Investment Banking 2014

Deutsche Bank
Investment Banking
Prof. Dr. Paul Achleitner
Seminar at WHU Otto Beish
heim School of Management
Vallendar March 25 26,
Vallendar,
26 2014
Contents
Section
1
Introduction to Investment Banking
The Financial Crisis of 2007/08
13
The European Sovereign Debt Crisis
61
The New Normal
76
A
Asset
t Management
M
t
120
Initial Public Offerings
149
Understanding the M&A Business
195
M&A Products and Services
249
Deutsche Bank
Prof. Dr. Paul Achleitner WHU Seminar 25/26 March 2014
Schedule
Tuesday,
March 25, 2014
08:45 10:15
Section 1:
Introdu
uction to Investment Banking
10:30 12:00
Section 2:
The Financial Crisis 2007/08
13:00 14:30
Section 3:
The European Sovereign Debt crisis
14 45 16:15
14:45
16 15
Section
S ti 4
4:
Th N
The
N
New
N
Normall
16:30 18:00
Section 5:
Assett Management
Lunch break
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Schedule (continued)
Wednesday,
March 26, 2014
08:45 10:45
Section 6:
Initial Public Offering
11:00 12:00
Section 7:
Underrstanding the M&A business
13:00 14:30
Section 7:
Underrstanding the M&A business (continued)
14 45 15:15
14:45
15 15
Section
S ti 8
8:
M&A Products
P d t and
dS
Services
i
15:30 18:00
Section 8:
M&A Products
P
and Services (continued)
Lunch break
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Section 1
Introduction to Investment Ban
nking
What is investment banking?
Investment banking is
what investmen
nt bank(er)s do
Financial intermediation in capital ma
arkets-related activities
Advisory services in capital marketsmarkets-related
related activities
Selected use of own capital
Its all about services to capital markets participants
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Capital markets serve as a means of finan

ncial disintermediation
Primary value
proposition
Deposit
Commercial
Banking
S
Saver
Loan
B k
Bank
B
Borrower
Risk assumption
vs
Spread
Issuer
Service
vs
Fee
Bilateral contracts
Mone
ey
Investment
Banking
Investor
Investm
ment
B k
Bank
Security
Two types of clients, investors and issuers

Ron Chernow: Death of the Banker?
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Traditionally banks can be classified by prroducts and clients
Products
Deposits and lo
oans
Securities
Consumers
Retail
banking
Businesses
Wholesale
banking
Clients
Commercial
banking
Investment
banking
Investment banks traditionally engage in underwriting of and investments in securities

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A systemisation of investment banking acttivities

Business se
egments
M&A
Corporate Finance
Structured Finance
Capital Markets
Sales & Tra
ading
Asset Mana
agement
Principal In
nvestment
Products
Clients
Equity
Mezzanine
D bt
Debt
Derivatives
Foreign exchange
Commodities
Real estate
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Corporations
Financial institutions
P bli iinstitutions
Public
tit ti
Institutional investors
High net worth individuals (HNI)
Retail investors
Various investment banking business mod

dels exist along
three dimensions
Business Focus
Operating Model
M
Financial Structure
Business Scope
Functional Sttructure
Capital Structure
Front office
e
Risk manag
gement
Operations & technology
Size of balance sheet

Leverage
Funding mix
Revenue Mix
Cost Drivers
Risk Appetite
Commissions
Fees
Proprietary trading &
carry
Compensattion
Technologyy
Other
Market and liquidity risk

Credit &
counterparty risk
Operational risk
Geographical footprint
Client mix
Product breadth
Value chain integration
Source: BCG
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Consolidation: Size matters ...
Economies of scale and scope

p
Achieving operating scale
Accessing clients on a global scale
C t efficiency
Cost
ffi i
ffrom economics
i off shared
h d experienc
i ce
Institutional knowledge as competitive advantage
Teamwork and culture of support
However:
H
IIssue off confidentiality
fid ti lit
Diversification of earnings stream
Competing globally and across cycles
Achieving a stable mix of businesses
Size means market cap
Balance sheet or assets largely irrelevant
Price/Book, P/E (growth) are key
Attractive acquisition currency
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Disaggregation: ... being best matters eve

en more
New reconfiguration
g
of value chain
Specialised niche players

Information/research (eg Bloomberg, Reuters)
Knowledge providers/advisors (eg Lazard Frres, Rothschild)
Capital
C it l providers
id
((eg reinsurance,
i
commercial
i lb
ban
nks)
k )
Processors (eg Instinet, Deutsche Brse)
Proprietary
p
y traders/investors ((eg
g hedge
g funds, p
privvate equity
q y funds))
Distributors (eg Charles Schwab, discount brokerss)
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10
Fluctuation: ... but who is best in what?
Speed
p
of change
g is enormous
Illustrative innovations
Adaptability of organisation is key
Product
Innovation
Innovation is vital
Impact of technology is
unpredictable
Competition for talent is intense
Universal bank in or out?
Format
Innovation
Access
Innovations
Investment
choice
Junk bonds
CDOs
Equity derivates
Swaps
Hedge funds
Private equity
Fund of funds
Dark pools
Islamic banking
Market
efficiency
Indexed mutual
fund
ETFs
Electronic trading
systems
Program trading
Algorithmic
trading
g
ABX index
Credit ratings
Bloomberg
Independent
research
Direct market
access
Balance sheet important or not?

E-finance future or none?
Price
transparency
Source: BCG
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11
Key factors in Investment Banking
Factor
ac o
Observation
Obse
a o
Capital
Market cap matters to capital

market players
Information
Becomes more of a commodity
Technology
Leverage and cost factor
Brand
Most valuable asset
People
War for talent decides everything
Its all about people
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12
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Section 2
The Financial Crisis of 2007/0
08
To set the stage:
Consequence
Consequence of human action
but not human design
(August v Hayek)
Th
he driving force of change is the
perenn
nial gale of creative destruction
(Joseph Schumpeter)
In a crisiss, markets can remain irrational

longe
er than you can remain solvent
solvent
(John Maynard Keynes)
Maybe
Maybe if I had lived through the Great Depression,
Depression
I would have been in a betterr position to understand events
(John Meriwether, LTCM)
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13
Agenda for section 2
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What happened?
pp
So what?
Wh t now?
What
?
Excursus: Overview of assset backed securities (ABS)
14
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Tab A
What happened?
What happened? An illustrative interpreta

ation
Economyy as human bodyy

Financial equals cardio vascular system
Two deccades of performance enhancing
drug abuse (= cheap credit/capital)
2007 sign
ns of high blood pressure etc
October 2
2008 near-fatal heart attack
Surgicallyy prevented by government intervention
Exodus avvoided but still intensive care
Problem
m:
eons are the only ones with credibility
Surge
Plastic surgery next?
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15
What happened? A historic interpretation
the ascent of money has been one of the d

driving forces behind human progress:
a complex process of innovation, intermediatio
on and integration that has been as
vital as the advance of science or the spread of
o law
(N. Ferguson, Ascent of money)
99% of financial history happened within two standard deviations

everything importantt outside of it
void
Tulip bubble
Louisiana landboom
Two types of bubbles:
legacy
US railroads
Internet boom
Globalisation and securitisation as important legacies of leverage boom

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16
What happened? A macroeconomic interp

pretation
Monetary
y imbalance
USA: Interest rate development
Inflation (CPI, 2002 to 2007, % pa)

3.5
3.0
2.5
20
2.0
1.5
1.0
0.5
0.0
10
8
6
4
2
0
90
94
98
02
Fed funds target rate
06
Average EMU inflation
DE
10
3.5
3.0
2.5
20
2.0
1.5
1.0
0.5
0.0
Average 3M rate, %
FR
NL
AT
IT
ES
GR
IR
PT
10Y govt. bond yields
Source: Fed, BLS, Global Insight
Source: Eurostat
Credit imbalance
Credit to private households & non-financial
corporations (1997 = 100)
700
280
260
240
220
200
180
160
140
120
100
80
60
1997
600
500
400
300
200
100
0
1997
2000
EMU
2003
DE
IT
2006
ES
2009
PT
Source: ECB, Eurostat
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Real house prices (1997 = 100)
2000
DE
GR
2003
GR
2006
IE
2009
ES
IT
Source: OECD
17
What happened? A macroeconomic interp

pretation (continued)
Regional imbalance
Balance of trade (in US$bn)
National savings rate (in % of GDP)

35.5%
33.5%
31.5%
29 5%
29.5%
27.5%
25.5%
23.5%
Industrial countries
800
600
400
200
0
(200)
(400)
(600)
Developing
p g countries
Industrial countries
Developing countries
21.5%
19.5%
1998
2000
2002
2004
2006
17.5%
2008
1991
1993
1995
1997
1999
2001
2003
2005
2007
Sectoral imbalance
Global financial assets (in US$bn )
200
294%
150
Growth (in %, pa)
317% 346%
350%
300%
201%
54
44
100
109%
50
0 2
2
5
1980
3
Equity
Bonds (private sector)
32
18
15
13
22
14
18
1995
2000
25
Gov bonds
Bank loans
Global GDP
5.9
5.0
Global trade
6.8
7.4
Capital flow
8.1
10.7
250%
200%
43
150%
24
26
100%
39
45
50%
2005
2006
36
since 1980 since 1990
0%
Financial depth
(Financial assets/GDP)
Source: Global Insight, Allianz Research
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18
What happened? A political interpretation
Demographic challenge
d return
Capital accumulation and
Commitment to
t private homes
Freddy Mac
c and Fannie Mae
Attracttion of financial industry
Tax advantages
g and regulatory
g
y arbitrage
g
European integration and enlargement
E
Spain, Ireland and CEE
Globalisation and GDP growth
Chimerica and Germany
BRIC Wirtschaftswunder
Commodity boom and SWF
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19
What happened? A systemic interpretation
Fair-Value-Trap (Mark-to-Market)
no observable market
Model assumptions
market distortions through
liquidity crisis
Procyclicality of the Basel Framework
Asset-backed securities Index (ABX.HE 06-02 AAA)

100
90
80
70
60
50
40
30
Jan-07
Jul-07
Boom
Ratings
improve
Jan-08
Jul-08
Jan-09
Recession
RWA
decrease
Ratings
fall
Downswing
RWA rise
MtM impairments
MtM gains
U
Upswing
i
Loan supply
increases
Capital requirements
lower
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Loan supply
slumps
Capital requirements
increase
20
What happened? A systemic interpretation (continued)
Increased leverage pre-crisis
Expanded business model
Assets/equity multiple
40x
45
35
25
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
15
Source:
Company data, Deutsche Bank Research bank coverage universe
Bank sponsored SIV assets under management (US$bn)

100
80
60
40
20
0
x2
2003
2004
2005
2006
2007
Source: Deutsche Bank Global Markets Research
Increased risk taking
Creation of complex products
( ) of Euro and US banks (m)

Evolution of average VaR(a)
Issuance of ABS CDOs backed by subprime products (US$bn)
x3
153
59
2002
2008
(a) VaR numbers are as reported and do not reflect changes in methodology since then
Source: Company data; chart shows major global investment banks across US and Europe
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80% CAGR
250
200
150
100
50
0
2003
2004
2005
2006
2007
Source: Deutsche Bank Global Markets Research

