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Volume 2/05  -  23.03.2005

Dear Sir or Madam,

Easter is here. In just 90 days it will be June 30th, 2005. There’s an old saying which is truer today than ever: “What you haven’t started by the middle of the year won’t yield any fruit by year’s end.” You experience this law day for day in your project business, in your search for new managers, or in the acquisition of new customers.

We are familiar with this rule from our M&A business. We know that the lead time for a successful purchase or sale of a company lasts on average 6 months, and sometimes longer. Whoever is looking for a successor or investment partner within 2005, whoever wants to increase revenues with a company acquisition; the commencing steps have to be taken now at the latest.

Our current portfolio includes 75 enquiries and exclusive mandates for concrete M&A projects. A selection of cases are presented in today’s JP Director’s Report. If you have questions about these projects, please give us a call or send us an e-mail.

If you are mulling over any other enterprising visions such as “How do I take a competitor out of the market?” or “How do I finance my growth?”, then you shouldn’t hesitate to contact us. We can provide you our support which is based on years of experience to help you to realise your visions.

We wish you happy Easter.

Best regards,

Heinz Jäger
-CEO, JP Mergers & Finance AG-

Marek R. Racieski is the new JP Senior Advisor in Poland

Since mid-March 2005, the former Managing Director of DEC Digital Equipment Poland, Marek R. Racieski, is the new partner of JP Mergers & Finance AG in Poland. In the course of his long and successful career, Racieski (56) has gained experience in the management of various renowned high-tech companies such as Danfoss, ComArch, Compaq and Computer2000 as well as with DEC. JP’s CEO Heinz Jäger is delighted about the latest and prominent addition to his team. “With Marek Racieski, we were able to gain a high-profile top manager for our team in Poland. We are highly delighted about our latest colleague and hope for a great deal of success together in our young Polish venture.

Author: Heinz Jäger, CEO, JP Mergers & Finance AG

Topics of this issue

Selected acquisition chances in Germany and Poland

Leading steel trading house seeks investment partner to take over ca. 50 % of company shares.

Profile:

• Revenues: € 60m and growing strongly
  85 employees

• Continuing good profit situation (over 5 % of revenues)

• Located in one of Poland’s principal industrial areas

Project no.: 38760

Brewery in north-eastern Poland seeks acquirer of up to 100 % of company shares.

Profile:

• 80.000 hl output

• High proportion of speciality beers
   

Project no.: 46131
 

Wine bottler and trader in southern Polish conurbation seeks investor to support further growth.

Profile:

• Products: wine, fruit wine, aperitifs, liqueurs

• Revenues: € 3.5m

• 40 employees

• Profitable

Project no.: 51755

One of Poland’s leading tobacco wholesalers seeks investment partner.

Profile:

• Revenues: € 50 – 100m

• Supplies over 1500 wholesale outlets

• Proprietary, fast growing line of outlets

• Sustained profitability

Project no.: 32777

Investor group seeks potential acquisitions Europe-wide in the hotel sector.

Requirements:

• Business hotels in the exclusive 4-star segment

• At least 150 rooms

• Located close to large European cities (up to one hour travel time from an international airport)

• Adequate leisure facilities

• Expansion potential

Project no.: 13784

Measurement and control technology product manufacturer based in southern Poland seeks cooperation partner.

Business description:

• Revenues of currently ca. € 10m

• Long-term customer relationships in the electrical and automotive industry (e.g. Siemens, ABB, Fiat)

• Certified to ISO 9001 and ISO 14001 and others

• Modern, high-performance production lines

• Well connected production sites with potential for expansion

Project no.: 51409

Polish metal working company seeks investors / cooperation partners.

Product range:

Metal work, for example:

• Fittings and tanks for yacht building

• Metal constructions for wind turbines

• Commissioned work in stainless steel and aluminium

Motor technology:

• Manufacture of crank shafts and motor components

• Refurbishment of (diesel) motors

Business description:

• Revenues: € 2m

• 120 employees

• Based in northern Poland

Project no.: 45667

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Keeping up appearances

Recently I met up again with the M.D. of a mechanical engineering company - let’s call him Mr. Maier - while on my tour through the Ruhr district. He proudly showed me the previous year’s provisional accounts, just 5 weeks after the end of year. That’s what we were there to talk about; about reporting techniques, about how to make things appear, and about the image to be projected to the outside world.

