Efficiency of M&A Transactions

Efficiency of M&A Transactions – Description
and critical Analysis
Master-Thesis
for the completion of the General Management degree „Master of
Science“
PFH Private University of Applied Science
submitted on: 09.05.2016
by: Frederik Küster
from: Göttingen
First examiner: Prof. Dr. Bernhard H. Vollmar

II
Directory
Directory..................................................................................................................................II
Table of Figures.....................................................................................................................III
1 Introduction .........................................................................................................................1
2 Fundamentals of M&A Activities .......................................................................................4
2.1 Characterization Merger and Takeover......................................................................4
2.2 Attack and Defence methods during a M&A Transaction ........................................8
2.2.1 Defence Tactics .....................................................................................................8
2.2.2 Offense tactics.....................................................................................................11
2.3 Legal Requirements...................................................................................................15
2.4 Valuation Models........................................................................................................17
2.5 The Negotiation Process ...........................................................................................24
3 M&A Activities in the field ................................................................................................28
3.1 Methodology for the Analysis...................................................................................28
3.2 General Influence of M&A Activities.........................................................................31
4 Particular Analysis of selected M&A Transactions .......................................................37
4.1 Hostile Takeover attempt of Deutsche Wohnen by Vonovia..................................37
4.2 Friendly Takeover of Rhön-Klinikum by Fresenius ................................................42
5 Conclusion.........................................................................................................................46
Appendix................................................................................................................................III
Exhibit 1: Average Exchange Rate for Transactions occurred outside of the
European Currency Area..................................................................................................III
Exhibit 2: Transactions and associated Information.....................................................III
Exhibit 3: Output Screens Regression Analysis.......................................................... XII
Part A: Output with three Variables........................................................................... XII
Part B: Output with two Variables ............................................................................. XII
Exhibit 4: WACC Calculation Deutsche Wohnen ........................................................ XIII
Exhibit 5: Synergies Deutsche Wohnen DW Management......................................... XIII
Exhibit 6: Relative Performance Deutsche Wohnen, Vonovia and DAX................... XIV
Exhibit 7: WACC Calculation Rhön-Klinikum .............................................................. XIV
References........................................................................................................................... XV
Books ............................................................................................................................... XV
Websites/Online Sources ............................................................................................ XVIII
Annual/Financial Reports .............................................................................................. XIX
Declaration.........................................................................................................................XXV

III
Table of Figures
ILLUSTRATION 1: LARGEST M&A TRANSACTIONS.........................................................................................2
ILLUSTRATION 2: TRANSPARENCY RATING.................................................................................................29
ILLUSTRATION 3: GERMAN M&A MARKET..................................................................................................31
ILLUSTRATION 4: DCF VALUATION DEUTSCHE WOHNEN ............................................................................39
ILLUSTRATION 5: SYNERGIES DEUTSCHE WOHNEN....................................................................................40
ILLUSTRATION 6: DCF VALUATION RHÖN-KLINIKUM...................................................................................43
ILLUSTRATION 7: SYNERGIES RHÖN-KLINIKUM ..........................................................................................44
ILLUSTRATION 8: RELATIVE PERFORMANCE OF FRESENIUS, RHÖN AND DAX ..............................................45
CHART 1: P/E MULTIPLES APPROACH.......................................................................................................18
CHART 2: COMPARABLE TRANSACTIONS ...................................................................................................19
CHART 3: M&A DETAILS COLLECTED FROM OBSERVED COMPANIES............................................................32
CHART 4: DATA SET FOR REGRESSION ANALYSIS .....................................................................................33
CHART 5: CORRELATION MATRIX..............................................................................................................34
CHART 6: REGRESSION ANALYSIS OUTPUT ...............................................................................................35
CHART 7: PREDICTION VS. OBSERVED PERFORMANCE ..............................................................................36
CHART 8: OFFER VALUE DEUTSCHE WOHNEN ..........................................................................................38

1 Introduction
1
1 Introduction
Every year the day of reaching $1 Trillion dollar in M&A transaction volume is a huge
topic in financial news. 2015 marked a new milestone in regards to this as is not only
reached it in a record time but also showed the highest all time volume with $3.42
trillion beating the previous highest mark from 2007, the year before the financial crisis
happened, by $ 20 Billion.1
Furthermore each year the biggest banks compete for the
greatest share of the volume and take great pride in being one of the top-5 banks
worldwide, especially since their future business depends on past performance and
reputation in the M&A sector. Besides these motivations all of the banks have a great
interest in being successful, as this will provide the highest fees, which can range from
2-4% for a large deal (more than $ 30 Million) and 8-12% for smaller deals.2
As it is quite difficult to find exact information how much each bank charges to advise
on a M&A deal the author assumes that for giant deals with a volume exceeding 1
billion the fee will be 1% of the volume, if a successful deal is reached. Using this 1%
the advising bank on the takeover of SAB Miller by Anheuser-Bush InBev, with a
volume of $106 Billions, could earn over one Billion Dollars just as a success fee,
without including all the other charges made during the deal.3
However the success fee
will normally be lower, if the deal has a huge volume, as for the currently terminated
merger between Allergan and Pfizer4
the Investment Banks associated with the deal
had to renounce over $200 Million Dollar in fees and expected up to $350 Million
Dollar, if the deal was successful.5
This would conclude an implied success fee of
0,22%. This may seem low but the absolute number still has an incredible size.
Consequently the question that has to be asked is: How successful is spending such
huge amounts on takeovers or mergers? Especially since the company is not only
spending their money on the transaction itself but also on a industry that has
specialised in supervising and supporting these large deals, this includes universal
Investment bankers, specialised M&A Boutiques, financial audit firms, Legal and Tax
Advisors and Business consulting firms. 6
Furthermore there can be other costs
involved, as such a deal always happens in a competitive environment, which means
1
Cf. Baigorri, M., (Global M&A to a Record), bloomberg.com/m-a-exceeds-annual-record, 09.05.2016.
2
Cf. BloombergBusiness, (Top Advisors), bloomberg.com/top-advisers-to-global-m-a-deals-banks,
09.05.2016 and Gravel, M., (Advisor Fees), imergeadvisors.com/ma-advisor-fees, 09.05.2016.
3
Cf. Wu, A., (Biggest M&A Deals), investopedia.com/biggest-ma-deals-2015-2016, 09.05.2016.
4
It was cancelled because the US Government closed a Loophole that allowed companies to move
overseas to decrease their Tax rate, which was the main reason for this transaction.
5
Cf. Baigorri, M., (Bankers Risk Losing), bloomberg.com/bankers-risk-losing-millions, 09.05.2016 and
Crowe, P., ($200 million Pfizer-Allergan), businessinsider.sg/pfizer-allergan-fees-lost, 09.05.2016.
6
Cf. Binder, P., M., (Mergers & Acquisitions, 2006), P. 103ff.

1 Introduction
2
that other firms could get involved and start a bidding war or act as a white knight to
protect the possible target. In addition it could also happen that the target itself hires an
advising firm to prepare a defence against the takeover. Something similar happens in
the takeover attempt of K+S by Potash. In this case K+S fought heavily against the
takeover, as they did not see the offered price as a fair representation of the
companies value. The management hired an investment bank to repel the bid and also
used its lobby to influence the politicians to side with the company against the
takeover. Finally the takeover was cancelled due to the strict refusal of the
management but also the changing situation in business environment (price drop of
commodity prices). Directly following the announcement that the takeover attempt will
be dropped the share price fell by over 25% and went downhill to around 25€, far
below the offered 41€.7
This example illustrates that recognising a good deal is always a subjective discussion,
as a lot of assumption are put into a valuation to reach a fair value of a company.
However this case also shows a general trend in regards to M&A deals, because as
soon as a takeover bid is announced, and in some cases even before it is official,
investors start buying the stock to make a quick profit on this event, particularly since
the investor has the final say in approving a takeover and possibly hopes for a
improved second offer. These short-term investors could also be the reason for the
sharp drop after the cancelation.8
Illustration 1: Largest M&A Transactions
Regardless the before mentioned problems and unpredictable events there are still
happening large takeovers and mergers every year.
Illustration 1 should show how much money is used for these operations and that the
size of deals increases each year, as this year already two companies are listed in the
10 biggest deals.9
Furthermore these transactions suggest that the largest deals mainly
7
Cf. Henning, E., Dummet, B., (Potash Corp. Withdraws), wsj.com/potashcorp-withdraws-8-8-billion-offer,
09.05.2016 and Finanzen.net, (K+A AG Chart), http://www.finanzen.net/chart/K+S, 09.05.2016.
8
Cf. Terzo, G., (Stock Prices Increase) finance.zacks.com/stock-prices-increase-after-takeover,
09.05.2016.
9
Illustration is based on information given on: BloombergBusiness, (Largest of All Time),
bloomberg.com/largest-of-all-time-m-a-deals, 09.05.2016 and CNBC, (The biggest mergers and
acquistions), cnbc.com/the-biggest-merger-deals-of-2015, 09.05.2016. Additionally the values were
adjusted for inflation by 2% for each year.

