The Sale to a Financial Investor Offers a Number of Important Advantages in Comparison to Other Sales Alternatives
The sale to a competitor as an alternative to a sale to a financial investor
The sale to a competitor will frequently lead to the full integration of the target into the buyer, whereas the sale to a financial investor will in many instances preserve operational and strategic autonomy of the firm. The integration with a competitor is typically done to realise synergies, i.e. corporate functions will be unified and centralised, plants will be closed and relocated and employees laid off. A financial buyer can only realise synergies, if it acquires several companies in one industry
A competitor could pretend to be interested to acquire a company in order to gain valuable inside information and trade secrets - this danger is typically non-existent with financial investors
Financial investors can typically move significantly quicker in the acquisition process than a trade buyer
In a strongly consolidating market, the sale to a competitor may, however, in individual cases, be the right choice both for the seller and for the target company
An Initial Public Offering ("IPO"), as an alternative to the sale to a financial buyer, often has significant disadvantages, particularly
for smaller "Mittelstand"-companies
An IPO is a long and complicated process:
Numerous minimum requirements are imposed on the company (e.g. regarding reporting standards)
Binds significant management capacity in the IPO preparation process and on
an on-going basis post completion
The IPO itself as well as the continuing investor-relations activity and reporting obligations are expensive
Reporting obligations allow competition to gain detailed insights into the company
A successful IPO and subsequent efficient trading in the company's shares require a certain minimal critical size of the company which most "Mittelstand" companies have not attained
In order to entice investors to acquire shares in an IPO, the stock is usually offered to initial investors at a discount of c.10-15% to the intrinsic value of the company
The costs of preparation and underwriting of an IPO represent a substantial percentage of the value of the company, particularly for small and medium-sized companies
The public will know the value of the company, and identities of its major shareholders
A sale of shares via the stock market has certain limitations:
The selling shareholders are often only allowed to sell down their remaining shares after a "lock-up" period of 6-12 months
In most cases, "Mittelstand"-companies will be faced with a very low trading volume - the sale of large blocks of shares via the stock market is often problematic or not possible
Large investment and pension funds, by volume the largest investors in the stock market, are often faced with restrictions and limitations regarding the companies that they are allowed to invest in; for example, many funds are only allowed to invest in large cap corporations that are part of a major index (e.g. Stoxx 50)
Analysts and banks typically pay much less attention to small firms and will hardly publish research or report about them
As a majority shareholder, manager or board member, one is faced with significant limitations with regards to buying and selling shares of the respective company (insider trading regulations)
Investors prefer IPOs in which the largest part of the proceeds will go to the company, to be used for concrete growth or expansion projects
Certain businesses which have inherently lumpy earnings from year to year (by the virtue of specifics of their respective industries and / or business models) are usually shunned by public markets which prefer companies with steadily growing, predictable earnings
Since 2001, the market for IPOs in Germany has been very difficult leading to a significant drop in the number of new issues
