Research on German Takeover Offers and “Endgames”
Deep insights in German takeover offers and “endgames”: the total cost of acquisition
German corporate law offers strong protection for minority shareholders. Direct influence of a majority shareholder on management decisions requires the signing of a domination and profit- and loss sharing agreement (DPLA). A squeeze out of minorities is only feasible with a majority of 90 % or 95 %. Additionally, in both cases minority shareholders being forced to leave are to be compensated. The compensation offered has to take the intrinsic value of the shares into account; minority shareholders have the right to challenge the compensation offer at a court. This procedure takes several years, and in a number of cases yields substantial increases of the compensation by the court.
As a result, a takeover offer in Germany has not yet reached its major goal to get control over the target when the bidder achieves a majority of 50 % plus one share. Reaching 100 % ownership requires additional costs, time and measures during the so called “endgame” for achieving the ownership stakes necessary for the signing of a DPLA and a squeeze out. This additional costs have attracted public attention as an increasing number of hedge funds is “jumping up” on top of takeover offers, demanding a higher offer premium by threatening to block the necessary vote for a DPLA.
Until recently potential bidders had only a vague idea about the cost of the endgame part when aiming to achieve full ownership. This has changed: Over the years the Center for Corporate Transactions and Private Equity CCTPE and the chair for financial management have set up a unique database containing all relevant information for German takeovers since 2006. Currently it contains 474 data for takeover offers, including offer premium, bidder toehold, target ownership structure, shares tendered etc. allowing a full picture on factors influencing the success of a takeover offer measured in % of shares tendered. Additionally the database tracks the further development of these offers during the endgame phase: stock price and ownership structure development after the offer, signing DPLA, squeeze out, compensation offers, court decisions on compensation etc. until the final court ruling.
Based on this database we calculate the total cost of acquisition for German takeover offers and especially shed light on the cost of the endgame. In a recent publication* the total cost of acquisition per share have been calculated to be roughly 40 % on top of the pre-bid share price of the target, while the offer premium is 32.55 % and the total cost for the shares bought in the endgame amounts to 53.2 %. For control-taking offers with a toehold lower than 50 %, total costs are significantly higher: total costs are 49.1 % on top of the pre-bid share price, with 40 % being the offer premium and 70.3 % the total cost of the endgame shares. Thus our first results suggest, that the additional cost of endgames in Ger- man corporate takeovers are significant. Based on our extensive data we are able to deeper analyze the takeover market in Germany; further studies on the increasing importance of hedge funds and index funds for the success of a takeover offer have already been published.**
* Aders/Lavrova/Schwetzler, Taking Private in Deutschland: Total Cost of Acquisition (TCA), Corporate Finance 2021, S. 50–60.
** Dobmeier, L., Lavrova, R., Schwetzler, B., Determinants of Hedge Fund Investment in Corporate Endgames, Working Paper SSRN, 2020 and Dobmeier, L., Lavrova, R., Schwetzler, B., Index Fund and ETF Ownership and the Market for Corporate Control, Working Paper SSRN, 2019.
At the Chair of Financial Management, we have specialized in two specific research areas: Company Valuation and Private Equity. In the first field (company valuation), I would like to share some of my experience as a transaction advisor, court expert and member of several academic committees by combining these with theoretical valuation approaches. In the second area of private Equity, I am particularly proud of our track record of high-profile publications and of several best paper awards that we have collected at internationally renowned research conferences.