The Bidder Competition for Techem

Table of Contents

List of Abbreviations

List of Figures and Tables

1 Introduction
1.1 Problem Definition and Objective
1.2 Course of Investigation

2 M&A and Bidder Competitions– Foundations
2.1 Theoretical Course of M&A Transactions
2.2 A Game-Theoretical and Economic Approach to Bidder Competitions
2.2.1 Bidder Competitions Viewed as an Auction
2.2.2 The Winner’s Curse
2.2.3 The Free-Rider Problem
2.2.4 Defensive Actions
2.2.5 Economics of Takeover Regulation
2.3 M&A in the Energy Sector – A Market Overview

3 Company Profiles
3.1 Techem and its Business Model
3.1.1 German Strategy and Outlook
3.1.2 Worldwide Strategy and Outlook
3.2 Macquarie and MEIF II Energie Beteiligungen GmbH & Co.KG
3.3 BC Partners and Heat Beteiligungs III GmbH

4 Transaction and Business Environment
4.1 The Bidder Competition
4.1.1 The First Phase – First Bid
4.1.2 The Second Phase – Competitive and Common Bid
4.1.3 The Third Phase – Shareholder Structure Problems
4.1.4 The Fourth Phase – Last Bid by Macquarie
4.2 Strategic Considerations of the Bidders
4.2.1 Macquarie
4.2.2 BC Partners

5 Financial Analysis
5.1 Empirical Analysis of Share Price Performance
5.1.1 Reaction of Share Price on Different Bids
5.1.2 Benchmark Analysis
5.2 Envisaged Financing Structure and its Feasibility
5.2.1 Macquarie
5.2.2 BC Partners
5.3 Independent Valuation
5.3.1 Trading Multiple Analysis
5.3.2 DCF Valuation

6 Critical Analysis and Interpretation
6.1 The Distinctiveness of the Techem Case
6.2 Bidders’ Strategies
6.3 Evaluation of Different Bids
6.3.1 Share Price Reactions
6.3.2 Bid Adequacy According to Own Valuation
6.4 Management Behaviour during the Bidder Competition

7 Outlook and Conclusion

Reference List

Appendix

List of Abbreviations

illustration not visible in this excerpt

List of Figures and Tables

Figure 1 “MEIF II’s Holding Structure”

Figure 2 “Heat III’s Holding Structure”

Figure 3 “Transaction Time Line”

Figure 4 “Annotated Share Price and Trading Volume Progression Techem”

Figure 5 “Benchmark Performances”

Figure 6 “Purchase Price/EBITDA”

Figure 7 “Football Field”

Figure 8 “Firm Values”

Table 1 “Techem’s Share Price Reactions”

Table 2 “Share Performances: Techem versus Macquarie”

Table 3 “Peer Multiples Overview”

Table 4 “DCF Assumptions for Valuation in 2006”

Table 5 “DCF Assumptions for Valuation in 2007”

Table 6 “DCF Valuations 2006 and 2007”

Table 7 “Sensitivity Analyses Enterprise Value”

Table 8 “Sensitivity Analyses EBITDA Exit Multiple”

Table 9 “Sensitivity Analyses Equity Value”

Table 10 “Purchase Price/EBITDA Techem”

1 Introduction

1.1 Problem Definition and Objective

A wrap-up of 2007 mergers and acquisitions (M&A) activity discovers that the M&A volume reached new records throughout the year but rapidly declined after the subprime-lending crisis made credit markets tighter. During the next years, Investment Banks expect less mega-deals with the participation of financial sponsors. The share of financial investors in the total M&A volume has sunk from 36% in May to 14% in October 2007 (Köhler, 2007). The same holds true for private equity companies that are struggling to raise new debt capital for their investments (“Vergleich mit J.C. Flowers,” 2008). Nevertheless, suggestions that the M&A boom has reached its climax and is about to come down may be premature. Especially for Germany, financial analysts expect a special economic cycle, as the M&A activity of public banks is expected to remain on the move. In general, the future trend is ambiguous; on the one hand, the credit crunch that already affected vast parts of global markets could also damage M&A activity. On the other hand, due to this crisis, new opportunities for large mergers and acquisitions may arise. According to Thomson Financial, the M&A volume for 2007 amounted to €3.0 bn due to record investments in the first half of 2007, compared to €2.5 bn in 2006 and €1.9 bn in 2005 (Köhler, 2007). Even more significant is the astonishing amount of high priced energy deals. Companies in the energy sector, having stable cash flows, will remain attractive targets. The energy sector, being one of the largest concerns of the global economy, is facing several simultaneous developments: with oil prices soaring, unrest in the Middle East and Russia exerting political pressure with its natural gas resources, the importance of M&A among energy companies is likely to increase in 2008. Especially government sponsored privatisation and market liberalisation programmes have provided the opportunity for investments in what were once state-owned monopolies (Deloitte, 2006).

