AIXTRON and its effects on M&A deals
In May 2016, Germany-based Aixtron SE (AIXTRON) and Fujian Grand Chip Investment Fund LP (GCI) had agreed on GCI’s public takeover of AIXTRON, including its US subsidiary Aixtron, Inc. Later in July 2016, GCI issued a voluntary public takeover offer (valued at EUR 670 million) to AIXTRON shareholders. The offer was conditional upon receiving investment control clearance in Germany and the United States of America.
In Germany, after having issued the required clearance certificate in September 2016, the Federal Ministry for Economic Affairs and Energy (BMWi) obtained new security-related information on the AIXTRON business, presumably from US intelligence services. As a consequence, the BMWi revoked clearance and initiated formal investigation proceedings under the German Foreign Investment Law in October 2016.
In the United States of America, the Committee on Foreign Investment in the United States (CFIUS) denied clearance and referred the case to the President recommending prohibition of the acquisition. On 2 December 2016, President Obama prohibited the acquisition of US AIXTRON business on national security grounds. Subsequently, GCI announced the withdrawal of the takeover offer with the effect that the BMWi terminated the formal investigation proceedings in Germany without deciding on the merits.
A few days after President Obama prohibited the AIXTRON acquisition, US lawmakers recommended to block another Chinese takeover, i.e. the USD 1.3 billion buyout offer for Lattice Semiconductor Corp., a US based company, from Canyon Bridge Capital Partners Inc., a private equity firm backed by investors in China.
The failure of the AIXTRON acquisition has raised concerns when Chinese investment into Germany is at an all-time high. Germany has been the top European destination for Chinese deal activity in 2016. According to Dealogic, Chinese companies have acquired German companies at the rate of about one a week since January 2016. In total, Chinese companies have spent more than USD 11 billion on German companies in 2016, which is substantially more than the previous record of USD 2.6 billion in 2014.
In addition to severe losses for AIXTRON and its shareholders, the AIXTRON case has contributed to a growing unease in the global M&A market. It is controversially discussed in M&A practice whether this has been a singular event or must rather be considered as manifestation of a larger protectionist trend.
In any case, from the perspective of legal due diligence, foreign investment control should more than ever be viewed as a relevant topic. Going forward, it will be an important action point at an early stage of the transaction process to analyse whether and to what extent such transaction may affect national security or other relevant political interests. Such analysis requires a comprehensive review of all potential direct and indirect acquirers on the one hand and the target company and its product portfolio on the other hand.
Reforms to the German competition law regime
On 28 September 2016, the German Cabinet announced a draft of the revised version of the German Act against Restraints of Competition (ARC).
Some of the most far-reaching and potentially most complex amendments relate to the German merger control provisions. Under the current law, concentrations have to be notified to the German Federal Cartel Office (FCO) in Germany if: (i) all undertakings together generated EUR 500 million of turnover worldwide in the last financial year; (ii) one undertaking generated EUR 25 million in Germany; and (iii) another undertaking generated EUR 5 million in Germany in the last financial year. Under the revised law, where the second domestic threshold of EUR 5 million is not triggered, a notification will be required if the value of the consideration received from the acquirer exceeds EUR 400 million and the target is active “to an appreciable extent” in Germany.
The supplementary threshold was proposed following Facebook’s acquisition of WhatsApp for approximately USD19 billion in 2014. Despite concerns about the effects of that transaction on the German market, the FCO did not have jurisdiction to review the deal as WhatsApp’s turnover in Germany was too limited to fulfil the current thresholds. The FCO is keen to extend its jurisdiction so that it has the power to review such transactions, in particular in the digital industry, where the target (e.g. a start-up) does not generate sufficient turnover in Germany for the deal to satisfy the thresholds of the current ARC but where the target has extensive innovative capacity, which is reflected in the substantial purchase price paid by the acquirer.
However, it should be noted that, in principle, even pharma deals could fall within the ambit, provided target has activities in Germany.
The FCO has indicated that it will issue guidelines about the application of the new threshold.
A number of reforms will also be made to the relevant national law concerning cartel damages actions. The majority of the changes will simply implement requirements of the European Damages Directive.
Further, the relevant provisions relating to the abuse of a dominant position will be adapted to the peculiarities of digital markets. This will make it easier for the German authorities to regulate digital players such as internet platforms in future. In particular, it will be possible to define a relevant product market for services rendered without charge.
The draft law also stipulates that additional factors relevant to the digital age should be taken into account when assessing market power and two-sided markets. For example, in future, network effects, switching costs for users, innovation-driven competition and access to competitively relevant data will be considered. An examination of these factors should help the FCO appraise the competitive situation on platform markets more accurately.
