1. Bradford – 1 Why are the Levels of Control (So) Different in German and UK Companies? Marc Goergen University of Manchester Institute of Science & Technology Luc Renneboog Tilburg University

2. Bradford – 2 German and UK IPOs We compare German and UK IPOs. 54 German IPOs are matched with UK IPOs of: –same size/industry –initial control (family/individual) We look at both: –first-tier control –ultimate control for the six years after IPO.

3. Table 3: Proportion of Voting Rights Held by Initial Shareholders, by New Large Shareholders, and by Small Shareholders in Recent Germany and UK IPOs German sampleU.K. sample Time after IPO (years) Initial share- holders (%) Free float (%) New large share- holders (%) Initial share- holders (%) Free float (%) New large share- holders (%) Immediately 1 2 3 4 5 6 76.4 73.7 69.6 64.9 59.4 50.7 45.0 22.2 24.0 25.0 25.3 25.0 26.3 24.8 1.5 2.4 5.4 9.8 15.5 23.1 30.2 62.8*** 51.4*** 47.3*** 37.7*** 33.6*** 31.4*** 30.0*** 37.2*** 43.1*** 39.5** 36.0** 37.6** 36.5** 40.8*** 0.1* 5.5 13.3** 26.4*** 28.8** 32.1 29.2

4. Table 4: State of Control of IPOs Six Years After Flotation Size sampleIndustry sample GermanyU.K.GermanyU.K. Panel A: Number of firms by state of control Full takeover Partial takeover Widely held (<25%) Still controlled by initial shareholders Total 1 18 1 34 54 19 5 17 13 54 1 20 1 36 58 18 4 16 20 58 Panel B: Average number of years before reaching the new state of control Full takeover Partial takeover Widely held (25% def.) 6.0 4.4 - 3.7 3.0 1.8 6.0 4.3 - 3.5 1.7

5. Table 4 – Continued Panel C: Ultimate shareholder in targets of full and partial takeovers (size-matched sample) Targets full takeover Targets partial takeover All full and partial takeovers GermanyU.K.GermanyU.K.GermanyU.K. Widely held Closely held 1-1- 14 5 8 10 -5-5 9 10 14 9

6. Bradford – 6 Patterns Control is diluted much quicker in UK IPOs. Free float is higher in the UK. Percentage of shares held by new shareholders is similar. Full takeovers are uncommon in Germany. Proportion of partial takeovers in Germany similar to that of full takeovers in UK. Half of the German targets become widely held.

7. Bradford – 7 Possible Reasons for the Differences Regulatory determinants: –Listing requirements –Protection of shareholder rights –Control-induced tender offers –Control through pyramids and non-voting shares  Control is more valuable in Germany  Several incentives to hold large blocks in Germany  Control is likely to be transferred rather than diluted

8. Bradford – 8 Possible Reasons for the Differences Economic determinants: –Firm size Negative relationship with ownership Weaker, negative relationship with control –Age Negative relationship Control is transferred to new shareholder in Germany

9. Bradford – 9 Possible Reasons for the Differences –Presence of founder Leadership skills Private benefits –Risk Negative relationship with control or Need for monitoring –Growth Dilutes control by initial shareholder More likely to hold for UK as in Germany control is different from ownership

10. Bradford – 10 Possible Reasons for the Differences –Nonvoting shares Makes it easier to retain control Makes transfers of control cheaper –Poor performance Triggers control changes Full takeovers (UK) versus partial takeovers (Germany)

11. Bradford – 11 Two Models Levels-Model explains percentage of shares held by: –old shareholders, –new shareholders, –the public six years after IPO.

12. Bradford – 12 Two Models Control-Model explains control states six years after IPO: –Control remains with old shareholders –Control is diluted –Control is transferred to a closely held shareholder –Control is transferred to a widely held shareholder

13. Bradford – 13 Findings for Levels Model Size: –Larger UK firms end up being widely held. –Control over larger German firms is transferred to new shareholder. Age: –Control of relatively older German firms goes to new shareholder.

14. Bradford – 14 Findings for Levels Model Presence of founder: –German IPOs remain founder controlled. –UK IPOs are more likely to be controlled by new shareholder. Risk: –Control of UK firms is transferred to new shareholder. –Initial control over German IPOs is lost.

15. Bradford – 15 Findings for Levels Model Growth: –Control of German IPOs is transferred to new shareholder. Nonvoting shares: –Control tends to remain with old shareholders. Profit: –No effect

16. Bradford – 16 Findings for Control Model Substantial differences between firms taken over by: –concentrated shareholders –widely held shareholders A transfer of control to a concentrated shareholder is more likely for –UK firms that are: German firms that are: risky small poorly performing firms profitable

17. Bradford – 17 Findings for Control Model Control is more likely to end up with widely held shareholder for –UK firms that are:German firms that are: large fast-growing profitable firms low profitability firms

18. Bradford – 18 Conclusion Legal environment in Germany predicts stronger levels of control. It does not explain how differences after IPO come about. We have found strong evidence that economic factors explain differences –across firms, –between the UK and Germany.