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Critical analysis of investment management within company successions

Seminararbeit 2015 29 Seiten

BWL - Controlling

Leseprobe

Table of Contents

Executive Summary

Table of Contents

List of Abbreviations

List of Figures

1. Introduction
1.1. Problem statement and objectives
1.2. Scope of work

2. Fundamentals on investment management and company successions
2.1 Company successions
2.1.1. Characterization of company successions
2.1.2. Phases of company successions
2.2. Investment management
2.2.1. Characterization of investment management
2.2.2. Funding possibilities and investment purposes

3. Private equity as an opportunity of equity financing
3.1. Fundamentals of private equity
3.2. Investment process of private equity
3.3. Exit strategies
3.4. Advantages and disadvantages of private equity

4. Critical appraisal
4.1. Opportunities and advantages of investment management
4.2. Limitations and risks of investment management

5. Conclusion

ITM Checklist

List of literature

Web references

List of Abbreviations

illustration not visible in this excerpt

List of Figures

Figure No. 1: Corporate lifecycle and funding possibilities

Figure No. 2: Sources of funding a PE financing

Figure No. 3: Order of events of PE financing

Figure No. 4: Qualitative and quantitative requirements of PE financing

Executive Summary

The funding landscape in Germany, including corporate funding, has changed significantly in recent years. The main reason for this change is the banking and financial market crisis through which profitability and risk considerations have become much more important in the business policies of financial institutions nowadays.

At the same time, analysts are talking about the biggest change in leadership of the post-war period in medium-sized companies in Germany. 1 Many family businesses were founded after 1945, so that the founders have to start considering a potential successor regime, as they are getting older. This includes high financing needs (in the form of the purchase price, taxes and severance pay) that cannot be fully covered by the successors in most cases.

With respect to the outstanding importance of these two main aspects, the aim of the present work is to show the opportunities and risks of investment management and especially funding by private equity in the context of corporate succession.

The conclusion of this paper finally shows that there are various opportunities and risks in the context of investment management regarding corporate successions. Each form of financing has its advantages and disadvantages, which must be analyzed carefully and according to the company´s needs and strategies before deciding which form of financing should be chosen.

1. Introduction

The funding landscape in Germany, including corporate funding, has changed significantly in recent years. Against a background of increasing international competition and, above all, due to the banking and financial market crisis, profitability and risk considerations have become much more important in business policies of financial institutions nowadays. These circumstances impede the procurement of capital, especially for small and medium sized corporations.2

At the same time many companies will have to regulate their successions in the future. According to the IfM Bonn, around 27,000 companies per year will be handed over to a successor from 2014 to 2018.3 In fact, analysts are talking about the biggest change in leadership of the post-war period in medium-sized companies in Germany.4

Many family businesses were founded after 1945, so that the founders have to start considering a potential successor regime, as they get older. This includes high financing needs (in the form of the purchase price, taxes and severance pay) that cannot be fully covered by the successors in most cases. For approximately half of all external successions, it is expected that the possibilities of internal and external financing will not be sufficient in order to close the funding gap.5

1.1. Problem statement and objectives

In the past years more and more articles are published in the daily press, which focus on succession problems of medium-sized companies in Germany. The typical unity of ownership and management leads to succession issues in the life cycle of a family business at some point, because not only the owners have to be replaced but also the management. This aspect is an existential problem.6

According to calculations of the IfM Bonn about 71,000 companies annually have to solve the question of succession.7 The number of companies that will not be taken over from family members increases and even if suitable successors are found, high costs remain which cannot be fully covered by most of the successors. At the same time the financial market crisis caused changes to capital adequacy and risk management, which makes financing more difficult.

With respect to the outstanding importance of these two main aspects, the aim of the present work is to show the opportunities and risks of investment management and especially the funding by private equity in the context of corporate succession.

1.2. Scope of work

The present assignment consists of five chapters. In the first chapter the problem and the different parts of this work are presented.

Chapter 2 consists of two sections. The first subsection deals with corporate succession. Here, the term company succession is first explained, and in a second step, the individual phases of a succession process are described. The second subsection deals with investment management, its characteristics and its financing and investment purposes.

This is followed by chapter 3, in which the focus is laid on the subject of private equity as a special form of equity financing. Here, the basics of PE financing and the investment process of PE financing are shown. In addition, the exit strategies and the benefits and limitations of PE financing are discussed.

Chapter 4 presents a critical analysis of the previous explanations. Here, the opportunities and advantages as well as limitations and risks of investment management are reviewed.

The conclusion is presented in chapter 5. Furthermore, this chapter gives an outlook on the development of equity financing in the context of company successions.