21
What happened? A technological interpretation
Information technology
Global information flow
Instant data availability
Model capacity/quantitative
p
yq
trading
+
Financial markets- technology
Academic achievements
(equity options, interest
deri ati es credit deri
derivatives,
derivatives)
ati es)
Innovative strength of financial
industry
Complex,
intransparent
financial products,
eg
ABS, CDS,
ABS
CDS
CDO, CDO,
+
Reaction to instant information
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22
What happened? A behavioral interpretatiion
Herd behaviour in capital markets

extreme events are generally underestimated (tail risks)
non-perfect models are run on the same histo
oric data sets
Deficient incentive systems (bonus
(bonus-system)
system)
varying time-horizon of different market participants
(banks, investors, endowments, pension fundss etc)
differing business cultures: Trader
Trader vs Investo
Investo
or
or
Failure of institutional governance:
departmentalisation of risk and return
risk-controller
risk controller vs risk-manager
risk manager
Relative performance orientation
my bonus vs Joes
global benchmarking vs transparency
Black swans and turkeys
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23
What happened? A competitive interpreta

ation
As
As long as the music is playing, you've
you ve got to
o get up and dance
dance
(Charles O Prince)
Intense competition for capital and talent

traditional banks vs investment banks
investment banks vs private equity/hedge fund
ds
No conflict no interest
Relative market capitalisation and growth
determine strategic freedom of action
Illusion of satisfactoryy underperformance
p
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24
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Tab B
So what?
So what? A multi-lever crisis

Q3
2009
Q2
2007
Q3
2007
Q4
2007
Q1
2008
Q2
2008
Q3
2008
Q4
Q
2008
Q1
2009
Q2
2009
Q3
2009
Q4
2009
Q1
2010
Q2
2010
1 Subprime Crisis
Credit and Liquidity Crisis
Capitalisation crissis (banking industry)
Global
G
oba b
break-down
ea do
o
of
Fi
Financial
i lE
Economy
4 the banking sector and new regulation
Real Economy
5 interventions
Governments
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Global economic crisis/government
Government debt
6 crisis
25
So what? Credit and liquidity markets in a vicious circle

Q3
2009
Vicious circcle
Increase
in mortgage
defaults
and arrears
(subprime)
Rating
downgrades;
unclear who
is impacted
Confidence
falls; Inter-bank
money market
illiquidity
(CP market
freezes)
Leveraged
vehicles fail
(SIV, conduits)
Write-downs;
tighter lending
Impact on real
economy
Credit crisis
Li idit crisis
Liquidity
i i
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26
So what? A nearly fatal heart-attack

MSCI World September/October 2008
S
September
October
Sale
Dresdner Bank
Nationalisation
Fannie Mae
Lehman insolvent
Takeover of ML
Freddie Mac
Takeover of
HBOS
Emergency sell-off
of Bradford & Bingley
Wachovia
split up
GS and MS
become
bank holding
companies
1000
950
8
15
900
850
19 21
17
18
28
29
800
750
AIG
lifeline
700
ECB
tightens
lending regulations
650
US
rescue program
30
3.
5.
7.
Aegon
capital injection
2. HRE
rescue
German
rescue plan
Dexia
rescue
e
Washington
Mutual
collapses
600
1.
CS + UBS
get fresh capital
BNP Paribas
P
buys parts
p
of Fortis
State guarantee
g
in Gerrmany
26
9. 11. 13. 15. 17. 19. 21. 23. 25. 27. 29.
Postbank
fresh capital
US rescue
program
passed by
Congress
1.
3.
Spreading
recession fears
ING 10bn
capital injection
Icelan
ndic banks
nation
nalised
Fortis
bail-out
HRE bail-out
French banks
capital injection
Part nationalisation of
UK banks
Global round of rate
cutting
13
20 21
16
22
28
27
5.
7.
9. 11. 13. 15. 17. 19. 21. 23. 25. 27. 29. 31.
with fundamental and permanent implications on the financial sector

Source: Thomson Datastream
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27
Unprecedented action by governments
S
Support
t measures since
i
2007 (US$b
(US$bn))(a)
3, 50
3,250
1,890
FED
ECB
((eg Treasury
T
purchases,
QE1, QE2)
((eg liquidity
li idit
provision,
covered
bond
purchases)
543
514
440
Gov Capital injection

i
BoJ
BoE
((eg QE1,
QE1
QE2)
( JGB
(eg
purchases,
bank loans)
((global
l b lb
banks
k
only))
(a) Totals reflect broad range of support measures and not just liquidity measures
Source: Deutsche Bank Global Markets Research, G20, Bloomberg
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28
So what? A lastingly changing landscape
but its not

the end of Wall Street
New supervisory regulations
will be shifting the focus
towards security and stability
Industry has adapted as
necessary before, and it will
again
Its place in capital formation
d liliquidity
idi provision
i i iis still
ill
and
necessary
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29
So what? Back-coupling on the real economy
Moratorium
m on New
Investm
ments
Declining
Economic Growth
Exacerrbated
Refinancing
Increasing
Default Rates
Companies
Real
Recession
Financial Crisis
Higher
Hi
h Interest
t
t
Costs/Defaults
Declining
Consumption
Consumers
Declining
D
li i g Asset
A
t
Prices/W
Wealth
Source: WEF (2009)
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30
So what? The worst financial crisis since World-War II
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31
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Tab C
What now?
What now?
Perspectives
What we know
What we dont know
Historic
No mean reversion of nation states
Macroeconomic
Political
No return to Chimerica
Lower growth,
growth lower capital returns
Return of inflation (midterm)
Decline in international trade
Reindustrialisation US
Rising
g savings
g rates
Never again politics
Strong re-regulation trend
Demographic challenges remain
Home country
y bias ((bank lending)
g)
Loss of trust in elites and institutions
s
Asian (China) potential remains high
h
Rising taxes
Redistribution of wealth
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Re-engineered Western-centrism
Economic regionalism
Fragmented protectionism
Rebalanced multilateralism
30s reloaded
Yes
Yes, we Keynes
Keynes
Japan
BRIC
Europe
Different regional
g
impacts
p
Degree of nationalism and
deglobalisation
Social and political stability
Pension gap/public debt
EU cohesion
Zeitgeist vs rule of law
Pacta sunt servanda vs sunt petenda
32
What now? (continued)
Perspectives
p
What we know
Enhanced regulatory requirements

Tackling Too-Big-to-Fail
Adjustment of accounting rules
Adjustments for fat tail risk/black swa

an
Systemic
Technological
Behavioral
Competitive
Risk aversion rising

Conservative but social awareness
Skepticism of finance, markets, man
nagers,
corporations
Cocooning, immobility
Extended work life
Deleveraging
Complexity reduction
Death of global titans
Talent into non-financial sector
Institutions over individuals
Fight for AuM
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What we dont know
Basis for next bubble

Effects of rapid rise in Chinese credit
Next 100 years event
Entrepreneurialism
Innovative capabilities
Investor risk return appetite
Universal vs utility
y banking
g
Sustainability of export model
Illusion of sustainable over-performance
33
Financial regulation has always been a ke

ey driver for the banking industry
History of financial regulation in the US

1927
1956
1
1999
The McFadden Act
Bank Holding Company Act
G
Gramm-Leach-Bliley-Act
Prohibition of
intrastate banking
End of bankholding
companies
Barrier between banking
and insurance
Repeal
Repeal of Glass-Steagall-Act
Glass Steagall Act
Path towards financial integration
Break-down of barriers allowing
banks, securities, firms and insurance companies to affiliate
New financial holding companies
1933
1996
2010
Glass Steagall Act
2
Glass Steagalls section 20
provision 1))
Permission for banks to
earn up to 25 % of revenues
from securities
Dodd-Frank Act
Consumer protection
Aims to end Too-Big-to-Fail by
imposing new capital requirements
and liquidation process; Volcker rule
Derivatives clearing
Supervision of hedge funds
SEC oversight of rating agencies
Compensation and Corporate
Governance
Separation of commercial and investment

banking
Regulatory environment has traditionally dicta

ated the structure of the industry
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34
An example: The House of Morgan
JS Morg
gan & Co.
1838, London
JP Morgan
1861, New York
Morgan Stanley
1935
Mo
organ
Guaran
nty Trust
19
959
Morgan Grenfell
1910
Morgan Stanley
Dean Witter
1997
JP Morgan
M
Ch
hase
20
000
Deutsche Bank
1989
Morgan Stanley
2001
JP Morga
an Chase,
Bankk One
20
004
What happens after new regulations like the Dodd-Frank Act?

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35
Comparison of approaches to a structural reform of the banking sector
Proprietary trading
US Volcker rule outright prohibition

of proprietary trading activities
German & French separation laws

l
separation of limited set of risky trading

activities from rest of the bank
UK Banking Reform Act (Vicke

ers)
ring-fence (separation) of depos
sits and
payments from investment bankk
EU Regulation (Liikanen) pro

ohibition
of proprietary trading and separa
ation of
market making
Deposit taking
Payments
Loans
Lending to Hedge Funds

/ PE
Market Making
Hedging
Underwriting
Proprietary trading
Deposit taking
Payments
Loans

/ PE
Market Making
Hedging
Underwriting
Proprietary trading
Deposit taking
Payments
Loans

/ PE
Market Making
Hedging
Underwriting
Deposit taking
Payments
Loans

/ PE
Market Making
Hedging
Underwriting
Proprietary trading
Different jurisdictions have chosen to adop

pt different approaches to a structural reform
of their banking sector issue of unlevel p
playing field
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36
General arguments for and against the existence of universal banks
Pros
Cons
Diversification of revenue sources leads to more

balanced earnings
(Organizational) complexity of universal banks leads to a

less transparent and potentially weaker risk profile
Diversification of asset portfolios reduces concentration

risks on the balance sheet
After a potential break-up, there would be a lower

potential for hidden balance sheet risks
Diversification of funding sources allows for more

flexibility and more robustness during crises
Implicit government guarantees (too big to fail), which

many universal banks enjoy, impede proper risk
management and prudent decision-making
Integrated product offerings facilitate one-shop stops

for customers at a single bank
Cross-subsidization of earnings and funding between
segments results in more diverse and holistic product
offerings
Due to their size, universal banks are the primary source
of economies of scale in banking resulting in lower costs
for clients
Universal banks are the key contributor to innovations to
the advantage of other stakeholders
History suggests that specialized (non-universal) banks
are relatively more exposed to failure
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There would be no loss of benefits as economies of

scale could be maintained at large single business banks
Cross-subsidizations at universal banks are negative for
the industry as they prevent natural catalysts to drive
unsustainable businesses out of the market
Retail depositors should not be responsible for risky
investment banking activities, which is the case at
universal banks
Investors would have higher transparency into their
investments when segments are separated
Rescues of universal banks are most painful for
taxpayers as these institutions tend to be among the
largest
37
No pattern of business models or size whe

en looking at recent bank failure
Bank
Business model
AIG
Alliance and Leicester
Insurance
Retail
Total assets (bn) Rea

ason for failure
712
Solvency concerns (financial products)
95
Liquidity concerns (mortgage exposures)
Allied Irish Banks
Retail & Commercial
174
Poor credit quality; low capital
Anglo Irish Bank
Retail & Commercial
101
Poor credit quality; low capital
Investment Bank
268
Liquidity and asset quality concerns (trading operations)
63
Liquidity concerns (mortgage exposures)
1,375
Liquidity and asset quality concerns
Retail
142
Liquidity and asset quality (mortgages)
Dexia
Public finance & retail
604
Low capital and liquidity concerns
Fortis
Bank-insurance
871
Low capital in banking unit
HBOS
Retail & Commercial
802
Liquidity and asset quality concerns (mortgages)
Hypo Real Estate Group
Public finance / CRE
350
Liquidity and asset quality concerns (mortgages)
Bear Stearns
Bradford and Bingley
Citi
Countrywide Financial
Retail
Universal Bank
IKB
Commercial Bank
50
Excess liquidity and bad investment decision
Lehman Brothers
Investment Bank
464
Liquidity and asset quality (trading operations)
Merrill Lynch
Investment Bank
684
Liquidity and asset quality (trading operations)
National City Bank
Retail
97
Liquidity concerns arising for high loan to deposit ratios
Northern Rock
Retail
131
Liquidity concerns arising for high loan to deposit ratios
RBS
S
Universal
U
e sa Bank
a
2,285
, 85
Asset q
quality
y concerns in investment and commercial banks;; low capital
p
ratio
UBS
Universal Bank
1,460
Asset quality concerns, large structured credit portfolio in Treasury
Wachovia
Retail
525
Low capital and asset quality (mortgages)
Washington Mutual
Retail
161
Liquidity and asset quality (mortgages)
Commercial Landesbank
288
Excess liquidity and bad investment decision
West LB
Source: Deutsche Bank Research
Deutsche Bank
38
Potential unintended consequences when separating banking activities
Overall economic
growth
European corporates much more reliant on bank credit than US corporates

