pellens 2013.

21 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Conglomerate discount in empirical research
经验主义

• Empirical studies on M&As prior to 1970 report positive value effects of diversifying M&As
(summary Akbulut/Matsusala 2003), and value-destroying effects in later decades.
- Increasing capital-market efficiency at that time as major explanation
• Zwahlen (1994):
- No positive value effects for owners
- Employment risk for employees and management goes down
- Credit-default risk for creditors decreases
• Weston/Siu/Johnson (2001):
- Diversified companies are traded at a discount on the capital market compared to focused companies
(conglomerate discount)
• Martynova/Renneboog (2006):
- Diversifying M&A transactions destroy value at the buying company and are driven by managers’ personal goals
• Boston Consulting Group (2006):
- More than half of the multi-industry companies develop better than the market average. Stock returns are
comparable to, and sometimes even better than those of focusing companies.

22 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

不是 所有的 收购 都是 为了 增加 公司 价值
并
的
。

f) Manager behaviour and agency problems

Not all acquisitions serve the purpose of increasing the firm value.
收购 的 原因 也可以
在 房 璐中 找
Reasons for acquisitions can also be found in the goals and behaviours of the management.
• Hubris thesis
过度的 ⾼估
Managers are willing to pay excessive prices for takeovers, as they systematically overestimate their own
capabilities. In their plans, they overstate the expected synergies and underestimate the restructuring cost.
夸⼤ 协同 效应 重组
• Principal-agent theory
Managers (agents) pursue their own goals with acquisitions ‒ goals that do not match those of the owners
(principals).
- Maximimum size of the company (and not the shareholder value), because managers’ income may correlate
positively with the size of the company
- Risk reduction through diversification in order to secure one’s own position and income.

• Empire-building
Managers seek power and prestige by building large corporations, if necessary also at the expense of profitability.

23 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Correction of managers’ goals and behaviours by the market

Corporate takeovers as a means of disciplining the management 公司 接阼为 的 来 管理 层 的 ⼀种⼿段

• If a listed company is no longer managed based on a value-maximizing strategy, this is expressed on the capital
markets by a lower valuation:
- Opportunity for other investors to buy the company, possibly against the will of the current management
- Exchange of the old for a new management team by the new owners
- The new owners implement a superior strategy and restructure the company (market-value increase)

• The capital market, in this respect, is a “market for corporate control”.

• The mere possibility of taking over inefficiently managed companies can already act as a means of disciplining
the management.

• Possibility of hostile takeovers as a prerequisite for a functioning “market for corporate control”
wn

爱意 敌对
收购 下 为运
诈的
⼆

公司 控利 市场
"

先决条件 的 可能性 、

24 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Motives for selling a company

Motives for decisions to sell

Owner-specific Company-specific
motives motives

• Succession plan • Lack of funding for investment

• Conflicts between owners • Debt reduction/Liquidity shortages
• Value realisation 价值 的 实现 • Lowering the cost of capital
• Career advancement • Focusing on core competencies
• Better alternative investment opportunity • Strategic realignment
• Financial distress 财务 危机 • Exit of particularly important employees
• Privatisation of state enterprises

25 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 M&A process and management

Target
Strategy Carrying out transaction
screening
Phases

Integration

Require-
Business
valuation,
Implementation planning i
Preparation
Completion
Activities

quantifi- Negotiation and

nnon
ment Preliminary of imple-
Strategy cation of for the execution
profile due Detailed Negotiation mentation Integration
development synergies, letter of the
and identi- diligence due of the final and
fication
price of intent
diligence transaction completion
implemen- 整合
determi- tation plan
nation

Possible Confiden- Antitrust Completed Term sheet Conclusion Change of Post-

approval of tiality- and review letter of of ownership merger
Milestones

supervisory possibly intent purchase and final integration

bodies exclusivity contract documen-
agreement tation
并购 后 整合

Source: Hollasch 2013.

26 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Actors and stakeholders in the M&A process

Social system

Employee Employer
organisations Economic system organisations

Competitors Customers
Enterprise system

Management
M&A Employees
process

Shareholders M&A service

Suppliers
providers

Public opinion Government

Media

Source: Wirtz (2003)

27 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 M&A consultants
Fields of activity and services
Acquisition management Post-merger-integration management Demerger management

Post-merger Post-merger Post-merger Demerger

Strategic analysis Transaction Demerger Demerger
integration integration integration analysis
and design phase phase concept implementation controlling and design implementation controlling

• Strategy • Screening/ • Definition of the • Definition of the • Premise-, • Strategic and • Creation of an • Premise-,
development selection of integration goals organisational implementation- financial detail information implementation-
• Determination of contract partners • Definition and and operational and progress analyses memorandum and progress
structures control control
the acquisition • Supervision of the prioritisation of • Development of • Supporting the
strategy pre-contractual integration • Integration of • Controlling the the demerger search for • Performance
phase measures information integration team concept investors monitoring
• Organisation and technology
Activities

control of the • Corporate • Determination • Controlling the • Implementation of

acquisition valuation and of the degree of • Organisation of integration climate revaluation
process purchase price integration and the internal and exter- measures
nal communication • Performance
determination integration speed monitoring • Supporting the
• Ensuring
• Antitrust review • Control of the knowledge transfer completion of the
• Conclusion of integration team transaction
• Harmonisation of
contract corporate culture • Definition of the
• Control of brand communication
and customer policy
management

• Strategy • Banks • Strategy • Strategy • Strategy • Strategy • Banks • Strategy

consultants • Auditors consultants consultants consultants consultants • Auditors consultants
• Auditors • Banks • Auditors • Auditors • Banks • Auditors
Consultancies

• Lawyers • Lawyers
• Tax consultants • Tax consultants
• Corporate brokers • Corporate brokers
• Strategy
consultants

28 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Regulation of corporate takeovers

企业 收并购 的 规 营 。

• Competition law 客观 因素 投资者是否 是 危害 到 竞争 市场

- Objective: Investigate whether the merger will impair competition in the joint market or at an overall level
(Effective competition at risk? Risk of dominant position?)
- What is the relevant market? Which products are traded at what prices? Which options for substitution
do buyers have? How do buyers react to price changes?
- Is applied, if defined merger requirements are met and revenue thresholds are exceeded

• Securities Acquisition and Takeover Act 收购 与 证券 接管 法案

- Application: Shares of the target are traded at an EU-regulated market
- Objective: Fair and equal treatment of all shareholders, comprehensive transparency and rapid procedures
- Procedural rules for public offers to purchase shares, including voluntary takeover bids and mandatory offers
- Specific bid of the bidder in the case of takeover offers
- Duties of the management board and the supervisory board of the target company during the bidding process
as well as legitimacy of defence measures
- Rules for the exclusion of minority shareholders (squeeze out)

29 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 > ⻔槛
_
European merger regulation (I)
_
Threshold values
nnnrr

• Obligation to report to the European Commission (Art. 1 (2) of EU Merger Control Regulation), if
- Worldwide combined prior-year revenues of all merging parties amount to at least EUR 5 billion
AND
- EU-wide prior-year revenues of at least two parties involved in the merger amount to at least
.

EUR 250 million each

- Exemption: Each of the companies involved generates more than 2/3 of their EU-wide revenues
in one and the same member state (in this case, the national antitrust authorities are responsible)
免税政策
7
每个参与 的 公司 创造了 超过 三分 之 欧盟
⼆ 的
、

范围 内 的 收⼊在 同⼀个 成员国 中 ( 在 这种 情况下 , 由 国家

垄断 当局 负责 )
反
Source: Meßmer 2015, Formelle Fusionskontrolle

30 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

European merger regulation (II)

Threshold values
强制的
• Also mandatory to report to the European Commission (Art. 1 (3) of EU Merger Control Regulation), if
- Worldwide combined prior-year revenues of all merging parties amount to at least EUR 2.5 billion
AND
- EU-wide prior-year revenues of at least two parties involved in the merger amount to at least
EUR 100 million each
AND
- Domestically combined prior-year revenues of all merging parties in at least three member states
amount to at least EUR 100 million each
AND
- Domestically combined prior-year revenues of at least two merging parties in each of at least
three member states amount to at least EUR 25 million each
- Exemption: Each of the companies involved generates more than 2/3 of their EU-wide revenues
in one and the same member state (in this case, the national antitrust authorities are responsible)

Source: Meßmer 2015, Formelle Fusionskontrolle

31 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 German merger regulation (I)
Threshold values

• Obligation to report to the Federal Antitrust Office (Section 35 (2) of German Act Against Restraints
on Competition; GWB), if
- Global combined prior-year revenues of all merging parties amount to at least EUR 500 million
AND
- Domestic prior-year revenues of at least one merging party amount to at least EUR 25 million
AND
- Domestic prior-year revenues of another involved merging party amount to at least EUR 5 million
- Exemption: “De-minimis clause” according to Section 35 (2) GWB: No merger regulation,
if the merger involves two companies and one of them has worldwide revenues of less than
EUR 10 million

Source: Meßmer 2015, Formelle Fusionskontrolle

32 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

German merger regulation (II)

Specific rules for revenue calculation according to German law

• Trade with goods: only 3/4 of the generated revenues (Section 38 (2) GWB)

• Production and distribution of newspapers: eight times the revenues (Section 38 (3) GWB)

• Production, distribution and organisation of broadcasting programs, selling broadcasting airtimes:

twenty times the revenues (Section 38 (2) GWB)

Source: Meßmer 2015, Formelle Fusionskontrolle

33 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 EU Takeover Directive
Attempt to create a single legal framework

• Entry into EU-uniform takeover rules

• Regulations concern ...

- Transparency in takeover bids 收购 报价 的透明度 要求
- Price determination and requirements for the offer duties 你确定乐 要的煽
- Protection of minority shareholders in the event of control changes
价格
- Sufficient time and information for shareholders as the basis for proper decision-making

(
- Prohibition of defence measures by the general meeting
- Prohibition of market manipulation and market abuse
禁⽌ 滥⽤ 和操纵市场
• The directive allows member states a co-existence of anti-defence European and defence-friendly
national takeover law.

为 股东 提供 ⾜够 的 时间 有 信息 ,
作出 正确 决策 的基础
34 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Implementation of the EU Takeover Directive in Germany (I)

• According to the EU Directive, it is at the discretion of the member states to establish a duty of
neutrality for the governing body of the target company.
中⽴
• Implementation in Germany (Section 33 WPüG):
"The management board and the supervisory board of the target company may not take any actions
that could prevent the success of the offer", except
- the search for a competing offer
- actions approved by the supervisory board
- actions that fall within the competence of the general meeting and which the general meeting has authorised
before the offer was published and with an 18-month deadline

• The management board and the supervisory board of the target company must immediately submit
an announcement of the offer or amendments to the offer, including the following contents:
- Type and amount of the bid
- Consequences of a successful bid for the target company, employees and locations
- Objectives of the bidder
- Intention to accept the offer or not

35 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Implementation of the EU Takeover Directive in Germany (II)

强制
• Mandatory offer: Obtaining control is formally defined as reaching 30% of the shares.
nnnr
• The offer documents to be submitted by the bidder to the supervisory authority and to be made
public must contain at least the following information:
- Terms and conditions of the offer
- Personal details of the bidder
- Offered bid 提供
报价
- Minimum/Maximum shareholding or minimum/maximum number of shares that the bidder wants to acquire
- Intentions regarding future business activities
- Deadline for acceptance of the offer
- Applicable national contract law

• Time: after reaching 30%, the offer documents must be sent to BaFin (Federal Financial Supervisory
Authority) within four weeks.
投标⽅应向监管部门提交的投标⽂件
public必须包含⾄少以下信息:
-要约的条款和条件
36 Stein/Kotulla University of Europe for Applied Sciences
-投标⼈的个⼈资料Mergers & Acquisitions
——提供报价
-投标⼈希望获得的最小/最⼤股份或最小/
最⼤股份数量
-未来业务活动的意向
-接受要约的截⽌日期
-适用的国家合同法

Implementation of the EU Takeover Directive in Germany (III)

• Price: The bid must be reasonable and must consider the weighted average share price of the last
three months before publishing the takeover decision and the highest paid package price within the
three months before publishing the offer documents.