The strong growth in revenues most certainly left visible traces in the balance sheet. Preferably not in this way, though! In contrast to the increased revenues and thanks to the efforts of Mrs. Maier in the accounts department, the sums outstanding had been significantly reduced. I wasn’t sparing with my praise, as this of course reduces the financial burden on the liabilities side. The balance sheet total was down from € 12 million to just € 10 million, and that within just one year. I marked this as a “good”!

Conspicuous in its absence was long-term debt from the liabilities. This can be interpreted in various ways, none of which are necessarily negative. So the evaluation is still on the sunnier side.

But what has happened to the profit? Last year it was € 1 million, corresponding with a solid return on sales; and yet this year it’s a measly € 1 million despite a marked increase in sales. Our previous meetings hadn’t given the slightest clue about a collapse of this extent. The criticism rooted in my query irritated Mr. Maier somewhat. The construction of the showroom halls that were completed to a great extent in the previous year had of course cost money. And the move into the newly leased production halls, fitting them out, all those installations; that didn’t come for free… But now there’s twice the capacity available, ready to handle the increases in sales now and in the coming year. So for the moment we stay patient and say nothing.

Oh yes, and what about the equity? Over all it adds up to 20% of the balance sheet total; enough to live from, but too little for investment and expansion. True to form, the previous year's profit is shown in the proper manner, although the losses carried over from the founding year are shown too. Like underwear hung out to dry. He immediately follows my suggestion to write-down the capital in the balance sheet by setting off the losses carried forward against the available liable capital. That doesn’t affect the net equity capital one bit, but at least that minus number is gone and the associated questions with it.

The P&L, or accountant-speak for profit and loss statement, shows the strong growth in revenues, but also shows over-proportional costs for labour and materials. Well, that’s the price of the aforementioned construction works carried out last year. Integrating those costs in the P&L is one way to get “one up” on the Inland Revenue, I was advised.

Now we’ve come to the point where we have to think things through again.
Naturally enough, showing the costs of investment reduces profit and thus the tax burden. But it makes a real mess of the way things appear. Calculating roughly, we came to an amount of € 2 million in the previous year and at least € 1 million in the year before that. There’s no point discussing 2003 any longer as the books are closed already. How the extra € 1 million in profit would have looked back then! The annual financial statement for last year can still be shaped, however. I demonstrate with calculations: capitalise the investment of € 2 million so that it appears in the balance sheet and is removed from the P&L; this strengthens the general assets to give him more muscle. Technically, the increased balance sheet total now adds up to € 12 million. His profit simultaneously rises by € 2 million to € 2.1million. That would have a completely different effect on the P&L. It might even beat the return on sales from 2003! In the balance sheet, presenting this profit would automatically increase the equity capital by € 2 million to compensate for the increase in assets. And his equity ratio would increase from 20% to 30%. This wouldn’t change the liquidity in any way, and yet the balance sheet takes on a completely new character. It would offer greater transparency to any observer. It would make critical questions like my earlier one completely superfluous, and the increased margin would even command respect. A completely different position with banks and creditors!

Mr. Maier wants to talk with his auditor and to consult with his tax advisor about the effects on taxation.

It’s certainly not all about looks; but “You never get a second chance to make a first impression”! Wouldn’t you agree?

You may agree that seeing things from the controller’s point of view, or that of anybody reading the balance sheet, can give us a better insight into the perspective of external lenders and creditors. Slight technical changes that don’t actually have any effect on the real world can provide us with a far better basis to present to outside observers. That’s customer service! For you, too?

Author: Dr. Dieter Kurandt - Senior Advisor, JP Mergers & Finance AG

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Interview: Financial Instruments for Companies with Perspectives

HS*: What distinguishes a factoring broker?

Kibgies: Unlike an agent or representative, a broker is legally obliged to exclusively represent the interests of his client, and this applies equally to factoring brokers. Further, the broker is obliged to provide best advice by providing the most advantageous offer that is in line with the client’s aims and intentions.

HS: And how exactly is this carried out?

Kibgies: Based on a detailed examination of company data, factors are selected to receive an invitation to bid that contains data relevant to their calculations and general information about the client. After receipt of the bids, the conditions are compared. If there is further interest, the factor is requested to supply more information. Parallel to this, initial talks are held with the client to deal with the first questions and to gain a first impression. A decision-making process considers each factor with a view to aspects including the conditions, but also the “soft” factors such as branch-related know-how, IT facilities, the range of services, reputation, etc.

HS: How many factors are there?

