Investor Churn

Abstract

“Continental snaps up VDO”. “Permira takes over Valentino”. “The Royal Bank of Scotland and Barclays Bank both bid for ABN AMRO”. In recent years, hardly a day went by without news leaking out of some major merger, sizeable takeover or substantial corporate investment. At the present time with the financial crisis and economic downturn hitting international markets, M & A–transactions have strongly declined across all industries and regions. Compared to its peak in 2007, the global M & A–volume more than halved in the fourth quarter of 2008 and was down by 47% for the entire year. With minus 79% the decline in private equity activities was even more dramatic.

Despite this downturn, the preceding peak in acquisitions and equity investments, the growing number of distressed asset sales, hostile takeovers and state-financed “rescue-takeovers” especially in the financial sector are consistently confronting companies and managers with new and powerful investors or groups of investors. They are oftentimes able to assert their demands even if they originally only purchased a minority stake. Hybrid financing vehicles have enabled them to invest in all corporate asset and risk classes. Debt-to-equity swaps now let them convert non-securitized debt into equity, whereupon they suddenly have or will become majority owners. As exit channels for investments are currently scarce, investors will even more focus on the operative business and tend to assert their will even against the management.

This chapter examines the factors that have triggered this trend and the impact this “investor churn” is having on companies and managers especially in times of crisis.