• Closing date: Four to ten weeks (Section 16)

• Sanctions: Interest on the bid (Section 38), loss of rights (Section 59), fine (Section 60), prohibition
on submitting a renewed offer (Section 26), interdiction (Sections 4, 15).

• Financing guarantees: For cash payment, confirmation by securities service company;

the confirming party is liable.
•价格:出价必须合理，必须考虑公布收购决定
前三个月的加权平均股价，以及在公布要约⽂
件前三个月内支付的最⾼⼀揽⼦价格。
•截⽌日期:4⾄10周(第16部分)
37 Stein/Kotulla
•制裁:对投标产⽣利息(第38条)、丧失权利(第
University of Europe for Applied Sciences Mergers & Acquisitions

59条)、罚款(第60条)、禁⽌
在提交新要约时(第26条)，禁⽌(第4、15条)。
•融资担保:现⾦支付，经证券服务公司确认;保
兑⽅负有责任。
 Contents

1 M&A Fundamentals 4 Due Diligence

1.1 Concept 4.1 Concept
1.2 Forms 4.2 Due Diligence versus Annual Audit
1.3 Process 4.3 Buyer/Seller Due Diligence
1.4 Market Development 4.4 Integrated Financial Due Diligence
1.5 Buyer- and Seller Motives 4.5 Normalizations, Adjustments, and Reclassifications
1.6 Regulatory Environment
5 Transaction Structures
2 M&A Finance 5.1 Asset Deal
2.1 Financing Structures, Tools, and Techniques 5.2 Share Deal
2.2 Investors
6 Purchase/Selling-Price Determination
2.3 Indebtedness Potential
6.1 Discounted-Cash-Flow Method
3 Hostile versus Friendly Takeovers 6.2 Multiples Method
3.1 Takeover Tactics and Defense
7 Empirical Results regarding Success and Failure of M&As
3.2 Case Example

38 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Financing is central for value creation through M&As

•公司购买投资活动
•公司撤资活动
固定资产 股权资本
股枞
T
O_O
•管理和运营活动 Shareholders
Equity Dividends and 股息及 股价 涨
Fixed capital share-price increases
• Company purchase as
assets (rEC)
investment activity
Creditors 债权⼈
vii.
• Company sale as Interest income
divestment activity Debt
capital
(and possibly 》 利息 收⼊

蘅
Current performance-related
• Managing M&As as components)
operational activity
assets 借⼊ 资本 (rDC)

⽬标 指标 : 资本 成本
Target indicator: capital cost
'# *#
!"## = %!" × + %#" ×
Capital cost serve as a standard assessment
nnn (" ("
for decision- and control calculations; 资本加权平均 财
value is created, only if the capital cost
are “earned” through the investments.
Source: Based on Pellens (2006)

39 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Content
Chapter

Title WACC 加权平均 资本 成本 Date /

Keywords 关键词 Notes 笔记 Review 复习记录 / / / / / 1

2
WACC.vn 总 股本成本 E 公司 股本的 市场价值
3
公式 : Rd :
债务 成本 D 公司 债务 的 市场价值
:

5
WACE ⽅法 每种 资本的 成本 乘以 占
些 计算
:

U)⼗⼏ 总 资本 的 ⽐重 然后 ,
6

7
+ 㕤) 灿 将各种 资本 淂 出 的 数⽬
8
x ( 1 T
-

) 加起来 ,

让 瓧⼝是 企 EN 股本 占 融资 总额 的 百分⽐ 资本化⽐⾟

: ,
10

市场 价值 百分⽐ 资产负债率
肌 债务 占融资 总额 的
业的 ,
11
=

12
下 :
企业 税率
13

14

15

16

17

Summary 总结
18

19

20
 The financing structure of acquisitions is complex ...

In bn. EUR
Acquisition of Schering by Bayer Acquisition of BOC by Linde
Total € 17 billion Total € 15 billion

Net financial surplus 1,2 Equity

1,8
Hybrid capital
Debt capital 1,0
3,8
Cash Sale forklifts
Shares 4,0
3,0
12,4
Shares Sale H.C. Starck,
0,7 Sales due to restrictions
Wolff and
15,8 1,9 GE Bayer Silicones
Sales of diagnostics
3,6 division
Pensions, 7,5
Mandatory financial debt Bonds, loans,
convertible bond sale of participations
2,3 General 1,3
expenses
1,2 Capital increase 1,3

Use Origin Use Origin

40 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

收购 融资 过程
"

从 中间 融资 到 议购
Overview of the process of acquisition financing –
From intermediate financing to “take-out”
中间 贷款 后 该 融资
Follow-up financing
Intermediate financing Characteristics
(“take-out”)

Syndicated intermediate financing § Quick and efficient procurement

(“bridge loan”) of the required funds
§ Ensuring confidentiality and 保密
nrnes
过 桥贷款 financing safety
§ Flexibility through medium-term
Medium-term syndicated loan
th
maturities
mn
期限
资本 市场产品 §延长期限配置§
Capital market products § Extended maturity profile
短期贷款 债券 (bonds, loans, hybrids,混合
~
§ Extended base of investors 扩⼤投资者基础§
私募
-

private placement)
nnnri § Optimized financing cost 优化融资成本
§ Improved credit profile §信用状况改善§债
Equity § Reduced debt ratio 务比率降低
股本 § Securing the rating §获得评级

Sale of assets § Additional liquidity

售卖 资产
Source: Deutsche Bank

41 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Strategic decision
How should the takeover be financed?

Self-financing Debt financing

股权融资 信贷 融资
Equity financing Credit financing
External financing
Mezzanine instruments
外 of corporate financing 公司 融资 的 夹层 垻

Revenues
Internal financing Asset sales Sale-and-lease-back
(tangible, intangible) 售 后 回租
内

42 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

即 过 桥 贷款
Syndicated loans are oftentimes used

inrrrrnnrnnrzns
to finance large-scale acquisitions
• The syndicated loan is a loan that is provided by at least two creditors to a debtor under uniform
conditions for all participants.
• The involvement of several lending banks leads to the formation of a credit consortium
The banks have four functions:
⾦融中介机构
- Financial intermediaries (arranger)
nnrrnnren

- Guarantors (underwriter) 担保⼈ Primary market ⼀次 市场

- Creditors (participant, manager) 债权⼈

- Buyers/Sellers of existing loans 买家 Secondary market ⼆级 市场

43 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Consortium formation and handling placement risk

财 国 形成
• There are two common methods for consortium formation:
nnnnnnn
- Club deal: small consortium of (house) banks with identical quotas
- Broad syndication: Variety of banks with different quotas

• In the context of syndication, there is a risk for the debtor that a placement and thus borrowing
will fail → solution:
- Full underwriting:
Full assumption of placement risk by the mandated arranger and transfer of the risk to the underwriter
- Partial underwriting:
Partial assumption of placement risk by the mandated arranger and transfer to the underwriter
- Best-effort contract:
No assumption of risk, only attempt of the most successful placement at the participants

即 过 桥贷款
-0
•在辛迪加的情况下，对债务⼈来说，配售和因此⽽导致的借
款失败是有风险的→解决⽅案:
44 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
——全部承保:
由受托安排⼈完全承担配售风险，并将风险转移给承销商
险⼈ 迷
-部分承保:
由受托安排⼈承担部分配售风险并转移给承销商 -_-保险⼈

- Best-effortcontract:
没有风险的承担，只有在参与者身上最成功的尝试

Motives for loan syndication

• Motives from the perspective of the debtor 从债务⼈ ⻆度

- Acquisition of new, large-volume
⼀⼀
sources of financing
- Transaction-cost savings ⼤ 容量
cnnnnnnn.nu

节省 交易 成本
• Motives from the perspective of the creditor 从 债权⼈ ⻆度
- Risk reduction through syndication enables entering credit contracts that could not be realized alone 由 过 桥 降低⻛险
- Increasing the profitability of the lending business
即贷款获利
- Credit-portfolio management: acquisition of different brackets and trading on the secondary market possible

45 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 通过 夹层 资本 拓宽 负债 基础
Broadening the liability base through mezzanine capital
Systematisation by
degree of -
fungibility /
-_- 夹层
按可互换性程度/资本市场准⼊程度进⾏系统化
capital market access ⼀

私⼈
夹层
Private mezzanine Public mezzanine
capital capital
资本

Subordin Participating Convertible

Profit Vendor Silent Participation
bond High yield
ated loan participating participation certificate Preference bond
debenture
loan bonds
次级 贷款 share
loan 供应商 贷款

Atypical
Typical silent Convertible Option bond
silent bond
participation
participation

Debt mezzanine 夹层 债务 资本 Equity mezzanine

capital capital

Systematisation
according to capital
character
46 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

后续 购买价值 调整
Subsequent purchase-price adjustment
“Closing the gap on price”

In cases where buyer and seller cannot agree on a fixed price for the target company, e.g., due to
uncertainties about the future development of the target, different methods of price adjustment
are available:
- Escrow/Holdback accounts: Deposit of a portion of the purchase price in a trust account, which the buyer can
access in case of deficiencies within a certain period.
托管 晰
- Balance-sheet-based purchase-price adjustment: In the case of a time lag between contract conclusion and
closing of the deal, balance-sheet items such as working capital or equity can significantly change to the
(un)favour of the purchaser → subsequent purchase-price adjustment by the amount of the absolute change
in the respective balance-sheet item.
- Contingent value rights are a hedge of the seller against losses when the purchase price is paid in shares.
- In the case of earn-out agreements, a part of the purchase price will only be paid in the future depending on
predefined performance indicators (e.g. EBITDA, EBIT) (vendor loan). Payments can also be linked to the
achievement of regulatory approvals, patent approvals, etc.

Source: DePamphilis (2011).

47 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Vendor loans
供应商
i
连接有关目标公司未来经济发展的信息不对称，以及由此
产⽣的买卖双⽅不同的价格预期
Aim: Bridging information asymmetries regarding the future economic development of the target
company and the resulting different price expectations of buyer and seller.
ent
- Loan arises from deferring parts of the purchase price.
- Vendor loan can include a kicker (→ participation of the seller in the future development of the company).
In this earn-out structure, the seller remains a minority shareholder for a limited period of time.
- Tool of risk distribution
unnr ⻛险 分布
- Keeping old owners and their know-how, e.g. as managing director

48 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Design options for earn-out agreements

Determining the relevant success indicators 指标

- Financial indicators (e.g. annual net profit, EBIT, cash-flow figures [HGB, IFRS, US-GAAP]) or
- Non-financial indicators (e.g. approval of a patent)

Determining the consequences of achieving the success indicators

- Percentage participation (if applicable, graduation of percentages)
- Use of multipliers
- ...

Further specifications
- Minimum value for earn-out? Maximum pay-out (“cap”)?
- Is success measured in ranges?
- Different standards: fixed, variable, cumulative

Defining the period

- Common: 1-3 years
- When will the earn-out be paid? During the year? After expiration?
- Is it possible to offset missed targets?
Source: Pellens (2013).

49 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Example of an earn-out agreement
赚取利润 的 协议
• Entering an earn-out agreement starting on 2018/12/31
• Basis for measurement: EBIT; EBIT in 2018 = € 3,900,000
• Earn-out period: 3 years 蔬 前利润
• Result scenarios:
Year Scenario 1 Scenario 2 Scenario 3
2019 4,200,000 4,200,000 4,200,000
2020 4,500,000 3,800,000 3,800,000
2021 4,800,000 5,500,000 3,800,000
Total 13,500,000 13,500,000 11,800,000

• Standards:
- Cumulative standard: 40% of accumulated EBIT exceeding € 11,700,000 (= 3 * 3,900,000)
→ earn-out payment only at the end of the earn-out period
- Fixed standard: 40% of EBIT exceeding € 3,900,000 → annual earn-out payments
- Variable standard: 80% of EBIT exceeding the best prior-year result → annual earn-out payments

Source: Pellens (2013).