Apart from mergers and acquisitions and the interest in energy-related topics, it has become a trend during the last years to invest in companies by acquiring control through so called “investment vehicles”. Such investment vehicles, for example, closed-end investment funds, combine different sources of money into a bundle and invest in certain types of securities, companies, funds, or other types of ventures. In Germany, closed-end funds are normally established as private limited partnerships (GmbH & Co. KG), where the limited partnership interest is offered for sale during a certain placement period for a long-term investment horizon (CEFA, 2008).

In Techem’s case, a combination of these three trends can be found. The Bidder Competition for the billing and metering company lasted almost 16 months and ended in Techem’s acquisition by a European Infrastructure Fund managed by Macquarie. Was this acquisition favourable for Techem, for its management, and, first and foremost for its shareholders? Which strategy does Macquarie follow with its closed-end infrastructure fund and why has Techem been the target? What development is to be expected in Techem’s future business (model) and which role will Macquarie play in the future leadership of the company?

These as well as other strategic and financial questions are to be addressed in this thesis. Along with a detailed outline of the course of the transaction, the bidders’ strategies are to be analysed also in light of current takeover legislation. The aim of this thesis is to make a reasonable judgement on the adequacy, fairness, and future implications of this transaction.

1.2 Course of Investigation

Beginning with a theoretical overview on M&A transactions, the thesis will proceed with describing bidding competitions as auctions highlighting the game-theoretical as well as economic aspects. Several theoretic foundations, such as the free-rider problem, the repercussions of defensive actions by the target’s management as well as the Winner’s Curse are going to be addressed. Subsequently, an outline of the current M&A market in the energy sector will be presented. Afterwards, the parties involved in the transaction will be presented through detailed company profiles. In case of the bidders, the funds bidding on behalf of the two companies Macquarie and BC Partners will be depicted.

Part four constitutes the beginning of the main part of this thesis. An exhaustive transaction description will be provided, divided into four transaction stages. Thereafter, the strategic considerations of both companies will be discussed.

The fifth section constitutes a financial analysis of the transaction. Beginning with an event study on Techem’s share price performance during the bidder competition, this performance is then juxtaposed to three different benchmarks: the DAX, the MDAX, and Macquarie. In the following section, the envisaged financing structure is examined in regard to its feasibility. Moving on, an own valuation by means of a trading multiple analysis of comparable companies on the basis of 2006 financials and a discounted cash flow analysis for 2006 and 2007 will be accomplished to cross-check strategic considerations from a financial point of view.

After determining the distinctiveness of the Techem case, the sixth section provides evidence on the interpretation and critical analysis of the bidders’ strategies, their various bids as well as management behaviour during the bidding period. In this section, especially the comparison of the outcome of the independent valuation to the actual bids is noteworthy. Finally, section seven concludes this thesis by summarising the main points and presenting an outlook for the future development of Techem.

2 M&A and Bidder Competitions– Foundations

Mergers and acquisitions is a collective term for all kind of company transactions in which a change of control occurs or in which two or more corporations are combined (Merriam Webster, 2008a). The objectives of these transactions can be divided into strategic and financial ones. On the one hand, the strategic aim of such transactions is, in most cases, to achieve growth that cannot be achieved on a stand-alone basis. Additionally, in the case of mergers, synergies between companies from the same industry may be achieved through the combination of the companies’ assets that allow a disproportionately high growth and efficiency. On the other hand, most often the financial aim of M&A transactions is to achieve a certain rate of return. To begin with, the following section outlines a theoretical course of a typical M&A transaction.