1 Introduction
3
happen in aging industries. For example the Pharmaceutical industry is facing the
problem of expiring patents and the oil and mobile companies are under high pressure
to consolidate, as these businesses require high capital spending to maintain und
expand the necessary infrastructure. By merging/acquiring (with) competitors these
companies can get access to new products or improve there refinancing conditions.
To analysis if these enormous sums spend on M&A transactions have an effect on the
value of the company will be the key goal of the paper. The second chapter will look at
the process of a normal M&A Transactions. It will look at special characteristic of both
the merger and the takeover. This includes every major act, such as deciding on the
takeover/merger objective by using valuation methods like Discounted Cash-Flow,
Comparable Transactions and Valuation Multiples, illustrating a important steps during
the negotiation process and briefly summarising the legal requirements that have to be
undertaken while doing a M&A transaction. This Chapter will also look at some
problems that can be met on the way to finalizing the deal, such as difficulties while
doing the negotiation to reach a mutual agreement or having the other side fight back
against the takeover through different measures. These will be illustrated and if
possible annotated by examples from German companies.
The third chapter will be focusing on analysing the general efficiency of M&A
transactions by first collecting data on how much money was spend on acquiring firms
as well as how much money was gained through disposals, as these two activities are
directly linked. These facts will be used to build a regression analysis that will examine
how these operations influence the share price illustrated by the performance of the
DAX.10
As an observation timeframe 2010 to 2015 were selected. By conducting the
research on an Index level it will illustrate if there is a general correlation between M&A
activities and the overall stock performance. The exact approach will be explained in
chapter 3.1 together with other factors that have to be factored in to come to a clear
result. Subchapter 3.2 will than present the findings and explain their usability as well
as a general evaluation of the German M&A market.
In the fourth chapter of this paper two individual transactions should be analysed to
evaluate: what had an influence on the outcome? To start evaluating the two
transactions, an independent valuation of each deal based on the announcement date
of the deal will be conducted. Than these transactions will be analysed in regards to
what worked out, where did problems occur and how this transaction influenced share
price and performance of the companies. This will be the last step of the analysis as it
10
Although the DAX is not a share the value of the Index is directly linked to the performance of the 30
listed companies that form the DAX. For further details see: Erdal, C., (Professioneller Börsenhandel,
2013), P. 87.

2 Fundamentals of M&A Activities
4
looks at individual transactions and examines if there are facts that make a transaction
a success or that lead to failure.
Chapter 5 will be used to summarize the found results and come to a conclusion on
how effect these operations are and what the key aspect are for a successful deal.
The whole process for an average M&A transaction involves different steps, which all
require different skills. These are financial and non- financial skills, as a transaction not
only requires valuing a possible partner for a merger respectively a company that
should be taken over either hostile or in agreement with the management. It also
requires legal steps, for example the due diligence11
or drafting a letter of content. Most
of the required skills will be provided either by the advising investment bank or the
auditing firm assigned by the company. However the most important part, besides the
valuation and analysis of the targeted company, is the negotiation with all stakeholders
that will be involved during the transaction. Therefore Negotiation will be a central part
in this process as it make the difference between making a good deal or ending up with
a lose-lose situation. To provide a guideline for the upcoming sub chapters, 2.1 will
outline what exactly a merger and a takeover is, when which one is used and what
companies expect from their actions. The second subchapter will illustrate different
methods that can be utilized by both sides to hide their actions respectively block the
hostile takeover. The next chapter will look shortly at different legal contracts and
requirements that have to be fulfilled to have a successful transaction. The next two
subchapters will discuss how a valuation can be done and how a negotiation process
has to be structured to reach a beneficial deal.
2.1 Characterization Merger and Takeover
Merger
The term merger normally describes a deal where two relatively equally sized
companies agree on joining their business together. Equal size doe not necessary
require a similar size in regards to asset value or revenue. In this case equal size is
more focused on a similar negotiation power, when agreeing on the terms of the
merger. To achieve this merger one company agrees to buy the other company,
although buy is not the right term in this case, as normally the transaction will be
11
Definition: Process during which the possible brought company has to disclose their economic, legal and
tax circumstances. Can also include environmental and insurances issues. Cf. Kästle, F., et al., (M&A und
Corporate Finance, 2006), P. 62.

5
structured in a way that the company that gets taken over receives shares of the new
respectively the acquirers company proportional to the value of their previous holding
including a normal premium for these transactions.12
This form of paying for a company
is usually called stock-for-stock transaction as the acquirer is buying the outstanding
shares of the acquiree by offering shares of his own firm. Depending on how the deal is
structure the acquirer will have to undertake a stock issue to raise the required shares
for the transaction.13
Often these deals get promoted as a merger between equals, but
in reality that will never be the full truth, as someone will be in control and have more
than 50% of the controlling interest. Furthermore every merger requires the removal of
redundancies in duplicate divisions as otherwise the projected synergies cannot be
utilized. This would be only rational as the goal of every company is to increase the
shareholder value, but if two equally strong companies try to merger their business and
promote this activity as such, it will lead to a struggle for power as managers of both
side try to preserve their position or gain an advantage from the changing situation.14
These internal struggles as well as the problem of different company cultures will be
discussed further in the negotiation chapter. Now that the term merger has been
explained the reason for using this approach should be explained using the most
common justifications. In general both firms expect to be better of with this transaction.
This expectation can be based on the most common objective: accessing synergies
with the other company. This can involve improved purchase condition by being able to
order in larger numbers or taking advantage of the fixed cost degression.15
This also
include reduction in employees, as the combined company will not require for example
two legal departments, marketing or sales teams. As some tasks can be done by one
person without increasing the overall workload, to illustrate this with an example: if two
firms from the same sector merge their business it is likely that they act as competition
in some regions. This would allow the assumption that there are two sales people
being in charge of the same area, thus making one of them redundant, without making
the job of the remaining one harder. Other reasons to merge with a company could be
the access to new markets trough already existing subsidies in the respective countries
or utilizing supplier relationships or distribution channels established by the acquiree.
Furthermore the buyer could try to gain access to special areas of the market by
gaining access to new technologies that allow him to enter a niche of the market
12
Cf. Coyle, B., (Merger and Acquisition, 2000), P. 2ff.
13
Cf. Kästle, F., et al., (M&A und Corporate Finance, 2006), P. 165.
14
Cf. Berner, W., (Merger of Equals), umsetzungsberatung.de/fusionsstrategie, 09.05.2016.
15
Definition: As fix cost stay the same for a certain range of output producing more units and being able to
sell them allow the company to reduce the fix cost part in the total cost for each unit. These fixed cost
include for exmaple depreciation, development and marketing. Cf. Vahs, D., Schäfer-Kunz, J.,
(Betriebswirtschaftslehre, 2007), P. 203 and 276.

6
currently not served by the acquirer.16
Other reasons include the possibilities to reduce
tax liabilities, by either using looses accumulated by the acquiree or being able to
transfer headquarter to a country with a lower tax rate. (See the failed merge between
Pfizer-Allergan) In addition a larger company benefits from a wider spread in their risk
positions and connected to this an improved refinancing situation, as the chance for a
default decreases.17
Even so most of theses arguments are viewed from the buyers
side it also involves the acquiree, as mentioned before, the old shareholders will
become shareholders of the acquirers firm, which means they benefit from these
actions as well. Nevertheless there are reasons exclusive for the seller side. This
include the fear that the firm will not be able to survive in a changing environment, as
the competition could be to strong or regulations require a certain diversification of
risks that can not be achieved by a firm alone. Other reasons are that the owners view
the offer as so beneficial that they just cannot accept it or that the owners wish to
diversify their portfolio and gain new liquidity through the acquisition, if assumed that
the new company will be more liquid and by that allow the new owners to better sell
huge parts of their shares without having to accept a discount on them.18
Additional
there are reasons that most likely will not be publicly admitted by the seller such as the
need for more funds to keep the business running or being able to compete in the long
run. Another reason for the shareholders to sell could be, that they conceive the
management as not able to do the job as expected. By selling the shareholders get
access to a most likely better management team introduced by the acquiree.19
Acquisition
After having defined the term merger it is now necessary to illustrate what makes a
takeover different and why firms decide to take this often more aggressive approach to
acquiring another company. In general terms a takeover means that the acquirer buys
all outstanding shares of the acquiree. This requires a takeover offer made publicly to
all shareholders as soon as the firm owns more than 30% of the shares.20
This rule
requires a written tender offer that has to be approved by the BaFin and has to be valid
for all shares outstanding.21
Furthermore the offer has to be acceptable in the way that
the price has to be a fair amount. Normally this means a payment close to the average
trading course over the last few weeks. In Addition the payment has to be made either
in cash or in shares with sufficient market liquidity (§ 35 WpÜG). To finish this legal part
16
Cf. Gassmann, O., Reepmeyer, G., Von Zedtwitz, M. (Innovation, 2004), P. 12.
17
Cf. Vogel, R., (Economics, 2007), P. 178.
18
Cf. Grossmann R., (Unsettled Account, 2010), P. 115 and Vogel, R., (Economics, 2007), S.178.
19
Cf. Sherman, A., (Mergers and Acquisitions, 2011), P. 14f.
20
This rule can be found in both the German „Wertpapiererwerbs- und Übernahmegesetz (WpÜG)“ §35 as
well as the S.E.C. “beneficial owner report”.
21
Cf. Faden, C., (Pflichtangebot, 2008), P. 43f. and 229.

7
about the offer it should also be mentioned that the offer has to be valid for four weeks
and can be extended to up to ten weeks (§ 16 WpÜG) and any change made to the
offer allows both sides to default on their agreement and re-enter into the contract
under the new terms. (§ 21 WpÜG).22
Before they reach this amount it is required by
the “Wertpapierhandelsgesetz” § 21 to announce ownership as soon as the investor
acquires a 3% ownership in the targeted firm.23
In conclusion, all these requirements
make a hostile takeover quite difficult as an announcement allows other investors or
trades to step in and increase the price for the shares in the anticipation of a tender
offer above the average trading price. Furthermore it gives other parties time to
prepare defence strategies or prepare a counter offer and launch a bidding war. These
actions would all have one likely effect on the transaction, in the way that they will likely
increase the price of the deal. This would decrease the appeal of the deal, as it would
take longer for the company to generate the anticipated return. To explain this problem
the Price-earnings ratio can be utilized. This formula divides the price paid through the
earnings to reach a number that illustrates how many time the price exceeds the
expected earnings. This can also be adjusted for future earnings growth but this is not
necessary her, as this aspect will be thematized during the Valuation Chapter.24
More
important is the information that can be obtained by using the calculate number to
divide 100 by the P/E – Ratio. This percentage result illustrates the expected return the
company will earn over the next years. To come back to the negative impact
introduced through a hostile takeover it should be assumed that the current share price
for a possible target is currently 15€ and the acquirer is willing to make an offer for 17€
per share. The company earns 2,5€ per share. This would yield a P/E – ratio of 6,8. If
now another investor steps and drives up the price to 18,5€ through a counteroffer than
the P/E – ratio would also go up to 7,4. Since everything else stayed the same the
appeal of the deal would decrease for the initial firm, as the expected return decreased
from 14,70% to 13,50%. This could make the difference between being able to make a
profit from the deal and loosing money in the long run. Nevertheless hostile takeovers
have certain attractiveness to companies as they normally facilitate the highest returns.
Certainly these high possible returns come with a high risk of being unable to make the
deal, being unable to gain the resources from the deal the acquirer expected or being
outmanoeuvred by a stronger predatorily investor.25
To summarise this section the main difference between merger and acquisition does
not lie with the size of the acquiree but rather with the approach to the deal (hostile vs.
friendly) and also if the shareholders of the acquired firm keep a ownership interest.
22
Cf. Bundesministerium Justiz, (WpÜG), gesetze-im-internet.de, §16, 21 and 35, 09.05.2016.
23
Cf. Bundesministerium Justiz, (WpHG, 2012), P. 18.
24
Cf. Gibson, C., (Financial Reporting and Analysis, 2012), P. 369.
25
Cf. Kirchner, T., (Merger Arbitrage, 2016), P. 184f.