Kibgies: There are over one hundred in Germany and there is a great diversity of concepts. We concentrate on about 30 to 35 factors which satisfy our quality criteria. Depending on the situation, invitations to bid are distributed as a rule to 3 to 15 bidders.

HS: What does factoring cost?

Kibgies: That depends on the volume parameters, i.e. revenues, the average factored amount, the number of customers, the branch, and the client's creditworthiness. The best way to find out is to obtain quotations. For anybody interested in a rough guide, we recommend a visit to the factoring calculator on the Internet (www.factoring-kalkulator.de). This is a useful tool that, online and anonymously, indicates the bandwidth of factoring costs relating to the volume parameters that are entered.

HS: How quickly can a client start with factoring?

Kibgies: The time span between the initial contact and the first advance generally lies between two and six months.

HS: Does anything change between the client and its customers once factoring has commenced?

Kibgies: In an open factoring procedure, the client informs the customer that payments are to be made to the factor’s account in future. In the discrete procedure, no such notification takes place.

Factors who handle the debtor accounting and dunning process also take over responsibility for the terms of payment and the dunning levels. Agreements can be made on the toleration of exceeded terms of payment and on the amount-related exemption limits arising from unauthorised cash-discount deductions, and so on.

Customers who have exceeded the agreed term of payment receive a friendly yet assertive reminder from the factor. Before reminders are sent, however, the client has the right to hold back the reminder—in which case he is obliged to repurchase the invoice from the factor and he loses the claim to del credere with that customer.

HS: What is the reaction of the customers when a factor gets involved?

Kibgies: There are different reactions. Many customers have experience of paying factor companies, and for them it’s nothing new. Notoriously late payers often convert from Saul to Paul because they fear that their delays in payment may be registered in some way and that their credit status may suffer.

There are even companies, car manufacturers in particular, who formally object to the assignment of receivables to a factor so that they can continue to pay the supplier while being freed of liability. In such cases it has to be checked if the factor should purchase the receivable anyway, but to use the discrete procedure instead.

HS: Does a company have to sell all of its receivables or is a selection possible?

Kibgies: The options on the market are varied. Apart from the overall purchase, factoring can be exercised for certain areas or sections. This is possible to the extent that receivables for sale are limited to certain customers, or even to individual invoices.

HS: One frequently mentioned advantage of factoring is that credit insurance becomes redundant—is that correct?

Kibgies: That depends, as is so often the case, on the particulars of the individual case. There are situations in which credit insurance should be maintained, such as to cover manufacturing risks, insurance limits or impending insured events. It is possible, however, to agree a dual profit model with some factors. Which of these alternatives is the better depends on the details of the credit insurance contract, among other things. A holistic view is necessary here.

HS: When is factoring worthwhile for a company?

Kibgies: From the point of view of profitability, factoring becomes worthwhile at the point when the return on investment from the additional liquidity is higher than the costs of factoring. Factoring may also be strategically interesting when revenues are growing and yet an increased load on existing credit lines is to be avoided, for instance.

Companies that have to avoid revenues because they can’t afford to finance the term of payment or can’t afford to settle should consider the use of factoring.

HS: Who does not benefit from factoring?

Kibgies: These days there are even companies that factor the building trade, although that is rather difficult. Mechanical engineering and plant construction companies that operate with payment by instalments can only factor the final payment. Otherwise there are no limitations, apart from that factoring is only offered to companies that are healthy and have perspectives. Factoring doesn’t provide miracle cures to the lame.

HS: Thank you, Mr. Kibgies.


* The interview was conducted by Hendrik Spod - member of the editorial staff, JP Director's Report

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10 tips and suggestions for closing a factoring contract

1. In selecting your factoring partner and negotiating contracts, take advantage of the knowledge of experts such as specialised brokers or auditors with factoring know-how.

2. Make sure that your receivables have not been assigned to a bank already (cession).

3. Ask your bank(s) about effects on the credit line in the event of cession.

4. Select a factoring partner that is experienced in dealing with companies of your size.

5. Request your partners to demonstrate references (from your sector as far as possible).

6. Make sure that you understand how a factor handles accounts receivable in the case of a ban on assignments.

7. Check carefully all of the offers for cost factors, especially the charges (e.g. from non-purchased receivables or in case of a customer's insolvency).

8. Insist upon written confirmation of the conditions for the adjustment of interest rates. Ensure that the factor reduces interest rates as agreed.