Warranty and Indemnity Insurance
In the last two years, there has been an increasing acceptance of Warranty and Indemnity Insurance (W&I Insurance) in the German M&A market. In fact, many believe that 2016 finally brought the breakthrough of W&I Insurance in Germany. Until a few years ago, W&I Insurance had been marketed by insurance brokers with limited success.
Simply put, W&I Insurance is a tool used to transfer the liability for a breach of a warranty or indemnity from a seller under an agreement to an insurer under a policy against payment of an insurance premium. The insurance can be the decisive factor for bridging the potential standoff between the seller seeking a clean exit and the purchaser seeking warranty and indemnity protection. This can help to significantly reduce both parties’ inherent risk in doing a transaction.
According to market participants, in 2016, a large number of private equity exits and also many sales by strategic investors were combined with a so-called ‘seller-buyer flip’ or ‘stapled’ W&I Insurance proposal, i.e. a W&I Insurance process initiated by the seller with a view to transfer the process to potential acquirers which can then negotiate and finalize a W&I Insurance as part of their acquisition process (buyer insurance). This follows the increasing global trend for insuring M&A deals.
In the case of a ‘stapled’ W&I Insurance proposal, the sale and purchase agreement for a transaction prepared by the seller typically includes operative warranties which are insurable under the W&I Insurance. In turn, the seller significantly limits its own liability for breaches of warranties, e.g. to a maximum amount of 1% of the enterprise value of the sold business. In many cases, the maximum liability amount of the seller under the sale and purchase agreement is the same as the retention amount under the W&I Insurance policy. Costs for a W&I Insurance are typically in the range of 1 to 3% of the policy limit.
For a buyer, taking out W&I Insurance can be attractive, in particular if the buyer does not have the negotiation power to factor inherent risks of the transaction into the purchase price or to request adequate warranties and indemnities from the seller. In addition, a buyer’s preparedness to accept a W&I Insurance proposal from a seller or to even suggest such a concept on its own initiative (if not proposed by the seller) can result in a competitive advantage in sales processes with multiple bidders. However, the more bidders generally accept a W&I Insurance proposal, the more are potential other bidders obviously forced to follow this route as well.
Trends in private equity deals
As per a recent survey on private equity deals, a large majority of respondents believe that Germany will continue to be attractive for private equity investments over the next five years. In addition to conditions which foster private equity investments on a global scale (e.g. cheap financing and high unused fund amounts waiting to be invested), quality companies, good economic conditions, skilled workforce, strong performances by the portfolio companies and developed infrastructure are among the reasons cited for the popularity of Germany as a destination for private equity investments.
At the same time, market participants are of the opinion that private equity transactions will become more complex. In particular, straightforward 100%-acquisitions by private equity investors are expected to become less frequent. A number of trends in private equity deals have contributed to this, including the following three which have been increasingly seen in Germany in the last few years:
Firstly, minority investments have become more common in larger private equity transactions in the German M&A market. Some attribute this to an intensified competition for assets resulting from a declining number of proprietary deals and an increasing number of auctions.
Secondly, co-investment is gaining strength in Germany. A co-investment is made when an investor accepts the fund manager’s invitation to directly buy a stake in one of the vehicle’s portfolio companies.
Potential co-investors are in particular attracted by transparency, higher net returns through lower fees (in some cases no fees) and the prospects of boosting returns due to greater deal selectivity. For some, in particular those building their own internal investment teams, co-investments offer the opportunity to invest alongside an experienced general partner (GP) and thus, gain experience in direct investments.
For the GP, allowing co-investments provides it the flexibility to execute large transactions without drawing too much money from the fund.
Thirdly, private equity firms nowadays are willing to team up with other financial investors to enhance their chances of winning public auction processes.
These days, bankers will often pitch a potential target to several dozen potential buyers. In the past, they often used to approach only a smaller group of parties. That means the opening round of an auction can nowadays often see in excess of a dozen bids, with many more staying in the game right up until a winner is announced.
The downside of the process is that as the bidders that make it to the final rounds have no exclusivity, they are spending money for the due diligence, without any guarantee of ending up on the winning side.
In such a situation, teaming up with other bidders can increase a private equity investor’s chances of winning an auction, reduce costs and combine know-how for the investment.
Recent transactions
Hengeler Mueller advised Linde AG on its envisaged USD 65 billion merger (merger of equals) with Praxair Inc., under a new holding company through an all-stock transaction. The companies have signed a non-binding term sheet and expect to execute a definitive Business Combination Agreement as soon as practicable.