8
(Cash vs. Share Deal) This can even be the case if a much larger firm buys a small
start up, as the big player normally undertakes this acquisition mainly for the
knowledge of the company in the form of patents and employees. Often these
individuals own the company together and to retain them as employees the new owner
has to give them shares in his company. This can also lead to a higher motivation as
the results of their work have a direct impact on their fortune.26
2.2 Attack and Defence methods during a M&A Transaction
This chapter will discuss well know tactics applied by acquirers to hide their intentions
and by the acquiree to make themselves unfavourable or just general sabotage the
takeover by introducing unexpected events, that reduce the chance of being successful
with the transaction. These measures will mainly be used if the acquirer made a hostile
approach to takeover the company. These different tactics should just be briefly
described, as the implementation can be quite difficult and could require the
observation of laws and guideline associate with the acquisition of publicly traded
companies. To outline these approaches is important for the later chapters as they
have a strong influence on the outcome of a transaction.
2.2.1 Defence Tactics
These tactics can include both internal measures as well as external approaches.
Internal instruments will make the company itself less desirable for a possible acquiree.
External measures will require for example lobbying against a possible takeover by
using concerns of monopolies or the destruction of jobs to convince politicians or
regulation agencies to take a stand against the acquisition.27
Some of these tactics are
not necessary legal in the European union, as the European countries are more
accessible by the U.K model. This model forbids or restricts actions that are only
focused on harming the transaction.28
Despite these possible legal frictions the most
common tactics should be introduced, as it is likely that some firms will still utilize them
during a hostile takeover as a possible lawsuit would drag on over a longer term and
make a short-term orientated acquirer drop the takeover attempt.
Poison Pill
This method is probably one of the most common approaches to block a takeover. The
basic idea is that the board of directors set a rule within the shareholder rights plan to
26
Cf. Monks, R., Minow, N., (Corporate Governance, 2011), P. 395f.
27
Cf. Bruner, R., (Applied M&A, 2004), P. 846.
28
Cf. Faulkner, D., et al., (Handbook of Mergers and Acquisitions, 2012), P. 290 and Merney, J-P.,
Tarbert, H., (Corporate Finance for Business, 2011), P. 410.

9
issue new shares at a discount to every shareholder of the company, except for the
acquirer, as soon as one investor acquires a certain percentage of the outstanding
shares. The trigger level will normally be between 20 and 30 precent of the shares,
depending on the tender offer made by the acquirer. The main objective achieved with
this “pill” is that the ownership of the predator is diluted and that the targeted company
gains some time and negotiation power to bargain about an increased premium, as the
acquirer becomes nearly incapable of controlling the firm without reaching a consensus
with the board. Normally this approach is used more as preventive measure to keep a
corporate raider from trying a hostile takeover rather than defending against an already
existing tender offer.29
This tactic violates German law, as it disregards the requirement
of treating every shareholder equal. However it is possible to structure the arrangement
in a way that would be complying with the legal requirement, by using authorized stock
for a capital increase. This option does not include a warrant for existing shareholders
but allows the board of directors to assign the shares as they please.30
Scorched Earth including Crown Jewels Strategy
This strategy is mainly applied if the targeted company knows that the raider is
especially interested in a certain core part of the business that is normally the most
profitable or provides the highest benefit to the attacking firm in the form of synergies.
This tactic has the objective to make the acquiree as unattractive as possible by selling
of assets (Crown jewels) or even destroying them (Scorched earth). The scorched
earth tactics comes at a huge risk as it risks the future of the business and may leave it
unable to finance their current activities. The Crown jewels tactic can be done in
combination with the White Knight move, which will be explained next.31
White Knight and White Squire
The basic idea of this strategy is that, when a company is faced with a hostile takeover,
it approaches a company that is views a friendly in a way, that it will not take the
company apart. This means that the White Knight has to make a counteroffer that will
have the support of the management of the acquiree. However this measure will only
be used as the last option, as it takes the independence of the targeted firm and does
not guarantee that the White Knight sticks to his promised friendly behaviour. The
White Knight approach in combination with the crown jewel tactic works in the way that
the company only sells their most valuable asset and signs an agreement with the third
company to buy it back at a price including a premium as soon as the hostile offer is
29
Cf. Zarin, S., Yang, E. (Hostile takeovers and defense strategies, 2011), P. 16ff.
30
Cf. Payne, J., (Takeovers, 2002), S. 104ff. and Achleitner, A-K., (Investment Banking, 2000), P. 216f.
31
Cf. Zarin, S., Yang, E. (Hostile takeovers and defense strategies, 2011), P. 21f. and Achleitner, A-K.,
(Investment Banking, 2000), P. 221.

10
retracted. Giving the White Knight either a valuable asset or a quick gain on the
agreement.32
The White Squire tactic is similar to the Knight approach but does not give up the
independence of the company. In this case the targeted company sells a large amount
of shares to the Squire that effectively blocks any takeover attempt while not giving this
firm the control of the acquiree. Normally these shares come with terms and incentives
that will discourage the third company from selling of their shares to the attacking
company or being required to vote in favour of the attacked company. The White
Squire will be offered some incitement by being able to buy the shares with a discount
on the current bid price.33
Both these instruments require the management of the firm
to find and approach a third party to take over this role. This would normally violate the
duties trusted in the board of directories. However management can easily avoid any
conflict of interest by appointing an investment bank with finding a suitable partner for
this venture. These strategies are best suited for companies who’s share price is
stagnant as well as undervalued as it provides the current owners with the opportunity
to gain more from their holdings as the hostile offer would have provided.34
Public Relations / Public Opinion
This tactic will use the media to convince the public that the proposed deal is not in the
best interest of all shareholders. This requires the management to reinforce their
arguments with economical facts. The management could for example point out that a
takeover through a company in the same industry would require cutting certain
divisions of the company back, as they would not be needed in the combined firm.
Furthermore the board of directors could argue proposed positive results promised by
the acquirer are not feasible. In addition, if the acquirer is using his own shares as a
medium of payment, a skilful media Campaign could have a negative impact on his
shares and increase the price for the takeover. Often investor relation firms are
appointed to help with this strategy. These firms will than target every stakeholder
within the firm; this could also include employees, local politicians and regulation
bodies. The main objective is to convince these parties that the hostile takeover is not
in the best interest for their group or the general public.35
A current example for this
approach was mentioned in the first chapter page two.
32
Cf. Atrill, P., (Financial Management, 2006), P. 485 and Zarin, S., Yang, E. (Hostile takeovers and
defense strategies, 2011), P. 22.
33
Cf. Gaughan, P., (Corporate Restructurings, 2011), P. 218.
34
Cf. Achleitner, A-K., (Investment Banking, 2000), P. 221.
35
Cf. Vogel, D., (M&A Ideal, 2002), S. 26, Brown, M., et al., (Takeovers: Strategic Guide, 2016), P. 8-5
and Achleitner, A-K., (Investment Banking, 2000), P. 220.

11
Pac Man
In contrast with the four strategies described before this last tactic is not focused on
fighting the offer or making the acquirer back down from his takeover attempt. It
actually reverses the roles of the acquirer and the acquiree, as the latter one will make
an attempt to takeover the hostile company. This strategy will mainly make sense when
the acquiring company plans to access synergies by combining their business with the
targeted company. This would allow the targeted firm to benefit from these savings,
while keeping their independence and having the full control. The name of this tactic is
based on the computer game of the same name that allowed the player to change from
being hunted to hunting down the enemy. To being successful with this defence
measure the targeted company needs an investment bank that is able to organize the
necessary capital for the counteroffer quick enough that the acquirer is unable to gain a
25% share in the company.36
These 25% present a threshold that will keep the
targeted firm from exercise the rights necessary to lunch a takeover attempt. Assuming
that the raider had fulfilled his requirements by informing the acquiree about exceeding
this ownership interest level.37
One of the most famous examples for this method is the
takeover attempt of Volkswagen by Porsche. At first it seemed like the much smaller
company would be successful with their venture and will actually be able to acquirer
enough shares to reach a controlling interest. However Porsches ambitious attempt
was handicapped by the finical crisis and a decreased financing situation leaving the
company with the inability to buy more shares. This allowed Volkswagen to turn the
situation around and acquirer the luxury car manufacturer.38
2.2.2 Offense tactics
After having discussed some oft the many available tactics utilized by the acquiree. It is
now necessary to illustrate what the acquirer can do to finalize the deal with the lowest
price possible and the best results for his own shareholders. The hostile company can
use their strategies to gain control as quickly as possible without getting in a position
where it has to agree to conditions dictated by the targeted company. This would mean
they could be separated in two sets of possible measures. The first one will help the
company acquire ownership interest quickly and without giving other parties much time
to intervene. The other set would countermeasures undertaken by the acquirer to block
tactics such as the poison pill or the scorched earth from being utilized.39
36
Cf. Kästle, F., et al., (M&A und Corporate Finance, 2006), P. 125 and Achleitner, A-K., (Investment
Banking, 2000), P. 222.
37
Cf. Bundesministerium Justiz, (Beschränkung der Rechte), gesetze-im-internet.de/aktg328, 09.05.2016.
38
Cf. Kirchner, T., (Merger Arbitrage, 2016), P. 282.
39
Cf. Faulkner, D., et al., (Handbook of Mergers and Acquisitions, 2012), P. 291.