9. Check in advance if the liquidity and credit conditions granted to you by the factor meet your needs.

10. Obtain several quotes and stay informed about alternative factors with conditions more favourable to you.

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Factoring - check list: services and providers

Provider
Service/
target group
 

Factoring institutions

Forfaiting companies

Arrangeure von
Asset Backed
Securities (ABS)

Credit insurers

Debt collection companies

Credit institutions

Financing

Financing of receivables

Sale of receivables (total, portion, or individual)

Sale of individual receivables

Sale of receivables (total or portion)

Credit insurance with agreed protracted default

Possible with sale of titled/untitled receivables

Cession credit (global and blanket cession)

Amount

 

75% to 100%

100 %

up to 95 %

60 % to 95 %

3 % to 25 %

5 % to 50 %

Time of payment

1-2 days after receipt of invoice

6-14 days after submission of documents

Continuous financing of the submitted portfolio of receivables

Delayed financing 180 days after maturityt

2-7 days after assignment of receivables

Continuous financing, e.g. current account, whereby receivables serve as security

 

Duration of claims against customers or term of payment

Up to 5 months

Up to 96 months

Up to 12 months

Up to 48 months

Overdue receivables

Up to 12 months

Delcredere

Amount

70 % to 100 %

100 %

Nominally 100%, although generally 0% because of high excess sums in case of loss

 

60 % to 95 %

3% to 25% of the value of the original receivable

Not possible

Time

90 to 120 days after due date or upon insolvency of the customer

Immediatly

Upon customer’s insolvency

Upon customer’s insolvency or 180 days after due date, with protracted default

Immediatly

Not possible

Collection

Factor, exception: in-house factoring

Forfaiter

Remains with the company

Can be carried out by credit insurer

Debt collection service

Not possible

Target group

Annual revenues exceeding € 250,000

Individual receivables exceeding € 250,000

Receivables portfolio of at least € 25m

All companies

All companiesn

All companies

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Advert:

 JP Mergers & Finance AG


 

JP Mergers & Finance Aktiengesellschaft
Schillerstr. 101 • D-63512 Hainburg • Tel. +48 (6182) 990483 • E-Mail: Vorstand@JPMergers.com
www.JPMergers.com

Mergers & Acquisitions • Partnering • Financial Engineering • Interim Management
 

Tips & Tricks for Company Acquisition and Sale (2):
Vendor Due Diligence

1. Possible problems within the company to be sold can be recognised and resolved in good time. It is always advantageous to be able to offer the “groom” a fault-free “bride”. Problems discovered by the acquirer often lead to a serious weakening of the vendor’s position.

2. The discovery of hidden problems within a company that is up for sale can often turn out to be a deal killer. The sudden emergence of problems leads to a serious loss of trust. Negotiations are stopped and both parties may suffer heavy losses (acquisition costs, etc.).

3. With the presentation of a due diligence report from a renowned consultancy, the acquirer is handed a “seal of quality” about the company. This can lead to a clear improvement in the vendor’s negotiating position and ultimately in the price.

Author: Matthias Noll - chief editor, JP Director's Report

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Fusion: The Alternative to Company Succession (I)

German public interest in the subject “company succession” is greater today than ever before. This is not surprising in view of the latest figures from the IfM Bonn, according to which around 71,000 SMEs are facing the question of succession.

There is an ever decreasing number of companies that can pass the relay baton at the right time from the “father figure” to the following generation. The IfM Bonn reckons with almost 6000 companies facing closure because there is no successor - a catastrophe, and not only from the point of view of the employees. The banks in particular consider the looming succession problems among their borrowers to be a subject of discussion, partly in anticipation of Basel II. Company succession is a process that has to be introduced in good time, otherwise there may be a compulsion to follow alternatives that would be out of the question under normal circumstances. But it’s not our intention to tell horror stories; we want to discuss alternatives!

Generally speaking, entrepreneurs pursue three goals with their succession arrangements:

• To secure the continuity of the enterprise—not least in the interests of preserving the entrepreneur’s life work.

• Preferably a successive withdrawal from operational business.

• Realisation of the company’s value as a financial safeguard for a hard-earned retirement.

Excepting the cases where succession is possible within the family, the popular models of company succession assume that the company is to be sold to a third party. In many cases this is the most appropriate and proper decision.

