Equity Swap

An equity swap is a based on equities or equity indices swap.

Cash - settled equity swap

A cash - settled equity swap is the typical variation of the equity swaps, in which a buyer purchases the price increases profits of an underlying share, but not the same voting rights. Specifically, mutual cash flows depending on the development of a share shall be agreed (see also derivative). This variant is used increasingly in hostile takeovers. The attacking company acquires at most various banks cash - settled equity swaps with the target company (target) as Underlying ( the underlying). The stock price increase of the target company, the aggressor receives the difference from the stock price accordingly agreed in each case at the drawing. At the same time buy the banks involved large blocks of shares to the acquiring company to hedge against the tax due by rising stock prices payments to the aggressor. The stock price increase of to the target company (as he usually does at the announcement of takeovers ), the attacker deserves correspondingly well. Then solves the attacker its cash settled equity swaps accordingly, they not only get the money, but at the same time, banks will try to sell the acquired shares to the acquiring company to sell again. Here offers then of course the attacker as a buyer at that can cover the purchase price for the shares in part by the earned with the cash settled equity swaps speculative profits. If the bank does not tender the shares to the Swap Counterparty, but a third party, then the attacker could buy shares directly through the stock market, which would certainly drive the price into the air, but the attacker would not matter, since according to the income from swap transactions parallel rise. However, a problem in the latter case could be a resulting increase in income tax liability, which is why such swap transactions are often handled through intermediary companies in tax havens.

Since the ultimate sale of the shares to the attacker neither pre- contract, nor necessarily is ( however, if only because of the business of banks likely to the attacker ), consists for the attacker previously no direct access to the shares and thus no after the takeover law binding obligation release. This gives the attacker is virtually a " sneaking in secret " is possible.

By cash - settled equity swaps, an attacker can

• To commit the share price of the target company to a certain extent,
• Acquire de facto company shares to the transferee company in advance, without having to report them,
• By the acquisition of these directly fund a portion of the cost of acquisition prior to the announcement of a takeover interest by sameness taking place market price of the target and the resulting speculative profits.

While in the previous variant, the attacker first maximizes its economic share shaft and minimizes the number of voting rights, happening from the perspective of the banks, the reverse: it is little or no economic ownership of the underlying company is acquired, however, the voting pool. Due to this property, it is also aggressive investors possible to conclude with third parties such equity swap to win without high capital investment particularly strong influence way through the collected votes. In this case, however, the greatest challenge of the investor, to find a suitable counterparty that assumes the economic risk in his hand and bets on rising prices of the underlying.

Examples of cash - settled equity swaps

• Acquisition of WMC Resources by BHP Billiton
• Takeover bid by Cleveland Cliffs for Portman Mining
• Takeover bid by Centennial Coal for Austral
• 2002: Perry Corporation ( Perry Capital) against Rubicon that were just bought by Guinness
• 2005: Agnelli family ( Exor ) to the Fiat group to back the equity investments during the conversion of convertible bonds
• Takeover of Volkswagen AG by Porsche SE in 2008
• Takeover Offer of the Schaeffler Group for Continental AG in July 2008

Treatment in the German legal

With the introduction of § 25a WpHG under the Act to strengthen investor protection and improve the functioning of the capital markets have from 1 February 2012, holders of cash - settled equity swaps exceeds or falls below the thresholds of 5, 10, 15, 20, 25, 30, 50, or 75 % of the BaFin and the issuer of the shares to repay here via message. Should the purchaser so, he faces regulatory fines. A loss of rights according to § 28 WpHG, however, is not provided.