12
Hidden Toehold/Threshold40
As mentioned on page seven an investor is required to disclose his holdings in the firm
as soon as he exceeds 3%.41
If these holdings were accumulated in a short time than
this would be a signal for other market participants that the disclosing company will
make an attempt to takeover the firm in the future. It is a common occurrence that
share prices will increase as soon as investors expect a takeover in the near future, as
they hope for an offer with a sufficient premium above the current share price.42
These
behaviour makes the tactic attractive as it aims to avoid the disclosure for as long as
possible by appointing for example investment banks to buy shares on their own
accounts just below the disclosure threshold. After a sufficient percentage of shares
are accumulated the advising banks sell their shares to the acquirer and give him a
huge ownership interest in the firm before the public is aware of his actions. This
approach has another benefit for the hostile company as it allows them to acquire
shares at the market price before having to make a tender offer that as to include a
premium. In conclusion this means an effective usage of this measure allows the firm
to improve their return on the transaction.43
Dawn Raid
This measure works similar to the before described tactics as it requires the company
to enter the stock market as soon as the markets open for business and buy up as
many shares as possible. This will take the target by surprise and allows the acquirer to
gain an ownership interest before any countermeasures can be placed. In most cases
this strategy will not give the firm a controlling interest as most firms will not have such
a high liquidity that more than 50% of the outstanding shares can be brought within one
quick raid. Therefore the raider has to combine the “Dawn Raid” with an ordinary
tender offer to acquirer the missing shares.44
Multi-tiered Offer
By making this offer the acquiring firm uses the greed of investors for their advantage
as it makes an offer that is composed of two parts. The first part is aimed at
accumulating enough shares to gain a controlling interest. This offer will normally
include an attractive premium paid on top of the current share price. Additionally it will
often be paid in cash allowing the investors to directly benefit from the transaction. The
second part will apply to all shares tendered to the acquiring company after 51% are
40
This term is not officially used but actually describes the process accurately. I decided to use this term.
41
Cf. Bundesministerium Justiz, (WpHG, 2012), P. 18.
42
Cf. Dollinger, M., (Fair Squeeze-Out, 2008), P. 26f.
43
Cf. Eckbo, E., (Takeover Activity, 2010), P. 45ff.
44
Cf. Faulkner, D., et al., (Handbook of Mergers and Acquisitions, 2012), P. 293.

13
surpassed. These investors will receive a lower price for their shares, for example only
the current bid price, and the payment will often be made in the form of shares of the
acquirer. This kind of offer provides the hostile firm with two benefits: 1. Investors have
an incentive to agree to the tender offer as quickly as possible as they loose money if
they miss the window for the first tier, allowing the firm to acquirer the controlling
interest faster than a formal tender offer would been able to. 2. The firm could save
money on the takeover if some of the investors agree to sell their shares in the second
tier. Since the second-tier does not include a premium that would be necessary in a
normal tender offer. However it is unlikely that many investors will accept the lower
offer, especially since the legislation allows them take cases like this to the court and
demand judgment on what a fair price for the company is. In the long run this often
means that the remaining shareholders receive the same offer, as the first-tier would
have provided. Despite these possible future outcome the raider can benefit from
having the full control of the firm in the mean time and prepare for the full takeover.
Indeed the firm will face the risk that the remaining shareholders will use their voting
power to block major decisions or that the court will award a price above the price paid
for the first tier. Nevertheless the acquirer also benefits from a lower capital need to
fund the complete takeover, assuming that future cash outflows had to be discounted
to the current day.45
Bear Hug
This Strategy will only be utilized if the Acquirer is aware that the management of the
targeted company will mostly likely oppose the takeover offer. To introduce pressure
on the board the acquirer will make a tender offer that incorporates a generous
premium above the share price. By doing so the board is facing the dilemma of being
unable to reject the offer without infuriating their shareholders. In addition the hostile
company will often increase the pressure by demanding a quick response as well as
making the offer public. After having made such an offer to the public institutional
investors will enter the process and increase the pressure on the management even
further by demanding that the offer is in the best interest of the shareholders. This
tactic often leaves the management without a second option as they otherwise risk
being sued by their shareholders for violating their duties.46
45
Cf. DePamphillis, D., (Mergers, 2015), P. 102f. and Vahs, D., Schäfer-Kunz, J.,
(Betriebswirtschaftslehre, 2007), P. 719f.
46
Cf. Steinbächer, J., (Defense Strategies, 2007), P. 7f. and DePamphillis, D., (Mergers, 2015), P. 99.

14
Proxy Fight/Proxy Contest
By initiating a proxy fight the acquirer will try to accumulate as many voting rights as
possible without actually buying a great amount of shares. The final objective of this
tactics is to have enough voting rights to change some or all members of the board of
directors. To collect these voting rights the investor needs to enter in an agreement
with other investors so that they transfer their rights to him. Therefore this strategy
requires that the firm have a few big core investors, as a negotiation with a lot of small
investors would be time-consuming and not efficient. Normally they receive a fee for
their rights but could also be motivated by the possible premium introduced through the
takeover later.47
The investor requires at least 5% of the outstanding shares to have
enough control to call for an extraordinary general meeting. By doing this he could use
the meeting as a platform to promote the takeover and gain support by other core
shareholders. However he will need 75% of the voting rights to be able to remove
board members from their position.48
Unfortunately a change in the board of directors
does not allow the removal or exchange of the executive committee, without having
valid reasons, such as delinquency or the lost of trust by the shareholders. Therefore
the proxy fight is quite rare in Germany and will be mainly used, when them term of the
committee is nearly over.49
After having illustrated the instruments that can be utilized by both the targeted
company and the acquirer it become quite obvious that the defender has more options
available and by using some a great chance to repel any attempt in the short-run. This
is based on the nature of most of these measures to make the takeover unattractive for
any investor with a short-term profit orientation. However if the acquirer has a long-term
focus and plans to benefit from synergies by merging the two business rather than
taking the company apart and making a profit by doing so, he can benefit from the legal
situation as many of the tactics described are either illegal or a legal gray area.
Meaning that he can be successful by filing a lawsuit against the deployed measures
and having them either revoked or being compensated for his looses by a court
ruling.50
In addition the acquirer can often build on the desire of the average investor to
make a profit quickly. This is especially valid for companies with a high free float as it is
unlikely that a large number of investors form a unity against the takeover if it is well
above the current share price.51
47
Cf. Achleitner, A-K., (Investment Banking, 2000), P. 197.
48
Cf. Bundesministerium der Justiz, (§ 103 Abberufung), gesetze-im-internet.de/aktg103, 09.05.2016 and
Bundesministerium der Justiz, (§ 122 Einberufung auf Verlangen), gesetze-im-internet.de/aktg122,
09.05.2016.
49
Cf. Baums, T., Scott, K., (Taking Shareholder Protection Seriously?), ilf-frankfurt.de/ILF_WP_016.pdf,
09.05.2016 and Achleitner, A-K., (Investment Banking, 2000), P. 197.
50
Cf. Haghirian, P., (Routledge Handbook, 2016), P. 137.
51
Cf. Misawa, M., (Cases on International Business, 2007), P. 99ff.

15
2.3 Legal Requirements
This chapter will discuses important contracts and legal milestones that have to be
undertaken to prevent the M&A transaction from failing because of a loophole in a
contract. Most of the covered topics in this chapter apply to a friendly transaction as
during a hostile takeover the negations and disclosure willingness will be greatly
reduced. There are different opinions on the succession of these tasks, as some
authors argue that the due diligence has to be done first and the letter of intent after
completing this task. However this paper will work through these tasks in the following
order: 1. Letter of Intent
2. Due Diligence
3. Tender Offer
The letter of intent is important for both sides as it captures the current negotiation
progress and gives both sides an incentive to keep working on the deal as they already
invested time and money in this deal. In addition both sides agree to keep working on
this deal. The letter also settles certain topics such as that the deal is exclusively made
with the acquirer and the firm will not “shop around”. Furthermore it normally included a
confidentiality clause that will punish the sharing of information gathered during the
negotiation.52
The letter is normally not legally binding. However it often includes a
break-up fee to keep either party from giving up the negotiation. It is normally
structured in the way that it prohibits either side from dropping the negotiation without
the other side agreeing to it. It also covers the termination of the deal through the fault
of only one party. The break-up fee will normally be paid in cash to compensate the
other side for any expenditure occurred during the negotiation and to cover damages
inflicted by terminating the negotiation (e.g. reputation, missing out on other interested
parties). By agreeing on a break-up fee the two parties also add another incentive for
finalizing the deal to the contract, as they want to avoid paying the fee.53
The next step following the letter of intent is the due diligence. This task marks one of
the most important legal parts during an M&A deal, as it decides if a possible target
fulfils the expectations put into this deal. The main objective of the due diligence is to
analyse all risk and opportunities associated with the targeted company. This analysis
will especially look for any legal liabilities that would be transferred to the acquirer
during an M&A transaction. In addition it will look at any business process that could be
negatively influenced by the deal. This illustrates one of the biggest struggles while
doing a due diligence. The buying firm is interested in acquiring as many sensitive data
as possible to form a reliably opinion about the firm. On the other side the acquiree has
52
Cf. Seckler, D., Seitz, C., (Leitfaden M&A, 2011), P. 49f. and Niewiarra, M., (Unternehmenskauf, 2006),
P. 36ff.
53
Cf. Fett, T., Spiering, C., (Joint Venture, 2015), P. 244f.