2.1 Theoretical Course of M&A Transactions

Any M&A transaction is a very complex process that requires a lot of preliminary planning and organisation before its actual completion. Prior to moving on to the theoretical course of these transactions one has to distinguish between mergers and acquisitions. In mergers, two or more companies are (voluntarily) combined into one (Merriam Webster, 2008a). Acquisitions, synonymously used for takeovers, are either the friendly or hostile takeover of one target company by another. Friendly acquisitions are defined by the fact that both companies agree on the acquisition and cooperate during the negotiations. The opposite holds true for hostile acquisitions, in which the target is reluctant to be acquired and possibly has no preceding knowledge of the bid. In general, an M&A transaction can be divided into three stages: the preparation phase, the transaction phase, and the (post-merger) integration phase (Roland Berger, 2008). The preparation phase begins with the search for an appropriate target company through a so called “screening” process. On finding this target, the acquiring company makes a public offer for the target (in case the target is listed on the stock exchange), after which the target’s management is obliged to issue a statement in regard to the offer (WpÜG, Part 3, Section 27, Sentence 1). Subsequently, a binding legal contract between the two parties called non-disclosure agreement (NDA) is signed which ensures that non-public information remains secret. It includes confidential material or knowledge that the parties intend to share. Additionally, a so called “letter of intent” is signed that is non-binding but assures both parties’ interest without finalising the transaction as well as its key terms. When the acquiring company gains access to confidential information about the target, often being made available in “data rooms” which among other data, contain unpublished financials, and important legal contracts, the due diligence process begins. In this process, the target is thoroughly reviewed and examined by the acquirer in order to enable him to make a reasonable decision about the target’s attractiveness and a possible execution of the transaction. A due diligence includes not only financial, but also legal, tax, labour, environment, market, as well as any other transaction-relevant considerations. Taking into account the results of the due diligence, the transaction is finally structured. The structure is provided in the “deal design” process which aims at achieving a win-win situation for the parties involved. The preparation phase is closed with the bidder’s financial valuation of the target.

The next phase, the transaction phase, commences with price negotiations between the bidder and the target. In this phase, the target has several opportunities to show dissatisfaction: amongst others he can take defensive measures to frustrate the bid. While in most cases the target management merely intends to raise the offer price, it is also possible that the target company does not consent to being taken over and wishes to impede the closing of the transaction. If this is not the case, the transaction is finally sealed with a final signing of a contract. Nevertheless, the transaction cannot be accomplished before the antitrust authorities have given their consent and all other closing conditions are met. Afterwards, in the (post-merger) integration phase, the target is either integrated into the bidder’s structure and corporate governance or merely managed by the acquirer.

The success or failure of M&A transactions is to be determined after the closing by means of formerly determined measures (for example the profitability’s or the share price’s development). According to Sommer (2006), shareholders should not have permitted most of the 15 biggest deals with German bidders in the last ten years if profit, revenue, and share price are taken into account. As a rule of thumb, he argues that 90% of all mergers are not promising, especially when they are on a global level.

2.2 A Game-Theoretical and Economic Approach to Bidder Competitions

Apart from analysing the theoretical course of M&A transactions, it is intriguing to evaluate such transactions from a game-theoretical and economic point of view. For this purpose, bidder competitions, a special case of M&A transactions, in which more than one company bids for the same target, will be presented as an auction process.

2.2.1 Bidder Competitions Viewed as an Auction

Competition among bidders can be illustrated in a so called open absolute English Auction. An English auction is called absolute when the auctioneer (here: the seller) does not begin the auction with a reserve price (lowest acceptable price), but permits the participants to bid openly against each other until an offer is not outbid. Then, the item (here: the target) is sold to this bidder. The underlying assumptions of an open English auction according to Khanna (1997, p. 326) are listed below:

1. All bids are publicly announced.
2. Bidders get to observe other bids before tendering their own.
3. A bidder who wishes to raise an existing bid is permitted to do so.
4. A bidder can bid any number of times.
5. The highest bidder wins and pays the value of the bid.

All of these assumptions except for 3 and 4, which are subject to legal restrictions apply to tender offers. Nevertheless, one has to add that each type of bidder has different private information about the object on sale and thus a different kind of valuation. Hence, acquiring firms are supposed to bid sequentially because they take different lengths of time to prepare a bid. After an initial bid, a competitor might realise that his synergy gains would be higher than the initial premium offered by the first bidder. Consequently, a second bidder prolongs the bidding process and gives others the chance to prepare and bid themselves. Nonetheless, the first bidder always has the option to try to “freeze out” other potential bidders by making a high opening bid (Khanna, 1997, p. 323).

In general, bids and competitive counter bids drive the tender price up. According to Ruback (1983, p. 142), each potential bidder would advance a bid until the takeover becomes a negative net present value investment. Additionally, Burkart (1999) found that if the bidders’ valuations do not differ vastly, the winning bidder has to pay a price which is close to his own valuation. Thus, the opportunity for a potential acquirer to realize a profit on the tendered shares is very restricted and the target shareholders remain the main beneficiaries. In general, if the number of bidders, and thus competition, increases, target shareholders’ returns augment (Berkovitch & Narayanan, 1991). In case the first bidder places a rather high offer, potential rivals might assume a high willingness to pay on the part of the first bidder. Accordingly, they reconsider their chances of winning and might abandon the idea of competing. Thus, according to Fishman (1988), by signalling a high valuation the first bidder can avoid the costly auctioning process. The higher the degree of expected competition, the more the offered premium goes up and so does the target shareholders’ welfare. Simultaneously, bidders suffer as they have to pay a higher price for the target than actually necessary.

