Are public takeovers in Germany really so highly complex?
I think the common perception in Germany is that takeovers are complex, expensive and take too long, and I think that’s not correct if you look at the precedents. You have seen only very few takeovers which in the end didn’t succeed, and the rules which you need to apply are very clear. There are only a few rules which you basically need to know. I think what changed is in last years — and that’s why the perception is different — how to deal with hedge funds and how to get them to tender.
Why do private equity funds seem to be more interested in public targets now?
I think in the current market, you see that financial sponsors are more interested in public deals, at least more than in the last years. And I think there are a couple of reasons for that. The first reason is the valuations in the private M&A market are just very high, and sponsors try to look at new opportunities, so they look at the public markets. Secondly, you have less competition in a public deal, because, I mean, you have an auction with other sponsors, but then generally I would say you have less sponsors looking at one of the same targets. And then thirdly, and I think that’s most crucial, financial sponsors understood that the public deal provides them with a certain financial engineering element, which a private deal does not, because of certain features in the German stock corporation law which enable them to get access to the cash flow, although then they don’t need to pay 100% of the shares.
Why do public takeovers seem to be so difficult at the moment?
I think what you currently see in public takeovers is that it’s more difficult to reach the acceptance threshold, and the reason for that is that we have a lot of hedge fund activity. You have, nowadays, hedge funds from all over the world in German P2Ps because they want to play a certain arbitrage game. And if they misjudge, the offer will fail.
What are the strategies for success?
I think most of all, and that’s probably the easiest strategy, is choose the wide acceptance threshold. I believe if your acceptance threshold is too high, which basically means hedge funds need to tender 90 or 95, 100% of their shares, it’s a high likelihood that they don’t make any profit out of their trade and they will not do it, or it will be more risky, and then the offer will fail. So I think it needs to be a threshold under which the incentive for the hedge funds to make the offer go through is high enough so they can actually profit from their shares.
What is your outlook for the next 12 months?
I think we will see more sponsor driven public deals for the various reasons we discussed — less competition, less valuations. I think we will also see the hedge fund arbitrage at least at the same level or going up.
I think in the end you need someone who in particular knows how to deal with the hedge funds and how to get them to tender, and Kirkland is extremely well-positioned for that because we know all the players, we know what they’re doing. I think, in the end, we know how to get the deal done.