2. Fundamentals on investment management and company successions

The following chapter consists of two sections. The first subsection deals with company succession. First, the term company succession will be explained and in a second step the individual phases of a succession process will be described. The second subsection deals with investment management, its characteristics and its financing and investment purposes.

2.1 Company successions

2.1.1. Characterization of company successions

The term "corporate succession" describes the transfer of ownership of a business and the related operational management of one person or group to another. Accordingly, both the property as well as the management must be incumbent to the person transferring. It is basically conceivable that the transfer of ownership and leadership are made at different times and to different persons or groups of persons.8

In literature, the concept of succession problems is discussed mainly in the context of family businesses, but it basically applies to any form of business.9

The following chapter will describe the stages of business ownership in detail.

2.1.2. Phases of company successions

As mentioned above, the most frequent trigger of succession problems is the business owner’s age. The search for a suitable successor is usually time-consuming and highly complex. Therefore, succession planning should be done carefully and with the assistance of external experts and experienced consultants such as business consultants, tax advisors, or accountants.10

Basically, the process of a succession can be divided into the planning phase of the succession, into deciding on a succession plan and into enforcing and monitoring the planned company succession.11

The planning phase of succession begins with target formation. This serves to create transparency by defining the goals associated with the corporate succession. The outgoing contractor must take into account both, the interests of the different stakeholders as well as his personal and family goals.12 In order to achieve the succession objectives, there are four alternatives: internal family succession, foreign management through (temporary) lease or transfer of the management to foreign managers, corporate independence by holding a minority stake or company sale.13

As a part of alternative assessment, the alternatives need to be evaluated in terms of their suitability. Their suitability depends on whether and to what extent the succession objectives can be achieved with an alternative. Through the use of a scoring model as a rational-analytical approach, however unintentional emotional influences can be prevented in the decision-making process. Thus, the selection of the succession alternatives takes place in a targeted and transparent manner.14

The results of the planning phase should then be documented and concretized in a succession plan. This makes it possible to consider deviation through ongoing control.15

Procedures for the preparation and training of a chosen successor and procedures to increase the attractiveness of a company for an external successor serve the enforcement or implementation of a succession.16

Finally, the control of a succession leads to indications of deviations that may threaten the achievement of objectives. The resulting adaptation measures are an important prerequisite for realizing a business succession.17

2.2. Investment management

2.2.1. Characterization of investment management

Nowadays, expansion and diversification through acquisitions of companies and product lines are part of the daily business of companies. In increasingly shorter periods, companies establish subsidiaries, strip holdings and restructure the portfolio of investments. 18 In order to identify which parts of the company might be outsourced and which corporate investments would bring a profitable return, companies and holding corporations need an effective and efficient form of investment management.

The term investment management basically sums up all operational and administrative functions of a company in relation to the affiliated company holdings. A subtask of investment management is investment controlling, which influences planning and control by coordination, support and administration of holding companies with the focus on achieving the best possible overall corporate goals and objectives for individual company.19

The following chapter serves to show funding possibilities and investment purposes for companies on the one hand and for corporate investment corporations on the other hand.

2.2.2. Funding possibilities and investment purposes

In the life cycle of a business, various financing phases are differentiated in which equity is provided. In this context the term "private equity" is used as a generic term for the entire market of private corporate finance, which also includes buy-out financings and hybrid forms of financing such as mezzanine capital. Subordinate to the term private equity, is the submarket of venture capital, which refers to the financing of young, innovative companies in the early stages of development and to established companies in later stages of development.20

With regard to the events of equity financing, four phases of financing are distinguished. The early phase of funding includes the idea funding (seed funding) and the establishment funding (start-up funding).

In the late phase of a company lifecycle the funding of growth (expansion financing), the changes in ownership (replacement financing), the renovation (turnaround financing) and the pre-IPO processes (bridge financing) are financed. 21 With increasing corporate maturity buy-outs by the company’s own management (management buy-out) or by a foreign or external management (management buy-in) can be used as a form of financing. 22 A relatively new investment strategy is the equity-like configuration of mezzanine capital, which can be offered, for example in the form of an atypical silent partnership.23

In addition to these basic possibilities of financing there are different types of exit solutions that have emerged as strategies for investment management, especially in the private equity segment. These possibilities are trade sales (sale of the shares to an industrial investor), initial public offerings (IPO or going public), buy-backs (repurchase of shares by the former owner), secondary purchases (sale of company shares to other private equity companies or to financially interested partners) and liquidations. These strategies are discussed in detail in chapter 3.3..

illustration not visible in this excerpt

Figure No. 1: Corporate lifecycle and funding possibilities 24

After having discussed the funding possibilities from the target company´s point of view, the focus will now be switched to the investment purposes of corporate investment corporations.