50 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Earn-out agreements from the seller’s and buyer’s perspective

Depending on the perspective, there are different advantages and risks:

Seller Buyer
+ Receiving a “fair” purchase price + Limitation of risk
− The seller continues to bear a certain part of the + The purchase price does not have to be paid
firm risk immediately in full (possibly additional financing
− The buyer has an interest in manipulating the advantage)
underlying success indicators and thus making − The buyer may be limited in his/her entrepreneurial
the performance appear worse freedom depending on the design in the earn-out
− The seller carries the bankruptcy risk of the buyer period (no synergy realization)
− Conflict of interest, provided that the seller
remains the CEO of the target company
→ increasing short-term earnings
− The seller may ask for inspection of internal
documents for monitoring purposes

Source: Pellens (2013).

51 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
 Sale of assets 资产 出售
• Sale of non-operating assets (tangible, intangible) of the target company
- e.g., realizing hidden reserves on land, inventories, etc.
- Possibly also licences, patents or other rights

• Sale of non-strategic shareholdings or business units

• Possibly also antitrust-driven sale of shareholdings or business units

52 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Different types of investors in M&As (I)

主权 财富基⾦
Soverigwedthfmds :

Governments and sovereign wealth funds Financial investors

as drivers of M&As in the crisis on the rise again
% of volume Percentage of global volume (%)
35% 30%
31,4% 27% 27%
Government Investments in US Targets 26% 26% 26%
30% 25%
25% 24% 24%
Government Investments in European Targets
25%
20% 19% 19%
21,1% 18%
20%
15%
16,3% 14%
15%

15% 12%
0,6% 11,0% 10%
10 %
8,8% 8,4%
10 % 7%
4,1%
5,6% 5%
4,5% 5%
5% 3,7% 3,5% 3,5%
1,6% 1,1% 4,2%
0,3% 0,4% 0,7% 0,3% 0,8% 0,4%
0% 0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: Thomson Reuters 2010, M&A Review 2017.

53 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Financial investors as buyers and sellers
Detecting undervaluations and restructuring
发现估值 过低亦重组
• Starting point: Detecting value differences between the market price of a company and its supposed
or actual fair value
- Imbalance of supply and demand
- Information advantages
- Subjective-irrational beliefs
• The aim of taking over the company is to sell it profitably again within a manageable time frame
• A number of short-term effective restructuring measures and of strategic repositioning measures
-
regularly take place prior to the divestment.
• Long-term influence is not regularly sought.

dvestment 转让
部分 投资 撤销 投资 ,

54 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Different types of investors in M&As (II)

Strategic investors ... Financial investors ...

§ are industry experts § invest opportunistically
§ can focus/limit due diligence § invest with the perspective of the future divestment
§ can more easily assess business-related risks § do not make strategic (pricing) decisions
§ need competition-sensitive due diligence information § cannot realise synergies
§ can achieve ‒ and pay for ‒ synergies § initially have only limited industry knowledge
§ can make strategic (pricing) decisions § need many consultants
§ are subject to antitrust acquisition restrictions § are never the only investor and finance project-specific
§ can offer own activities for purchase-price payment § are very transaction-cost aware
_

(asset swap)
交易 成本

Source: Dr. Pohlig (E.ON), lecture at the symposium of the study group Financing of the Schmalenbach Society.

55 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 The “locusts” leave Grohe
Kno. FRANKFURT, 26 September. The brand increase in value of more than one billion “And we are fully committed to growth.” The
name alone is not what made Grohe famous. Euros has taken place. works councils are open to the transaction,
The SPD politician Franz Müntefering also did ____________________________________ nobody should be afraid. Last but not least, the
his share in a speech on 19 November 2004. At connection could help Joyou develop the brand
that time Müntefering spoke of the “locusts” in the Asia-Pacific region. The Grohe Group,
who had taken over the manufacturer of headquartered in Dusseldorf, employs around
bathroom fittings: financial investors who had 9,000 people, and still has 2,300 of them at
burdened the company by paying the purchase three German production sites. The turnover is
price based on debt, who had dismissed 1.4 billion Euros. Lixil is the largest housing
employees and who offered little perspective at and building materials company in Japan with a
first glance. After that, the private equity turnover of almost 11 billion Euros.
industry lost its reputation: Locusts suck the The locust image, meanwhile, still shapes the
life out (even though they cannot do that perception of financial investors in the German
biologically) and only cause harm. Various middle class ‒ despite the development of
studies were written on Grohe. However, the Production in Germany, owners in Japan Grohe: “In consulting mandates with family
Photo Edgar Schoepal
negative picture was put into perspective by businesses, we continue to encounter
____________________________________
good numbers in the business – and now Grohe reservations,” says Frankfurt lawyer Hans-
is the target of the largest-ever foreign Jochen Otto, who has been involved in similar
According to the participants, the takeover will
investment by a Japanese company in transactions for years. So the “locusts” are soon
create the new world market leader in the
Germany: the Lixil Group paid 7 billion Euros history for Grohe, but not yet for the industry
sanitary business with an industry turnover of

FAZ from 27 September 2013

for 87.5 percent of the shares; the resulting of financial investors.
more than 4 billion Euros. The purchase, which
value of the company reached 3.06 billion
Lixil is undertaking together with the
Euros.
Development Bank of Japan, will be completed
The recent history of Grohe, founded in 1936,
in early 2014. The antitrust authorities still
also shows that the financial investors had to
have to approve. “But I do not expect any
face harsh criticism, but can also look forward
difficulties,” Grohe CEO David Haines told
to an enormous increase in the value of their
this newspaper. Haines remains Grohe’s boss,
leveraged acquisition. In 1999, the investor
considers Lixil the perfect partner and has
BC Partners had initially estimated Grohe's
signed a new five-year contract. Haines himself
enterprise value at around 980 million Euros; in
had the idea of talking to the Japanese. The fact
2003, the new owners TPG and a subsidiary of
that Grohe and its Chinese subsidiary Joyou
the Swiss bank Credit Suisse valued it at
remain independent within the Group provides
around 1.5 billion Euros. Since then, a further
a special charm, in Haines’s opinion.

56 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

The average holding period of financial investors

is 7 years

20%

15,0%
15% 14,2%
13,3%
12,4% 12,4%

9,7%
10%
⼀

5,3% 5,3%
5% 4,4%
2,7% 2,7% 2,7%

0,0% 0,0% 0,0%

0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Duration in years
Source: PWC/BVK 2005/Ernst & Young 2017

57 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Value-enhancing measures by financial investors
⾦融投资者增值 措施

Corporate governance structure 100%

Personnel hirings or dismissals 92%
Performance measurement of business units 92%
Composition of the company management 88%
Strategic orientation 84%
Changes in the organisational and operational structure 80%
Measures in production 76%
Changes in the IT/communication structure 76%
Company purchases or sales 72%
Measures in marketing/sales 64%
Capital measures 60%
Measures in procurement 48%
Corporate culture 40%
Employee trainings 36%
Measures in research and development 28%

0% 25% 50% 75% 100%

Source: Weber 2006

58 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Sovereign wealth funds

Definition 主权财富 基⾦
盈余
-
A Sovereign Wealth Fund (SWF) is a state-owned investment fund or entity that is commonly
established from balance-of-payments surpluses, official foreign currency operations, the proceeds of
privatisations, governmental transfer payments, fiscal surpluses, and/or receipts resulting from
resource exports. The definition of sovereign wealth fund excludes, among other things, foreign-
currency-reserve assets held by monetary authorities for the traditional balance of payments or
monetary policy purposes, state-owned enterprises (SOEs) in the traditional sense, government-
employee pension funds (funded by employee/employer contributions), or assets managed for the
benefit of individuals.
主权财富基⾦(SWF)是⼀种国有投资基⾦或实体，通常由国际
收支盈余、官⽅外汇业务、私有化收益、政府转移支付、财政
盈余和/或资源出⼝收⼊建立。主权财富基⾦的定义不包括,除
其他事项外,外国货币当局持有的货币储备资产的传统国际收
支或货币政策的目的,传统意义上的国有企业(国有企业),政府雇
员养老基⾦(由雇员和雇主的贡献),为了个⼈的利益或资产管理
Source: SWF Institute

59 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Sovereign wealth funds
Investment volumes

The 10 largest funds alone account for around 71% of the total investment volume of 7.8 trillion USD.
Around 60% of the fund volumes come from oil- and gas production.

Linaburg-
Assets Source Maduell
Country Name Founding
Billion USD of funds Transparency
Index

Norway Norway Government Pension Fund – Global 1,109 1990 Oil & gas 10
China China Investment Corporation 941 2007 Non-commodity 7
United Arabic Emirates Abu Dhabi Investment Authority 580 1976 Oil & gas 6
Kuwait Kuwait Investment Authority 534 1953 Oil & gas 6
Hong Kong (China) Hong Kong Monetary Authority Investment Portfolio 528 1935 Non-commodity 8
Singapore GIC Private Limited 453 1981 Non-commodity 7
Singapore Temasek Holdings 375 1974 Non-commodity 10
Saudi-Arabia Public Investment Fund 360 1971 Non-commodity 7
China National Council for Social Security Fund 325 2000 Non-commodity 5
United Arabic Emirates Investment Corporation of Dubai 305 2006 Oil & gas 5
… … … … … …
Total 7,755

Source: SWF Institute (2020).

60 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Sovereign wealth funds as investors

Benefits and concerns

Two main perspectives with regard to the topic of SWFs.

• SWFs will cause financial volatility
- Lack of transparency
- Lack of regulation > 缺乏 监管 透明度 1
- Control of strategic/system-relevant industries/companies
- Concerns that political interests may dominate over pure economics
-
• SWFs are bringing benefits to the global economy
- Capital injections allow industry giants in distress to survive
- Support of long-term structural changes in national economies of origin (diversification of industry-mix)
- Support of (new) growth opportunities of local and global industries
- The above-mentioned leads to macro stabilisation in the countries of origin and the world economy,
thus creating wealth for future generations

61 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Sovereign wealth funds
Food for thought

• Concerns in the developed world about SWFs already lead to protectionism.

• Funds gain more and more power to influence economic decisions, as funds are expected to grow
exponentially in the future.
指数 级
• New direction of investments: from emerging countries to the developed world.
- New economic order?
- Which legal and institutional standards to follow?
- Which corporate governance standards to follow?