16
to watch the whole process so that no information get shares that would have an
influence on the competition. Furthermore he always faces the risk that the deal will not
be finalized leaving him vulnerable to insider knowledge of the acquirer. To share this
information one of the parties involved will open a data room that will be used by
lawyers, accountants and advisors to work through any important contract and
document. Depending on the company size this process can take up to a few weeks to
be completed. This process also allows a deeper insight into the targeted firm. This
gives the investor the opportunity to revise certain assumptions made during the
valuation or better understand which synergies can be achieved realistically.54
The last step that should be described her is the tender offer and what has to be
fulfilled to make the offer in a legally correct manner. As described in chapter 2.1 the
tender offer has to fulfil certain requirements to be legal. Furthermore the offer does not
necessary has to be hostile but can also be supported by the board of directors.55
As
the constitution of the tender offer was already covered it should just be said that not
complying with the rules established in the „Wertpapierübernahmengesetz“ would lead
to either making the tender offer invalid or leaving the company open to law suits by
shareholders that assume their rights were violated.56
The offer can be made in two
different ways. The first one that was mainly covered before is the share deal, in which
the acquirer buys all shares or at least enough to have a major interest in the firm. The
second option is the asset deal that is focused on acquiring a certain asset of the firm
or designated part of the company (e.g. a subside or division).57
A good example of how a well-elaborated letter of intent can have an influence on the
outcome of a merger can be found in the deal between Allergan und Pfizer. The
merger between these two large pharmaceutical companies was mainly proposed to
save taxes by shifting the location where they have to pay taxes. This would have lead
to saving billions in tax expenses. However the two firms expected that the politicians
will not be satisfied with this explanation and are likely to take steps to prevent the
merger. By including these expectations within the letter of intent both firms agreed on
a small break-up fee off only 400m dollar, only 0,27% of the merger value of 150 billion
dollar. By including this small fee it allowed the firms to break up their negotiations
without having to suffer a big financial los.58
Certainly this result is not an example of a
successful M&A transaction but illustrates that the legal work can prevent shareholders
from taking a loose when it is not necessary.
54
Cf. Connolly, D., (UK Trader’s Bible, 2005), P. 270 and Seckler, D., Seitz, C., (Leitfaden M&A, 2011), P.
31.
55
Cf. DePamphillis, D., (Mergers, 2015), P. 57.
56
Cf. Bundesministerium Justiz, (§ 12 Haftung), gesetze-im-internet.de/wp_g12, 09.05.2016.
57
Cf. Rohlfing, B., (Wirtschaftsrecht, 2005), P. 278f.
58
Cf. Rockoff, J., et al., (Walk Away), wsj.com/pfizer-to-walk-away-from-allergan-deal, 09.05.2016.

17
2.4 Valuation Models
The Valuation is the core part during an M&A Transaction as it fulfils the need of the
management to reduce uncertainty by having numbers for their plans. Indeed
conducting a valuation and reaching a price that seems reasonable gives a certain
satisfaction but it comes at the price that all valuations work with a great amount of
assumptions to draw a picture that is as close to the current reality as possible. It
requires the correct prediction on how the business will grow over the coming years
and also for the unforeseeable future. This task already illustrates that valuation can
never be perfect but if the company is publicly listed it the share price will give an
anchor to compare the calculated value with.59
Three methods for doing a valuation will
be introduced her: Valuation Multiples, Comparable Transaction method and
Discounted Cash flow (DCF). Each Method will be annotated and advantages as well
as disadvantages will be pointed out. The first two focuses on similar companies and
deals in the sector to reach a value that would mirror the current market situation,
without going into much details of the respective firm. These two methods are also
called the relative valuation approach. The DCF method conducts an in-depth analysis
of the firm by looking at the specific situation and circumstances to reach a reliable
value. It is more focused on reaching an absolute valuation.60
The first method that should be explained her is the Multiples approach. Beginning with
a general description on how this technique works and later one going into two applied
models to illustrate the workings even further. In basic terms the multiples approach
uses operating numbers such as the EBIT61
, revenue or the net income to value a
firm.62
It uses these numbers to calculate the multiple by dividing a chosen price
through the number. These multiple allows for an investor to evaluate how much he
would have to pay for a certain value of assets, revenue or income. The utilized price
usually is the current share price but could also be the value of the invested equity.
𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑒 =
!"#$%
!"#"$%&#
63
However to conduct a valuation using multiples the investor has to first find a company
that is similar to the firm he is trying to value. This included the same industry, similar
asset value, similar revenue and if possible a comparable growth expectation. The
most commonly used method is the price/earnings ratio that was discussed before.64
The following example should illustrate how a valuation can be done using this method:
59
Cf. Spremann, K., (Valuation, 2004), P. 1ff.
60
Cf. Pinto, J., et al., (Equity Asset Valuation, 2015), P. 18ff.
61
Explanation: EBIT = Earnings before Interest and Taxes
62
Cf. Risius, J., (Business Valuation, 2007), P. 97f.
63
Formula is abstracted from Hitchner, J., (Financial Valuation, 2011), P. 296.
64
Cf. Hitchner, J., (Financial Valuation, 2011), P. 291ff.

18
The Investor wishes to valued Company B, but the firm is currently not really liquid,
meaning he cannot use the share price to the firm as a base for his valuation.
Assuming that the firm would be valued higher if the free float would be increased.
Therefore he uses Company A, as it presents the highest similarity to his targeted
company. It is known how much Company A and B are earning per Share. (See Chart
1) Furthermore all required information for Company A are publicly available. Based on
the given Numbers the investor calculates that the P/E ratio for A is 10 (25/2=12,5).
This can now be used to reach a fair value of Company B by multiplying the given EPS
with the ratio resulting in a share price of 18€.
Chart 1: P/E Multiples Approach
Company A (Similar Firm) Company B (Target)
EPS65
2€ 1,80€
Share Price 25€ 22,5€ (implied Price)
P/E Ratio 12,5
In addition to valuating an illiquid company it could also be used to determine if a
company is over- or undervalued. This would require the investor to being able to
decide which firm is currently valued correctly. The multiples can also be used to
include assumptions about the future, such as the forecasts for the next year for
revenue, EBITDA or net income, giving the investor a more forward-looking analysis
rather than one based on past numbers that not necessary provide a helpful base for
the valuation. The main reason why this way of valuating a company is widely used is
that it can be easily done, as the numbers are freely available and to reach results
does not require a lot of time. Furthermore it can be used as a benchmark to check if a
conducted in-depth analysis (DCF) reached a value that is consistent with reality. Most
problems with this valuation arise from the highly simplified approach to break a lot of
different variables down to calculate one multiple. This will often disregard important
characteristics that one firm possesses and the other one is missing. In addition using
Valuation Multiples gives the investor a value that is mainly based on other market
participants as he is relying on their assumptions and key figures to calculate the
multiples.66
The next method is the comparable transaction approach. It is similar to the multiples
approach as it also utilizes them to calculate the value of the firm. The main difference
arises from the circumstances that it will look at recent comparable transactions to
determine how much the firm will be worth if bought. This would include a premium that
65
Definition: EPS is earnings per Share; Showing how much earnings can be attributed to each share
issued by the firm.
66
Cf. Fryman, D., Tolleryd, J., (Corporate Valuation, 2010), P. 47ff.

19
is always paid during such transactions.67
One of the most widely used form of this
approach is the TEV / EBITDA Valuation. TEV stands for the total enterprise value. The
Calculation can be found in the following formula.
𝑇𝐸𝑉 = 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑏𝑡 + 𝑀𝑎𝑟𝑘𝑒𝑡 𝑉𝑎𝑙𝑢𝑒 𝑆ℎ𝑎𝑟𝑒𝑠 − 𝐶𝑎𝑠ℎ 𝑜𝑛 𝐻𝑎𝑛𝑑
EBITDA is the earnings before Interest, Taxes, Depreciations and Amortizations. This
will normally be found within the finical statements published by the firm and therefore
does not need to be calculated. By calculating this key figure for a few comparable
transactions the investor gains an understanding how his targeted firm should be
priced.68
The following example should illustrate how this approach can be utilized to
conduct a valuation. Assuming the investor wishes evaluate a small oil company, that
provides specialized equipment and knowledge to larger firms. This firm has revenue
of 20m Euro and an EBITDA of 2,5m Euro. By using the recently bought Firms shown
in Chart 2 the Investor can calculi the TEV/EBITBA figure to determine how much his
targeted firm should be worth.69
The share price of the firm does not deliver a reliable
result, as it does not include a premium that would be ensured during a takeover.
Chart 2: Comparable Transactions
70
Date Sales EBITDA Price TEV/EBITDA
A 04.2013 18m € 1m € 11m € 11
B 01.2016 25m € 5m € 45m € 9
C 12.2015 9m € 1m € 8m € 8
D 06.2010 86m € 14m € 120m € 8,6
E 03.2016 65m € 20m € 240m € 12
Chart 2 shows 5 companies that a in the same industry as the targeted company and
have been bought recently. The key figure for TEV/EBITRA ranges from 8 to 12.
However only a two of these should be used to value the firm, as the first one is not a
recent transaction, as it was done in 2013. Furthermore D and E are much larger in
regards to sales and EBITDA making them not suitable as references. This leaves B
and C as base for the valuation. By using their TEV/EBITDA figure the firm would be
worth between 20m Euro and 22,5m Euro. The Investor can uses this to calculate how
much premium would be probably paid on the current share price respectively how
much he had to offer the current shareholders to be successful with his tender offer. In
regards to what is good about this method: It works with readily available data, as long
as the target is a listed firm and has to disclose certain figures, and incorporates a
premium to give the investor an insight into how a possible transaction would play out
67
Cf. DePamphillis, D., (Mergers, 2015), P. 284.
68
Cf. Catty, J., (Fair Value under IFRS, 2010), P. 87f.
69
It was assumed that the Price given in Chart 1 is equal to the total Enterprise Value and the Firms
70
Chart 2 is based on Table 8.1 in DePamphillis, D., (Mergers, 2015), P. 283. However it was heavily
modified.