ase,, as well as costs of hedging
g g and liquidity
q
y likely
y to decrease
Cost of credit likelyy to increa
Impact studies for Vickers sh
howed a significant impact on UK GDP of proposals put
forward
Midcap access to
service
More limited access to creditt and services, especially for Midcaps who may not be served
b iinternational
by
i
lb
banks
k
Increased complexity of servving clients for banks
Several of our clients have spoken
s
out against the reforms
Loss of competitiveness
European banks would be disadvantaged in serving US and Asian clients (account for
25% of revenues) at a time when
w
EU banks are already under pressure
Smaller banks (under separa
ation thresholds) may increase systemic risk by trying to
provide additional services
Retail and Commercial

banks could become
more risky
Retail and Commercial bankks will have deposit overhangs which they will be forced to
invest into yielding assets
d the failure of many retail banks due to poor investment
During the crisis this caused
decisions
Shadow banking
Expected growth in the shad

dow banking sector, currently with lighter regulatory regime
May have unintended conse
equences for financial stability
Deutsche Bank
39
Bank credit, patterns of foreign banks and impact on the (unregulated)

shadow banking market need to be consid
dered carefully
Banks remain an important
p
source of credit in Europe
Foreign
g bankks tend to exit
non-home ma
arkets in crisis
Growth of shadow banking

g
sector in Europe
% of credit from banks vs capital

markets
Example Germany: loans to domestic

firms and self-emplo
oyed (% yoy)
Assets in tn
75
10.8
15
10
9% CAGR
5
0
30
5.1
(5)
(10)
(15)
(20)
Europe
US
Source: Deutsche Bank Global Markets Research, Bundesbank
Deutsche Bank
07
08
0
09
10
11
Dome
estic banks
Foreiign banks
Source: Deutsche Bank Global Markets

M
Research, Bundesbank
2003 Q4
2012 Q2
Source: ECB Monthly Bulletin February 2013,

based on euro area accounts (ECB and Eurostat)
and monetary statistics (ECB)
40
Summary
No silver bullets
Next 20 yyears structurallyy differrent than p
past 20
No return to status quo ante
Fundamental challenges remain (see section 4 on the New
New
Normal)
Demographic time bomb
Overstretched state commitmentss
Climate change
Political, economic power shifts
Growth requires a focus on intellectual capita
al and incentives for entrepreneurialism
Deutsche Bank
41
Deutsche Bank
Tab D
Excursus: Overview of asset backed securities (ABS)
Asset Backed Securities (ABS)
((Asset)) Securitisation
Since the 1970s a new service offered by investment
i
banks
Strong growth in the 1980s because of (inte
ernational) deregulation
Securitisation is either
Placement of instruments as a substitution of other ways of finance
(example: bonds vs bank loans)
Transformation of (illiquid) assets into (liquid
d) securities
(= asset backed securities)
Deutsche Bank
42
Goals of asset securitisation
Liquidity
q
y improvement
p
Additional possibilities to raise capital
Access to international capital markets
Improvement of capital ratios
Tax reduction
Bank specific issues:
gain flexibility regarding (legal) capital ad
dequacy requirements
credit portfolio management (risk management)
Deutsche Bank
43
Types of asset securitisation
AB
BS
Asset backed secu
urities in aggregate
MBS
AB
BS
CDO
Mortgage Backed
Securities
as a gene
eric class
Collateralised Debt
Obligations
RMBS
C dit Cards
Credit
C d
CBO
(Residential Mortgage
Backed Securities)
Auto Leasing
(Collateralised Bond
Obligations)
CMBS
Consume
er Loans
CLO
(Commercial Mortgage
Backed Securities)
Oth
hers
(Collateralised Loan
Obligations)
Deutsche Bank
44
Selection of underlying assets
Examples
p
Car loans
Credit card receivables
Student loans
Trade receivables
Mortgages (MBS Pfandbrief)
Leases (car, airplane, computer)
Insurance claims
etc
Deutsche Bank
45
Generic ABS structures: An illustration
Tru
ust
comp
pany
Manag
gement ((Bridge
g
g financing
gp
provided))
Asset sale
Originator
Payments
Service fees
Spe
ecial
Purp
pose
Veh
hicle
Service
Payments
Services/goods
Debtor
Deutsche Bank
Principal
and
interest
Investor
Liquidity
Ratting
Rating
agencies
46
Mortgage Backed Securities (MBS)
An illustrative
us a e value
a ue chain
c a of
o the
e mortgage
o gage marke
a e
et
Individual
borrower
Mortgage
lender
Deutsche Bank
Commercial bank
Hedge funds
Wall Street lende
Pension funds
er
Other financial institutions
Financing
counterpart/lender
47
Collateralised Debt Obligations (CDO)
CDO balance sheet

A CDO is comparable to a finance company
borrows money (liabilities)
invests in assets (collateral)
has residual value (equity)
Equity of a CDO represents an ownership
stake in an entity and first loss position
Assets are typically managed by a seasoned
assett manager in
i the
th respective
ti CDO assett
class
Whether the liabilities can be repaid or not,
depends on the performance of the collateral
pool and the asset manager
Through credit enhancement, CDOs are able
to issue investment grade debt from subinvestment grade assets, which makes CDOs
available to a wide investor base
Deutsche Bank
Assets
Liabilities
(CDO portfolio)
(CDO debt)
Shareholders
equity
(Residual
income)
48
Credit enhancements mechanism
I t
Internal
l credit
dit enhancements
h
t
Subordination
verse order from subordinated to the most senior tranche

Losses in the pool are allocated in rev
Excess collateral
Collateral pool value exceeds the principal value of the ABS notes
Reserve account
Primarily losses are covered with the reserve

r
account
Excess spread
Available interest margin absorbs pote

ential losses before any tranches takes a loss
External credit enhancements (rely on a third party guaranttee)

Guarantee
External counterparty (normally insura

ance company) ensures interest payments and redemption
Bond insurance
Bond insurance provides for protection

n against losses through the purchase of insurance against
non-performance
Deutsche Bank
49
CDOs divide the securities to be issued into various credit tranches with
different risk/return profiles
Economics associated with a simple
p hypothetica
yp
al CDO
Basic CDO Structure
Assets held
by CDO
Securities issued
by CDO
Proceeds
Principal
+ Interest
ABS
Excess
Cash flow
Senior
notes
Junior
notes
(Mezzanine)
Equity
(Preferred
shares)
CDO Cash Flow analysis

a
(in US$m)
Assets
ABS
Management &
other Expenses
Liabilities
Class A
Class B
Class C
Equity
Ratin
ng
Amount
(US$)
Libor
Spread
Interest
Rate
Unratted
400
5.35%
1.90%
7.25%
29.0
(1.0)
28.0
AAA
A
A
BBB
B
250
105
10
Unratted
35
Maximum potential yield to equity
Deutsche Bank
Cash Flow
(US$)
5.35%
5.35%
5.35%
0.35%
1.20%
2.50%
5.70%
6.55%
7.85%
14.3
6.9
0.8
Residual
6.0
17.1%
50
Complex relationships: From mortgage, co

ommercial and consumer loans
to securitisation and CDOs
Initial Collateral
(financial assets)
Agency Mortgage
Backed Loans
Mortgage
Loans
Securitisa
ation
(bonds backed by
fi
financial
i l assets)
t )
Agency MBS
S
(Pass-through MBS or CMOs)
Commercial
Mortgages
CMBS
Jumbo Loans
Resi-A RMB
BS
Alt-A Loans
Consumer /
Commercial
Loans
Auto Loans
Student Loans
Others
A-notes
B-notes
CRE CDO
(primarily CMBS, but some
whole loans))
CDO of
High Grade ABS
(senior
CMBS, RMBS, ABS &
CDO tranches)
Home Equity Loans

(HEL)
Credit Cards
CDOs
Asset Backe
ed
Securitisatio
on
(ABS)
HEL-ABS
is the largest sector
s
CDO of
Mezzanine ABS
(mezzanine
CMBS RMBS
CMBS,
RMBS,ABS
ABS &
CDO tranches)
(eg manufacturing housing)
Source: Dresdner Kleinwort Debt Research
Deutsche Bank
51
Sub-investment grade collateral in investm

ment-grade securities
How a subprime mortgage becomes a Home Equity ABS (HEL

EL-ABS)
ABS) and is packaged into CDO tranches
Subprime
mortgages
Home equity
ABS
Principal
+
Interest
Home equity
ABS
High grade deals

Super
Senior
AAA
Triple-A
Senior
AAA
Double-A
Mezzanine
AA
A
BBB
Triple-B
Subordinated
AA
A
BBB
Equity
Losses
Double-B
Subordinated
First loss
Piece
CDO
Equity
Mezzanine deals
Super
Senior
AAA
AA
A
BBB
Equity
Source: Citigroup Credit Research
Deutsche Bank
52
Collateralised Loan Obligations (CLO)
Comparable
p
to CDOs except
p that collaterals are loans instead of debt securities
Variety of loans are used, eg
ed companies
high yield loans associated with distresse
leveraged loans associated with leverage
ed or management buyouts
investment grade loans
emerging market loans
project finance loans
Buyout
B
t boom
b
in
i 2006/
2006/early
l 2007 was fifinancced
d mainly
i l b
by CLO
CLOs
Instead of retaining leveraged loans to fund
d buyouts on its balance sheet,
a bank has sold such loans into the CLO market, thus freeing up capital to extend new
loans to other private equity firms
Deutsche Bank
53
Asset backed commercial paper (ABCP) programs

p
(1/3)
Similar to ABS,, ABCP programs

p g
repackage
p
g p
pools of assets into special
p
purposes vehicles
g short-maturity debt
However, they are mainly funded by issuing
(commercial paper (CP))
t fund purchases of financial assets
Proceeds from the short-term debt is used to
Three most common vehicles:
traditional conduits: Use debt to finance recceivables, leases, loans
security arbitrage conduits: Use debt to invest in highly rated
structured credit paper
structured investment vehicles (SIV): Use
e debt to mainly buy mainly longer-maturity
corporate bonds and lower-rated structurred credit products
Arbitrage conduits and SIV are tranched: Lo
osses are first absorbed by equity holders and
only subsequently by holders of medium-term-notes and CP
Deutsche Bank
54

p
(2/3)
Collateral composition
p
Arbitrage conduits
SIV
CBO/CLO
CMBS
25%
RMBS
17%
CDO
23%
Student loans
5%
HELs
5%
4% Credit cards
RMBS
31%
13%
Deutsche Bank
Others
Financial
11%
CMBS
6%
Credit card
5%
4% Student loans
Oth
Others
7%
44%
55

p
(3/3)
In comparisons
p
to ABS CDOs,, arbitrage
g con
nduits and SIVs are p
perpetual
p
structures with
revolving and fluctuating asset sizes (CDOss have fixed portfolio sizes and pre-defined
amortisation schedules no asset /liabilityy mismatch)
ABCP programs face important liquidity riskks: If they cannot extend commercial paper
financing, they must dissolve themselves an
nd sell the underlying assets
Sponsoring banks of arbitrage conduits typiically offer liquidity support (liquidity line for
arbitrage conduits is generally equal to 100% of the outstanding CP)
SIVs typically do not have liquidity lines
Deutsche Bank
56
Analytical framework for structured finance

e ratings
Five areas of analysis:

y
Credit quality of the securitised assets
Payment structure and cash flow mechanics