Usually, strategic buyers are existing companies in search of a sustainable improvement in their market position by the purchase of another company or of business shares. The income or the return of the potential acquisition is not in the focus of this deal, but rather its sales and market shares. With these purchases, companies want to improve their position in the market or attain leadership, achieve synergy effects and economies of scale. Moreover, companies may wish to expand their product range or break into foreign markets. 25

Financial investors act as buyers of companies or business units to achieve the highest possible return. These financial investors are banks, insurance companies, pension funds, corporations or wealthy individuals. Even classic investment companies that invest in more traditional sectors and risk associate companies that put their focus on high-growth technology companies are clearly focusing on return considerations when investing in other companies. Therefore, a feasible exit within three to five years plays an important role.26

The purchase of a company by a person or a group of people, who want to manage the company on their own, is best described by the term entrepreneurship. The main advantage of buying a business is that it allows the buyer to stat the business activities directly, since products, premises, production facilities, employees and customers are already available. When buying an existent company, however, it must be remembered that product range, sector and structure of the company are largely predetermined and cannot easily be changed by the new owner. Every entrepreneur has his own style of leadership, and especially for small and medium-sized enterprises, which are strongly influenced by the person of the entrepreneur, a change of leadership is always associated with adaptation processes.27

3. Private equity as an opportunity of equity financing

While the previous chapter has presented a general explanation of the terms business succession and investment management and explained the theoretical foundations of the succession process and funding opportunities, the following chapter will focus on the area of private equity.

Since sales to competitors or even the liquidation of a company are often unsatisfactory solutions within a company succession 28, the commitment of financial investors is becoming increasingly important. 29

Private equity can offer numerous opportunities to medium-sized companies, but many companies are still skeptical towards this form of financing. Therefore, this chapter shows the basics, the process and the exit of a private equity financing in order to provide information that may solve the concerns about this type of financing. In addition, a discussion on whether private equity can solve the financing problems of the SME`s will be performed and an examination on the risks and limitations of this form of financing will be carried out in this chapter, too.

[...]


1 Cf. Kempert, W. (2008), p. 22.

2 Cf. Trautvetter, A. (2011), w.p.

3 Cf. Huber, A. (2014), p.4.

4 Cf. Kempert, W. (2008), p.22.

5 Cf. Business and Innovation Centre Kaiserlautern (2006), w.p.

6 Cf. Berens, W., Brauner, H., Frodermann, J. (2005), p. 24.

7 Cf. Business and Innovation Centre Kaiserlautern (2006), w.p.

8 Cf. Hauser, H.-E.; Kay, R.; Boerger, S. (2010), p. 9.

9 Cf. Hohmann, D. (2005), p. 13.

10 Cf. Brost, H., Faust, M., Thedens, C. (2005), p. 64.

11 Cf. Becker, W. (2001), w.p.

12 Cf. Stephan, P. (2013), p. 200.

13 Cf. Meyering, S. (2007), p. 81.

14 Cf. Stephan, P. (2013), p. 200.

15 Cf. ibid.

16 Cf. Von Andreae, C. (2007), p. 154.

17 Cf. Stephan, P. (2013), p. 200.

18 Cf. Kaschytza, J., Wolter, T. (2008), w.p.

19 Cf. Ottersbach, J. (2003), p 203.

20 Cf. Schmeding, C., Simmert, D. (2010), p. 132 ff.

21 Cf. ibid.

22 Cf. Pott,O., Pott , A. (2012), p. 354 ff.

23 Cf. Brüse, M. (2011), p. 31.

24 Cf. Schmeding, C., Simmert, D. (2010), p. 134.

25 Cf. Fueglistaller, U. Müller, C., Volery, T. (2008), p. 136.

26 Cf. ibid.

27 Cf. Sobanski, H., Gutmann, J. (2013), p. 204.

28 Cf. Hofelich, M. (2004), p. 12.

29 Cf. Keller, M.(2004), p. 12.

Details

Seiten
29
Jahr
2015
ISBN (eBook)
9783668364325
Dateigröße
832 KB
Sprache
Englisch
Katalognummer
v346474
Institution / Hochschule
FOM Essen, Hochschule für Oekonomie & Management gemeinnützige GmbH, Hochschulleitung Essen früher Fachhochschule
Note
1,7
Schlagworte
critical

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Titel: Critical analysis of investment management within company successions