There are two common frameworks that have been developed in order to investigate bidding behaviour: the independent private values (IPV) and the common value (CV) models (Milgrom & Weber, 1982, pp. 1089-1094). In a CV auction, the market value of the object on sale is the same to all participants, but unknown at the time bids are placed. Each participant independently estimates the value of the item before placing a bid. In an IPV auction, however, each bidder knows precisely his own value of the object on sale, but is not aware of the object’s value to the other bidders. According to Gilberto and Varaiya (1989, p. 64), there is no need for a bidder to bid his own valuation in order to win in such an auction. It is only necessary to bid slightly more than the closest competitor. Both models are taken up in the next section.

Generally, a big disadvantage for bidders in English auctions as well as the CV model is the so called Winner’s Curse which arises due to strong competition and bidders getting carried away during the auction. This phenomenon is described in the next section.

2.2.2 The Winner’s Curse

The Winner’s Curse is a phenomenon that occurs in CV auctions. It entails the assumption that winning bidders, having submitted the highest bid, tend to overestimate the value of the object on sale (Varaiya & Ferris, 1987, p. 65). Empirical research has shown that winning bidders usually suffer from losses. Kagel and Levin (1986, p. 894) define the Winner’s Curse by stating that a large number of bidders (6-7) leads to more aggressive bidding than a small number (3-4), resulting in negative profits. However, an overpayment will only occur if the winner fails to account for this phenomenon.

According to CV auctions, the object has the same unknown worth to all bidders. Consequently, they are only distinguished by their own valuation estimates which are derived from publicly available data. If the value estimates exceed the target’s current market value, a takeover can be expected (Varaiya & Ferris, 1987, p. 64). A divergence in these estimates not only occurs due to valuation errors, but also due to differences in the valuation method, the anticipated post-takeover synergies, differences in tax situations, and especially due to differences in the assessment of the target company’s future prospects. The bidder with the highest estimate wins the auction, but probably overestimates the item’s value (Capen, Clapp, & Campbell, 1971) and thus overpays. The more bidders take part in an auction, the more severe the Winner’s Curse becomes. The reason for this is that the probability of overestimating the item increases when more bidders enter the auction. Sometimes a bidder fails to recognize that winning the auction means that he has received the highest value estimate so that it is likely that he pays more than the target’s intrinsic value.

Several optimal bidding strategies to avoid the Winner’s Curse have been developed (amongst others to be found in Wilson, 1977; Kagel & Levin, 1986). According to Gilberto and Varaiya (1989, p. 64), in CV auctions, if bidders conscious of the Winner's Curse adopt optimal bidding strategies, the expected winning bid converges to the unknown true value with an increasing number of bidders. Being confirmed by Wilson (1977, p. 517), the latter adds that this is the case although each bidder only disposes of an incomplete information sample about the target’s value. These optimal bidding strategies involve discounting the bidder’s value estimate, in order to account for the degree of competition and uncertainty about the target’s true value. As far as the findings of Gilberto and Varaiya (1989) are concerned, they assume that the optimal bid in the CV model decreases with an increase in competition and uncertainty, whereas in IPV models bidders know their own value of the target with certainty so that there is no reason to account for the Winner’s Curse (French & McCormick, 1984). In general, bidders should bid less (in relation to their own value estimates) when the degree of uncertainty about the size of takeover gains and the degree of competition increases. If bidding close to the perceived firm value, overpayment may be the result. Additionally, the premium should decrease the more uncertain the information about the target company is.

Since most auctions, amongst them also bidder competitions, involve at least some of the characteristics of common value auctions, the Winner’s Curse is a crucial phenomenon that has to be taken into consideration when placing a bid. The disequilibrium phenomenon could correct itself given a sufficient amount of time and the right kind of information feedback. Still, the question what mechanisms, if any, insure a market memory of past mistakes, assuming that the Winner’s Curse involves a learning process, persists.

