3 questions to smart minds
Photo: Dr. M. Schuster | SBCF

Intransparency in corporate transactions

For this 3 questions to Dr. Michael Schuster

SBCF & Cie.
Photo: Dr. M. Schus­ter | SBCF
15. Octo­ber 2014

Corpo­rate tran­sac­tions in the mid cap segment are charac­te­ri­zed by high uncer­tain­ties of market parti­ci­pants (buyers and sellers). The large number of buyers and sellers as well as the typi­cally poor infor­ma­tion situa­tion in the compa­nies lead to a parti­cu­larly strong lack of trans­pa­rency in the market for medium-sized tran­sac­tions. A distinc­tion can be made between beha­vi­oral, quality and price uncer­tain­ties. Finally, there are uncer­tain­ties on both sides regar­ding the value of the company and the achie­va­ble price. Due to the intrans­pa­rency and lack of compa­ra­bi­lity of the proper­ties for sale on the market for mid-market tran­sac­tions, the achie­va­ble price is diffi­cult to esti­mate for sellers as well as for many buyers. Compared to buyers with tran­sac­tion expe­ri­ence, such as finan­cial inves­tors, the seller typi­cally has considera­ble infor­ma­tion disad­van­ta­ges. On the other hand, the seller has an infor­ma­tion advan­tage regar­ding the quality and nature of the target company.

For this 3 ques­ti­ons to Mana­ging Part­ner of SBCF & Cie. in Munich; Dr. Schus­ter teaches at the Munich Univer­sity of Applied Scien­ces and the GGS / German Graduate School of Manage­ment and Law; advan­ced trai­ning for the Bava­rian Cham­ber of Nota­ries in corpo­rate acquisitions.

1. What uncer­tain­ties exist on the part of the seller?
Sales proces­ses prima­rily have the task of enab­ling a tran­sac­tion by suffi­ci­ently redu­cing uncer­tain­ties. Such proces­ses place a considera­ble time and finan­cial burden on medium-sized entre­pre­neurs, espe­ci­ally since a signi­fi­cant propor­tion of “rigid” costs are incur­red, regard­less of the tran­sac­tion size. There is a dilemma: On the one hand, infor­ma­tion defi­cits are parti­cu­larly viru­lent in the case of medium-sized proper­ties for sale and marke­ting efforts are ther­e­fore all the more important. On the other hand, the value of medium-sized compa­nies is also lower than that of large compa­nies, which is why marke­ting efforts and process costs are signi­fi­cantly higher in rela­tion to the tran­sac­tion value. For the seller, there are uncer­tain­ties espe­ci­ally regar­ding the beha­vior of poten­tial buyers. Are they genui­nely inte­res­ted or just looking to gather infor­ma­tion (about a compe­ti­tor)? Quality uncer­tain­ties exist because the seller does not know whether the acqui­rer is finan­ci­ally and cultu­rally capa­ble of acqui­ring and inte­gra­ting its busi­ness. This also raises the ques­tion of whether suffi­ci­ent syner­gies can be reali­zed for both sides to bene­fit from the transaction.
2. What uncer­tain­ties exist on the part of the pros­pec­tive buyer?
For pros­pec­tive buyers it is unclear what the quality of the object for sale is. Typi­cal uncer­tain­ties relate to the depen­dence on the previous owner, the know-how and moti­va­tion of the work­force, and ulti­m­ately the future cash flows. In addi­tion, pros­pec­tive buyers feel uncer­tainty about whether the seller will prove fair and relia­ble over the dura­tion of the sales process. Does the latter really want to sell his company? Does he intend to with­hold facts that reduce value? Does he want to nego­tiate covertly with other pros­pec­tive buyers?
3. What metho­di­cal solu­ti­ons exist within the frame­work of a process design that is in line with the inte­rests of the company?
Both the mone­tary and non-mone­tary results of the nego­tia­ti­ons are decisive for the assess­ment of a tran­sac­tion success. An essen­tial prere­qui­site for maxi­mum satis­fac­tion of inte­rests with regard to tran­sac­tion results is an opti­mally aligned process design. Only a process that is consis­t­ently orien­ted to actual inte­rests can ensure a satis­fac­tory result: Buyers can get a clear picture of the object of purchase at an early stage and procure the infor­ma­tion neces­sary for a purchase decis­ion. For sellers, a struc­tu­red process design is important, among other things, in order not to lose poten­tial inves­tors, but also in order not to weaken their nego­tia­ting power at an early stage (e.g. serial nego­tia­tion manage­ment instead of control­led bidding compe­ti­tion). The latter is funda­men­tally reflec­ted in the outcome of nego­tia­ti­ons and is evident right up to the phase of trans­fer­ring the company to the inves­tor after a successful closing. A profes­sio­nal, struc­tu­red process design requi­res a high level of compe­tence and expe­ri­ence and is asso­cia­ted with a considera­ble use of resour­ces (person­nel, time and finan­cial) for both buyers and sellers. Even though more and more medium-sized compa­nies have M&A expe­ri­ence, the consis­tent alignment of the process with their own actual inte­rests in parti­cu­lar pres­ents compa­nies with major chal­lenges. Inte­rest-orien­ted process manage­ment requi­res analy­zing one’s own inte­rests without getting stuck on one’s own and others’ posi­ti­ons. A successful process syste­ma­ti­cally incor­po­ra­tes the inte­rests of both tran­sac­tion part­ners. The use of exter­nal and specia­li­zed service provi­ders and consul­tants on both sides can prevent both tran­sac­tion part­ners from devia­ting too quickly from a struc­tu­red process, adop­ting rigid posi­ti­ons at an early stage and beco­ming entan­gled in sham conflicts.

Subscribe newsletter

Here you can read about the latest transactions, IPOs, private equity deals and venture capital investments, who has raised a new fund, how Buy & Build activities are going.

Get in touch

Contact us!
fyb [at]