(incl guarantees etc)
Legal and regulatory risks
Operational and administrative risks
Counterrparty risk
Rating agencies measure credit risk, ie the odds of default on a debt instrument that is
held to maturity
They NEITHER measure market risk (whe
ether the price of the asset will rise or fall until
it reaches maturity) NOR liquidity risk (whether the asset will remain easily tradable)
Deutsche Bank
57
Rating systems
Investment
Grade
Moodys
y
Standard & Poors
Aaa
Aa1
Aa2
Aa3
AAA
AA+
AA
AA-
Prime-1
A1
A2
A3
Baa1
Baa2
Baa3
A+
A
APrime-2
Prime-3
Ba1
Ba2
Ba3
Speculative
Grade
B1
B2
B3
Deutsche Bank
A-1
A-2
A-3
BB+
BB
BBNot Prime
Caa
Ca
C
Long-term
BBB+
BBB
BBB-
A-1+
Short-term
B+
B
B-
CCC
CCC+
CCC
CCC-
Long-term
Short-term
58
The role of monoliners
Rating Agencies
Investors
Municipal bond issuers
Municipal bonds
Structured credit, incl

mortgage-backed securities
Wrapped bonds
M
Monoliners
Investment banks
Hedge
g funds
Deutsche Bank
59
Credit Default Swap (CDS)
Protection Buyer: purchases protection in case of a default of an agreed underlying

Protection Seller: sells protection in case of a defa
ault of an agreed underlying
Periodic spread
d payment [X] bp
Protection
Buyer
Protection
Seller
Notional valu
ue of underlying
Unde
erlying
In case of default
Protection Buyer
Protection Seller
NPV C
Cash-flows
h fl
=
((1-R) x PD + 0 x (1-PD)) x d =
Probability
weighted cash flows
in case of defaults
NPV C
Cash-flows
h fl
Sxd
Probabilitty
weighted
d cash flows
in case of
o no defaults
Spread payment
Discount rate
Recovery rate
PD Probability of default
Deutsche Bank
60
Deutsche Bank
Section 3
The European Sovereign Deb
bt Crisis
Root causes of the debt crisis go back a lo

ong time
Germany: Public revenue, expenditure, balance & GDP

G
(1970 = 100 (left), in % of GDP (right))
1,000
2.0
900
1.0
800
0.0
700
(1.0)
600
(2.0)
500
(3.0)
400
(4.0)
300
Maastricht limit
200
(5 0)
(5.0)
(6.0)
100
0
(7.0)
1970
1975
1980
Budget balance (right)
1985
GDP (left)
1990
1995
2000
Public revenue (left)
2005
2010
Public expenditure (left)
Note: Excluding one-off effects (take-over of the debt of the Treuhandanstalt in 1994 and UMTS sales re
eceipts' in 2000)
Source: Sachverstndigenrat, Deutsche Bundesbank
... and remember: the country used as an exa

ample is among the least affected
Deutsche Bank
61
Escalation of sovereign debt crisis in 2009

9
Fiscal balances (in % of GDP)

in % of GDP
5%
0%
(5)%
(10)%
(15)%
(20)%
(25)%
(30)%
(35)%
2005
2006
Greece
2007
Ireland
2008
2009
9
Italy
2010
2011
Portugal
2012
2013E
2014E
Spain
Source: Eurostat, Deutsche Bank Research
Fiscal balances in Europe

Europess periphery still und
der pressure
Deutsche Bank
62
Risk was reassessed...
EMU: yield spreads (spread to German long-term in

nterest rate in percentage points)
30
25
20
15
10
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 20
002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Greece
Ireland
Italy
Portugal
Spain
Source: Global Insight (as of 15-Feb-2014)
Yield spreads and CDS levels spiked to unprrecedented levels

Deutsche Bank
63
... and flight to (perceived) quality accelera

ated
Net positions vis--vis the Eurosystem (Target2) until Sep/Oct 2013 in bn

De Nederlandsche Bank
Banque Centrale du Luxembourg
Bank of Finland
Deutsche Bundesbank
1,200
1,000
800
600
400
200
0
(200)
(400)
Banca d'Italia
Nationale Bank van Belgi
Banco de Espaa
Bank of Greece
Central Bank of Ireland
(600)
(800)
(1,000)
(1,200)
2007
2008
2009
2010
2011
2012
2013
Source: National banks, Deutsche Bank Research
Germany with a dominant net position,

position while Spain
Spains
s and Italy
Italys
s gap widened sharply in 2012
Deutsche Bank
64
Five options to deal with a debt overhang
Growth: growing out of debt; debt to GDP ratio declines

Problem 1: EU structural growth rate too low even in good times!
Problem 2: Does not help in the short run and short-te
erm stimulus programmes are fiscally counter productive
Austerity: debtors save long period of sub-trend growth, deflation
Problem 1: not all nations or all sectors of an economy can
c simultaneously generate surpluses
Problem 2: corporatism often leads to savings in innovative sectors
Monetisation: central banks finance debt inflation
Problem 1: ECB has no mandate nor political support to
o do this
Problem 2: Does not lower the interest burden as investtors will add an inflation surcharge
Default: classic default event reduces debt overhang quickly
Problem 1: hurts creditors; banking crisis ensues; dama
ages reputation of debtors
Problem 2: Cross-national contagion
g
effects
Financial repression: private sector forced to invest in private debt distortion
Problem 1: worked well post-WWII, but would it in mode
ern economies? (capital mobility)
Problem 2: Crows out resources for investment in infrasstructure,
structure education and R&D
Deutsche Bank
65
Measures taken to tackle the crisis
by the ECB
Government yields as crisis thermometer
Refi rate reduction

Extension of the maturity of liquidity provisions
Widening of collateral eligibility
Spreads to bunds (10yr government bonds, %)

40
35
Draghi "whatever it takes"
30
Covered bond purchase program

25
Securities Markets Programme

20
Longer-term refinancing Operations

(3 year LTRO)
Draghis Bazooka as the game changer (do
whatever it takes): Outright Monetary Transactions
(OMTs), ie potential unlimited purchases of
government bonds
Forward guidance: Promise to keep refi rates low
15
10
5
0
Jan-10
Jan-11
Greece
Ireland
Jan-12
Italy
Jan-13
Portugal
Jan-14
Spain
Source: Datastream, GetRetisData
Deutsche Bank
66
Measures taken to tackle the crisis by po

oliticians
by politicians at the European level
First rescue package for Greece (May 2010)

European Financial Stability Facility (EFSF, May
2010)
Ireland bailout (November 2010)
Portugal bailout (April 2011)
by politicians at the national level
Consolidation of public finances

Challenge: Consolidation difficult in economically
tough times
Stronger fight against tax evasion
Challenge: inefficient administrations
Second Greek rescue package (March 2012)

Spains bank recapitalisation (June 2012)
Greek debt restructuring (March 2012)
2012/2013: Overhaul of fiscal surveillance (Fiscal
Compact, reformed Stability and Growth Pact)
2013: European Stability Mechanism (ESM)
Cyprus bail-out
bail out / bail
bail-in
in (March 2013)
Project Banking Union (Single Supervisory
Mechanism, Single Resolution Mechanism, Single
Rule Book)
Deutsche Bank
Privatisations
Challenge: Prevent fire sales
Reforms of the labour market, public administration
and pension systems
Challenge: reform gridlock and strong unions
Deregulation and liberalisation of sectors and
professions
Challenge: Wide-spread Corporatism
67
Consolidation of public finances with good

d progress
Structural budget deficits (% GDP, pp)

5.0
0.0
(5.0)
(10.0)
(15 0)
(15.0)
(20.0)
ES
FR
GR
2013
PT
BE
E
EMU
NL
IT
AT
FI
DE
C
Change
since last high 2009/2010
Source: EU Commission
Strongest shift in Greece

Greece, Portugal and Spain
n
Deutsche Bank
68
Competitiveness is slowly improving
Unit labour costs
: Effective exchange rate
2005 = 100, seasonally adjusted
Vis-a-vis 40 trading partners, Index Q1 1999=100
125
130
120
120
115
110
110
100
105
90
100
80
95
05
06
Germany
Ireland
07
08
09
10
11
Greece
Portugal
Source: OECD
12
13
05
06
07
08
09
10
11
12
13
Nominal effective exchange rate
Italy
Spain
Real effective exchange rate CPI deflated

Source: ECB
Reduction of unit labour costs and real deprecia

ation of the has helps to improve competitiveness
Deutsche Bank
69
Progress also visible in current account ba

alances and export data
Current account balances
Export performance(a)
% GDP, Q4 mov. average
1999=100
130
10.0
120
5.0
110
0.0
100
(5.0)
90
(10.0)
80
(15 0)
(15.0)
70
(20.0)
01
02
Germany
Portugal
03
04
05
Greece
Spain
06
07
08
09
Italy
France
Source: National statistical offices, Eurostat
10
11
12
13
60
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Ireland
Germany
Portugal
Italy
Spain
Ireland
France
(a) Actual growth in exports relative to the growth of the country's export markets
Source: OECD
Current accounts of peripherals in upbeat moo

od; worrisome export performance in France & Italy
Deutsche Bank
70
The positive trend could continue...
Fiscal deficits are coming

g under control
Average primary deficit (deficit ex interest paymentss) among the 5 peripheral member states fell
from 7.5% of GDP in 2009 to 1.7% in 2012 and turn
ned positive in Q4/2013
Current account deficits are closing
All the peripheral euro area members are seeing a decline of their current account deficits
On average, the trailing 4-qtr deficit has fallen from a peak of 9.4% of GDP in 2008 to 4.0% in Q4
2013
Higher frequency data is more impressive: Ireland, Portugal and Spain back in surplus; Greece
recording three months of surplus in the last four
Target2 imbalances are declining
For example: negative values for France, Belgium and
a Spain more than halved by now
Source: Deutsche Bank Research, Haver Analytics LP
Deutsche Bank
71
... but especially labour markets are still ch

hallenging and...
Unemployment rate
Youth unemployment
Unemployment rate, under 25 years, %
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
07
08
09
Germany
Italy
10
11
Greece
Portugal
Source: Global Insight (as of 15-Mar-14)
12
13
07
08
Ireland
Spain
09
Germany
Italy
10
11
Greece
Portugal
12
13
Ireland
Spain
Source: Eurostat
Recall Hartz reforms ... it take several years tto make an impact
Deutsche Bank
72
... there is still a home bias of debt in perip

pheral Europe
Public debt
Exposure of banks
2012, % GDP; GIIPS, Belgium, France, Germany
Q3 2013, % of government debt
175
40
150
35
125
30
25
100
20
75
15
50
10
25
GR
IT
IE
Foreign investors
PT
ES
BE
FR
DE
AT
Domestic investors
Source: Eurostat, OECD, Bruegel database of sovereign bond holdings, Deutsche Bank Research
NL
DE
UK
FR EMU IE
(17)
Domestic banks
PT
IT
ES
GR
Foreign banks
Source: BIS, ECB, Eurostat, Deutsche Bank Research
Banks hold 27% of EMU countries

countries governme
ent debt
Deutsche Bank
73
How to resolve the crisis: consolidate, inte

egrate, grow
1) Rebalance vulnerable member states

Reduce external funding needs and make the co
ountries investable again
Important as a political signal to creditor countrie
es
2) Integrate and share the burden
Integration necessary to encourage an internal flow of funds and reduce euro fragmentation
Requires a better stability architecture:
prevent and correct macroeconomic imbala
ances
finance difficult imbalances
resolve impossible imbalances
3) Achieve economic growth
Euro area GDP has been contracting since Q3 2011; coincidence of public and private deleveraging
has weighed;
g
slower g
global economy
y amplified
p
Positive economic growth will both boost confidence in debt stabilisation and the ease the politics of
consolidation and integration
Deutsche Bank
74
Keep political and economical risks in mind
Politics
Economics
Italy: Political risks with Renzi still high
Dilemma 1: Growth and deleveraging
Spain: Financing susceptible to incomplete redomestication
Without austerity and deleveraging, no long-term

growth...
Portugal: Austerity Policy always subject to Supreme

Court review
...but without growth, no credible debt stabilisation

Dilemma 2: Growth and central banking
Greece: Focus on domestic political and social stability