62 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Further options for investor structure

The insider
is the initiator Owner transfers shares to another company in which he himself participates;
Owner buyout (OBO) also: Buyout of existing shareholders by other existing shareholders (reasons:
succession planning, unfreezing parts of the assets tied up in the company)
⼀⼀

收购
Acquisition of company shares by the own management (reasons: company
Management buyout (MBO)
succession, achieving independence, realization of managers’ own ideas)

Own workforce acquires company shares (reasons: company in distress,

Employee buyout (EBO)
lack of other investors)
The outsider Acquisition of company shares by an external management
Management buy-in (MBI)
is the initiator (reasons: same as MBO)

External strategic investor acts as acquirer (reasons: strategic motives,

Third-party buyout (TPBO)
generating returns)

External financial investors act as acquirers (reasons: implementation of buy-

Institutional buyout (IBO) and-build strategies, financial support of a management team or of employees
for making the purchase price possible, generating returns)

Leveraged
The financing has a high debt ratio (leverage)
... buyout/-in

63 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Capital structure: Mind the synergies

Moody’s downgrades credit rating for RWE after purchase of Essent

Moody’s has lowered its credit ratings for RWE following the Essent acquisition. The rating agency
downgraded the group's long-term senior unsecured debt from “A1” to “A2” with a negative outlook.
The short-term “Prime 1” rating, which rates the risk of default as very low, has been maintained.
The Essent rating was lowered by Moody’s as well. According to the rating agency, the downgradings
affect loan collaterals totalling € 18 billion.
RWE had completed the acquisition of Essent for € 7.3 billion at the end of September, including
€ 600 million of debt. Moody’s pointed out that the positive impact of the acquisition, which
strengthens RWE in Northwest Europe, were well appreciated. However, also the flexibility of the group
is affected by the increased debt. Together with the extensive investment program and a presumably
negative free cash flow, net debt in 2009 might have risen considerably, as Moody's further explained.
At the end of 2008, net debt amounted to € 21 billion.
Börsen-Zeitung, 5 November 2009

64 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Determination of the maximum debt potential

• Rating benchmarks as reference points for debt capacity

• Deriving the debt capacity from cash flow approximations
• For this, you need future forecasts for the cash flow
Moody’s aggregate metrics by rating category: Global non-financial corporations
EBITA/ (FFO + Debt/
EBITA Debt/ FFO/
Interest IntExp)/ Book
Margin EBITDA Debt
Expense IntExp Capitalisation
Aaa 30.6% 11.5 17.2 1.9 35.1% 41.5%
Aa 19.5% 13.9 15.2 1.8 31.0% 43.4%
A 15.8% 10.7 13.1 2.3 40.7% 34.1%
Baa 13.9% 6.3 8.1 2.9 46.4% 27.1%
Ba 13.3% 3.7 5.1 3.7 55.7% 19.9%
B 11.2% 1.9 2.9 5.2 65.8% 11.7%
Caa – C 7.0% 0.7 1.6 8.1 89.3% 4.6%
Source: Moody's Financial MetricsTM Key Ratios by Rating and Industry for Global Non-Financial Corporations: 2017

65 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Example of calculating the debt capacity

Figures for
Management forecasts 2018 2019 2020
lending basis

Turnover 营业额 105 108 112

Cash-effective operating cost 80 67 67
Depreciation 20 20 20
Interest expense 15 13 11
Taxes 0 2 5 Critical with
Net income -10 6 9 management
estimates
Borrowing cost 10% 10% 10%
1 8 108 -
67 1 12 67
EBITDA 步25 : 41 = 45 33 Debt capacity
Understand
why different
7 FFO ?
-0 10 26 29 20 calculated on the
basis of the
values with
different
B category benchmarks benchmark benchmarks
Debt/EBITDA 5.2 171.6
FFO/Debt 11.7% 170.9
Be clear why EBITA/interest 1.9 68.4
these
benchmarks (FFO + interest)/interest 2.9 105.3

Average 129.1
Source: Based on Nordea (2009)

66 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Choice of the “transaction currency”

Signal for the quality of the target

100%
8% 11% 13% 9%
16% 15% 14% 15% 19% 19% 17%
22% 21% 22%
27% 13% 15% Shares
80% 13% 11% 20%
45% 17%
22% 13% 28% 36% Hybrid
14%
22% 19% 25% 31% Cash
60% 24%

20%
40% 79% 77%
74% 74%
68% 68% 69%
64% 62%
57% 59% 56% 58%
49% 52% 55%
20%
35%

0%
2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: M&A Review 2017; Q4 2016.

67 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Contents

1 M&A Fundamentals 4 Due Diligence

1.1 Concept 4.1 Concept
1.2 Forms 4.2 Due Diligence versus Annual Audit
1.3 Process 4.3 Buyer/Seller Due Diligence
1.4 Market Development 4.4 Integrated Financial Due Diligence
1.5 Buyer- and Seller Motives 4.5 Normalizations, Adjustments, and Reclassifications
1.6 Regulatory Environment
5 Transaction Structures
2 M&A Finance 5.1 Asset Deal
2.1 Financing Structures, Tools, and Techniques 5.2 Share Deal
2.2 Investors
6 Purchase/Selling-Price Determination
2.3 Indebtedness Potential
6.1 Discounted-Cash-Flow Method
3 Hostile versus Friendly Takeovers 6.2 Multiples Method
3.1 Takeover Tactics and Defense
7 Empirical Results regarding Success and Failure of M&As
3.2 Case Example
根据买⽅的态度对收购策略进⾏分类
68 Stein/Kotulla 友好收购
University of Europe for Applied Sciences Mergers & Acquisitions
•收购经目标公司最⾼管理层批准
•向采购公司管理层提供⼴泛的数据和其他协助
敌意收购

•违背⾼层管理⼈员的意愿收购公司的多数股权(⾼层管理
⼈员常常担⼼成功收购后会有失业的风险)
•有时限的直接向目标公司的所有者/股东提供报价→所需
股权的当前市场价值的⾼溢价
•购买公司不提供目标公司的内部数据→⾼风险
Classification of acquisition strategies according to •问题:员⼯和小股东的保护

the buyer’s attitude

Friendly takeover
• Acquisition with approval by the top management of the target company
• Management of the buying company is provided with extensive data and other assistance

Hostile takeover
• Acquisition of the majority stake in a company against the will of the top management
(who often fear the risk of losing their jobs after a successful takeover)
• Time-limited offer directly to the owners/shareholders of the target company
→ high premium on the current market value of equity required
• The buying company will not be provided with internal data of the target
→ higher risk
• Problems: Protection of employees and minority shareholders
• Practical examples: Mannesmann/Vodafone; Aventis/Sanofi; attempts: MAN/Scania, Merck/Schering

69 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Techniques in hostile takeovers

In order to strengthen the offer to buy, the following techniques are often used for hostile takeovers.

Tender offer Public takeover bids to the shareholders of the target company

Creeping tender/ (Secret) acquisition of blocks of shares before an aggressive takeover campaign, whereby disclosure
Dawn raid obligations might be complied with.

Attempt to obtain a proxy of the target’s shareholders to change the management team at the general
Proxy fight meeting

Attempt to persuade the shareholders of the target, against the will of the management, to accept the
Bear hug offer based on a particularly high premium

Golden parachute Members of the target’s management are assured high financial benefits in the event of leaving the firm

Acquisition of a shareholding of up to 25% and combining it with proxy votes to blackmail the target’s
Green mailing management to repurchase the package at a higher price

70 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

对 敌意 收购 的 防守 ⽅法
Countermeasures in hostile takeovers (I)
“Raider defence”

Long-term defence measures include:

• For actual control of the target, the attacker must be able to appoint the members of the board 董事会
• However, in some countries, the board is appointed by the supervisory board
• Voting a supervisory board member out is only possible based on a 3/4 majority of the annual
Two-tier board general meeting
• Even with a qualified majority, the management board can be dismissed of office before the end of the
term only for a compelling reason
• Management board has a better overview of the shareholder structure
Restrictedly
• Identifying takeover attempts in advance _ 在 转让 股份 受限 的情况下
transferable 可
• In the case of restrictedly transferable shares, the approval of the management board, supervisory board
registered shares or the general meeting is required

(
Golden shares Preference shares held by the state, which grant the state defencing power
Defensive clauses in the firm’s statutes (e.g. temporal diversification of the office terms of management
Shark repellents bodies [→ exchange more difficult], division of shares into classes with different voting rights [→ single,
multiple])
Active shareholder- Value-oriented firm policy ensures a fair market valuation and makes a company unattractive to raiders
value policy

71 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

限 利 可 转让
的 记名 股票
 Countermeasures in hostile takeovers (II)
“Raider defence”

Short-term defence measures include:

Issuing special conversion- or option rights on new shares at a discount, activated by a hostile
Poison pills takeover attempt → involvement of the general meeting required
Leads to share-price increase and thus makes the takeover of the company more expensive and
Repurchase of own shares complicated → involvement of the general meeting required
• Provoking antitrust issues
Purchase of companies
• Reducing the liquidity reserves of interest to the bidder
or other assets • Acquiring assets unattractive to the bidder → usually involvement of general meeting
Sale of assets that are of particular interest to the acquiring company
Sale of crown jewels → potentially jeopardising the survivability of the target (involvement of general meeting)
Transfer of assets to a subsidiary in which a third party or foundation that cannot be influenced
Asset lock-up is involved

Pacman Target company makes a counter-offer for the raider company

Bidder who helps the target and can be supported by issuing new shares
White knight → involvement of the general meeting required
毒丸
发⾏特别转换——或折价认购新股份的期权，由恶意收购企图激活——要求股东⼤会的参与
72 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
回购自⼰的股份
导致股票价格上升，从⽽使公司的接管更昂贵和复杂→需要股东⼤会的参与
收购公司或其他资产
•引发反垄断问题
•减少竞标者感兴趣的流动性储备
•收购资产的出价的⼈→通常参与⼤会的王冠
与被收购公司有特别利益关系的资产的出售
→可能危及目标的⽣存能⼒(股东⼤会的参与)
资产锁定
将资产转移到不受第三⽅或基⾦会影响的⼦公司
吃⾖⼦

Contents 目标公司对突袭机公司提出还盘
白骑⼠
帮助目标公司并能通过发⾏新股支持的投标⼈→要求股东⼤会参与

1 M&A Fundamentals 4 Due Diligence

1.1 Concept 4.1 Concept
1.2 Forms 4.2 Due Diligence versus Annual Audit
1.3 Process 4.3 Buyer/Seller Due Diligence
1.4 Market Development 4.4 Integrated Financial Due Diligence
1.5 Buyer- and Seller Motives 4.5 Normalizations, Adjustments, and Reclassifications
1.6 Regulatory Environment
5 Transaction Structures
2 M&A Finance 5.1 Asset Deal
2.1 Financing Structures, Tools, and Techniques 5.2 Share Deal
2.2 Investors
6 Purchase/Selling-Price Determination
2.3 Indebtedness Potential
6.1 Discounted-Cash-Flow Method
3 Hostile versus Friendly Takeovers 6.2 Multiples Method
3.1 Takeover Tactics and Defense
7 Empirical Results regarding Success and Failure of M&As
3.2 Case Example

73 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Course of the pre-contractual phase of an acquisition

Week 1 First contact with acquisition partner Week 10 Start of negotiations and preparation of
Confidentiality/Agreement/Statements a data room by the seller
of non-disclosure
Week 10 Determination of the rules of
Week 3 Receipt of the first company profile data-room procedure
Week 8 Submission of the Letter of Intent Week 12-20 Implementation of the various
due-diligence forms
Week 8 For bidding procedures: Providing the
first-round bidding instructions and making Week 12 Agreement on a Memorandum of
first non-binding bids Understanding
Week 9 Management presentation Week 20 Receipt of the first draft of the contract

Week 9 For bidding procedures: Decision of the seller Week 25 Submission of the final bid
on the inclusion in the final bidding process
(final round bidding) Weeks 27-36 Final detailed negotiations and formulation
of the contract

Week 36 Signing of the contract

Week 38 Closing

Source: Jansen (2008)

74 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Interest divergences in the negotiation phase

Goals of the buyer Negotiation difficulty Goals of the seller

• Agreement on the most • Agreement on the most

important points important points
• Collecting information • Collecting information
• Building trust low • Building trust

决定合并或终⽌
决定合并或终⽌ Decision on combination or termination Decision on combination or termination
• Generate additional informational material • Retention of specific information •特定信息的保留
•⽣成额外的信息材料•预期价格
•合并后企业的计划
• Expected price
higher
• Submission of bid •提交投标⽂件
• Post-merger plan • Post-merger plan
•对交易结构的批准 •合并后企业的计划
• Approval on the structure of the deal • Approval of the structure of the deal
•关于价格和程序问题的协议• Agreement on price and procedural issues • Agreement on price and procedural issues •对交易结构的批准
•关于价格和程序问题的协议
• Wrestling for concessions for the firm, the staff

•为公司、员⼯争取让步
Design of the contract Design of the contract
• Concept of the purchase contract • Control over the buying concept
• Requirements for strict guarantees and collaterals • Minimisation of guarantees of any kind
• Search: Payment modalities for tax minimisation • Search: Payment modalities for tax minimisation
• Demand for price reduction, if hidden problems arise later • Price limit should be almost unchanged from the beginning
to the end

Source: Jansen (2008) Conclusion of the contract

75 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 收购 前 调查
iii. 分析
Due diligence (I)
Term
和 衡量 收购 对家
• Careful analysis and examination of the acquisition object
-

• All major opportunities and risks of an acquisition are measured in a standardised manner
• For friendly takeovers: Seller provides the prospective buyer with comprehensive, otherwise
inaccessible internal data
- Data room, survey of management team and employees, company visit
- Various, interdependent analysis fields
• Prerequisite for starting the due diligence: Signing a letter of intent
• With the beginning of the due diligence, an acquisition team of experts from various departments
is to be formed

76 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Due diligence (II)

Term

Origin of > The concept comes from the Anglo-American legal system, where it describes
the term (1) a general measure of liability (comparable to Section 276 BGB) and
(2) a commercial law institute, namely the pre-purchase audit of a target company
> Within the meaning of (2), the term due diligence is anchored in the US capital-
market law and investor-protection law (security law)
> Literally, “due diligence” means required carefulness

Definition of > Definition: Due diligence as a careful investigation and analysis of a target
the term company as part of the preparation and execution of an M&A transaction
in the German to identify and analyze the major influencing factors that are essential to the
M&A context transaction

Source: Hollasch (2013)

77 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
 Selected possible risks in practice

Where is the risk? Why do you need a due diligence?

