The following article is adapted and reprinted from the M&A Tax Report, Vol. 9, No. 4, November 2000, Panel Publishers, New York, NY.


By Robert W. Wood

Okay, so maybe we were a little optimistic when we covered the German tax overhaul that can only be described as massive. It was a huge event in world news, a huge event in European news (sparking some "me too"s by other European nations) and certainly a milestone in anticipated European and worldwide M&A activity. See Wood, "Massive German Tax Overhaul," Vol. 9, No. 1, The M&A Tax Report (August 2000), p. 1. We noted at the time that tax laws have an enormous effect on the movement of deals (on this topic, see Wood, "Tax Law Effect on Deals? You Bet!" Vol. 8, No. 7, M&A Tax Report (February 2000), p. 1), but maybe we spoke too soon.

Indeed, the latest news is that the enormous German tax reform has actually put a damper on M&A activity. Why? Since most of the reform does not kick in until 2002, a note of caution has entered the market. It may be better to wait, the market is saying. See Harnischfeger, "Tax Reform Puts a Dampener on Activity," Financial Times, October 23, 2000, p. VI. While Germany's M&A market has been buoyant in the first six months of the year, and some deals have been truly enormous (such as Mannesmann/Vodafone), companies have hit the brakes after tax reform. Analysts and officials are saying they expect activity to spark in the second and third quarters of 2001, primarily for deals that are to take effect on January 1, 2002. Id. Companies that are eager to sell financial stakes in other companies are using various financial tools such as convertible bonds to bridge this awkward waiting period. However, the true wrap-up to the volume of German and European deals expected in the wake of tax reform now seems a good way off.

Tax Reform, Yes, But Other Laws Still a Barrier

Even apart from the waiting period, some have noted that a couple of other problems are present in this mix. One, the corporate governance laws in Germany can reduce the appeal of owning or merging with a German company. Two, the continental European market is now highly fragmented, and lacks pan-European corporate legislation. Cross-border deals are sometimes not as appealing to shareholders (or at least not as easily explainable) as they might someday be.

Finally, there are plenty of deals that are done behind board room doors in Germany, not involving investment bankers. (Ouch!) This is a striking contrast to US and UK standards. The tradition in Germany is not to broadcast M&A deals, but rather to quietly make contacts and do the deals directly. (For a full discussion, see Harnischfeger, "Tax Reform Puts a Dampener on Activity," Financial Times, October 23, 2000, p. VI.)

More on German Tax Reform, Vol. 9, No. 4, The M&A Tax Report (November 2000), p. 8.