20
for him and how much capital would be required to finances this deal. On the other side
the disadvantages can be found in nearly impossible task to find really comparable
firms, as even if the revenue and other earnings figures are close to equal, the two
firms can still be fundamental different. This could be based in different spending’s on
R&A or a lower employee turnover that will likely result in a greater growth in the future.
Furthermore as these comparable transactions always took place some time ago the
significances could be close to zero if the economic environment has changed in the
meantime.71
The rapid oil price decline happening over the last year is a good example
of how changes in the environment impact strongly on the value of a firm.
The last part of this chapter will cover an absolute valuation approach by going through
a valuation done with the Discounted Cash Flow method. The essence of this
approach is that the value of a firm can be calculated by discounting all future money
inflows to a reach a present value. That implies that cash flows that are closer to the
present day a more valuable than ones that a far in the future and by that more
uncertain.72
The DCF model has different ways to conduct the valuation. The first one
is the Dividend Discount Model (DDM) that assumes that the only cash inflow an
investor has from owning shares in the company is the dividend paid by the firm.73
However this is not suitable for an M&A transaction as the acquirer will have access to
all cash flows generated by the firm therefor the Discounted Free Cash flow to the Firm
(FCF/FCFF74
) approach will be used for this paper. The FCF valuation model will use
all cash flows that are available to cover claims of shareholder as well as debt holders.
It will not incorporate the current financial structure of the firm, as this will be included in
a later step. Depending on which numbers are available for the company the following
formula can be applied to calculate the FCF.75
If the EBIT is not given in the financial
statements it can be easily be calculated by using the EBITDA and subtracting the
amortisations and depreciations.
𝐹𝐶𝐹 = 𝐸𝐵𝐼𝑇 1 − 𝑡 + 𝑑 + 𝑎 − 𝐶𝐴𝑃 𝐸𝑋𝑃 − ∆𝑊𝐶76
t = tax rate d = depreciations a = amortizations
CAP EXP = Capital expenditures ∆WC = Changes in Working Capital
This formula requires working with the financial statements of the company to either
find the required variables or calculate them with the given information. The tax rate
71
Cf. Pignataro, P., (Leveraged Buyouts, 2013), P. 26f. and Hitchner, J., (Financial Valuation Applications,
2003), P. 189f.
72
Cf. Hitchner, J., (Financial Valuation, 2011), P. 143.
73
Cf. Damodaran, A., (Investment Valuation, 2012), P. 323.
74
Both abbreviations can be found in literature. This paper will use FCF going forward.
75
Cf. DePamphillis, D., (Mergers, 2015), P. 251f.
76
Formula is abstracted but altered from DePamphillis, D., (Mergers, 2015), P. 252.

21
however can either be determined using the taxable income and the tax expense
(Effective Tax Rate) or the investor could pick his own tax rate, as he assumes that in
the future the firm will be part of his enterprise. Another approach could be to use
industry averages or the tax rate of the country the firm headquarters in. Furthermore
the marginal tax rate could be used as it represents the amount of taxes payable for
the last dollar the firm earned. This would often lead to a higher tax rate for the firm and
by that greatly change the weighted average cost of capital (WACC) that will be
discuses later.77
The whole process of a DCF valuation using the FCF approach
requires four steps:
1. Calculating the WACC
2. Determining the FCF
3. Define a reasonable terminal growth value
4. Discount the values to calculate a present value.78
The Weighted Average Cost of Capital aims at calculating a discount rate that will be
used to discount the future cash flows. It uses the capital structure of the firm to
incorporate the yield expectations of both debt- and equity holder. It also considers tax
benefits provided by using debt capital. The weightage of the capital structure can be
done by using the market value of the debt and equity or by deciding on a capital
structure that should be established as soon as the firm is taken over.79
This capital
structure is often described as Optimal Capital Structure. This optimal structure
assumes that the share price can be maximised by using a certain combination of debt
and equity. On a general bases the cost of debt will be lower than the cost of equity as
it has priority in case of a default and will have to receive their interest before any other
interest holder. The cost of equity is higher as they have claim on al residual profits of
the firm and face a higher risk in the case the firm has to declare bankruptcy. Both
costs will increase with an increasing level of debt. However the WACC will decrease
with the first incurrence of debt, as the cost of equity is below the cost of equity. The
optimal structure depends heavily on the company, the economy and the industry.
However a rule of thumb is 30% debt and 70% equity, often even separated for
common and preferred shares.80
As it is quite difficult to determine what exactly the
optimal structure for a firm is the market value of debt and equity will be used in the
later process. The common WACC formula is shown below.
77
Cf. Damodaran, A., (Investment Valuation, 2012), P. 250ff. and DePamphillis, D., (Mergers, 2015), P.
252f.
78
Based on the McKinsey DCF model. Cf. Fryman, D., Tolleryd, J., (Corporate Valuation, 2010), P. 76.
79
Cf. Dreher, M., Ernst, D., (Mergers & A., 2014), P. 149f.
80
Cf. Essayyard, M., Carey, O., (Essentials of Financial Management, 2005), P.61 and Brigham, E.,
Ehrhardt, M., (Financial Management Theory, 2008), P. 358.

22
𝑊𝐴𝐶𝐶 = 𝑊𝑑 ∗ 𝐶𝑑 + 𝑊𝑒 ∗ 𝐶𝑒
It uses the cost of debt (Cd) and cost of equity (Ce) and multiples them by their share
in the capital structure. The weightage for debt and equity can be easily calculated
using these formulas.
𝑊𝑑 =
!"#$ !"#$%"&
!!"#$ !"#$%"&
𝑊𝑒 =
!"#$%&
!"#$% !"#$%"&
To calculate the WACC the cost for both debt and equity is still missing. The cost of
equity can the calculated by using the capital asset pricing model (CAPM). This model
assumes that investors seek a return that beats the risk free rate (rf), normally the yield
of safe government bond (Germany/USA), and also includes a premium (MRP=Market
risk premium) to compensate for the higher risk of holding equity in a firm.81
The
formula is given below.
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝑟𝑓 + 𝛽(𝑀𝑅𝑃)82
Both the MRP and the rf can be found on research websites such as Bloomberg and
will show what currently is expected for a certain firm or industry. However the Beta (β)
is important for the calculation as it represents a non-diversifiable risk. This value
represents how a share behaviours in comparison to another benchmark. This
benchmark is often the leading Index such as the DAX or the S&P 500. If the Beta is
below 1 it indicates that the firm has a lower risk than the main index and vice versa.
This is the reason why the MRP has to be adjusted by the specific risk of the
company.83
The last part required for calculating the WACC is the cost of debt. For
simplicities sake the cost of debt will be calculated by using the debt capital and the
interest expense. By dividing the interest expense by the debt capital a percentage rate
can be obtained that is required for the next step. Interest payments can be deduced
from the taxable income allowing the firm to reduce their tax expense.84
Therefore this
benefit has to be included when calculating the cost of debt.
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡 = 𝐶𝑑 ∗ (1 − 𝑡)85
Parts of the second step of the model were covered in the beginning. Therefore only a
few comments should be added to the explanations. To conduct a valuation multiple
FCFs are required. Normally this includes the current year and 5 to 10 forecasted
years, depending on how many years the investor expects the firm to have an
extraordinary growth. These years are normally based on analyst’s assumptions on
how revenues, capital expenditure and other variables with change. These
81
Cf. Armitage, S., (Cost of Capital, 2005), P. 278.
82
Formula is abstracted from Damodaran, A., (Investment Valuation, 2012), P. 77. The expected return for
an Investor is the counterpart of cost of equity from the viewpoint of the firm.
83
Cf. Hitchner, J., (Financial Valuation, 2011), P. 255 and Damodaran, A., (Investment Valuation, 2012),
P. 741.
84
Cf. Cordes, J., et al., (Taxation & Tax Policy, 2005), P. 215
85
Formula is based on: Brigham, E., Ehrhardt, M., (Financial Management Theory, 2008), P. 358.

23
developments are based on past development, expected economic growth and
company specific factors.86
The calculated FCFs have to be discounted by the WACC,
this albeit will be covered in a later segment of this paper. First the terminal growth
value has to be determined. This variable shows by how much the company will grow
forever. As forever is ungraspable long period reasonable assumptions have to be
made as otherwise the valuation will be unbelievable high and would not give a good
representation of the companies value. This growth rate incorporates assumptions
about the world wide economic growth, inflation expectations and long-term growth
forecasts for the company. Often this infinite growth variable is set at around 4%
assuming 2% inflation and 2% real growth as the long-term expectation.87
However
values from 2 to 6 per cent can found in published models. This always depends on the
specific situation of the firm and how the respectively analyst had chosen his
assumptions. After having discussed the terminal growth variable the remaining step is
discounting the FCF Values and putting it all together to calculate the total enterprise
value. The common discount formula can be altered to fit this model.
𝑃𝑉 𝐹𝑖𝑟𝑚 = 𝐹𝐶𝐹0 +
𝐹𝐶𝐹1
(1 + 𝑊𝐴𝐶𝐶)
+
𝐹𝐶𝐹2
1 + 𝑊𝐴𝐶𝐶 !
+
𝐹𝐶𝐹3
+
𝐹𝐶𝐹4
+
𝐹𝐶𝐹5
+
𝐹𝐶𝐹6
(𝑊𝐴𝐶𝐶 − 𝑔)
/(1 + 𝑊𝐴𝐶𝐶)^588
This example was done with 6 years, FCF0 is the year the Valuation is conduct in the
other five are the one a forecast was done for. This could be adjusted for any number
of years, as long as a forecast can be done reliable. The terminal value incorporating
the infinite growth assumption is represented by
!"!6
(!!""!!)
this segment in the formula.89
Since the total present Value of the firm is determined one last step has to be
undertaken to calculate how much the equity of the firm is worth to compute what an
investor should pay for the firm. To calculate the Equity Value the Total Enterprise
Equation can be rearranged. The TEV Equation is build as followed.
𝑇𝐸𝑉 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 + 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐷𝑒𝑏𝑡 − 𝑢𝑛𝑎𝑙𝑙𝑜𝑐𝑎𝑡𝑒𝑑 𝐶𝑎𝑠ℎ90
By rearranging the formula to solve for the Value of equity an investor would end up
with the following equation.
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 = 𝑇𝐸𝑉 − 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐷𝑒𝑏𝑡 + 𝑢𝑛𝑎𝑙𝑙𝑜𝑐𝑎𝑡𝑒𝑑 𝐶𝑎𝑠ℎ
86
Cf. Stowe, J., et al., (Equity Valuation, 2007), P. 130.
87
Cf. Mellen, C., Evans, F., (Valuation for M&A, 2010), P. 135 and Lurin, P., (Business Planning for
Managers, 2010), P. 117.
88
Based on the discount formula used by Vahs, D., Schäfer-Kunz, J., (Betriebswirtschaftslehre, 2007), P.
719.
89
Cf. Stowe, J., et al., (Equity Valuation, 2007), P. 143.
90
Based on the equation used by Shenoy, C., McCarthy, K., (Applied Portfolio Management, 2008), P.
114.