The target company does not fit the buyer’s strategy or culture
→ strategic and cultural due diligence

Priced-in synergies cannot or not sufficiently be realized

→ financial/operational/technical due diligence

The target company does not comply with applicable environmental regulations
→ possible fines and conversion costs → environmental due diligence

The target company has rising pension obligations without the formation of reserves
→ financing gap → financial due diligence

The target company paid bribes to win contracts

→ fines/damage to image → compliance due diligence

If no deal breakers have been identified, there might be the risk that the buyer will pay too much
→ commercial/financial due diligence
Source: Hollasch (2013)
78 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Distinction between due diligence and annual audit t

差别
Due diligence Annual audit

No defined standards Legal and professional regulations

No formal confirmation Auditors’ report under materiality aspects

Assessment of operating and financial performance Evaluation in terms of “true and fair view” acc. to IFRS

In addition to past orientation, strong focus on planning Annual financial statements (but going concern)

Source: Hollasch (2013)

79 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Buyer- versus seller due diligence

Buyer due diligence Seller/Vendor due diligence

Aims: Aims:
• Confirmation of investment • Presentation of the company,
hypotheses and evaluation unbiased analysis of profits and
• Identification and quantification cash flows
of opportunities and risks • Protection of internal resources
• Information needs • Acceleration of the process
• Reduction of uncertainties Consultant (auction)
• Structuring of the acquisition • Ensuring financing
• Structuring of the purchase contract • Protection against surprises
(in terms of purchase price,
purchase contract)
• Higher transaction security

Source: Hollasch (2013)

80 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Due diligence – Contents of the report

> Future market-, product-, process strategy

Investment calculus
> Implications for employees, locations and licences that are to be kept

> Valuation method (multiples-, DCF-, earnings-value method)

Indicative valuation
> Influencing factors on enterprise value and equity value

Corporate > Description of the acquisition structure (share deal vs. asset deal)
legal structure > Location selection for the holding company, tax implications buyer/seller

> Guarantees from the seller, involvement of seller/management in financing

Conditions
> Assets of the target company

Financing- & purchase- > Equity- and debt-financing components

price mechanism > Locked-box- vs. completion accounts (regarding the point in time of closing)
Source: Hollasch (2013)
81 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
 Types of purchase contracts
Locked-box-/Completion accounts

Completion-accounts mechanism (SPA and APA)

• Valuation date coincides with the closing
• Purchase-price calculation based on rules in line with a previously determined
reference calculation
• Requires the establishment of detailed accounting and evaluation methods
in the contract

Valuation
date

31 December Signing Closing

Valuation
(contract (payment of the
date conclusion) purchase price)

Locked-box mechanism (SPA)

cnnrrnnne
• Valuation date is in the past
• Seller demands interest on the purchase price for the period
between valuation date and closing

鼺
• Significant risk for the buyer due to “leakage” until-
closing

Source: Basler (2016). SPA = Share Purchase Agreement; APA = Asset Purchase Agreement

82 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

An integrated financial due diligence is essential

for the success of the M&A process
Typical due diligence issues Improve/Validate
§ Early capture and realization of synergies Valuation Model &
from the M&A transaction Value Drivers Deal Structure
Financial
§ Uncertainty around target management’s
§ Products
claims on growth Commercial
§ Markets
§ Stability of customer base § Customers Maximize Synergy
§ Accelerating time to close § Capabilities Operations
§ Culture
§ Tax and accounting structuring IT
§ ROIC
§ Internal control structure § Risk
Due Tax Develop Additional
§ Effect of regulatory matters on a target Diligence Negotiating
company’s industry Value drivers
Process Legal Leverage
determine price
§ Identification and quantification of tax
and structure of
exposures and optimization of related benefits the transaction Human Capital
and define the Provide Feedback
§ Employee benefits, information-technology
nature and the Risk on Acquisition
systems and risk-management practices
scope of due Management Agreements
§ Supply-chain- and manufacturing-site
diligence
Source: Hollasch (2017)

inspection Forensic/
§ Benefit-plan funding and liability exposures Investigative
Identify, Assess &
Service
Minimize Risk

Experience shows that it takes more than financial due diligence to make the deal work

83 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Sustainable result
Where and what has to be normalised?
Examples of …

• Wage- and salary increases ý • Off-period expenses and income þ

• One-time effects due to changes in accounting or bookkeeping: • One-time revenues ý
- Changes in the evaluation method used
- Changes in the definition of assets þ • Cost associated with business transactions þ
- Balance-sheet measures (the target company starts to use factoring
or undertakes measures in working-capital management)
• Cyclical developments in business and industry ý
• Creation of value adjustments on small and medium-sized
receivables within a financial year ý • Compensation payments
(e.g., by insurances for damages to assets of the company)
minus incurred cost
þ
• Non-operating, one-time expenses or income þ
• Reversing of provisions (under certain conditions: also their
• Profits and losses from selling fixed assets þ formation and use) þ

• Expenses for restructuring measures þ • Changes in procurement- or purchase prices ý

þ = typical normalisations ý = business transactions and circumstances that cannot be normalised
Source: Hollasch (2013).

84 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Sustainable result
Pro-forma, like-for-like adjustments
Description of the different adjustments

Normalisations Elimination of non-recurring business transactions to determine the sustainable profitability of the company

Adjustments Representation using hypothetical assumptions:

Pro forma Adjustments to represent an independently operating company (stand-alone),

e.g., in a carve-out scenario

Adjustments of the historical numbers to achieve comparability with the planning,

Like-for-like
e.g., in the case of a reorganisation of a business unit as part of a business transaction

Foreign-currency Eliminating foreign currency effects by applying a constant exchange rate, applying the budgeted exchange rate
effects as part of a so-called “constant currency analysis”

Reclassifications of expenses or income with/without EBITDA impact

Reclassifications
(e.g., pensions, leasing)

Source: Hollasch (2013).

85 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Contents

1 M&A Fundamentals 4 Due Diligence

1.1 Concept 4.1 Concept
1.2 Forms 4.2 Due Diligence versus Annual Audit
1.3 Process 4.3 Buyer/Seller Due Diligence
1.4 Market Development 4.4 Integrated Financial Due Diligence
1.5 Buyer- and Seller Motives 4.5 Normalizations, Adjustments, and Reclassifications
1.6 Regulatory Environment
5 Transaction Structures
2 M&A Finance 5.1 Asset Deal
2.1 Financing Structures, Tools, and Techniques 5.2 Share Deal
2.2 Investors
6 Purchase/Selling-Price Determination
2.3 Indebtedness Potential
6.1 Discounted-Cash-Flow Method
3 Hostile versus Friendly Takeovers 6.2 Multiples Method
3.1 Takeover Tactics and Defense
7 Empirical Results regarding Success and Failure of M&As
3.2 Case Example

86 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Transaction structure of a company takeover (I)

Asset deal 公司 收购 皎易 结构

Investor1
1

Seller 2 EC Investor2
Purchase price Takeover Purchase- .
4
Target company price financing .
Pay-out and/or
DC
.
liquidation Transfer of
assets and rights
.
3 Investorn
Use as a collateral 抵押品
⼀⼀
-_-

for debt financing

87 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Asset deal (I)

• In the case of a direct asset deal, the buyer purchases and, thus, takes over the assets and liabilities
of the target.
• An exclusion of individual assets is possible (“cherry picking”).
• The target company will continue to exist and may be liquidated later on.
• The buyer raises the necessary acquisition loans and/or mezzanine financing directly.
• Such an asset deal can also be carried out indirectly by including a takeover company (NewCo).
• In this case, the NewCo acquires the assets and assumes or redeems the liabilities, whereby the
Newco’s shares are held by the buyer.
• The NewCo then also takes out the necessary debt to finance the acquisition.
资产交易
•在直接资产交易的情况下，买⽅购买并接管目标公司的资产和负债。
•排除个别资产是可能的(“cherry picking”)。
•目标公司将继续存在，并可能在以后被清算。
88
•买⽅直接筹措必要的收购贷款和/或夹层融资。
Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

•这样的资产交易也可以通过包括收购公司(NewCo)间接进⾏。
•在这种情况下，新公司收购资产并承担或赎回债务，据此，新公司的股份由买⽅持有。
•新公司还会拿出必要的债务来为收购融资。

Asset deal (II)

• An asset deal primarily meets the objectives of the buyer.

- Cherry picking (lower purchase price than for a total purchase)
- Transferred assets become assets of the takeover company and can be used by it as collaterals for the liabilities
- The cash reserves are fully available in the acquiring company for the repayment of liabilities
- No remaining minorities
- Liability only for explicitly assumed debt

89 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Asset deal (III)

尽快折旧 1 摊消 被 收购 资产 的 收购 成本
• The acquisition company is primarily interested in depreciating/amortizing the acquisition cost
of the acquired assets as quickly as possible (to reduce its tax payments).
• In this context, as the acquisition price is usually higher than the book values of the target’s assets,
there will be a book-value increase (so-called “step-up”), which leads to even higher depreciation.
- Tax payments can be further reduced
- As a result, cash flows increase (liquidity effect)
• Higher cash flows for debt-capital repayments

90 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

⾼折旧带来的好处最终取决于资产的使用寿命结构:剩余使用寿命相对较短的资产
所占比例越⼤，对买家越有利，因为流动性效应可以更快实现。
然⽽，收购目标公司的资产往往会因为卖⽅的利益⽽失败，卖⽅更愿意出售股
份，原因是
-税收原因(通过出售资产获利的⾼税收)-责任-法律原因
——therequiredeffort
卖⽅(对于目标公司的合法交易)的公司责任完全保留，因为目标公司继续存在。
Asset deal (IV) 以后清算的费用完全由卖⽅承担。资产的转让必须按照“单⼀继承”原则进⾏，即
所有资产必须单独转让。
这意味着，付出的努⼒相当⾼
最终iàg ,
The benefits from higher depreciation ultimately depend on the structure of the useful lives of the
lnnnnnn

assets: The larger the proportion attributable to assets with comparably short remaining useful lives,
⼀
⽐刚
the more advantageous is the asset deal for the buyer, since liquidity effects can be realised faster.
However, acquiring the assets of the target company often fails because of the interests of the seller,
who prefers the sale of shares because of
- tax reasons (high taxes on profits from selling assets)
-
- liability-law reasons
- the required effort

The corporate liability of the seller (for the legal transactions of the target) fully remains, since the
target company continues to exist.
The cost of a later liquidation are entirely borne by the seller. The transfer of the assets must be
carried out based on “singular succession”, i.e., all assets must be transferred individually.
This means, the effort is quite high.