Nonconventional efforts by ECB have bought time...
France: Hollande must progress structural reforms
...but also weaken incentives for structural reforms
Empowering the ECB (as prospective Single
Supervisory Mechanism (SSM)): Direct bank recap,
common resolution mechanism
OMT / ECB / Germany: Will the German Constitutional
Court skip OMT? Judgment to be expected in 2014
Deutsche Bank
Dilemma 3: Growth and financial stability

Without financial stability no long-term growth...
...but without growth perspectives no financial stabilty
75
Deutsche Bank
Section 4
The New Normal
Deutsche Bank
Keyy forces in the New No

ormal: The six Ds
Excursus: the New Norm

mal for banks
76
Deutsche Bank
Tab A
Key forces in the New Norma
al: The six Ds
The six Ds
1)
Deleveraging
2)
Demographic change
3)
De-carbonization
4)
Digitalisation
5)
Dynamic shift South-East
6)
Diffusion
Deutsche Bank
77
The six Ds
1)
Deleveraging
2)
Demographic change
3)
De-carbonization
4)
Digitalisation
5)
6)
Diffusion
Deutsche Bank
78
Deleveraging has only just begun
Total debt(a) 1990 Q2 2011 in % of GDP
(a) Includes all loans and fixed-income securities of households, corporations, financial institutions, and government
Source: Haver Analytics; national central banks; McKinsey Global Institute
Following decades of debt accumulation,

accumulation we are now seeing signs of stabilization/reduction
Deutsche Bank
79
Welcome to a new world!
Government debt, in % of GDP

120
100
80
60
40
20
0
00
01
02
03
04
05
06
Developed Markets
07
08
09
10
11
12
13E
14E
15E
16E
17E
18E
Emerging Markets
Source: IMF
Excessive leverage is today largely a problem of the so called developed markets

Deutsche Bank
80
Central banks are still heavily loaded only ECB with a significant decline
from peak levels
Central bank balance sheets (June 2007 normalised
d to 100)
550
500
450
400
350
300
250
200
150
100
07
08
BoE
09
10
Fed
11
ECB
12
13
BoJ
Source: BoE, BoJ, ECB, Fed, Deutsche Bank Research
The word tapering

tapering has become one of the m
most sensitive in financial markets
Deutsche Bank
81
The six Ds
1)
Deleveraging
2)
Demographic change
3)
De-carbonization
4)
Digitalisation
5)
6)
Diffusion
Deutsche Bank
82
Demographics: 65+
Average further life expectancy at age 65
Share of population aged 65+, in percent

30
23
AUS/NZ
22
Western Europe
Europe
25
AUS/NZ
Northern America
21
Europe
20
Northern America
20
Latin America
19
Latin America
China
18
World
15
Asia
17
Asia
16
India
15
World
10
Africa
Africa
14
13
12
19952000
20052010
20202025
20302035
20402045
20452050
0
1950
1970
1990
2010
2030
2050
Source: UN population division, World Population Prospects, 2008 revision
Deutsche Bank
83
Demographics: in Europa und China supp

ply of labour shrinks
Population in working age (15-64 years old) vs 2010

0 figures (in m)
355
Africa
729
270
A i ex Chi
Asia
China and
d IIndia
di
377
10
China (103)
241
India
Europe
317
(48)
(103)
North America
19
38
78
78
Latein America
Oceanian
5
9
in 2030
in 2050
Source: UN population division, World Population Prospects, 2008 revision, Allianz Economic Researc
ch
Deutsche Bank
84
No more pyramids in 2050
Age distribution of the worlds population

1970
Less developed regions
2013
2050
More developed regions
Males
Females
Source: UN World Population Ageing 2013
Deutsche Bank
85
Demographic change serves as underlying

g driver
st important driver of old age provision

Demographic change is the single mos
Limited number of possible solutions
Expanded social systems (on a pay-a
pay as
a you go basis)
as-you-go
Increased fertility rate
More migration
Capital based old age provision
Sustainable
Sus
a ab e o
old
d age p
provision
o s o requires
equ es high
g performing
o
g cap
capital
a markets
a es
Attention: Financial Crisis Loss of Confid
dence (?)
Deutsche Bank
86
The six Ds
1)
Deleveraging
2)
Demographic change
3)
De-carbonization
4)
Digitalisation
5)
6)
Diffusion
Deutsche Bank
87
China is the worlds biggest carbon emitter and
Total CO2 emissions from consumption of

energy in 2011 (million metric tons)
2011 per capita CO2 emissions (in tons)
17.6
8,715
World:4.7
World:
World:
32,579
5,491
9.2
6.5
748
China
Germany
USA
China
Germany
USA
Source: U.S. Energy Information Administration (EIA) (latest data available as of 16-Mar-2014)
Deutsche Bank
88
is expected to stay in the lead
Incremental energy demand by fuel & region 2008-2

2035 (in million tons of oil equivalent)
Coal
Oil
Gas
N l
Nuclear
Hydro
Biomass
Other renewables
(500)
(250)
0
OECD
250
China
Other no
on-OECD
500
750
1000
1250
Inter-regional (bunkers)
Source: International Energy Agency
Deutsche Bank
89
A focus on green energy brings the EU at the forefront of CO2 reduction;

the United States likewise with a positive o
outlook thanks to
to...
Growth of CO2 emissions (in % pa)
6.0%
6.4%
2.5%
0.7%
0.5%
0.5%
(0.4)%
%
(0.6)%
(1.1)%
China
EU
1970-1990
1990-20
010
USA
2010-2030
Source: BP (2013) "Energy Outlook 2030"
Deutsche Bank
90
... their approach to shale gas, which led to

o a paradigm shift
U.S. Electricity generation from natural gas and

coal, 2005-2040 (billion kilowatthours)
U.S. natural gas imports and exports,

2000-2040 (trillion cubic feet)
Source: U.S. Energy Information Administration (Annual Energy Outlook 2014 Early Release Overviiew )
Deutsche Bank
91
Remember: Energy patterns have change

ed throughout the history
History of energy consumption in the United States (1776-2012; in quadrillion Btu)
Source: U.S. Energy Information Administration
Deutsche Bank
92
Key forces in the New Normal: The six D

Ds
1)
Deleveraging
2)
Demographic change
3)
De-carbonization
4)
Digitalisation
5)
6)
Diffusion
Deutsche Bank
93
Digitalisation: changing lifestyle patterns
Do you check/update
Twitter or Facebook
after you go to bed?
Digital communities
under age 25
over age 25
32%
27%
4 million English Wikipedia articles (1.4 million in

German)
20%
19%
If Facebook was a country, it would have

the third biggest population in the world
with over 1.23 billion users (December 2013),
thereby outnumbering the USA by almost four times
21%
Mobile
ob e internet
e e
The global stock of smartphones was
at 1.9 billion at the end of 2013
11%
Mobile data traffic is expected

p
to g
grow with a CAGR
of 44.5% between 2012 2017
Yes, any time
I wake up during
the night
Yes, sometimes
when I wake up
during the night
Yes, as soon as
I wake up in the
morning
Emerging markets in Asia-Pacific with a

forecasted rate of 64%
USA with 46%
Western Europe with 34%
Source: Retrevo, Ericsson, Analysys Mason, company information
Deutsche Bank
94
Digital definition of mobility: tablet compute

ers and e-book readers on the
rise while
while...
% of US adults aged 18+ who own each device, 200
06-2012, n=2,253
34% Tablet
computer
ownership as
of May 2013
Source: Pew Internet surveys, Deutsche Bank Research, Pew Research Center (for May 2013 figure)
Deutsche Bank
95
... car sales and driver licences in gradual decline
Share of 18-35 year-olds with driver license and

own passenger car in Germany (in %)
US total new passenger car(a) sales in % of

population
3.7%
3.4%
3.2%
3.1%
3.1%
2.9%
2.8%
%
2.5% 2.6%
2.3%
2.2%
1 8%
1.8%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
(a)
Retail new car sales include both sales to individuals and to corporate fleets (incl leased cars)
Source: WardsAuto.com, Motor Vehicle Facts & Figures (Southfield, MI: Annual Issues), pp. 17,
25 and similar pages in earlier editions; Global Insight (as of 15-Feb-2014)
25,
Deutsche Bank
Source: Handelsblatt (as of 5-Feb-2014) based on data from Deutsches Mobilittspanel 2012/2013
96
Desire for location- and time-independent accessibility
Global stock of mobile devices (in million)

10000
8000
3,079
2,883
3,310
3,587
6000
3,902
4,211
4,479
4000
4,612
4,712
2000
855
227
2011
1,277
266
2012
1,903
2,591
3,273
3,931
4 539
4,539
5,093
,
5,602
314
375
445
521
601
683
766
2013
2014E
2015E
2016E
2017E
2018E
2019E
Mobile PC/router/tablet
S
Smartphone
Traditional cell phone
Source: Ericsson 2013
Deutsche Bank
97
Huge business potential around Big Data
Big Data market potential in Germany (in m)

1800
1600
506
1400
1200
395
1000
523
306
800
411
600
218
400
200
0
119
228
69
75
53
134
98
208
2011
2012
2013
Services
316
475
335
2014E
S
Software
2015E
658
2016E
Hardware
Source: Bitkom, Experton Group
Deutsche Bank
98
The six Ds
1)
Deleveraging
2)
Demographic change
3)
De-carbonization
4)
Digitalisation
5)
Dynamics shift South-East
6)
Diffusion
Deutsche Bank
99
Dynamics shift South-East
Share in global GDP (in %)

100%
80%
Others
60%
40%
20%
0%
2000
2005
United States
2010
China
2015
2020
European Union
2025
Brazil
2030
Russia
2035
India
2040
Japan
Other
Source: Global Insight (as of 15-Feb-2014)
China and India are dominating global growth

h and will continue to do so
Deutsche Bank
100
Dynamics shift back to South-East Asia
Share of global GDP development by countries year 1 to 20

003 PPP of 1990 US$
100%
90%
Others
80%
70%
60%
50%
United States
40%
Western Europe
30%
20%
India
10%
China
0%
3
203
403
603
803
1003
1203
1403
1603
1803
1950
2003
Source: Angus Madison
Chinese and Indian prevalence is anything bu

ut new
Deutsche Bank
101
Growth of emerging markets is supported by growth of financial markets

and vice versa
Market cap of equity markets by region since

(share in global total in %)
Emerging market banks gaining clout (market

cap of the world's 25 largest banks by region)
100%
50
45
80%
40
35
60%
30
25
40%
20
15
20%
10
5
US
BRIC
Europe
Other Asia
Source: World Exchanges,

Exchanges Deutsche Bank Research
Deutsche Bank
Japan
Others
Ja
an 14
Ja
an 13
Ja
an 12
Ja
an 11
Ja
an 10
Ja
an 09
Ja
an 08
Ja
an 07
Ja
an 06
Ja
an 05
Ja
an 04
Ja
an 03
0%
1999
USA
Japan
Emerging markets
2004
2007
2009
2013
Europe
Other developed countries
Note: as of mid-June each year

