Corporate Governance and Regulatory Impact on Mergers and Acquisitions

Telekom as computed actuarially, the pension provision as of 12/31/2004,

established in accordance with the International Financial Reporting Standards

(IFRS), discloses an underfunding in the provision which, under IFRS, cannot

be reflected in the balance sheet. The corresponding value effect is determined

in a separate calculation, too. Moreover, special items resulting from Deutsche

Telekom’s holding of T-Online shares before the merger are valued separately.

Finally, stock option programs for the management of Deutsche Telekom, and

U.S. stock option plans resulting from acquisition activities of Deutsche

Telekom in the United States, as well as a mandatory convertible bond issued

on 02/24/2003, must be taken into consideration. After these adjustments, the

value of Deutsche Telekom equity is simply divided by 4,195,183,321, the num-

ber of shares outstanding, which gives €28.31 as the “fair” value per share of

Deutsche Telekom.

To account for the corresponding exchange ratio, this value has to be com-

pared with that of T-Online. In order to derive the T-Online value per share a

similar calculation was conducted. This leads to an equity value of

€17,998,000,000, which—with a total number of 1,223,890,578 outstanding

shares—gives a value per share of €14.71 and thus an exchange ratio of 0.5196

shares of Deutsche Telekom for each share of T-Online.

9.6 Consequences for German takeover practice

The valuation standard IDW S1 is designed for expert opinions needed to cal-

culate cash compensations, exchange ratios, or guaranteed dividends. These are

transactions regulated by law, because a majority can force minority sharehold-

ers to quit the company against their wishes. Nevertheless, the scope of IDW S1

goes far beyond these cases. In particular, IDW S1 has also great importance for

unregulated takeover bids, although in Germany there is no obligation that a

takeover bid has to reflect the fundamental (“intrinsic”) value of a company.

However, a bidder typically aims at gaining control over the target firm.

Therefore, a takeover bid to get a qualified majority of 75% is usually only the

first step in a chronology of events that leads to the conclusion of a control

agreement and, subsequently (if a majority of 95% is met), the enforcement of

a squeeze-out. A shareholder who has to decide whether he should accept a

takeover bid or not will not compare that bid with the former or present stock

market price. In contrast, he will be wondering whether the bid is higher than

the cash compensation he can expect when a control agreement is established

or a squeeze-out is eventually enforced. Thus, a takeover bid is only accepted if

most of the shareholders expect no higher future compensation; that is no

higher IDW S1 valuation. The bidder as well as shareholders of the target thus

“execute IDW S1-valuations,” may it be for their own decision making or in

order to convince the other side to accept the bid or to raise it. These consider-

ations highlight once more the great practical relevance of theoretical

foundations of valuation issues.

256 Corporate Governance and Regulatory Impact on Mergers and Acquisitions