24
In conclusion the calculated present value of the firm has to be reduced by their
outstanding debt capital and any unallocated cash has to be added in. Cash gets
subtracted from the TEV, as it is not part of the operating process unless it is part of the
working capital. This capital is required by the firm to run their day-to-day business.
This is also called excess cash and also includes any cash equivalent that is not
required for the operating process.91
Logically it has to be added back in to compute
the Value of Equity as it would be under the control of the acquirer during a M&A
transaction. In addition to valuing the firm on its own, the model can also be extended
to capture synergies achieved by merging the business. To calculate the value of
synergies can be easily achieved by treating the expected benefit das a Future Free
Cash Flow (FCF) and applying the formula given above. Costs related to archiving the
synergies have to be subtracted before. This however requires that certain risks get
evaluated on a stand-alone base. These risk normally arise from either being unable to
implement the planed synergies (Implementation or having the savings offset by the
competition (Competition risk).92
Deciding on an exact value of these risks will again
require assumptions about the industry, the firm and the competition.
There is no example for this model in this chapter. It will be covered extensively during
chapter 4.
2.5 The Negotiation Process
This subchapter covers first what makes good negotiation and second what tactics can
be applied to maximise the benefit gained from reached agreement. The tactics should
only be briefly summarised. Negotiations are a key occurrence as soon as people
interact with each other. There will always be something to reach an agreement about.
It can be simple things such as what movie to watch or what to eat for dinner. However
they can be much more complicated if the topic that has to be settled has many issues,
where each one has to be negotiated on its own. Such an example would be the
takeover negotiation in which topics such as redundancies, closing of locations or the
price per share have to be settled. Most people thing that negotiations will often end
with a winning side and a loosing side, as they expect that the stronger party will
leverage their position to force the other side to agree to their terms. Indeed these
situations can occur but would have a damaging effect on any future business and
could also harm the reputation of the stronger side. The even worse outcome of a
negotiation would be that no side feels like a winner. This can occur when both sides
91
Cf. Gutmanm, A., (Investment Banker, 2013), P. 143ff.
92
Cf. Gaughan, P., (Mergers: What can go wrong, 2005), P. 169ff.

25
are poised to their positions and have not prepared enough be able to see where
consensus could be reached.93
This leaves to the first important step that has to be undertaken to reach a conduct a
good negotiation. Preparation and keeping track of you progress makes a huge
difference while negotiating, as it keep the process on track and the discussing focused
on the topic rather than certain statements or position made.94
The preparation works in four steps. First it requires the negotiator to determine his
interest: What does he want to archive with? Why does he require certain
concessions? Which topic has the highest/lowest priority for the investor? By making
sure that the objective is clearly defined the chance of reaching it greatly improves. The
next step requires emphasising with the opposite side for the reason to determine their
interest and goals during the negotiation. When the negotiator is aware of what the
opponent values most during the discussion he can either use it to convince him of his
point or use it as a bargain chip for something that is of high priority to him. By
researching the opposite side it also prevents statements that could offend the other
side and leave to a break up of the negotiation.95
After having investigated the interest
of both sides it is necessary to explore options that can be beneficial to both sides.
When having to negotiated people often assume that one topic can only be settled in a
way that gives one side what they want and leave the other side as the looser. This
can be perfectly illustrated with the story of two people that both want the last orange.
They agree on splitting it half way only to then realise that the one party needed only
the skin while the other needed the pulp. In this example both sides leave possible
gains by failing to consider variable options. This is based in the human behaviour that
assumes that there always is a right solution and that the respectively party is arguing
for the best answer. Furthermore most positions are formed under the expectation that
there is a limited amount of resources available and that these amount gets smaller by
agreeing on an unfavourable settlement. This problem is linked to another obstacle that
stands in the way of reaching a good deal: The negotiating parties see each other as
enemies and focus on how to solve their own problems or reach their gaols rather than
trying to find solutions that fulfil all sides as good as possible.96
In a certain way the
available resources are of course limited, as an investor only has a certain budget
intended for buying the shares. However these resources have to be seen as a certain
value that both sides put on them. Normally each side is likely to value money the
same, yet there can be exceptions from this if they seller has other issues he is more
93
Cf. Lewicki, R., et al., (Essentials of Negotiation, 2000), P. 3f. and Pinet, A., Sander, P., (Only
Negotiation, 2013), P. 146f.
94
Cf. Fisher, R., Ury, W., (Getting to Yes, 1999), P. 5ff.
95
Cf. Ury, W., (Getting Past No, 1993), P. 17ff.
96
Cf. Fisher, R., et al., (Harvard-Konzept, 2015), P. 92ff

26
concerned about than the finale price per share. When keeping this in mind the
negotiator can increase the benefit both sides have by introducing several topics that
are of different significance to him. This of course only works out when both sides have
at least some topics that are differently important to them. 97
While researching any issue that could be discussed during the negotiation it is also
necessary to think on the one hand about how important each topic is to the acquirer
and on the other hand what goals he wanted to reach on each of them. These gaols
are normally defined as range with an opening price, a target value and a resistance
point. Depending on the strategy applied by the negotiator the opening price can be set
aggressive (high/low balling) or reasonable in combination with a convincing
justification. Logically the target value is the one that would be ideal for the respectively
party and the resistance point marks utterly minimum that should be agreed to on an
issue. When choosing values for each of these three benchmarks the negotiator has to
think about the other side and their possible standing on each of these issues, as a
wrongheaded value could lead to falling at reaching an agreement. Therefore
considering the Zone of possible agreement makes sense for every negotiator, as this
concept uses the resistance points of all parties involved to determine if an agreement
on the particular issue is possible. Normally the R.P. is not publicly known but
approximations can be used to evaluate a reasonable value. However some
negotiation tactics aim at misleading the opposite side in regards to the resistance
point.98
The remaining step to achieve a successful negotiation is researching alternatives for
the case that the negotiations fail or the agreed terms are not what the investor wanted
to achieve. This alternative is called BATNA, the best alternative to a negotiated
agreement. By being aware of what would be the alternative to giving up on the
negotiation the investor can be assure that he does not agree to terms that are not
more favourable than his available alternatives. Furthermore researching and
improving your BATNA will improve your negotiation power, as there are no incentives
to agreeing to terms that provide no benefit to acquirer. In addition it is important to
keep your BATAN hidden, as the other side would utilize this knowledge by offering
just a little bit better than the alternative. While building up the acquirers BATNA it is
helpful to first collect information about the opponents BATNA, to determine side is
97
Cf. Diamond, S., (Getting More, 2010), P. 124 and Pinkley, R., Northcraft, G., (Expert Negotiator, 2003),
P. 57ff.
98
Cf. Harvard Business School, (Harvard Business Essentials, 2003), 24ff. and Hames, D., (Negotiation:
Closing Deals, 2012), P. 59.

27
stronger, and second reduce the attractiveness of their best alternative by pointing out
possible flaws or increasing the uncertainty associated with it.99
To finalize this chapter three of famous tactics utilized during a negotiation will be
introduced. Probably the most used one is expanding the pie, as it will help reach an
agreement that is beneficial to all involved parties. This tactic will need both parties to
discuses all issues that need to be settled and depending on them, split them up even
further if possible. Furthermore new issues can be brought up during the meeting
giving more space to reach an agreement that benefits both sides. The core essence
of this tactic is to reach an agreement by discussing multiple topics rather than
focusing on one prevalent topic, such as prices or salaries.100
Linked to expending the
pie is the tactic log rolling that requires both parties to give a concession on an issue
that is less valuable to them than it is to the other side. In exchange the opponent
agrees to a deal on a different topic that is important to the acquirer. This however
requires a certain trust between all parties, as they have to be honest about what is
more or less important. An example for such a deal could be that one party cares
mostly about the price while the other side wants to protect their employees. This could
than easily be resolved by agreeing to a lower price, while offering an employment
protection for a certain time frame.101
The last tactic that will be discussed her is
anchoring. The general idea behind it is that the negotiator who makes the first offer
proves a benchmark that will influence all following offers. If it is combined with a
persuasive clarification this tactic can throw the other party of their game, since a
complete different price would now make an agreement difficult and damage the
reputation of the other side. The anchor will influence their attitude towards the topic as
it is hard to argue for a low ball price if the other side started with an reasonable offer
that was provide with arguments and statements that supported the claim of being a
fair deal.102
All of these tactics are focused on a collaborative approach to negotiation.
There are a lot more and also many “dirty” tactics to leverage the other side to agree to
the offered deal. However as it is nearly impossible to get an insight into negotiations
happening during a takeover this should not be discussed further just pointed out that
the right negotiation can make a big difference in the results.
99
Cf. Ury, W., (Getting Past No, 1993), P. 21ff., Harvard Business School, (Harvard Business Essentials,
2003), 15ff. and Thompson, L., (Truth about Negotiation, 2013), P. 42f.
100
Cf. Pinkley, R., Northcraft, G., (Expert Negotiator, 2003), P. 62f.
101
Cf. Churchman, D., (Negotiation Tactics, 1995), P. 34ff.
102
Cf. Harvard Business School, (Harvard Business Essentials, 2003), 49ff.