91 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Transaction structure of a company takeover (II)
Share deal

2 Investor1
1
Kaufpreis
Purchase price
Verkäufer
Seller EK
EC Investor2
Takeover
Übernahme- Kaufpreis-
Purchase- .
Target company
gesellschaft finanzierung
price financing .
Transfer ofvon
Übertragung .
shares
Anteilen FK
DC
.
3
Investorn

92 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

直接股份交易包括收购⽅收购目标公司的股份，并将其作
为长期⾦融资产在资产负债表上记账。
•目标公司继续存在，保留所有资产和负债。
•这样的股票交易也可以通过包括收购公司的间接进⾏。
•在这种情况下，收购公司获得目标公司的股份。
•购买价格直接支付给前所有者。
•卖⽅有税收优惠。
Share deal (I) 股票交易 •买⽅的缺点是:
-对目标潜在少数群体已知和未知的责任的持续
-与董事会早先决定有关的义务

• The direct share deal involves the acquisition of the target’s shares by the acquirer and accounting
for them on the balance sheet as long-term financial assets.
• The target company continues to exist, keeping all assets and liabilities.
• Such a share deal can also be carried out indirectly by including a takeover company.
• In this case, the takeover company acquires the shares of the target company.
• The purchase price is paid directly to the former owners.
• There are tax advantages for the seller.
• Disadvantages for the buyer are:
- Continuity of liability for known and unknown liabilities of the target
- Potential minorities
- Obligations related to earlier board decisions

93 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Share deal (II)

• From the buyer’s point of view, the share deal also has limited possibilities to convert the
acquisition cost into tax-effective depreciation.
iink
• The acquired shares represent non-depreciable assets – unlike the asset deal, the acquisition of
shares does not lead to an increase in the book value of the assets of the target company.
• Overall, the cash flow that can be generated to repay the debt is lower than in the case of
an asset deal (the additional cash flow due to tax savings is lower).

•从买⽅的角度来看，股权交易也有有限的可能性将收购成本转换为税收有效
的折旧。
•收购的股份代表非折旧资产——与资产交易不同的是，收购股份不会导致目
标公司资产账面价值的增加。
•总体⽽⾔，用于偿还债务的现⾦流低于资产交易的情况(由于节省税收⽽产⽣
的额外现⾦流更低)。
94 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Contents

1 M&A Fundamentals 4 Due Diligence

1.1 Concept 4.1 Concept
1.2 Forms 4.2 Due Diligence versus Annual Audit
1.3 Process 4.3 Buyer/Seller Due Diligence
1.4 Market Development 4.4 Integrated Financial Due Diligence
1.5 Buyer- and Seller Motives 4.5 Normalizations, Adjustments, and Reclassifications
1.6 Regulatory Environment
5 Transaction Structures
2 M&A Finance 5.1 Asset Deal
2.1 Financing Structures, Tools, and Techniques 5.2 Share Deal
2.2 Investors
6 Purchase/Selling-Price Determination
2.3 Indebtedness Potential
6.1 Discounted-Cash-Flow Method
3 Hostile versus Friendly Takeovers 6.2 Multiples Method
3.1 Takeover Tactics and Defense
7 Empirical Results regarding Success and Failure of M&As
3.2 Case Example

95 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Methods for company valuation

Various methods are available for company-value determination. 公司通过综合利用所有表内和表

外资源持续产⽣财务盈余的能⼒
公司的总/净值，即在资产负债

e.
表内记录的单⼀资产的总和 产⽣的总价值/净价值
Gross/Net value of the Gross/Net value of the company
company as the sum of the Company-valuation resulting from the ability to sustainably
single assets recorded in the generate financial surpluses from the
methods
balance sheet combined use of all on- and off-
balance-sheet resources

Single-valuation Total-valuation
methods methods

- Net-asset-value method
- Liquidation-value method
Investment-calculation Comparison
methods methods

Gross/Net value of the Value derived from certain

company as the present value financial indicators or values
of future surpluses of peer companies
- Discounted-cash-flow - Multiples method
method (DCF) - Comparable transaction
- Earnings-value method
96 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

波动性使买卖双⽅的估价和价格决定复杂化
Volatility complicates valuation and price determination
for both the buyer and the seller

Expectations buyer Expectations seller

Cash flows Cash flows

Increased
Capital structure discrepancy Capital structure

≠
and capital cost and capital cost
Company Company
value value
Market Market
multipliers multipliers

Synergy Synergy
potentials/ potentials/
Complicated
real options price determination
real options
Source: According to Deutsche Bank

97 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 Investment-calculation methods

BW(RW)
PV(RV)

BW(CF
PV(CFnn) )

BW(CF
PV(CFn-1
n−1 ) )

Discounting with demanded return of shareholders

... n
Present Value (PV) = ∑ CF! ∗ 1+i −! + RV ∗ (1+i)−"
t=1
Residual
Rest -
Value

Cashflows
wert

Expected
(RV)
BW(CF
PV(CF!2))

+
CF33 CF44 CF55
CF22
CF11 CFnn
BW(CF
PV(CF"1))

0 1 2 3 4 5 n
years

Present
Company
Value
Planning Horizon
Terminal
Value (TV) 终值
98 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

?
Assumptions about the development of cash flows
and the useful lives

Fluctuating Constant
cash flows cash flows

'
(1 + +)' −1
Limited life !" = $ %&$ ' (1 + +)($ !" = %& '
+ ' (1 + +)'
$%&

)
%&
Unlimited life !" = $ %&$ ' (1 + +)($ !" =
+
$%&

99 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

 剩余价值
The residual value can be determined based on
different assumptions
⼀⼀

&

!" = $ %&# ' (1 + +)'# + -" ' (1 + +)'&

#$%

⽆限
Assumption:
Infinite continuity of the company
Assumption:
Liquidation of the company
瀞
⼀⼀
延误 Þ Residual value = present value
永久资产of a perpetual Þ Residual value = liquidation
的现值 annuity value
年⾦

' '
($
%&
!" = $ %&$ ' (1 + +) + ' (1 + +)(' !" = $ %&$ ' (1 + +)($ + ." ' (1 + +)('
+
$%& $%&

100 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

△ The market value of equity is determined directly

in the net approach and indirectly in the gross approach
净值法
Equity approach (net approach)
实体 ⽅法
Entity approaches (gross approaches)
总额⽅法
Market value of equity results after
Time values of the subtracting the market value of debt
cash flows in t (CFt)
Equity cost rate

ECMV ECMV
FTE
TGw-DCuiEC.no
TC cost rate

TCMV
FCF

DCMV

税盾: - =

债务资本的税收优
惠，由于利息费用 Tax shield: Gross approaches differ
Tax benefits from debt capital due to the depending on the
从税基中扣除，因deductibility of interest expenses from the tax base, tax shield (TS)
thereby representing a value contribution
此代表价值贡献
FTE = flow to equity; FCF = free cash flow; TC = total capital; EC = equity capital, DC = debt capital, MV = market value
⾃由 现⾦ 流
101 Stein/Kotulla University of Europe for Applied Sciences
股权
资本 Mergers & Acquisitions
 Determination of the valuation-relevant cash flows

Free cash flow (FCF) Flow to equity (FTE)

Earnings before taxes Earnings before taxes
– Corporate taxes 企业 – Corporate taxes
= Earnings after taxes
所得税 = Earnings after taxes
+ Interest and similar expenses + Interest and similar expenses +利息及类似费用
+/– Depreciation/Appreciation 贬值 1 升值 +/– Depreciation/Appreciation + / -折旧/升值
+/– Establishing/Utilizing provisions +/– Establishing/Utilizing provisions + / -建立/使用规定
–/+ Increase/Decrease in prepaid expenses –/+ Increase/Decrease in prepaid expenses
预付费用增加/减少递延收益增加/减少-固
+/– Increase/Decrease in deferred income +/– Increase/Decrease in deferred income
– Investments in fixed assets – Investments in fixed assets 定资产投资
–/+ Increase/Decrease in working capital –/+ Increase/Decrease in working capital- /+营运资本增加/减少

= Operating net cash flow 经营净现⾦流 = Operating net cash flow

– Corporate tax savings due to proportionate debt financing – Interest and similar expenses
由于债务融资的比例⽽节省的公司税
+ Debt capital borrowings
= Free cash flow
– Debt capital repayments 偿还 债务
资本
= Flow to equity

Source: Baetge et al. (2012)

102 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

△ ?
Determination of the valuation-relevant capital-cost rates
Equity approach (net approach) Entity approaches (gross approaches)
Calculation Flow-to-equity Adjusted present value Weighted average cost of capital
steps (FTE) (APV) (WACC)

Cash flows (1) Cash flow available to equity (1)所有投资者可以获得的现⾦流(所谓的自由现⾦

(1) Cash flow available to all investors (so-called free cash flow, FCF)
investors (so-called flow-to-
§ after investments 流，FCF)§投资后的现⾦流
equity, FTE)
§ before financing §之前融资
§ after investments §如果是纯自筹资⾦，则应扣除应交所得税
§ after income taxes payable in case of pure self-financing
§ after all financing measures
§ after all income taxes
税收挡
⼀道
(2) Periodic tax shield (TS) from à Tax shield incorporated in cWACC
(given the capital structure the de facto debt financing
of the firm) à captured and discounted
separately
-

Discount rate Risk-adjusted EC cost rate (1) for FCF : cdf

EC Weighted TC cost rate incl. TS
cid = r + (r - r ) × βid (2) for TS : rf c idWACC = c DC × (1 - taxrate) ×
DC
+ c idEC ×
EC
EC f M f TC TC
whereby βid = β df × (1 + (1 - taxrate ) × D C )
EC

Result n
FTE t n
FCFt n
TS t n
FCFt
EC MV = å (1 + c
t =1
id t
EC )
EC MV = å (1 + c
t =1
df t
EC )
+ å (1 + r )
t =1 f
t
- DC MV EC MV = å (1 + c
t =1
id
WACC )
t
- DC MV

Direct determination of Total-capital market value (equity market value

the equity market value after subtracting the debt-capital market value)
FTE APV WACC
à If the assumptions are the same, there is a valuation identity: EC MV = EC MV = EC MV

id = indebted, df = debt-free, TC = total capital, EC = equity capital, DC = debt capital, MV = market value, WACC = weighted average cost of capital, β = participation in systematic market risk
103 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
 Mini case
Mikron Infrared Inc. – Company valuation with the WACC method (including taxes) (I)

• Mikron Infrared, listed on the New York Stock Exchange, plans to acquire German measurement
technology provider IMPAC. IMPAC is a non-listed company in the legal form of a GmbH
(limited liability company, LLC).
• As a preliminary step for determining the purchase price, Mikron’s CFO, Paul Kohmescher, has
assigned you the task of valuing IMPAC GmbH as of 2021/01/01.
• To do this, he provides you with the following data: The earnings before taxes amounted to
€ 500,000 as of 2019/12/31. This value is also expected for the current financial year 2020. Due to
positive cross-selling expectations resulting from the planned merger, yearly increases of 5%
(compared to each previous year) are considered possible from 2021 onwards. As of 2024, due to
conservative estimations, no further growth is estimated. The achieved pre-tax profit is to be
-0extrapolated as a perpetuity. Expenses for depreciation are planned at 10% of the yearly pre-tax profit.
Long-term provisions are planned at 5% of the yearly pre-tax profit. In addition, starting from 2021,

飝 yearly investments in a new measuring technique to test the spice coating of potato crisps amounting
to € 250,000 are planned.

104 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Mini case
Mikron Infrared Inc. – Company valuation with the WACC method (including taxes) (II)

• Simplified, the flat-rate profit tax amounts to 39%.

• The equity ratio should be 60% for all periods.
• The risk-free interest rate (here identical to the debt-capital interest of IMPAC) is planned to be
constant at 5% p.a.
• The return of the market portfolio is constantly 9% p.a. The beta factor for IMPAC provided by
investment banks is bid = 1.75 and was derived from available data about comparable listed
companies.
• The book value and the market value of the debt capital are also constant at € 1,125,000.
• Kohmescher asks you to calculate the market value of the equity of the IMPAC GmbH using the
WACC method. Proceed in such a way that you first determine the relevant cash flows, discount
them with the appropriate discount rate and then, based on this, execute the further calculation steps.