Source: The Banker,
Banker Thomson
Thomson, Bloomberg
Bloomberg, Deutsche Bank Research
102
Three Asian financial centres in the Top 5
Global Financial Centres Index (2013 vs 2007)
Significant rank changes (Sep-13

(Sep 13 vs Mar
Mar-07)
07)
GFCI 2013
GFCI 2007
London
Seoul
New York
Luxembourg
Hong Kong
Shanghai
Singapore
Vancouver
Tokyo
Oslo
Zurich
Tokyo
Boston
14
Cayman Islands
Geneva
10
Moscow
F kf t
Frankfurt
Seoul
10
43
Toronto
11
12
San Francisco
12
13
Luxembourg
13
26
Chicago
14
Source: The Z/Yen Group of Companies
Deutsche Bank
Madrid
Brussels
Warsaw
Dublin
(40)
(20)
20
40
Source: The Z/Yen Group of Companies
103
The six Ds
1)
Deleveraging
2)
Demographic change
3)
De-carbonization
4)
Digitalisation
5)
6)
Diffusion
Deutsche Bank
104
Diffusion of social spheres
Business
State
Publicc sphere
Indivvidual
Private
e sphere
Re
eligion
Deutsche Bank
105
Deutsche Bank
Tab B
Excursus: the New Normal fo
or banks
A huge overhaul of new financial regulations in the aftermath of the

financial crisis
Systemic
y
Risk
Crisis management
Living wills
SIFI
Deposit guarantee/
Si l R
Single
Resolution
l ti F
Fund
d
Supervisory
Banking union
S
Supervisory
i
change
h
Conduct
Market abuse
M
Money
laundering
l
d i
Compliance
Disclosures
Other
IFRS
Ratings
Solvency II
Retail distribution review
Deutsche Bank
Taxes
Financial transac
ction taxes
FATCA
A
Bank levies
Bank Struc
cture
Volckerr
Liikanen
n
Vickers
s
R
Recovery
and
d re
esolution
l ti
Subsidiarisa
ation
Capital and Liiquidity
Basel III / CRR
C
SIFI
Leverage
Living willls
NSFR / LC
CR
Securitisattion
Markets
OTC derivatives
HFT
Short selling
AIFMD
Market abuse
UCITS
Prospectus directive
MiFID
ETFs
Shadow banking
Governance
Compensation
Board composition
Listing standards
Tests
ECB asset quality review
EBA stress tests
US stress tests
106
Basel III introduction (continued)
Five facts on Basel Accord
BCBS member states
To provide a global guidance on banking regulation

the Bank for International Settlements (BIS),
headquartered in Basel, has implemented the Basel
Committee on Banking
g Supervision
p
((BCBS))
The BCBS is a group of central bankers and
delegates of national supervisors that develops
minimum standards that should be implemented into
national law by the member states
The latest Basel accord is Basel III (new minimum
capital- and liquidity standards), to make banks more
resilient against
g
external and internal shocks
In the European Union Basel III is implemented
through the Capital Requirement Directive IV and the
Capital Requirement Regulation I
BCBS continuous to complete rules on the Leverage
Ratio and Liquidity Ratios
All BCBS member states are currently implem

menting Basel III or have already done so
Deutsche Bank
107
Capital requirements Basel II vs Basel III
Basel II
Basel III
Insured deposits / deposits
Insured deposits / deposits
Secured funding
Secured funding
Senior liabilities
15.5%
Senior liabilities
12.0%+
9.50%+
8 00%
8.00%
Tier 2 Capital
4.00%
4.00%
Tier 1 Capital
4.00%
2.00%
(
(max.
50% Hybrid
H b id Tier
Ti 1)
Deutsche Bank
4.50%
Additional Tier 1 and Tier 2

minimum 3.50%
Max of G-SIB / D-SIB charge
0% to 2.50% (+1% disincentive charge)
Countercyclical capital buffer
2.50% OR HIGHER
Capital conservation buffer
2.50%
Common Equity Tier 1 minimum
requirement
4.50%
108
Evolution of the capital base as a result off Basel III
Minimum Common Equity

Countercyclical Buffer
Capital Conserva
ation Buffer
Hybrid Tier 1 cap
pital
max of G-SIB / D-SIB Charge

Tier 2 capital
18%
16%
Buffers can only be filled, if AT1 and T2 buckets are at lea

ast 1.5% and 2%, respectively
2.0%
14%
2 0%
2.0%
1 5%
1.5%
2.0%
1.5%
2.5%
1.5%
1.25%
1.25%
1.25%
1.875%
1.875%
2 5%
2.5%
12%
10%
2.0%
8%
6%
4%
2%
0%
4 0%
4.0%
2.0%
2.0%
Jan-12
1.875%
2.5%
2.5%
2.0%
1.5%
1.5%
1.5%
0 625%
0.625%
0.625%
0.625%
3.5%
4.0%
4.5%
4.5%
4.5%
4.5%
4.5%
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
100%
100%
3 5%
3.5%
1.0%
Phase-in of
Deductions
(including threshold
deductions for DTAs,
MSRs and financials)
20%
Deutsche Bank
40%
60%
80%
109
Conceptual overview of key regulatory ballance sheet figures (using

Deutsche Bank figures)
Nettting effects: particularly
3
Trading
assets
Assets relevant for

RWA calculation:
approx 1,080bn
Operational
risk
VaR
Multiple
x risk
Corporate weighting
1
risk
FI risk
x risk
weighting
2
5
Tier 1 ratio: 16.9%(a)
CET1 ratio: 12.9%(a)
Mortgage x risk
backed/ weighting
3
other
collateral.
Deutsche Bank
figures eoy 2013
Total assets:
1,649bn
RWA: 302bn
Less
Less
Tier 1 capital:
51.1bn
Hybrid Tier 1:
12.2bn
Common Equity
Tier 1 capital:
38.9bn
Other Tier 1
elements: approx
(7.0)bn
Goodwill: approx
(9.5)bn
Shareholders'
equity: 55.1bn
55 1bn
Total liabilities
and equity:
1,649bn
(a)
According to Basel 2
2.5
5 rules (regulatory minimum currently under Basel 2
2.5
5=4
4.0%)
0%)
Source: Deutsche Bank company data (from preliminary FY 2013 reporting)
Deutsche Bank
110
Basel III & CRD IV / CRR I revised defin

nitions of capital and leverage
ratios
Tighter capital definition

CET1 Capital
RWA
Introduction of leverage ratio

>=
X%
Tier 1 Capital
Total Assets + Off-balance sheet items
>=
3%
Key drivers:
Key drivers:
Increased scope of deductions generally from

Common Equity
y Tier 1 (eg
( g minority
y stakes in
financial entities, DTAs)
Derivatives (with regulatory netting under certain

conditions))
Phase-in of deductions from Jan 2014

Reclassification of current Tier 1 deduction of
securitisation first-loss
first loss pieces into RWA
Increased RWA for counterparty credit risk
Off-balance sheet items (eg letters of credit, trade

finance guarantees)
Tier 1 capital
Mi i
Minimum:
New CVA charge
Minimum ratio of 3% during parallel-run period

from 2013-2017
Higher risk weight for large and

unregulated FI
Basel III seeks calibration in 2017 and will set as

hard standard in 2018
Minimum:
Increased minimum ratios plus buffers
Deutsche Bank
CRD IV sets this out as a tool to be applied to

individual banks at supervisory discretion may
achieve Pillar 1 treatment from 1 January
y 2018
111
Basel III & CRD IV / CRR I new liquidity

y ratios
Liquidity Coverage Ratio (LCR)
Net Stable Funding Ratio (NSFR)
Stocks of high quality liquid assets

>= 100%
Net cash outflows over a 30
30-day
day period
Available amount of stable funding

>= 100%
Required amount of stable funding
Surviving a 30 day acute stress scenario with

highly liquid assets
Required amount of stable funding over 1 year

time horizon
Key drivers:
Key drivers:
Narrow definition of liquid assets
Loan book is the single biggest driver
Rigid treatment of FI balances
Substantial term funding requirements for LCR

liquid assets
Timeline:
Observation period per 2012
Ti li
Timeline:
Basel III: Partial introduction (60%) in January

2015 and increases by 10% every year until 2019
Observation period per 2012
Definition of liquid assets to be provided by the

European Commission in 2014 (based on EBA
study)
Introduction as minimum standard per 2018
Deutsche Bank
To be revised by mid-2016
112
"No More Bail-out!" Bail-in

Bail-in (at point of non-viability)
No more taxpayers money may be used to
(re)capitalise banks in distress
Going forward under the BRRD(a) mechanisms will
be available which ensure sufficient burden
sharing of senior and subordinated creditors as
well as shareholders
Key drivers:
Prevent Banks from becoming in-operational (nonviable) by writing off equity and certain liabilities
Bank can continue as going-concern while parts of
capital structure suffer losses as if in insolvency
Achieves
A hi
b
burden
d sharing
h i b
butt avoids
id di
disruption
ti
(value destruction) of insolvency
High level of regulatory discretion
Timeline:
a)
Vote in European Parliament: April 2014

Transposition deadline: December 2014
Bail-in for capital instruments: January 2015
Keyy date for senior bail-in: January
y 2016
European bail-in legislation

B il i liliabilities:
Bail-in
biliti
Firstly Additional Tier 1 (AT1) and later Tier 2 (T2)
and if not sufficient
secondly eligible senior debt
Method:
Write-off of notional or
Conversion into equity
Purpose:
Recapitalize an institution or
Provide capital for bridge institution
Insured deposits
Secured funding
Excluded Liabilities (i.e. less than min. 7d original maturity
loans to FI)
Other eligible liabilities (incl. senior debt)
Additional Tier 1 and Tier 2
Common Equity Tier 1
BRRD: Bank Recovery and Resolution Directive
Deutsche Bank
113
Overview of global systemically important banks (G-SIBs)
Indicators for qualifying as a G-SIB
Overview current G-SIB buckets
Size
G-SIBs (November 2013) allocated to buckets

corresponding to required level of additional loss
absorbency(a)
Interconnectedness
Substitutability
Global (cross-jurisdictional) activity
Bucket 4 (2.5%b):
HSBC
JP Morgan Chase
Bucket 3 (2.0%b):
Barclays
BNP Paribas
Citigroup
Deutsche Bank
Bucket 2 (1
(1.5%
5%b):
Bank of America
Credit Suisse
Goldman Sachs
Group Crdit Agricole
Mitsubishi UFJ FG
Morgan Stanley
Royal Bank of Scotland
UBS
Bucket 1 (1
(1.0%
0%b):
Bank of China
Bank of New York Mellon
BBVA
Groupe BPCE
ICBC
ING Bank
Mizuho FG
Nordea
Santander
Socit Gnrale
Standard Chartered
State Street
Sumitomo Mitsui FG
Unicredit Group
Wells Fargo
Complexity
Key facts
29 banks named as G-SIBs
G SIBs in Nov 2013
Phased in beginning of 2016 (based on an
updated list Nov 2014)
D
D-SIBs
SIB are mostly
tl lleft
ft to
t discretion
di
ti off nationa
ti all
regulators
(a)
(b)
G-SIBs in alphabetical order within each bucket