2.2.3 The Free-Rider Problem

According to Merriam-Webster’s Online Dictionary (2008b), a “free ride” is “a benefit obtained at another’s expense or without the usual cost or effort”. In economics, free riders are actors who appropriate more than their fair share of a resource, or pay less than their fair share of the creation costs. The free-rider problem deals with the issue of how to avoid or at least restrict the negative effects of free-riding. In theory, shareholders of a company would only sell their shares if they receive at least the current share price by the bidder. Nevertheless, they anticipate the post-takeover price appreciation of their shares and are not willing to sell them to the bidder to this price. Consequently, they expect a premium in order to receive some part of this future price appreciation in advance – they act as free-riders. If a firm lies exclusively in the hands of small shareholders, a whole takeover attempt could fail because of this phenomenon. Moreover, in case of a high premium, the bidder might not bid as the takeover would become unprofitable for him. Thus, the takeover price would lie somewhere between the current and the future anticipated share price. Still, the shareholder has to decide whether to tender his shares or not. He will make his decision dependent on two things: firstly, whether the takeover will be successful and secondly, if he can influence this outcome. If he concludes, that he cannot, then he decides solely on the basis of his own estimations about the takeover’s success. In case he thinks the takeover will be successful, he will keep his shares if the offer is lower than the anticipated post-takeover share price. If he assumes the contrary, he will sell his shares to any price that lies above the current share price. Houben (2000, p. 2) supposes that all shareholders have the same behavioural strategy if they are only small shareholders having the same information. Hence, the contrary of what the shareholders expect will occur. The reason for this is that if no shareholder sells his holding, because he thinks that the takeover will be successful, then the bidder will not receive any shares and the takeover attempt is doomed to fail. If, however, the shareholders expect a takeover failure, then the latter will succeed, because every shareholder will sell his shares. This is the reason why a takeover can only take place, if the bidder offers the anticipated future share price. Without the existence of transaction costs this optimum would not cause any problems, but if transaction costs are taken into account, the potential acquirer would not bid as he would suffer a loss.

The issue of free-riding has mainly been addressed by Grossman and Hart (1980). They suppose that a badly managed firm, having a management that does not act in its shareholders’ interest, has potential for improvement and will probably become a takeover target as most often each shareholder is too small to devote resources in overthrowing management. Normally, a bidder’s strategic aim would be to buy the company at a low price, reorganise it in a more efficient way and then resell it at a higher price. Grossman and Hart (1980, p. 43) show that this argument is false: any profit an acquirer can make from the price appreciation of his purchased shares represents a profit that shareholders could have made if they had not tendered their shares. If each shareholder’s tender decision will not affect the bid’s outcome, then, if shareholders think that the takeover attempt will succeed, they will not tender their shares like depicted above. As a result, a takeover bid may not be profitable even though current management is not acting in the interest of shareholders.

What are possible solutions to this free-rider problem? A first solution provided by Grossman and Hart (1980), is the so called introduction of “dilution”. In this case, the term entails a dilution of shareholders’ property rights where shares of those who have not tendered are treated differently than the bidder’s own shares. At the expense of minority shareholders, shareholders could stipulate in the corporate charter that the bidder may rule out minority shareholders from sharing profits brought about by the bidder’s improvements in the firm. For example shareholders could allow a winning bidder to vend the firm’s assets or output to a different company he owns at conditions which are disadvantageous to minority shareholders. In this case he obtains more from the bid than merely his part of the firm’s (improved) profits. Generally, shareholders realize that the more dilution they permit, the more they increase the threat of a potential bid, which is advantageous on the one hand because it makes incumbent management more efficient, but they also lower the tender price they would receive in the event of a bid, which is negative for them on the other.

A second solution might be to provide the bidder with a so called “squeeze out” right. This right coerces the remaining minority shareholders to sell their shares to the bidder on the same terms as the original offer (Yarrow, 1985). The squeeze-out right influences the tendering decision in a similar manner as dilution does. When a bid depending on the level of tendered capital is victorious, all remaining shareholders are required to vend their shares and thus may as well have accepted the original offer (Berglöf & Burkart, 2003, p. 182).

In a corporation with many small shareholders, the presence of a large minority shareholder provides a possible third solution. Possessing a pre-takeover stake in the target company, this shareholder could place a bid to acquire the remaining shares. Even in the case of free-riding, he would then profit from the price appreciation of the shares he already owned. Subsequently, the more shares a bidder can acquire prior to his tender offer, the larger his gains from a takeover will be (Choi, 1991). Still, the deal would only be profitable if the monitoring and takeover costs would be lower than the gain of the shares from the initial stake (Shleifer & Vishny, 1986a). An innovation to Shleifer and Vishny’s solution could be the introduction of an information asymmetry between the purchaser, who knows the post-takeover value of the target firm, and the target shareholders, who do not. In this case, target shareholders cannot be certain whether it is in their interest to tender their shares or not (Hirshleifer & Titman, 1990, p. 296).

