CMS study reveals effects of financial crisis on the M&A market

Frankfurt, 10.11.2008

Most of transaction market under scrutiny - 134 deals from an 18-month period under review

Frankfurt – The first study produced by CMS Hasche Sigle on transactions concluded in recent months in Germany is a unique record of the effects of the worldwide financial crisis. The detailed review of 134 deals of the commercial law firm covers approx. one quarter of the entire market for company acquisitions and sales. The unique nature of the review is a representative testimony to developments in the economy. The clear trends disclosed in the study reveal that, influenced by the crisis in the financial market, from roughly the middle of 2007

the transaction volumes dropped
the financial investors are reluctant to invest
the sellers' market has transformed itself into a buyers' market.

In a roadshow across Germany CMS Hasche Sigle presented the study to a high calibre public consisting of board chairmen, directors and financial directors who largely confirmed the findings of the study. "The fascinating thing is that the results accurately reflect the experiences of our audience. With this study, the only one of its type in Germany, we wanted to gain a detailed overview of the situation on the German market for corporate transactions and we have achieved our aim," said Dr Thomas Meyding, partner of CMS Hasche Sigle and project leader of the practical study. "We commenced our study in good time in order to be able to provide the clear results "just in time". The response from the distinguished public was overwhelmingly positive," said Meyding. He said that at the presentations in Germany's economic centres many lively discussions had developed about own experiences and the current mood on the market.

The law firm had evaluated transactions of its own clients from the period between January 2007 and June 2008 in Germany. In particular, typical parameters of the transaction agreements, the "deal points", such as warranties, liability caps and restraints on competition from various transactions were categorised and then compared with one another. Thomas Meyding commented: "Each transaction has its individual features and requirements which CMS Hasche Sigle can cater for with tailor-made solutions. Nevertheless, the crisis in the financial markets is not without implications for the parameters of a transaction. The trends can be seen in the CMS Hasche Sigle study!"

The corporate acquisitions and sales can be attributed mainly to industry (27.6 %), the services sector (21.6%), technology and media (19.4%) and the pharmaceuticals, energy, finance and insurance and consumer and luxury goods sectors.

The details of the three core findings are:

Drop in transaction volumes
The proportion of major transactions with a volume of more than 100 million euros compared with the overall number of transactions dropped from approx. 25 % (first six months of 2007) to 8 % (first six months of 2008).
Financial investors' reluctance to invest
Whereas the financial investors constituted 23.5 % of all buyers and 33.3 % of all sellers in the first six months of 2007, their share dropped to 8.1 % and 5.4 % respectively in the first six months of 2008.
Change from sellers' to buyers' market
This observation was backed up by several individual findings in the study.
- Low liability caps
  Until the middle of 2007 liability caps of less than 10 % of the purchase price were agreed in a good quarter of the transactions. None of the sellers involved were able to enforce the same conditions 12 months later.
- Clear increase in sellers' guarantee for corporate finance
  A guarantee about the amount of liabilities was assumed in only approx. 30% of cases in 2007, whereas in the first six months of 2008 this amounted to 54%.
  An increase is also noted in equity guarantees: in 2007 these were agreed in approx. 13 % of cases and in 2008 24 % of cases.
- Clear increase in securing financing of buyer as closing condition
  in 2007 such agreements were made in 21.6% of cases and in the first six months of 2008 in 37.8 % of cases.
- Purchase price adjustment only in favour of buyer – reversal in trend
  More than 50% of the transaction agreements provides a purchase price adjustment. An adjustment which can only be in the favour of the buyer was agreed in the first half of 2007 in barely 7 % of cases and in 2008 in as many as 30 % of cases.
- Lower exemption limits – clear increase
  In 2007 most of the agreed exemption limits were between 0.5 % and 1 % of the purchase price. The exemption limit is the amount which a substitute claim of the buyer must first exceed in order to be (fully) replaceable. On the other hand in 2008 much lower exemption limits of between EUR 1 and 0.5 % of the purchase price proliferated.

Corporate lawyer, Thomas Meyding, pointed out that despite the financial crisis this was now a good time for strategic buyers. As the major fund companies had now withdrawn from the market German companies could now use the competitive edge presented by the strong euro.

Contact CMS Hasche Sigle:

Dr Thomas Meyding, Partner, Corporate
Tel.: +49 (0) 71 19 76 43 89
E-mail: thomas.meyding@cms-hs.com

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