Executive Summary/Highlights:

• Austrian M&A during Q1 through Q3 2011 was largely driven by (1) consolidation involving intra group restructurings with disposals and exits, and (2) transactions triggered by insolvency.
• Consolidation of the Austrian banking sector remained a key driver for transactional activity.
• New 2011 law implemented Regulation 2009/109 EC, providing among other things for lesser reporting requirements for upstream mergers of subsidiaries into their parent and for company splits where the participation ratios remain unchanged and an improvement of the standing of creditors of companies subjected to a merger or split, giving creditors an actionable right to collateral.
• For the rest of 2011 and beyond, corporate reorganisations on a national level are expected to trigger some larger volume transactions, and distressed M&A involving in particular the financial sector are set to continue.

MAIN ARTICLE

Private M&A

Austrian M&A during Q1 through Q3 2011 was largely driven by consolidation involving intra group restructurings with disposals and exits. Additionally, some key transactions in the market were insolvency related and generated.

The first half of 2011 was characterized by closings of cross border deals announced in Q 4 2010, like Knowles Electronics, USA/NXP Semiconductors, USA, or German Volkswagen/Porsche, which had a substantial Austrian element of EUR 3.3 billion. Other notable cross border inward investment transactions into Austria included the acquisition by French SNCF of a stake in Westbahn, a private rail project, and the sale of a majority stake in Trenkwalder, Austria´s largest and one of Europe´s leading personnel leasing companies, to Droege Capital , a German private equity firm.

An exit typical for the transactional environment was the first half 2011 dual track private sale/IPO sales process resulting the IPO of aluminium company AMAG, allowing One Capital Partners (OEP), the private equity arm of JP Morgan, to partially exit AMAG which OEP had acquired in 2010.

Consolidation of the Austrian banking sector remained a key driver for transactional activity. In 2011 HHA Bank Group started a program of asset stripping in an attempt to at least partially repay state funding. ÖVAG, the fourth-largest Austrian banking group received substantial government financing in 2009 and was forced to start a massive consolidation and downsizing program.

In Q 3, 2011 ÖVAG, together with co-owners French BPCE and German DZ/WGZ BANK succeeded in selling Volksbanken International, comprising CEE network banks, to Russian Sberbank for a purchase price of up to EUR 645 million. This transaction has been the largest 2011 announced Austrian transaction but also the largest M&A banking deal in Europe in 2011 until date.

The ongoing restructuring of the Austrian banking sector will leave Unicredit Bank Austria, Erste Bank and Raiffeisen Banking Group as the three leading Austrian banking groups.

Also in Q 3 2011, insolvent listed industrial conglomerate A-Tec announced its financial restructuring involving a EUR 210m investment by Contor, funded by Pakistani investor Alshair Fiyaz and Chinese Wolong Group. Subsequently A-Tec will be split up among the investors behind Contor allowing acquisitions by the investors of A-Tec´s subsidiaries including automotive company ATB and copper mill Brixlegg.

Notable outbound private M&A transactions included: In Q1 2011 listed Raiffeisen Bank International agreed to acquire a 70% stake in Polish Polbank for USD 669m. In Q 2 2011 VSE listed Austromicrosystems acquired US TAOS, a Texas based leading light sensing technology company for USD 320 million.

Public M&A

London listed Partygaming acquired Vienna listed Austrian bwin in a reverse takeover valued at about USD 1.76 billion to create the world´s biggest publicly traded online betting company. The transaction was completed during the first half of 2011 and resulted in a delisting of bwin at the Vienna Stock Exchange. The merged company remains listed at the London stock exchange.

During Q1 2011, Unicredit BankAG launched a voluntary public offer for CA Immobilien Anlagen AG and increased its stake in the target from 11,88 % to 16,89 %. This was the second stage in the group internal restructuring of Unicredit’s streamlining of the bank- held real estate group, which had started with the taking private of CA Immo International in 2010. During Q2 2011, small cap LAI Beteiligungsinvest GmbH launched a mandatory offer for Private Equity Performance Beteiligungs AG and increasing its participation in the target from 33,42% to 63,68%. In a prior ruling, the Takeover Commission had held that the Takeover Act was applicable to this public offer despite a change from the regulated to the unregulated market of the VSE. In June 2011, small cap Pankl Racing Systems launched a partial offer collecting 10% of Pankl Racing Systems as treasury shares.

2011 CHANGES IN LAW AFFECTING AUSTRIAN M&A

Simplification of Restructurings

The 2011 law implemented Regulation 2009/109 EC by the European Parliament and the Council from September 2009 on the reporting and documentation requirements in case of mergers and demergers of companies. The simplifications include lesser reporting requirements for upstream mergers of subsidiaries into their parent and for company splits where the participation ratios remain unchanged and a reduction of printed publication requirements of financial statements with online publication being sufficient. Apart from simplifications, the draft Act provides for an improvement of the standing of creditors of companies subjected to a merger or split giving creditors an actionable right to collateral. Finally, under the Act, listed companies will be able to register their company website address with the company register of the court allowing the company court to verify publication of legally relevant company information on a listed company´s website.

Employment Law changes affecting cross border M&A

During 2011 the so-called Red-White-Red Card was introduced implementing a new immigration model easing the access to the labour market for highly skilled specialists and students from non-EU countries. The new scheme is based on the evaluation of inter alia the following target criteria: language skills, qualification, working-experience and age.

Tax Law Changes affecting corporate and financing transactions

Under the 2011 Tax Law Reform enacted in December 2010, numerous changes to the Austrian tax regime will apply to (cross border) corporate and financing transactions. These include:

(i)        No interest deduction for related party transactions: From 2011 onwards, but also including leveraged intra group share acquisitions made prior to 2011, interest expenses can no longer be deducted for the leveraged acquisition of participations from foreign or Austrian group companies or controlling shareholders, or for leveraged capital contributions related to such acquisitions. The changes in the law do, however, not affect the deductibility of interest expense incurred in connection with the acquisition of shares from third parties.

(ii)        Double dip structures: Dividends paid by non-Austrian companies to Austrian companies are no longer tax free if the dividend can be deducted as an interest expense at the level of the distributing company. This change will eliminate double dip structures through hybrid instruments which previously resulted in the deduction of payments in the source state and made use of a corporate tax emption of the income resulting thereof in Austria.

(iii)       R+D tax refund increased: From 2011 onwards, the tax refund on R+D expenses will be increased from 8% to 10% but the alternative R+D allowances of previously 25% to 35% of qualifying R+D expenses will be abolished.

(iv)       Stamp Duties for Loan or Credit Agreements abolished: For loan and credit transactions concluded from 1 January 2011 onwards, stamp duty of previously 0.8% to 1.5% of the loan amount will no longer apply. This is good news for (acquisition) financing transactions which previously required complicated compliant stamp duty avoidance schemes by abroad documentation or other measures.

OUTLOOK

For the rest of 2011 and beyond corporate reorganisations on a national level triggering some larger volume transactions but also distressed M&A involving in particular the financial sector are set to continue in a volatile yet still partially very active M&A market. Medium-sized local and cross-border transactions relating to the Austrian and central and Eastern Europe and CIS markets have remained and are expected to remain relatively stable.