The last solution entails that present shareholders sell only part of their shares and free-ride with the rest (Holmström & Nalebuff, 1992). A shareholder who holds his shares is interested in the success of the takeover attempt. Simultaneously, he has to consider that the probability of success decreases with him holding his shares. There is a conflict of goals between the intention to free-ride and actually having the possibility to do so. The solution is to find an optimum proportion of holding and selling. The more shares he sells, the higher the probability of a successful takeover becomes. At the same time, the shareholder loses the opportunity of free-riding with every sold share. The optimum ratio is supposed to be to sell the share of one’s holdings that corresponds to the percentage needed to control the company (Houben, 2000, p. 4). If, for example, the bidder needs 50% of the shares to acquire control, the shareholder has to sell 50% of his shares and can free-ride with the rest. As all shareholders act in the same way, the bidder will get as many shares as he needs to succeed.

According to Burkart (1999), the free-rider problem does not imply that profitable takeovers are impossible. If some solution is implemented or the shareholders have lower estimations about the future improvement than the bidder, takeovers are feasible but most of the profits still flow to the target’s shareholders.

2.2.4 Defensive Actions

Target management’s defensive actions have to be divided into two cases. In tender offers, on the one hand, incumbent management has no veto power as the bidder directly addresses target shareholders when asking them to tender their shares. It remains their personal decision whether to accept or reject the offer, therefore they determine the takeover’s failure or success. In merger proposals, on the other hand, the target management has the prerogative to accept or reject the offer and shareholders only get the opportunity to decide over the outcome if management puts it to a vote (Dodd, 1980, p. 106). But how do defensive actions look like in reality? A more spectacular defensive tactic is the creation of special securities, so called “poison pills” (Burkart, 1999). These “pills”, being dividends paid to the current shareholders, inflict huge financial commitments on any potential acquirer that intends to attain control without managerial approval. Another defensive tactic by target managers is to increase leverage (Israel, 1991), sell some of the assets (so called “crown jewels”) thus making the company less attractive for possible bidders, or carry out (even economically senseless) acquisitions so as to be shielded by one’s size.

In general, target management can use undisclosed information about the “real” value of the company to oppose a takeover attempt. To be able to take any actions necessary to obtain a fair bid price, shareholders have to empower their management to do so (Jaggia & Thosar, 1993, p. 447). Shareholders benefit from management negotiating and maybe also resisting on their behalf, if they are too numerous and unable to coordinate their actions efficiently. In general, there are three types of targets that successfully resist offers: the first are those who are willing to agree to an acquisition, but are simply unsatisfied with the offer as it does not mirror the firms “real value”. The second ones are those who resist because their management has a so called “preference for control” meaning that they want to maintain their jobs and prerequisites. The last ones resist simply out of the reason that they are waiting for another, potentially more advantageous offer (Baron, 1983, p. 331). A preference for control may also be given because management has the incentive to grow the company beyond its optimal size as this would increase their power by augmenting the amount of resources under their control (Jensen, 1986, p. 323).

If the bidder expects any kind of opposition from the target and he then fears that this would make new competitors enter the bidding, this may affect the value of the bidder’s initial offer. The premium-setting decision is dependent upon the uncertainty regarding the future performance in combination with the target on the one hand and the degree of competition amongst bidders on the other. According to Jaggia and Thosar (1993), the premium will augment, when the degree of uncertainty as well as competition increases. Supposed that high bid premia have a limiting effect on competition, high initial bids, also called “pre-emptive bids”, are found to discourage entry by additional companies (Noronha, Sen, & Smith, 1996; Gilberto & Varaiya, 1989). According to Noronha et al. (1996, p. 40), auctions involving multiple bidders occur more often if the target management for example introduces litigation. This strategy of delay gives other companies the time to collect information and place an own bid. Management resistance can be beneficial for shareholders as it can also signal that the target has no white knight [according to Merriam-Webster (2008c): “a corporation invited to buy out a second corporation in order to prevent an undesired takeover by a third”] but is not satisfied with the current offer, thus inducing others to formulate a potentially higher offer (Shleifer & Vishny, 1986b). Following Khanna (1997, p. 335), the management’s power to resist through increasing competition for their firm, thus letting additional bidders enter the auction, enhances the target shareholders’ welfare.