Additional loss absorbency: Common equity as a percentage of risk-weighted
risk weighted assets
Deutsche Bank
114
Resolution regimes shall ensure that (big) banks can fail in an

orderly fashion
Main legislation
Dodd-Frank Act
Recovery and Resolution
Directive
Deposit Insurance Act
Federal Banking Act
No specific legislation proposed
Key features
G-SIBs
Liv
ving Wills, supported by Orderly
Liq
quidation Authority and Fund
Cro
oss-border recovery and resolution plans
and statutory bail-in
14
Po
owers for deposit insurance fund in
res
solution and to bail-in instruments
Po
owers to ensure SIFI resolvability plus
Co
oCo requirements
Au
uthorities rely
y on existing
gp
powers; reforms
con
nsidered in near future
The G-SIB home jurisdictions have taken different

d
approaches to implement features for
a resolution regime issues of cross
cross-boa
board effectiveness
Deutsche Bank
115
Key elements of Banking Union
Banking Union
Single Supervisory
Mechanism (SSM)
Single Re
esolution
Mechanism
m (SRM)
Single Deposit
Guarantee System
Introduce EU-level decisionmaking on bankk resolution
Original aim to create single

euro-zone deposit guarantee
Ensures consistent application

g rulebook for banks
of EU single
Aim to create sttand-alone

Single Resolutio
on Authority,
subject
j
to treaty
y change
g
Acknowledged as not possible

without further fiscal integration
Subject to asset quality review

(AQR) of major banks
Backed by Single Resolution

Fund, financed by banks
ECB as direct prudential

supervisor for major euro-zone
banks, other countries can join
Current aim to harmonise

national DGS by finalising
2010 EU legislative proposal
EU-wide single
g rulebook for banks
The EU-wide legislative framework for banking is th
he foundation of the banking union, as it creates a
harmonised set of rules for supervision, capital, re
ecovery and resolution and deposit guarantees
The vision of an integrated financial framew

work within the EU begins to assume shape
Deutsche Bank
116
ECB Asset Quality Review (AQR)
Process
NCA (National Competent Authority) bank-level teams
and independent third parties will verify that credit
exposures have been correctly classified
Over the course of the coming months, first effects of
the AQR may become visible (i.e. Central Banks
addressing lack of provisions to respective banks)
Execution
n phase from March 2014 (Stage II)
In execution phas
se, data will be sampled and reviewed on site, with:
Asset and collateral

c
valuation by external experts
Classificatio
on of non-performing exposures, collateral,
provisioning
g
if needed, a recalculation of provisions and credit / market RWA
No full assessment of internal models which are

used for RWA calculation during the exercise,
but the outcome of the exercise may lead to
adjustments in the risk-weights
All types of financial instruments will be subject
to revision according to a conservative
interpretation of current IFRS (i.e.,
(i e available for
sale, fair value option, HtM, held for trading, and
loans and receivables), where necessary taking
national GAAP into account
Definition
D
fi iti
off non-performing
f
i
exposures (agreed
(
d
with EBA): every material exposure 90 days past
due will be classified as non-performing even if
not recognised as defaulted or impaired
Deutsche Bank
2014
AQ
QR
1Q 2014: Methodology
Publication
Stage I
ECB to pick portfolios of banks to

examine (at least 50% of RWA)
Stage II
Validation of accounting valuation

(external experts)
Stage III
Pee
er review to compare results of
St
Stage
II
Benchmark 8% CET1
1 on a January 2014 basis
EBA stress test based on AQR

results
2015
Oct 2014
AQR
reporting
Nov 2014
SSM in place
If a bank fails If recap in market fails, use

national backstop, when the 2013 EC Banking
Communication applies (Management
remuneration max 15x national average; Loss
absorption of capital (not senior))
Benchmark 8% CET1 on a 2016? basis

(5.5% for adverse scenario)
117
EBA stress test
EBA definitions for balance sheet

Assets:
Banks are required to stress test the common set of risks:
Credit risk
Market risk
Sovereign risk
Securitisation
Cost of funding
f nding
Capital:
Framework of EBA stress test
The stress scenarios cover the period of 2014-2016
Exercise to be carried out on the basis of consolidated

year end 2013 numbers
Assets
A
t and
d liabilities
li biliti that
th t mature
t
within
ithi the
th time
ti
h i
horizon
off
the exercise should be replaced with similar financial
instruments
Assumption of a static balance sheet
Role of Competent Authorities (CA)
Are responsible for ensuring that banks correctly apply the

EBA common methodology and assess the banks internal
measurement systems
CAs (and ECB for Euro Area) are in charge of quality

assurance and therefore of challenging banks results and
ultimately of determining and taking any supervisory action
needed
Minimum hurdle rates for the 2014 EU-wide stress test:
8% CET1 ratio for the baseline scenario
5.5% CET1 ratio for the adverse scenario
Timeline:
April 2014: Detailed scenario and methodology as well as advanced data collection for computing benchmarks for
risk parameters
May 2014: Exercise formally commencing
End-October 2014: Results published before the com

mmencement of the SSM on November 4th
Deutsche Bank
118
Details on the Structural Reform on Bank

king proposed by the
European Commission
Scope of EC structural reform proposal
Consequences for institutions
Key proposals:
Separation of certain trading activities
Prohibition of proprietary trading
Affected institutions include:
Too-big-to-fail banks
G-SIBs and banks with certain thresholds (trading exposure>

70bn / >10% of Total Assets)
Relevant branches of foreign banks
Activities concerned:
Review and exclusion of trading activities
Supervisors have duty to review, Competent Authorities (CA )

retain
t i flexibility
fl ibilit to
t nott require
i separation
ti under
d certain
t i
circumstances
The "core" and the "trading" entity would need to be

legally, operationally, and economically separate subgroups within the company
The structurallyy separated

p
institutions will then have to
comply with CRR capital requirements, large exposures,
liquidity, leverage and disclosure on an individual basis
Separation would include issuing own debt on an individual

or sub-consolidated basis, subject to the individual
resolution plan
A "trading" entity would not be able to take deposits eligible

under the Deposit Guarantee Scheme (DGS) or provide
payment services
Timeline:
Agreement
g
between European
p
Parliament, Commission and Council needed ((Trialogue)
g ) unlikelyy in 2014 (European
(
p
Parliament elections in May 2014)
July 2016: List of covered banks as determined by Na

ational Regulators will be published
January 2017: Proprietary trading bans (financial insttruments, trading of physical commodities, investing in hedge funds)
Julyy 2018: Potential separation

p
((depending
p
g on p
positio
on vs thresholds)) into a trading
g entity
y of activities such as market
making, complex securitisation and risky derivative trrading
Deutsche Bank
119
Deutsche Bank
Section 5
Asset Management
Deutsche Bank
Introduction
Production and investmen

nt process
M k t overview
Market
i
120
Deutsche Bank
Tab A
Introduction
Asset managers pool assets of household

ds, corporations, and
governments and invest them in the financcial markets
AM Industry structure
Key industry characteristics

Global industry/strong presence
in developed countries
Fragmented AM markets
$
Asset
Manager
g
Strong long-term growth

Dynamic environment
Overall, profitable industry
Deutsche Bank
121
Asset managers create economic value by

y pooling risks, providing advice,
and reducing transaction costs
Customer needs
AM value p
propo
position
Complex
p
financial markets
Types
Retail
Institutional
High net worth
Complex and dynamic

financial markets
Multiple asset classes,
classes
industries, countries
Large number
of securities
Complex economic
environment
Needs
Asset growth/return
Capital preservation
Risk management
Cost
C t minimisation
i i i ti
Professional advice
Asset management
expertise
Deutsche Bank
Pool risks
Provide advice
Reduce transaction costs
Generate exxcess returns
Charge a fee on
assets managed
m
Complex investment
management theory
Economic 7 capital
market expectations
Strategic asset allocation
Investment analysis
Investment styles
122
Major criteria for fund classification
Criteria
Characteristics
By legal structure
Open-end
Closed-end
By target customer
Retail
R t il
Institutional
By asset class
Equity
Fixed Income
Money Market
By investment strategy
Active
Passive
By investment category
Region/country
Sector
Topic
By investment style
Core
Growth
Value
Deutsche Bank
Real Estate
Alternative
Alt
ti A
Assets
t
123
Key value drivers for asset management companies

c
Drivers
Neither assets managed, nor a liability
to customers, appear on an asset
managers balance sheet
Operational model
Market movements
Equity
Macroeconomic
Fixed income
FX
full benefit and risk associated with

managed assets stay with the
customer
+
Net sales
Without either asset or liability risk,

asset management firms have no
requirements
i
t ffor risk
i k capital
it l
Distribution
Net flows
material difference from banks or

insurers
Fee rates
Absolute
Performance fees
Compression/expansion
Operating costs
Revenue leverage
Variable element
Investment performanc
ce
likely to be some nominal statutory
capital requirements
Relative
Absolute
Gearing
Valuation of an asset manager is

therefore driven by fees, offset by
expenses
Assets under managem

ment
Asset type
Quality
Asset source
Transferability
Deutsche Bank
=
Value creation
124
Development of industrys profitability
Net revenues (in relation to assets under management)
30
29.4
30.9
31.8
34.3
40
35.3
29.3
28.2
29.8
29.7
38
38
34
35
34
36
37
20
29
30
10
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Costs (in relation to assets under management)

25
Costs (basis po
oints)
38
29.3
21.4
20.3
20
19.7
21.2
21.8
19.3
19.9
19.4
19.0
18.5
15
Op
perating margin (% of net revenues)
Net revenues(a)) (basis points)
40
Operating profit (in relation to revenues)
27
20
10
10
5
0
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
(a) Management fees net of distribution costs

Source:BCG Global Asset Management Market-Sizing Database (2013)
Decline in costs largely driven by growth in assets

Deutsche Bank
125
Overview of asset selected management terms

t
Active
assett manager performs
f
regular
l actions
ti
to
t meet/outperform
t/ t f
the benchmark
relies on the skill of the portfolio manager
Asset allocation
the process of determining in what proportion assets are invested
i various
in
i
geographic
hi regions/countries/industries/securities
i
/
t i /i d t i /
iti
Assets under Management (AuM)

amount of assets managed
Benchmark
existing/constructed index against which the performance of a
fund is evaluated
DB and DC
Defined Benefit (usually based on final salary) and Defined
Contribution (based on employers actual pension contributions)
pension funds. Employers shifting to DC due to funding shortfalls
ETF Exchange Traded Fund (see also passive/index)

Index fund or trust that is listed on an exchange
and can trade like a stock
Various investment objectives/assets available
Benefits: cost efficiency and liquidity
Fund/portfolio
monies received are typically not managed on an account level,
but pooled into much larger funds or portfolios
exceptions are large wholesale/institutional clients, or very
traditional discretionary asset managers
Deutsche Bank
Fund of Funds
consultant-like operations that place assets in a variety of
hedge funds
Institutional/wholesale
managing assets on behalf of non-individuals
eg
g companies,
p
, pension
p
p
plans,, state retirement p
provisions
Internal vs external funds

funds managed for clients within the group/external or third
party clients
Passive/index
asset mangers objective is to replicate and therefore meet
the benchmark
relies on technology in place to track indices and execute
appropriate transactions
Out/underperformance
O
/ d
f
refers to amount by which a funds or portfolios performance
exceeds/falls below the benchmark
asset manager typically receives an incentive fee for
achieving outperformance
Retail
managing assets on behalf of the individual
2 and 20
Hedge funds usually charge 2% management fee and 20%
performance fee
126
Deutsche Bank
Tab B
Production and investment pro
ocess
Alternative roles of asset managers
Investment
process
Production
Mutual fund
(Publikumsfonds)
Institutional
mutual fund
(Spezialfonds)
Serv
vicing
Marketing
Distribution
Asset allocation
Data-mining
Branding
Direct distribution
Asset selection
Reporting
g
Reputation
Performance
monitoring
Relations
shipmanagem
ment
Third party
di t ib ti
distribution
Sub-advisory
Private labeling
Third party-distribution
party distribution
Full-service line producer
Deutsche Bank
127
Segmentation of clients
Institutional
Instividual
Individual
Insurers
Deferred comp
pensation
agreements
High net worth individuals

