After 2000, a widespread term for a special approach on the part of some private equity funds. – These funds initially buy more than fifty percent of a stock corporation. – The company is then forced to pay a very high (special) dividend by a majority resolution at the Annual General Meeting. – This must be paid partly – in extreme cases even entirely – from the substance of the company. This reduces the equity ratio of the company. – As a result, the company is given a higher risk weighting in the banks’ ratings and therefore has to accept a higher interest rate for loans. – The managers of the funds usually calculate that the tapped capital could be invested much more favorably elsewhere; in other words: the return on equity in the company was lower than the profit that could be achieved with the money withdrawn from the corporation in another use. – In detail, this leads to decision-making issues that are extremely difficult to weigh up. In 2007, for example, the London-based fund Permira acquired a majority stake – via its subsidiary Valentino Fashion Group in Milan – in the fashion group Hugo Boss AG and enforced a special dividend. As a result, Hugo Boss’ equity ratio fell from 52 percent to 18 percent, which was still above the average for German companies in 2007 at 16.6 percent. – The Permira managers pointed out, however, that in the balance sheet of Hugo Boss AG, which they considered to be overcapitalized, the goodwill acquired for consideration alone should be valued at EUR 1 billion, and that other balance sheet items would also have to be revalued. Some balance sheet analysts and IFRS experts agreed with this view, while others strongly condemned the capital drain. – See Asset Deal, Cannibalization, Burn-Out Turnaround, Financial Vultures, Go-go Funds, Hedge Funds, Locusts, Leveraged Buyout, Opportunity Costs, Private Equity Funds, Venture Capital, Trade Sale, Vulture Fund, Window on Technology.
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
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