Defensive actions could also be regulated: a so called “passivity rule” introduced by Easterbrook and Fischel (1981, 1982) could set up a norm that forbids targets any defensive steps. The only actions allowed are statements to the shareholders about the offer’s and the target’s value. In this case, the extent of the target management’s preference for control would be irrelevant, as it would not be permitted to oppose an offer. Other areas of regulation are addressed in the following section.

2.2.5 Economics of Takeover Regulation

According to Burkart (1999), there are three main fields of public takeover regulation: Firstly, the disclosure threshold for holdings that primarily influences the incentives of potential bidders; secondly, the degree and means of target shareholder protection; and thirdly all discretion to perform defensive measures. In general, the latter should become subject to shareholder approval as all conflict of interest between managers and shareholders is predominantly to be found in takeovers. Shareholder control is advanced by giving them the decision power over takeover defences. In general, a regulatory framework determines how the negotiating power is divided between the bidder, the target management, and the shareholders.

A disclosure threshold determines at which limits investors have to disclose their holdings. Increasing transparency by making the investor’s identity publicly known prevents a possible acquirer from secretly buying the company’s shares or even forces him to submit an offer. The bidder can therefore not conceal his intentions and further share purchases become more and more unattractive. As a consequence, the introduction of a disclosure threshold restricts the amount of shares that a bidder can buy prior to placing a public bid. In Germany, according to Part 5, Sections 21 and 26 of the Securities Trading Act (WpHG), these thresholds are: 5%, 10%, 15%, 20%, 25%, 30%, 50%, and 75%. Still, the bidder could decide to negotiate a block sale if a large shareholder existed.

The two main obligations of regulations are to treat all shareholders equally in case of a tender offer and the Mandatory Bid Rule (MBR) which is usually thought to ensure a higher degree of shareholder protection. The duty of equal treatment is fulfilled by the bidder’s obligation to offer the same price to all shareholders which restricts his ability to stipulate the offer conditions. Concerning the MBR, no shareholder should be forced to become a minority shareholder and thus gets the opportunity of selling his shares in the case of a change of control (in Germany when the 30%-threshold is exceeded). Proponents argue that the MBR is an essential rule to defend shareholders against a possible disappropriation by the acquirer once he has succeeded. Accordingly, it is guaranteed that no shareholder has to sustain losses, as all of them get the same price which undisputedly lies above the current stock price. Also having also to pay the control premium to small shareholders can drive up the entire purchase price beyond the bidder’s willingness-to-pay (Berglöf & Burkart, 2003, p. 196). Mandatory Bids are generally unpopular to bidders as they cause additional costs. For this reason, some of the offer documents contain clear declarations that the only reason for the bid was “compliance with law” (Cleary Gottlieb, 2005) and that the high free float level of the target’s shares is to be kept. As a result, the MBR enlarges the payment to minority shareholders in case of a successful takeover on the one hand, but it reduces the probability of a takeover on the other.

Some of the regulations might have made bids more complex, contrary to what the government’s intention should be. Nevertheless, M&A activity has witnessed some records in the last years. A case in point is the development of the energy sector as outlined in the next section.

2.3 M&A in the Energy Sector – A Market Overview

Energy producers and utilities have accumulated a high amount of cash worth more than €55 bn (Lonkevich & Cimilluca, 2006) after oil prices tripled in the past five years to more than $90 a barrel. According to Lonkevich and Cimilluca (2006), the energy sector, including oil, gas, coal, and electric companies accounted for €228 bn, or 18%, of takeovers announced in 2006, making energy one of the most lucrative sectors for M&A transactions. With oil prices having temporarily reached the $100 limit, the outlook for the energy sector is supposed to remain bullish. Still, electrical utilities may have difficulties in generating higher profits because of regulation inducing them to look for possible deals. The problem is that M&A transactions have led to small companies being integrated into much larger international corporate groups. Thus, this diluted industry is now being led by people who do not possess permanent relationships anymore making the resolution of disputes, that are becoming more complex anyway, more difficult.

In times of global pressure through the regulatory environment, there is a slow but noticeable global consolidation trend. Nonetheless, it is still hard to get deals done because the industry does not support very high premiums, which makes it difficult to create transactions that meaningfully exceed stand-alone values. Especially U.S. companies have to get used to the thought of being owned by foreign companies, particularly European ones. A timely reason for this development is the strengthening of the Euro, currently traded at $1.45 (Oanda, 2008). Another reason is that European companies view the U.S. market as “fragmented with a highly attractive regulatory regime” (Deloitte, 2007). Deloitte (2007) takes the wind industry as an example and finds that especially in Germany this market is very advanced while in the U.S. the wind industry is only starting to develop. A reason for this is seen in the political landscape which has been different in Germany due to a Green Party which has been demanding more renewable energies for decades. Additionally, it sees infrastructure investments as being insensitive to commodity price changes so that these ventures would add a rather steady return. Especially in view of emerging infrastructure investment funds in the last years, energy is considered part of the investment landscape by now. These funds, being aware of the risk-return scale, include businesses with steady cash flows and “hard assets”, such as roads, bridges, and tunnels in their portfolios.

