16.5 Purchase Price and the Payment Method 483retail bank by number of branches and the market leader with Mittelstand compa-
nies.
The transaction was largely in shares because of Commerzbank’s concerns
about maintaining sufficient levels of capital. This served a further purpose.
Commerzbank’s agency problems were partly mitigated because Allianz ended up
with a substantial stake in the enlarged Commerzbank. The parties chose a two-
step process. This helped to mitigate Commerzbank’s information problems and to
speed up the acquisition. In the first step, Commerzbank would acquire a bit over
60% of the Dresdner Bank and issue shares representing approximately approxi-
mately 18.4% in Commerzbank to Allianz. In step two, Dresdner Bank would be
merged into Commerzbank and Commerzbank would acquire Allianz’s remaining
stake in Dresdner Bank. In return, Allianz would receive Commerzbank shares
depending on the merger exchange ratio.
There was a cash component. In addition to a fixed component, a contigent
payment was used to solve the problem of the buyer and the seller having different
opinions about the valuation of Dresdner Bank’s problem ABS assets. The prob-
lem assets were placed in a special vehicle. Commerzbank agreed to: take the hit
on first losses on those assets of up to €275 million; put another €975 million into
the vehicle to cover additional losses; and earmarked that amount (€975 million)
as a contingent payment to Allianz. Only the amount not realised as losses would
be paid to Allianz in 2018.
Commerzbank’s share of losses from problem ABS assets was thus limited to
€275 million. The maximum price payable by Commerzbank to Allianz for those
assets was limited to €975 million.^78 The terms were soon renegotiated.^79
Particular agency problems. Control over the target typically gives rise to two
price-related agency problems (generally, see Volume II). Where the target is still
controlled by the vendor but the parties have already agreed on the price, there is a
risk of adverse changes of the target to the detriment of the acquirer. Where the
target is controlled by the acquirer and the parties have agreed on a price reduction
mechanism, there is a risk of adverse changes of the target to the detriment of the
vendor.
In both cases, the parties may agree on covenants setting out: (a) general duties
such as a duty of care, a duty to act in good faith, and a duty not to take action
other than in the ordinary course of business; (b) particular duties such as restric-
tions on distributions of assets and changes of corporate structure; as well as (c)
particular sanctions for breach of duty such as a duty to pay the agreed unadjusted
price and the waiving of rights to a price reduction.
Adjustment as a sanction for misstatements. Breach of contract by the vendor
can trigger various remedies under legal background rules and/or the terms of the
acquisition agreement. Typically, the acquirer is entitled to damages and/or a price
reduction. It is in the interests of both parties to agree explicitly on: what circum-
stances are regarded as breaches of contract; sanctions for breach of contract; and
(^78) The last laugh, The Economist, September 2008; Commerzbank’s stock exchange re-
lease of 31 August 2008.
(^79) Commerzbank’s stock exchange release of 27 November 2008.