105 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
 Mini case
Mikron Infrared Inc. – Company valuation with the WACC method (including taxes) (III)

• Aim: Determination of the market value of equity capital

ECMV → WACC method, with taxes!
n
FCFt
EC MV = å (1 + c
t =1
id
WACC )
t
- DC MV

• Determination of free cash flows (in K€)

2019 2020 2021 2022 2023 as of 2024

Earnings before taxes 607.8
– Taxes 39%
Earnings after taxes 305.0 305.0 320.3 336.3 353.1 370.7
+ Interest expense (€ 1.125 million x 5%)
+ Depreciation (= 0.1 x EBT)
+ Provisions (= 0.05 x EBT)
– Investments
= Operating net cash flow 436.3 436.3 205.3 225.2 246.1 268.1
– Tax shield (Interest expense x tax rate)
= Free cash flow 414.3 414.3 183.3 203.3 224.2 246.2

106 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Mini case
Mikron Infrared Inc. – Company valuation with the WACC method (including taxes) (IV)

DC id EC
• Determination cWACC: c idWACC = c DC × (1 - taxrate) × + c EC × with cid = r + (r - r ) × β id
TC TC EC f M f

• Discounting the forecasted free cash flows to determine the market value of the total capital:

Present value perpetuity t4 - ¥

t0 t1 t2 t3 t4 - ¥
2021 2022 2023 2024 (forever)
246.2
→ PV = = 2,924.0
0.0842

PV refers to 2024/01/01
→ Discounting for another
+ three periods to 2021/01/01
S= Û TCMV

107 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
 Mini case
Mikron Infrared Inc. – Company valuation with the WACC method (including taxes) (V)

• Determination of the market value of equity capital:

EC = TC - DC =
MV MV MV

108 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Comparison methods evaluate a company relatively

based on market data
The aim is to evaluate the company using simple key indicators in an industry comparison.

Types of comparison methods

Comparative Comparative
company multiples transaction approach
Company value is the product of Company value is derived from
the reference value (e.g. earnings) prices of comparable corporate
and an industry multiple transactions

Source (for this and the following): Pellens (2013).

109 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
 Comparative company multiples

Determining the value of a company/share based on a key-indicator comparison

Basic idea with other companies à market-oriented approach!

General “Fair” value of the company/share = reference value x multiple

Reference Usually, profit, EBIT, EBITDA, cash flow or revenues, but also “clicks”, customers, etc.

Multiple Is determined on the basis of an indicator comparison with other companies (“peer group”)

Requirement The company is actually comparable to the peer companies in terms of growth rate, risk, etc.

110 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Net and gross multiple method

- Net method (equity method):

EC Co.
MV = ReferenceValue Co. × Equity - Multiple peer

- Gross method (entity method):

EC Co. Co.
MV = (ReferenceValue Co. × Entity - Multiple peer ) - DC MV

Co: company to be valued; MV: market value; peer: comparison portfolio.

111 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
 Net and gross multiple method

• Composition of equity- and entity multiples:

peer
ECMV
Equity - Multiple =
ReferenceValue peer
EC

TC peer
Entity - Multiple = MV
peer
ReferenceValueTC

112 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

References and multiples

Net approach Gross approach

Use, for example, of earnings Use, for example, of

(after interest expenses) operating earnings
or balance-sheet equity (e.g. EBIT, EBITDA, revenues)

Equity value (EC MV) Enterprise value (EV)

ECMV = annual net profit * P/E-ratio EV = EBIT * “EV/EBIT” multiple
ECMV = oper. CF (after interest) * P/CF-ratio EV = EBITDA * “EV/EBITDA” multiple
ECMV = ECBV * MV/BV-ratio EV = revenue * “EV/revenue” multiple

P/E-ratio = price/earnings ratio

P/CF-ratio = price/cash-flow ratio
MV/BV-ratio = market-value/book-value ratio
MV = market value; BV = book value

113 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
 Definition of equity- and enterprise value

The equity value is intended to reflect the market value of the equity capital to be acquired:
Market value of equity
– Minority shares
= Equity value (ECMV)

The enterprise value is intended to reflect the market value of the operating capital
employed for the operating business:

Equity value (ECMV)

+ Minority shares
+ Value of debt
– Value of non-operating assets
= Enterprise value (EV)

Non-operating assets:
Financial assets, non-operating land or similar

114 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Determination steps in the multiple procedures

Selection Selection Multiple Value

Company analysis Interpretation
multiples peer group calculation determination

• Analysis of company • Selection of suitable • According to • Calculating • Applying the • Comparing the result
characteristics reference measures subjective the multiples determined multiple with the values
(key indicators) and assessments, for the individual (average of the from other valuation
• Preparation of corresponding comparison comparison peer group) to the methods
financial data multiples companies are companies reference value of
(equity/entity selected (regarding on the basis the company (actual
multiples) product portfolio, of the collected and/or planned data)
• Key-indicator
relevant market, financial data
analysis
competitive position,
size, risk class, etc.) • Calculating the
average for the
• For this peer group, multiple across the
the relevant data entire peer group
are collected (aim: smooth out
miscalculations)

Source: Löhnert/Böckmann (2012).

115 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
 Multiples in practice

EBIT and revenue multiples for the enterprise value, September 2017

INDUSTRY STOCK MULTIPLES EXPERT MULTIPLES SMALL CAP* EXPERT MULTIPLES MID CAP* EXPERT MULTIPLES LARGE CAP*
EBIT Revenue EBIT multiple Revenue multiple EBIT multiple Revenue multiple EBIT multiple Revenue multiple
multiple multiple from to from to from to from to from to from to
Advisory services -- -- 6.2 ­ 8.6 ­ 0.68 ­ 1.04 7.0 ­ 9.1 ¯ 0.80 ­ 1.14 9.0 ­ 10.6 ­ 0.90 ­ 1.25 ¯
Software 14.7 ¯ 1.88 ¯ 7.7 ­ 9.9 ­ 1.32 ­ 1.79 ­ 8.3 ­ 10.9 ­ 1.47 ­ 2.02 ­ 10.6 ­ 11.8 ­ 1.61 ­ 2.30 ­
Telecommunications 15.0 ¯ 1.67 ¯ 7.6 ­ 9.5 ­ 0.92 ­ 1.27 ¯ 8.6 ­ 10.2 ­ 1.03 ­ 1.45 ­ 10.1 ­ 11.5 ­ 1.15 ­ 1.68 ­
Media 11.4 ¯ 2.15 ¯ 6.7 8.9 0.91 1.52 ¯ 7.6 ­ 10.0 ­ 1.11 ­ 1.68 ­ 9.7 ­ 11.1 ­ 1.21 ­ 1.86
Trade and e-commerce 11.7 ¯ 0.77 ¯ 6.5 ­ 9.0 ­ 0.60 ­ 0.90 ­ 7.4 ­ 10.1 ­ 0.65 ¯ 1.13 ¯ 10.0 ­ 11.4 ­ 0.70 ¯ 1.30 ­
Transport, logistics and tourism 12.5 ­ 1.09 ­ 6.0 ­ 8.0 ­ 0.50 ­ 0.80 ­ 7.0 ­ 9.0 ­ 0.54 ­ 0.93 ­ 8.8 ­ 10.1 ­ 0.60 ­ 1.00 ­
Electrical engineering and electronics 14.5 ­ 0.99 ¯ 6.5 ¯ 8.6 ¯ 0.70 1.00 ¯ 7.4 ­ 9.8 ­ 0.79 ­ 1.10 ¯ 9.2 ­ 11.2 ­ 0.89 ­ 1.30
Vehicle construction and accessories 11.3 ¯ 0.92 ¯ 6.0 ¯ 8.0 ¯ 0.57 ¯ 0.89 ­ 7.0 ­ 9.2 ­ 0.65 0.98 ­ 8.8 ­ 10.0 ­ 0.70 1.00 ­
Mechanical and plant engineering 15.2 ¯ 1.28 ¯ 6.9 ­ 8.8 ­ 0.70 ­ 0.97 7.6 ­ 9.9 ­ 0.72 ­ 1.03 9.9 ­ 10.8 ­ 0.82 ­ 1.15 ­
Chemistry and cosmetics 13.7 ¯ 1.76 ¯ 7.6 9.5 ¯ 0.89 ¯ 1.28 ­ 8.1 10.4 1.00 ­ 1.46 ­ 10.1 ­ 12.3 ­ 1.11 ¯ 1.70 ¯
Pharma 12.2 ¯ 1.83 ¯ 8.0 ­ 10.3 ­ 1.41 ­ 1.97 ­ 8.7 ­ 11.2 ­ 1.47 ­ 2.10 ­ 11.0 ­ 12.6 ­ 1.74 ­ 2.54 ­
Textiles and clothing 8.5 ¯ 1.17 ¯ 6.6 ­ 8.2 ¯ 0.75 0.99 ¯ 7.3 ¯ 8.8 ­ 0.79 ¯ 1.09 ¯ 8.4 ­ 10.5 0.84 ¯ 1.27 ¯
Food and beverage 9.5 ¯ 0.63 ¯ 7.7 ­ 9.7 ­ 0.91 ¯ 1.32 ¯ 8.7 ­ 10.5 ¯ 1.02 ¯ 1.48 ¯ 10.4 ­ 12.6 ­ 1.17 ¯ 1.82 ¯
Gas, electricity, water 13.0 ­ 0.79 ­ 6.0 7.6 0.68 ­ 1.00 ­ 6.6 8.5 0.76 ­ 1.11 ­ 8.4 ­ 9.4 ­ 0.84 ­ 1.17 ­
Environm. technol. and renewable energies - - 6.6 8.6 0.70 ­ 1.00 ­ 7.5 ­ 9.4 ­ 0.80 ­ 1.15 ­ 9.1 ­ 10.2 ­ 0.90 ­ 1.30 ­
Construction and crafts 14.7 ¯ 1.14 ¯ 5.5 ¯ 7.5 ­ 0.50 ­ 0.77 ­ 6.8 ­ 8.5 ­ 0.55 ­ 0.80 ­ 8.0 ­ 9.1 ¯ 0.60 ­ 0.90 ­
* Small cap: company revenue below 50 million Euros; mid cap: 50-250 million Euros; large cap: over 250 million Euros;
arrows show decreased/increased value compared to previous value.
Source: FINANCE-Multiples September/October 2017

116 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Mini case
Diet H. Rich ‒ Multiple method (entity method) (I)

• The real estate mogul Diet H. Rich has reorganised his assets as part of an institutional buyout.
Currently, he is looking for a new lucrative investment opportunity for the millions that came from
the deal. Inspired by the results of the Deloitte Annual Review of Football Finance (“return on sales
of the German Bundesliga clubs three times as high as that of the Premier League clubs”), he has
identified the listed football club Schwarz-Gelb AG as a takeover target.
• Rich first asks you to comment on a possible hostile takeover of the football club.
a) Characterise key differences between a hostile and a friendly takeover.
b) With regard to hostile takeovers, there are different techniques. Name and describe these techniques.
c) Which defence measures against a hostile takeover would be applicable for the Schwarz-Gelb AG?