3 M&A Activities in the field
28
This chapter will conduct an evaluation using a statistical model called the regression
analysis. Hence the study will determine if there is a general correlation between M&A
activities, measured in money spend on acquisitions and earned by disposals, and the
performance of the DAX Index for the years 2010 to 2015. This analysis will be done to
figure out if there are general observations that could be derived from the collected
data or the composed regression formula.
3.1 Methodology for the Analysis
As mentioned before a regression analysis will be utilized to determine, if there Is a
relationship between money spend/received on M&A transactions by all DAX
companies and the performance of the index
A regression analysis is used to construct a mathematical model that predicts one
variable by multiple other variables. The variable that should be predicted is the
dependent and the other ones used to do so are the independent variables.
The general regression formula is given below:
𝑌 = 𝑏0 + 𝑏1 ∗ 𝑋1 + 𝑏2 ∗ 𝑋2 + ⋯ 𝑏n ∗ 𝑋n103
Y = dependent Variable X1,X2,Xn = independent Variables
b0= Value of the predicted Value if all other Variables are Zero
b1,b2,bn= Each shows how the dependent Variable changes for each unit the
independent Variable increases
This model will be constructed using Excel. However this requires a test to determine if
the model is useful. This can be seen in the value “Adjusted R-square” given by Excel.
If it is greater than 0,7 than the model is useful in the applied context. Certainly a
higher value is targeted, as the closer is gets to 1 the better the model is for the
prediction. This value has to be seen in context with r-square as this shows how much
of the deviation is explained by model. This would mean a model with an r2
of 0,85
explains 85% of the variation. The adjusted r2
is then used during the next step as it is
used to compare models with a different variety of independent variables. A higher
value will indicate that this model is better suited than another one with a lower
adjusted r2
.104
After having evaluated the model it is also necessary to examine each
value in regards to his contribution to the model. This test is called the significance test
103
Cf. N.N., (Multiple Regression), https://explorable.com/multiple-regression-analysis, 09.05.2016.
104
Cf. N.N., (Difference between r-squared and adjusted r-squared), investopedia.com/ask/012615/whats-
difference-between-rsquared-and-adjusted-rsquared.asp, 09.05.2016.

29
and uses the p-value given by Excel to decide if a certain Variable should be part of the
model or should be rejected. This test normally takes 5 steps:
1. Hypothesis0: X1= 0 (not significant) HypothesisAlternative: X1 ≠ 0 (significant)
2. Level of significance: 0,05
3. t-stat and p-value: given by Excel
4. Decision Rule: Reject H0 if p-value < level of significance
5. Conclusion depending on results
During this analysis this step will be repeated as long as a p-value indicates a value
above 0,05. The significance level shows how likely an event will occur that has an
significant influence on the whole model. At a 0,05 level only 5% of the time such an
event will occur.105
To collect this data all annual reports of the companies listed in the DAX during the
whole observed timeframe were used. During 2010 to 2015 only 27 of the 30
companies were members of the Index for the whole time. Vonovia, Heidelberg
Cement and Continntal joined the lead index during the observed time and are
therefore not part of the analysis. However K+S will be included as it left the index after
2015. Information necessary for this research step could be found normally in the
financial statements of the respective company. Often the required information were
given in the Notes to the financial Statement in either “Scope of Consolidation”,
“Business Combinations” or in a separate part that discuses M&A transactions closed
during the reporting period.
Illustration 2: Transparency Rating
Depending on the firm these information were readily and in detail available within their
reports or hard to find as they are spread the information all over the report or
information are only given incomplete. Illustration 2 should highlight this issue by
dividing all 27 firms in three different rankings. Companies that disclose nearly all
information in regards to acquisitions and disposals, this includes: Price, Company
105
Cf. Munro, B., (Statistical Methods, 2005), 91f.

30
Names, Closing Date and Deal type, were given a good transparency rating.
Companies that at least disclose some information, most noteworthy: Company
Names, Transaction quantity and full information in significant transactions, received
an average rating. The last category was reserved for these companies that keep the
discloser to a minimum and only reports large transactions or an accumulated list of all
M&A transactions. Some of these companies made it especially hard to find the related
information as it was spread over the whole document or hidden in the list of all
consolidated companies in the case of Lufthansa. The company with the best
transparency was Adidas as they discussed every transaction detail regardless of
transaction size. The worst company in regards to transparency is Allianz as they only
reported on one transaction over the whole six-year time frame and did not mention
any other deal in their statements. Transactions reported will be discussed in detail in
the next subchapter.

31
3.2 General Influence of M&A Activities
To start of the basis analysis a depiction of the M&A market in Germany should be
given and how it developed over the last few years. Illustration 3106
shows how much
money was spent on M&A transactions over the last 10 years and how many
transactions took place. The highest value was reached in 2006 shortly before the
subprime crisis started in 2007. The chart shows that it took till the End of 2007 to have
an impact on the German M&A market. After that the number of transactions went
down and reached its lowest point during 2010. Interestingly enough the European
crisis, which begun in 2010, did not influence the M&A market strongly, as it started its
recovery in 2011.107
Illustration 3: German M&A Market
In Addition the chart shows that the absolute number of transactions did not fluctuate
much over the observed timeframe after reaching a maximum at 2751. After this it
moved between 2351 and 1813, without being strongly influenced by the European
Debt Crisis. This could indicate that M&A deals are often planned with a long-term view
and did not get strongly altered by current economic events, unless the event is similar
to the Subprime Crisis as this led to difficulties financing large deals. While the
European Crisis mostly had a positive influence on German companies, as they
benefited from the perception of Germany as a Safe Haven and the decreasing interest
yields associated with this. This can be seen in the decreased yield on outstanding
bonds calculated by the Bundesbank. This rate decreased from 4,75% at the end of
2008 to currently 0,05%. Indeed these rates only apply to Bonds with the highest rating
but it can be assumed that Bonds with a lower rating would benefit from a decreased
106
Data is obtained from: N.N., (M&A Germany), imaa-institute.org/statistics-M+A, 09.05.2016. Additional
Information was added.
107
Cf. N.N., (Financial Crisis), theguardian.com/business/credit-crunch-boom-bust-timeline, 09.05.2016.
0
50
100
150
200
250
0
500
1000
1500
2000
2500
3000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Value in Bn € Number
Subprime Crisis
European Debt
Crisisx

32
interest yield, certainly not as low as the AAA Bonds but still in a similar fashion.108
Furthermore the increasing deal volume in combination with stable number of
transactions indicates that more large deals are closed assumable as part of a
consolidation process to keep up with an increased competition and new regulations
introduced especially towards banks.
Now that the general situation is illustrated the regression analysis will be conducted.
All information was obtained from the published Annual Reports and Financial
Statements of the 27 DAX companies. In some cases transaction prices were given in
currencies other than Euro. For these deals yearly average exchange rates were used
to transform them. Information on the utilized exchange rates can be found in Exhibit 1.
Furthermore the gathered transactions and associated information can be found in
Exhibit 2 broken down for each company. Chart 3 shows all information that could be
gathered from the reports except for the DAX performance.109
This Variable was
introduced for the regression analysis, as it is the dependent variable that should be
evaluated on changes based on the M&A details acquired.
Chart 3: M&A Details collected from observed companies
Point development over one year was chosen, as it is easier to understand the results
given by the final regression formula. Cash spent/received on transactions was
calculated by the given purchase/sale prices and in some cases combines cash, cash
equivalents and liabilities transferred as these were mostly given in an accumulated
sum. The undisclosed number of transactions was include to underline that between
23% and 50% of all transaction are either so insignificant that the sale price did not had
to be disclosed or that the companies actively decided not to report the whole details of
the deal. This could indicate that large amount of M&A transactions did not end well
and firms try to protect their reputation by not disclose unsuccessful dealings.
Furthermore companies could decide on not disclosing transactions to hinder
competitors in analysing their business plans and preventing them form taking similar
measures. Nevertheless a good tendency can be seen in the chart as the percentage
108
Cf. Bundesbank, (Time series), Shortlink could not be insert as whole link was too long to work with
Word. Full link can be found in the References.
109
Cf. N.N. (Kurshistorie), http://www.boerse.de/historische-kurse/Dax/DE0008469008, 09.05.2016.

33
of disclosed transactions increased to 79% over the last years expect for the 2015
were it went down to 70%. Cash received from disposals stayed stable over the
observed time frame expect for 2015 were it nearly reach double the average amount
of the previous years. These increases mainly arose from transactions by companies
that a currently struggling to adjust to a radically changed business environment or
overcome scandals that put pressure on their business:
Siemens (6,8 bn €), E.ON (5,6 bn €), RWE (4,3 bn €) and VW (3,1 bn €)
On the acquisition side the total amount nearly doubled from 2010 to 2015 and only
had a strong slump in 2013. However this could be explained by undisclosed
transactions as 20 billion euro less than the previous years appeals to be a to radical
decline for a year without any mayor drawbacks for the German Economy.
Admittedly only Cash spent/received and Number of total acquisitions and disposals
were used for the regression, as the correlation between undisclosed and total
transactions is so high that the program shows an error message for the output
information. Even if the information is split in disclosed and undisclosed transactions
the output information are still not usable. Therefore only information shown in Chart 4
was used.
Chart 4: Data Set for Regression Analysis
The four first had to be examined in regards to their correlation to each other an their
correlation to the dependent variable as it is necessary to check if any of them have a
high correlation to another variable. This problem is called multicollinearity and takes
place when two variables are highly correlated and not truly independent from each
other. Normally these high values arise from similar information provided by both
variables. Having variables that display a multicollinarity problem could lead to
constructing an unclear model that can not be used to make general observations
about the topic.110
110
Cf. Matignon, R., (Modelling, 2005), P. 28.

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