To present an outlook, state regulation will still play a crucial role on the development of M&A activity in the energy sector, particularly for financial investors (Davis & Lamb, 2005, p. 44). But with the international regulatory landscape influx and a still rather fragmented industry (Hendrickson, 2003, p. 67), consolidation might remain a future trend even in 2008. Even though Western Europe has consolidated to the point where the number of possible targets is rather restricted, currently high commodity prices might even accelerate this trend in the future. The utmost aim should be to create the legal and regulatory framework needed in order to sustain the process of liberalisation.

3 Company Profiles

Previous to providing a detailed outline of the course of the transaction, the major participants being Techem AG, the Australian Investment Bank Macquarie and its Infrastructure Fund as well as the private equity firm BC Partners together with its holding fund are introduced. All information is extracted from the respective homepages.

3.1 Techem and its Business Model

Established in 1952, Techem AG is one of Europe’s most successful players in the provision of services to the housing and real estate industries. Based in Eschborn, Frankfurt am Main, it is a leading global provider for the housing and property industry in the fields of recording, allocating and billing data on energy, water and cooling consumption. In addition to other customer services, its services range from identifying the optimum energy management and saving solution, defining and planning the technical solution, installing and programming the specific device, and maintaining, regularly inspecting as well as replacing the products when necessary. Techem has rental options available and reads mid-term figures at each changeover of occupants. Its major advantage is that all of its applications are connected with a high degree of functional safety and are easy as well as safely installable. Moreover, Techem stands for customised service packages.

After having divested its IT Services Division as of October 1, 2006, Techem’s main competencies are now split into two business segments: Energy Services and Energy Contracting. On the one hand, the segment Energy Services is responsible for the measuring and billing of energy and water consumption as well as equipment sales, rentals and maintenance. Additionally, it is in charge of home automation services. In this segment Techem is number one in Germany with 42.4 mn installed measuring devices and 7.9 mn serviced apartments (DVFA Analysts’ Conference, 2007). On the other, the Energy Contracting department is ranked fourth in Germany with 1,045 heating supply contracts and provides for the planning, financing, installation and operation of energy producing facilities since 1991 [Techem Annual Report (AR) 2006/07]. Techem is an energy contractor for the residential and commercial real estate sector offering cost effective and modular energy supply solutions. According to Techem’s Annual Report 2006/07, Energy Services accounts for 81.2% (€454.4 mn) whereas Energy Contracting contributes 18.8% (€105.0 mn) to total revenue.

Being number one in Germany and market leader in other countries, Techem is the world market leader in installed radio metering devices and makes a global turnover of €560 mn which has increased by 7% since fiscal year 2005/06. It has around 690,000 clients and a total number of 2,800 employees. Horst Enzelmüller, the Chairman of Techem’s Board of Directors has maintained a market success for more than 50 years and founded subsidiaries in more than 24 different countries (Techem Homepage, 2008). One of Techem’s main aims is to conserve resources and aid operational efficiency through the use of inventive technologies and forward looking energy management. This also entails systems for detailed consumption analyses, online services and for saving energy. In times of exploding energy prices and increasing incidental expenses, saving energy has become an imperative. Independent of the way of heating (oil, gas or district heating), Techem reduces incidental costs by making sure that the heater only fuels when the heat is actually used. Another trend has become to register consumption data via radio transmission without actually entering apartments. Therewith, Techem built up a crucial competitive advantage. All in all, Techem developed from a pure provider of metering services to a globally operating energy manager in accordance with the slogan “creating added customer value through smart solutions”. This holistic approach is unique in the industry and turns Techem into an innovation leader. Having been listed in the MDAX of the German Stock Exchange, Techem has been substituted by “Gildemeister” on December 27, 2007 due to a too small degree of free float. The fiscal development in 2006/07 showed a decreasing net profit from €57.3 mn to €48.8 mn (-18.3%). This is mainly due to €10 mn of non-recurring consulting expenses in the course of the bidder competition and depreciation costs in the context of a loss-generating biomass power plant.

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