117 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
 Mini case
Diet H. Rich ‒ Multiple method (entity method) (II)

Impressed by your answers, Rich is now convinced that he wants to own a football club. Based on the
following data, he asks you to assess whether the Schwarz-Gelb share is currently under- or overvalued.
Determine the “fair” value of one Schwarz-Gelb share using EBIT multiples based on the entity
method. What advice would you give Rich?
Peer group

Juve Bröndby Chelsea Ajax Schwarz-Gelb

Share price in € 15.00 11.70 13.80 24.50 70.00

Number of shares 1,500,000 2,600,000 4,750,000 1,850,000 1,142,839
Market value of debt capital
4,000,000 3,750,000 6,500,000 7,550,000 6,275,000
(assumed = book value) in €

Average balance-sheet equity in € 2,250,000 4,500,000 2,750,000 800,000 3,500,000

Return on equity (after interest

11.25% 19.5% 8.625% 17.25% 24.75%
and taxes) on a book-value basis
Average interest on debt capital 5.5% 5% 5.5% 7% 9%
Taxes in € 240,000 400,000 420,000 160,000 255,000

118 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Mini case
Diet H. Rich ‒ Multiple method (entity method) (III)

• Aim: Calculating the fair share price

Fair share price = EC MV ÷ Number of Shares

• ECMV to be determined based on entity method via EBIT multiple of a peer group

ECSG SG
MV = (EBITSG × EBIT - Multiple peer ) - DC MV

• EBIT Schwarz-Gelb AG
EBITSG = Ø Balance-sheet ECSG ∙ rEC(after interest and taxes)SG + [book value DCSG ∙ Ø rDCSG] + Taxes SG

119 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
 Mini case
Diet H. Rich ‒ Multiple method (entity method) (IV)

• Determining the average EBIT multiple of the peer group

• Step 1: Determining the EBIT values for Juve, Bröndby, Chelsea and Ajax

EBIT VJuve =
= 713,125

VBöndby
EBIT =
= 1465,000

EBIT VChelsea =
= 1014,688

VAjax
EBIT =
= 826,500

120 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Mini case
Diet H. Rich ‒ Multiple method (entity method) (V)

• Step 2: Determining the market value of total capital for Juve, Bröndby, Chelsea and Ajax

TC Juve Juve Juve

MV = EC MV + DC MV

Share price * Number of shares

TC Bröndby
MV = 34,170,000

TC Chelsea
MV = 72,050,000

TC Ajax
MV = 52,875,000

121 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
 Mini case
Diet H. Rich ‒ Multiple method (entity method) (VI)

• Step 3: Calculating the respective EBIT multiples for Juve, Bröndby, Chelsea and Ajax

TC Juve
EBIT - M Juve = MV
= =
EBIT Juve

EBIT - M Bröndby = = 23.32

EBIT - M Chelsea = = 71.01

EBIT - M Ajax = = 63.97

• Step 4: Calculating the average EBIT multiple of the peer group

M1 + M 2 + M 3 + M 4
= = 48.87
4 4

122 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Mini case
Diet H. Rich ‒ Multiple method (entity method) (VII)

• Calculating the market value of the equity of Schwarz-Gelb AG using the average EBIT multiple
of the peer group

,- ./
EC*+ = EBIT ./ x EBIT multipl; 0112 − DC*+
=
=

• Calculating the “fair” share price of the Schwarz-Gelb AG

%&
!"#$
Fair share price = =
345612 78 9:;219

123 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
 Contents

1 M&A Fundamentals 4 Due Diligence

1.1 Concept 4.1 Concept
1.2 Forms 4.2 Due Diligence versus Annual Audit
1.3 Process 4.3 Buyer/Seller Due Diligence
1.4 Market Development 4.4 Integrated Financial Due Diligence
1.5 Buyer- and Seller Motives 4.5 Normalizations, Adjustments, and Reclassifications
1.6 Regulatory Environment
5 Transaction Structures
2 M&A Finance 5.1 Asset Deal
2.1 Financing Structures, Tools, and Techniques 5.2 Share Deal
2.2 Investors
6 Purchase/Selling-Price Determination
2.3 Indebtedness Potential
6.1 Discounted-Cash-Flow Method
3 Hostile versus Friendly Takeovers 6.2 Multiples Method
3.1 Takeover Tactics and Defense
7 Empirical Results regarding Success and Failure of M&As
3.2 Case Example

124 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

Success factors and failure reasons of M&As

Typical results in transaction projects Critical success factors (survey)

Synergy and value capture – Taking steps to measure,

73% 45% mine and achieve synergies is critical to a transaction’s
did not achieve success
their envisaged of executives leave
synergy realization by the third year Readiness – Ensuring a smooth transition from the
beginning of the merger correlated very highly with
overall success
50% Effective organization – Executive leadership support
reduced productivity Customers see and and including management from the acquirer are seen
within first 4-8 are frustrated by as the most critical organizational factors to successful
months change integration

Communication & Culture – Transparent and

50% 26% consistent communications with employees as well as

alignment of cultures between the two companies are
did not manage to need more than 12 crucial for M&A success
finish integration in months to realize
time synergy targets
Operating Model – it should address questions such as
where will the company operate, what products will it
sell, and what operations will be outsourced.
11% 30%
did not feel well criticize a lack of Due Diligence & Price – Conducting an accurate due
prepared for the effective cultural diligence and determining an optimal price fosters the
integration alignment
success of the transaction
Source: Deloitte Consulting M&A survey, DC analysis; Deloitte Integration Report 2015: Putting the pieces together

125 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
 Do company takeovers create value for shareholders?

• Results from finance research

- “Event studies”: Reactions of stock market to M&A announcements
- Result: On average, there are increases in value, but most of them go to the shareholders of the
acquired company; shareholders of the acquiring company lose on average
• Results from strategy research
- Analysis of the profitability of the acquiring company before and after the acquisition
- Result: On average, buyers cannot increase their return
• Results from consultants
- Analysis of a selected number of cases to better understand the success rate and the reasons for
success and failure
- Results: Mixed

Source: Venohr 2007

126 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

“The average deal dilutes value”

Less than half of all deals create value for the acquirer
% of deals with a positive return
50

45,8
45 43,4
42,5

40

35

30
CAR RTSR [1 yr] RTSR [2 yr]
CAR = Cumulative abnormal return over seven-day window centred around the announcement date (+3/-3)
RTSR = Relative total shareholder return for one year (RTSR [1 yr]) and two years (RTSR [2 yr]) after the announcement date
Source: Boston Consulting Group: Accelerating out of the Great Recession, 2010.

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 The performance of M&A transactions is better ...

• ... the more similar the markets are, in which the acquisition partners operate.

• ... the greater the complementarity of the served markets are.

• ... the more similar the production conditions are.

• ... the greater the complementarity of production conditions is.

• ... the greater the market power on the sales- and/or procurement markets is.

• ... the more acquisition experience is available.

• ... the greater the match of the corporate cultures is.

Source: Straub (2007)

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“Value creation correlates with industry proximity

and the type of payment”
The acquirer's long-term value creation Acquirers paying in cash outperform
depends on industry proximity acquirers using other forms of payment

Average RTSR [2 yr] (%) Average RTSR [2 yr] (%)

5 5
03
02

0 0
-01
-02

-5 -5

-08
-10 -10

-11

-15 -15
Core Industry Near-core Noncore Cash only Other Stock only

Industry proximity Type of payment

Source: Boston Consulting Group: Accelerating out of the Great Recession, 2010.

129 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions
 Typical issues related to acquisitions

• Lack of strategic logic

• Insufficient assessment of the target company
• Difficulties with post-merger integration
• Purchase price too high and inability to use synergies (“synergy trap”)
• Too high indebtedness
• Company too focused on acquisition
• Too much diversification
• New company too big

Source: Venohr 2007

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Lack of strategic logic

• No or unclear strategic goals

• Lack of a rational assessment of the potential benefits
- Economics of scale/scope
- Acquisition of new skills and abilities
- Reinforcement of market power
• Failure to develop and consider alternative growth options
• Overestimation of the strategic value of the target company
• Lack of risk assessment
• Guided by “opportunism” (available companies) rather than strategic goals

Source: Venohr 2007

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 Insufficient assessment of the target company

• As part of the acquisition process, hundreds of questions need to be scrutinised

(under time pressure and with limited information), e.g.
- Strategic and operational situation of the target company
- Financing of the transaction
• Lack of understanding of the target company
- Customer- and cost structure
- Resource overlaps and expected synergies
• Miscalculation of the value of the target company
• Wrong assessment of the synergies and non-discovery of the “skeletons in the closet”
- Magnitude of synergies
- Cost and time frame for the realisation of synergies
- Neglecting “negative synergies” (e.g. declines in revenues)

Source: Venohr 2007

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Typical mistakes in post-merger integration and

in the implementation of strategic goals
• Merging two different corporate cultures
• Combining different financial and controlling systems
• Building effective working relationships (different management styles)
• Power struggles in the management boards
• Losing important managers weakens the skills of the acquired company
• Underestimating the tasks associated with an acquisition, and insufficient allocation of resources
• Inability to implement clear leadership
• Too fast or too slow actions

Source: Venohr 2007

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 “Synergy trap”

• Companies tend to overestimate synergies

- Cost synergies are typically easier to achieve in key value-chain activities
- Revenue synergies (new channels, service bundles, etc.) are typically more difficult to achieve
• Companies tend to underestimate integration cost when assessing potential acquisitions
• Considering the overestimation of synergies, the purchase premium is usually too high

Source: Venohr 2007

134 Stein/Kotulla University of Europe for Applied Sciences Mergers & Acquisitions

“Those Elusive Synergies”

When three of Japan's largest banks combined to form Mizuho Bank the result was a bank with assets of $1.5 trillion, more than twice
those of the world leader Deutsche Bank. The name “Mizuho” means “rich rice harvest” and the bank's management forecasted that
the merger would yield a rich harvest of synergies. In a message to shareholders, the bank president claimed that the merger would
create “a comprehensive financial service group that will surge forward in the 21st century”. He predicted that the bank would “lead the
new era through cutting-edge comprehensive financial services … by exploiting to the fullest extent the Group’s enormous strengths,
which are backed by a powerful customer base and state-of-the-art financial and information technologies”. The cost of putting the
banks together was forecasted at ¥130 billion, but management predicted future benefits of ¥466 billion a year.

Within a few months of the announcement, reports began to emerge of squabbles among the three partners. One problem area was
IT. Each of the three merging banks had a different supplier for its computer system. At first it was proposed to use just one of these
three systems, but then the banks decided to connect the three different systems together using “relay” computers.

Three years after the initial announcement the new company opened for business on April 1, 2002. Five days later, computer glitches
resulted in a spectacular foul-up. Some 7,000 of the bank's cash machines did not work, 60,000 accounts were debited twice for the
same transaction, and millions of bills went unpaid. The Economist reported that two weeks later Tokyo Gas, the biggest gas
company, was still missing ¥2.2 billion in payments, and the top telephone company, NTT, which was looking for ¥12.7 billion, was
forced to send its customers receipts marked with asterisks in place of figures, since it did not know which of about 760,000 bills had
been paid.

One of the objectives behind the formation of Mizuho was to exploit economies in its IT systems. The launch fiasco illustrated
dramatically that it is easier to predict such merger synergies than to realise them.
Source: The creation of Mizuho Bank and its launch problems are described in “Undispensable: A Fine Merger Yields One Fine Mess”, The Economist, April 27, 2002, p. 72.

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 Excessive focus on the acquisition

• Managers of both companies are involved in the takeover process

• Managers lose sight of core business by focusing too much on the acquisition
• The employees are distracted as well: “What’s in it for me?”; job worries ...
• Executives make decisions too hesitantly
• Power struggles between executives of both companies during the integration phase

Source: Venohr 2007

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Too much diversification

• Diversified companies are more complex to manage

- New markets, customers and competitors
- Enlarged geographical scope
• Management focus: pure financial control rather than strategic control in evaluating the performance
of business units
• Specific problems with “alien” businesses

Source: Venohr 2007

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 Suboptimal company size
“Diseconomies of scale”

• Additional cost may exceed the benefits of scale/scope economies and the expected additional
market power
• Additional size can lead to more bureaucratic control and thus to more inflexible management
• Companies may become less innovative

Source: Venohr 2007

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“Successful company takeovers are like a triathlon:

The winners master three areas”

Economic logic Adequate price Integration!

■ Scale ■ Realistic valuation ■ Good project

■ Scope of the takeover candidate management
■ Skill ■ Total purchase price ■ Aligning the
value-creating for corporate cultures
■ Market power
shareholders of the ■ Operational
acquirer (cash, other merging
purchase price elements;
■ Stability in the
preserving synergies)
transition phase

Value creation potential: Intelligent buying, Adequate resources

1 + 1 > 2! no overpayment and management skills
Source: Venohr 2007

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