554 20 Acquisition Finance
agreements or as a termination event under the target’s contracts with asset inves-
tors. Both cases can increase the acquirer’s financing needs even more. In fact,
many takeover defences work by increasing the financing needs of the acquirer
(section 18.4). Sometimes the acquisition or the following refinancing and restruc-
turing of the target can trigger an obligation to repay state subsidies or state aids,
because state subsidies and state aids tend to be subject to conditions.^14
It is therefore particularly important for the acquirer to find out about such
things when it performs due diligence before agreeing to the terms of the acquisi-
tion (i.e. prior to signing).
Payment method and financing mix. The acquirer must seek a payment method
which is attractive to the vendor or vendors and a financing mix which is attractive
to investors – there will not be any deal without those two elements. On the other
hand, both the payment method and the financing mix should, of course, be ac-
ceptable to the acquirer itself (for the pros and cons of different payment methods,
see section 16.5).
Price and the financing mix. Even the price can influence the financing mix.
For example, if the price is very low compared with the assets of the acquirer, the
acquirer may be able to finance the acquisition internally, but a very high price
will make external funding necessary:
“For each potential takeover price ... the acquirer associates optimum acquisition and fi-
nancing decisions ... Thus, his financing opportunities may affect the takeover price of-
fered ... The takeover financing can be looked upon as a way in which the acquirer adapts
to the price necessary for acquisition. In a bargaining process, as price rises the acquirer can
modify the financing mix to best adapt to the price which must be paid to acquire the firm.
However, financing can only be used to a limited extent, and there will exist a price for
which no financing mix will increase the acquirer’s utility above the existing level.”^15
Risk and the financing mix. The perceived risk-return profile of the acquisition can
influence the financing mix. When the perceived risk is low, the acquirer may be
prepared to raise more debt. When the perceived risk is high, the acquirer may
prefer to raise more outside equity in order to reduce its overall corporate risk
level, or search for co-owners in order share the risk.^16 The effect of risk can be il-
lustrated by the acquisition of Sampo Bank by Danske Bank.
In November 2006, Danske Bank acquired all shares in Sampo Bank, a Finnish bank, for
€4.050 billion (DKr30 billion) in cash from Sampo Group.
The Danske Bank Group changed its capital targets in connection with the purchase.
The changes reflected the implementation of the new Capital Requirements Directive
(Basel II, see section 3.5) and the increased geographical diversification which the Group
achieved through its acquisition of Sampo Bank. The capital targets were changed to: a core
(^14) See Wündisch S, op cit, p 23. For German law, see also § 3 Subventionsgesetz (SubvG)
and § 264 Strafgesetzbuch (StGB).
(^15) Grammatikos T, Makhija AK, Thompson HE, Financing Corporate Takeovers by Indi-
viduals Seeking Control, Managerial and Decision Economics 9(3) (1988) pp 227–235
at pp 233–234.
(^16) Ibid, pp 234–235.