From the company’s point of view the departure of the entrepreneur means the loss of enormous know-how. Mainly through the invaluable personal contacts to clients and suppliers. He is in a sense a personalised company asset. The complete and rapid withdrawal from the company may be a resolute move after the sale of the company, but this does not necessarily reflect the life planning of the entrepreneur. It is often the wish to step back gradually, but to be available to help in word and deed when required. Well worthwhile…

What could be better than to choose a gradual process for entrepreneur and company, such as with a fusion with a “compatible” company.

The dictionary tells us that a fusion is the economical and legal amalgamation of multiple companies with the ultimate aim of unified management. The most prominent fusions take place between large corporations.

The motivation of owner-managed SMEs concerning succession is clearly different. The root lies in the awareness that organic growth within consolidating markets is not enough to sustain or attain a relevant competitive position. Worthwhile company acquisitions are currently not an option, or they would lead to a long-term weakening of the capacity to act.

Figuratively speaking, a fusion of this type is similar to a marriage. As such it is true to say that “It all depends on the partner you choose”. The target group is actually rather larger than one may initially assume.

A “dream partner” of a entrepreneur who is looking for a follower could be described as follows:
The target company is fit, strong and at the cutting edge; the management is dynamic and geared toward success. The company is well positioned in the market; growth until now has been organic and attained with internal resources. Or the owner(s) are fully committed both personally and financially in view of the known liability risk.

The model for fusion/succession that is described in the following combines the outlined targets of both companies. The total process is generally protracted over a period of 5 – 7 years and can be divided into three main phases:

Phase 1: Fusion / Integration
The first step, much as expected, is the fusion and integration of both companies with respect to company law and organisation.

Based on comprehensive analysis or benchmarking of the two fusion partners, the combined organisation of the future enterprise is negotiated and defined. Careful advanced planning—ideally in the form of a detailed business plan—can be decisive for the successful realisation of the intended synergy effects and for the adequate consideration of the owners’ interests.

Another important element is the structure of the fusion under company law. German company law allows for a number of fusion models, many of which are rooted in the Reorganisation Act (Umwandlungsgesetz, UmwG). Leaving the variations aside which are too numerous to mention here, the core of the issue concerns the legal form, the valuation of the company and thus the future structure of ownership or shareholding.

The process of fusion and integration provides the “former owner” with the option of gradual withdrawal from operational business. His future influence in the initially joint company may involve an appointment to a supervisory board or advisory board. The company would thus retain an important source of experience. The all-too-frequent collapse subsequent to a change of management can be cushioned in this way.

Phase 2: Expansion
Based on a successful fusion/integration, the way is open for continued growth on a broader basis. It should be mentioned, however, that a fusion/integration places heavy demands on the organisations of the involved companies over a period of months.

Both companies then have the chance to benefit from the “quantum leap” from synergy and scale effects (1+1>2!).

Phase 3: Exit
Whereas phases 1 and 2 are typified by a synchronised behaviour of owner and company, the exit phase is the final step in this model and is limited to the withdrawal of the former owner from the company’s capital. The aim is to realise the appropriate proportion of the company value at the moment of exit. The opportunity for the former owner in this model is the higher rate of interest on the contributed capital which arises from the increase in company value from the fusion. It is important that the rules of the game are clear from the beginning of the fusion (phase 1) and that the former owner’s time of exit is clearly defined.

In one of our next newsletter, part II of this article will report on possible exit scenarios and methods of efficient fusion process.


Author: Hans-Jürgen Kenntner - Senior Advisor, JP Mergers & Finance AG

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The JP Mergers & Finance AG

Combining competence in corporate finance with classical management consulting generates strength.

Our core competences are:
Corporate finance, mergers and acquisitions, partnering, financial engineering, strategy / planning / controlling, restructuring, participation management.

For further information please call us or send a brief e-mail to eMail. We shall be pleased to contact you.

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Advertising rates: JP Director's Report

• Number of recipients: approx. 33.000 copies

• Target group: top management, corporate leaders, executive boards, supervisory boards, investors (approx. 92%)

• Languages: German, Polish, English

• Release area: worldwide (emphasis: Germany, Poland, Switzerland, Austria)

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Acknowledgements & contact

JP Mergers & Finance AG
Schillerstr. 101
D-63512 Hainburg
 

Tel.: +49 (6182) 9904-83
Fax: +49 (6182) 9904-88
eMail: Vorstand@JPMergers.com
Internet: www.JPMergers.com

CEO: Heinz Jäger

Chief editor: Matthias Noll

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Confidential copyright © JP Mergers & Finance AG 2005. Reproduction prohibited without preliminary authorization.