Hengeler Mueller advised real estate funds managed by Blackstone on its acquisition of OFFICEFIRST Immobilien AG from IVG Immobilien AG. OFFICEFIRST Immobilien contains IVG’s carved out strategic core portfolio. With 97 properties worth about EUR 3.3 billion (reporting date 30 June 2016), OFFICEFIRST Immobilien is one of the largest owners of office properties in the German real estate market.
Hengeler Mueller advised Carl Zeiss AG on the sale of 24.9 per cent stake in its SMT division to ASML. The Dutch company ASML is the world's biggest provider of semiconductor lithography equipment which is used to produce integrated circuits (microchips). The purchase price is EUR 1 billion in cash.
Hengeler Mueller advised General Electric on its acquisition of a 75 per cent stake in Concept Laser GmbH. Concept Laser designs and manufactures powder bed-based laser additive manufacturing machines.
Hengeler Mueller advised Innogy SE on its successful IPO with the initial listing of its shares on the Frankfurt Stock Exchange. The EUR 5 billion Innogy IPO is the largest IPO since 2000 and the fourth largest in the history of Germany.
Hengeler Mueller advised Cinven, a leading European private equity firm, on the the sale of SLV Group (SLV), headquartered in Germany. The buyers are private equity funds advised by Ardian, a private equity firm based in Paris. SLV was founded in 1979 and is a provider of residential and technical lighting.
Hengeler Mueller advised Liaoning Dare Industrial Co. Ltd. (Dare Group) on the acquisition of Carcoustics Group which is based in Leverkusen, Germany and manufactures acoustically and thermally effective products for the automotive industry and other industrial sectors. Dare Group is headquartered in Fuxin City, China. Its business includes industrial diesel engines, automotive interior parts, high pressure CNC washing centers, as well as the provision of financial services.
Hengeler Mueller advised SGL Group, one of the world’s leading manufacturers of carbon-based products and materials, on the sale of its Graphite Electrodes Business to Showa Denko, a Japanese chemical company.
Hengeler Mueller advised Konecranes group companies on the sale of STAHL CraneSystems GmbH to Columbus McKinnon. Konecranes Oyj is a listed engineering company specialised in industry and crane process technology based in Hyvinkää, Finland.
Hengeler Mueller advised Deutsche Bank AG on its Conditional Pass-Through Structured Covered Bond Programme guaranteed by SCB Alpspitze UG, the first debt issuance programme of Deutsche Bank for structured covered bonds. The programme size is EUR 35 billion and there are inaugural series expected to be issued under the programme for a total nominal amount of EUR 8.5 billion. The programme is among the largest European structured covered bond programmes and is based on a robust and highly efficient legal structure.
Hengeler Mueller advised the banking syndicate consisting of Commerzbank Aktiengesellschaft, Deutsche Bank AG, London Branch, HSBC Bank PLC und Société Générale with respect to the successful issuance of a bond by TUI with a total volume of EUR 300 m.
Hengeler Mueller advised Sonic Healthcare Limited, Sydney, Australia on the acquisition of the Staber Laboratory group, based in Munich. Founded in 1982 by late Dr. Fritz-Georg Staber, the group today operates three hub laboratories in the cities of Munich, Dresden and Kassel as well as 14 regional, specialty and hospital laboratories across Germany.
Slaughter and May and Hengeler Mueller advised Essentra PLC on the divestment of its Porous Technologies business to Filtration Group. The transaction values Porous Technologies at GBP 220 million (free of cash and debt). Filtration Group is an affiliate of Madison Industries.
Hengeler Mueller, Bredin Prat, Slaughter and May along with Paul Hastings, Wolf Theiss and Mori Hamada advised Chicago-based Filtration Group on the acquisition of the industrial filtration business of MAHLE Group. The transaction involved the following jurisdictions - Germany, China, France, Japan, Poland, Romania, Hungary, USA and Great Britain.
Hengeler Mueller and Bredin Prat advised Groupe BPCE on the acquisition of FIDOR Bank AG. Founded in 2009 by its CEO Matthias Kröner, Fidor is one of the world's first ‘Fintech Banks’, pioneering the collaboration between traditional financial services and technology businesses and having developed an innovative approach to retail banking and a proprietary digital banking platform. Groupe BPCE is one of the ten largest European banking groups.
Hengeler Mueller and De Brauw Blackstone Westbroek advised Stirling Square Capital Partners, a leading pan-European mid-market private equity firm, on the sale of the ESE Group (ESE), a leading European temporary waste storage solutions provider, to RPC Group PLC for a consideration of EUR 262.5 million. ESE is headquartered in Maastricht, The Netherlands.
About the firm’s India Desk
The India Desk advises Indian companies on their business activities in Germany and in accompanying German companies to India. Members of the India Desk regularly visit India to meet corporates, law firms, banks and auditors and also to attend conferences based on different topics like IT and foreign investment in India.