(HNI)
Corporate sche
emes
Affluent
Banks
Pension funds
Mass affluent
Foundations/ Endowments
Mass retail
Taylor-made products
Performance relative to
benchmark key
Highly sophisticated
Deutsche Bank
Complex syste
ems and service
requirements
Gatekeepers and
administration
More standardised products

Total return important
Absolute vs relative
performance
128
Relationship between services and clients

s
Production
Production
Investment
process
Distribution
Servicing
Marketing
Distribution
Institutional
investors
Retail
investors
Instividual
business
Core business of
asset management
Essential
Relevant
Not important
Deutsche Bank
129
Rationale for funds selection
Diversification of risks
Economies of scale in trading and costs
transaction
custody
management and administration fees
brokerage
Expertise of fund managers
Timing
Ti i
me consuming
Monitoring of individual investments very tim
Deutsche Bank
130
Type of funds: asset classes
Funds
Risk
Invesstment horizon
Potential return
Stocks
Medium to high risk
Mid- to
t long-term
High
Bonds
Medium to low risk
Mid- to
t long-term
Determined by yield curve
P
Property
t
Low risk
Mid to
Midt long
long-term
term
Low/steady returns
Shortt- to long-term
Determined by money
market rates
Money market Low risk

Balanced
Medium risk
Mid- to
t long-term
Determined by assed mix
Hedge
High risk
Shortt- to long-term
High return/loss potential
Deutsche Bank
131
Investment process: overview
Production
Investment
process
Asset allocation
Strategic
Tactical
Conditions:
Forecasts
Individual risk-return
requirements
Deutsche Bank
Serv
vicing
Asset sellection
Active vs pas
ssive
approach
Investments
Monitoring
Marketing
Distribution
Performancecontrolling
t lli
Externally
Internally
132
Strategic and tactical asset allocation
Strategic
g
Tactical
Definition of long-term risk-return

matrix
Definition of guidelines to temporarily deviate

from strategic allocation targets:
Selecting investment universe

Allocation criteria
asset classes
country allocation
taking advantage of current

demand momentum
considering current trends in the
market place
Execution of allocation process
currency allocation
buy/sell asset classes
sector allocation
use of derivatives
Creating sample portfolios

Considering client guidelines
Systematic allocation of asset inflow accordin

ng to investment philosophy
Deutsche Bank
133
Asset selection: basic strategies
Basic strategies
Passive strategy
Minimal tracking error
Benchmark tracking
Replication of selected
indices
Partial selection/semi-active
management (tracking error
< 2-3%)
Lower fees
Deutsche Bank
Active strategy
s
Outperforman
nce through
stock p
picking
g and timing
g
(tracking error > 2-3%)
Hedging strategy
Hedging current performance
((lock-in))
Reallocation of
o bench-mark
portfolio
Reallocation
R ll
ti of
of assett classes
l
Fundamental vs technical
analysis
134
Passive vs active investment strategies
Attitude
Assumptions
Value
e proposition
Trading strategy
Weak to semi-strong
market efficiency
Sys
stematic outperrformance of benchmarks
thro
ough
acttive portfolio
ma
anagement
Individual asset
selection/stock pricing
Active
investors
Strong market efficiency
Passive
investors
No systematic
outtperformance of
ben
nchmark indices
Fundamental research
Investment in
undervalued stocks
Construction of portfolios
replication indices
tracking basket
stratified sampling
Selective trading
index changes
new fund
in-/outflows
Deutsche Bank
135
Significant growth of passive investment products

p
Global AuM by product

US$37.5 trillion
US$47..3 trillion
5%
5%
2%
16
%
8%
10
22%
15
7%
%
3%
%
66%
2003
Active core(a)
US$62.4 trillion
3%
23
11
10%
25
18
13%
59
9%
20
008
Active specialties(b)
Solutions and
d LDIs(c)
4%
24%
50%
2012
Passive/ETFs
Alternatives(d)
(a) Includes active-domestic, large-cap equity, active-government fixed income, money market, tradition
nal balanced funds and structured products
(b) Includes equity specialties (foreign, global, emerging markets, and small- and mid-caps, and sectors
s) and fixed-income specialties (credit, emerging markets, global, high yield, and convertibles)
(c) Includes absolute-return, target date, global-asset allocation, flexible, income, and volatility funds , as
a well as liability-driven investments (LDIs)
(d) Includes hedge funds, private equity, real estate, infrastructure, liability-driven investments, and com
mmodity funds
Source: ICI, Preqin, HFR, Strategic Insight, Blackrock ETF report, IMA, OECD, Towers Watson, P&I, Lippers/Reuters, BCG Global Asset Management Market-Sizing Database (2013), BCG Global Asset
Management Benchmarking Database (2013), BCG analysis
Investor preferences are shifting away from traditional (active) offerings, but they still count
for 50%
Deutsche Bank
136
Renaissance of active portfolio manageme

ent (active specialties)
Reasons for active specialties

p
Information processing (competitive advantage)
Volatility (stock/bond picking offer opportunities)
Sector rotation (cyclical changes overweight/unde
erweight)
Duration management
g
Market phases (different investment styles offer opp
portunities)
Market conditions (take advantage of special situatio
ons)
Deutsche Bank
137
Classification of active investment strategiies
Investment horizon
Investment concept
Strategic
(> 1 year)
Tactical
(1 - 12 months)
Operational
(< 1 month)
Top-down
Bottom-up
Fundamental
Investment methodology
Technical
Quantitative
Growth
Investment style
Value
Income
Deutsche Bank
138
Investment styles
Investor type
Growth
i
investors
t
Interest
Atttitude
Examples
High growth
High risk/return approach
Google
Driven by future prospects
Strong performance
pressure
Apple
High industry multiples
SAP
etc
Value
investors
Income
investor
Driven by present operating

performance
Steady investment
behavior
Low industry multiples
High expectations on
management
etc
Dividend yield
Long-term perspective
Nestl
Free cash flows
Conservative investment
behavior
Munich Re
Sale if price target is achieved
Deutsche Bank
BMW
McDonalds
etc
139
Excursus: Hedge funds
Private investment p
partnerships
p that seek above
a
average
g returns
through active portfolio management and
d
whose primary compensation is a percentage of the profits
Inherent market volatility presents hedge fu
unds with permanent profit opportunities
Trading from both the long and short side o
of markets enabling managers to invest
profitably when conventional market strateg
gies experience negative returns
Investmentmodernisierungsgesetz allows hedge funds in Germany since 2004
Due to high acceptance of risks limited by SE

EC to sophisticated accredited investors only
Deutsche Bank
140
Performance monitoring
Performance measurement of p
portfolio man
nagers
g
Key figures
sharpe ratio:
takes into considerration performance and risk equally

(Return Re
eturn on risk free investment)
(
y)
Risk (Volatility)
Jensens Alpha:
Difference between
n risk adjusted return of portfolio
and market return
External vs internal performance measurem

ment
externally on basis of public information
internally on basis of proprietary manage
ement information system
Deutsche Bank
141
Deutsche Bank
Tab C
Market overview
Global assets under management, 2002 2012 (US$trillions)
(1)
12
10
28.8
27.7
(3)
29
15 9
15.9
9.9
2007 2011
North America
17
14
30.3
16 6
16.6
2002
2012
2002
2007 2011
Europe
3.2
2.5
2002
2012
2
14
24
2002
17 5
17.5
0.7
12
0.3
16 2
16.2
1.3
2007 2011
Latin America
1.5
0.5
2012
200
02
2002
12
5.9
6.3
2007 2011 2012

Japan and Australia
12
1.1
1.1
57.2
1.2
2007 2011 2012

South Africa and
the Middle East
An
nnual growth,
20
007 2011 (%)
57.0
62.4
32.6
2002
Annual growth,
2002 2007 (%)
6.6
3.5
2007 2011 2012

Asia
(excluding Japan
and Australia)
15
0.8
3.8
2007 2011
Global
2012
Annual growth,
2011 2012 (%)
Note: AuM totals represent assets, sourced from each region across 42 markets, that are professionally
y managed for a fee, including captive assets of insurance groups
Source:BCG Global Asset Management Market Sizing Database (2013)
Deutsche Bank
142
Development of net flows
Average net flows (in % of AuM at beginning of period)
5.7
45
4.5
4.0
3.1
3.2
1.0
1.0
0.1
(0.2)
(0.5)
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: BCG Global Asset Management Benchmarking Database (2013)
The industry has suffered a sharp drop in n

net new flows since 2007
Deutsche Bank
143
Trends and requirements post crisis enviro

onment
Megatrends
g
Demography
Pensions
Medical support
Long-term care
Aging population
Climate change
Risk coverage
and management
Investments
New Normal in capital

c
markets
Moderate growth
h
Low interest rate
es
Market volatility
Economic uncerttainties (Europe)
Inflation (?)
Tougher capital requirements
r
More (structural) regulation
Higher
g
taxes
Digitalisation
Client behavior
New products
Cost reduction
Deutsche Bank
144
Industry dynamics (1/2)
Success factor
Industry trend
Investment quality/
Alpha
Greater influence of profession

nal buyers prioritises quality of investment process as well
as consistent returns
Tangible pricing of beta through
h ETFs emphasises value for true alpha through active
management; increasing dema
and for high
high-alpha
alpha investment strategies
Ability to
manage total
portfolios & risk
Financial crisis underlined the need

n
for more solution-oriented approach to product
development, advisory and enh
hancements in risk management
Absolute return/outcome-orientted products increasingly important to investors of all types
& sizes
Shift to more immunised and diversified asset allocations among institutional investors
Promising solutions opportunities include Target Date Funds, Retirement Income
products Asset Allocation prod
products,
ducts and Fiduciary Management
ducts,
Global capabilities
p
& reach
Shift away from home bias tow

wards more global benchmarks confirmed by analysis of
consultant search activity and mutual
m
fund flow patterns with Global Equity, Global Fixed
Income, Asset Allocation and Global
G
Emerging Markets favored by investors
Revenue pools of AM industry follow
f
high growth expectations in Emerging Markets
Asset managers with globally relevant research & production and distribution capabilities
with competitive advantage
Deutsche Bank
145
Industry dynamics (2/2)
Success factor
Industry trend
Access to
distribution
Globally, intermediaries tend to

o consolidate their asset manager relationships;
building/ maintaining of priority distribution relationships crucial
Institutionalisation of retail business should enable institutional managers to effectively
compete
t for
f retail
t il flows
fl
and
d ass
sets
t
Increased usage of investmentt consultants, especially in the US
In Europe, banks potential with
hdrawal from asset management may lead to more open
platforms, but also to more com
mpeting banking products
Talent
management
Talent retention a critical factor in long-term franchise value; war for talent intensifying
again
Institutional investors place gre
eater emphasis on alignment of incentives between firm
equity and individual performan
nce in manager selection
Deutsche Bank
146
Asset Management barbell

barbell
(a)
(a)
Management fees net of distribution costs
Note: LDI = liability-driven investments
Source: ICI, Preqin, HFR, Strategic Insight, Blackrock ETP report, IMA, OECD, Towers Watson, P&I, Lippers/Reuters,
L
BCG Global Asset Management Market-Sizing Database (2013), BCG Global Asset
Traditional actively managed asset classess are forecast to weaken further

Deutsche Bank
147
Global asset management net-revenue po

ool
Industry revenues (US$ billions)

279
12
14
4
215
9 4
89
66
80
60
68
79
2012
2016E
Active core(a)
Active specialties(b)
Altern
natives(c)
Money market
Passice
Solutions(d)
(a) Includes active core equity (local large-cap

large cap equity), active core fixed income (developed market
market go
overnment debt), traditional balanced funds and structured products
(b) Includes other active equity and fixed-income products
(c) Includes hedge funds, private equity, real estate, infrastructure, liability-driven investments, and com
mmodity funds
(d) Includes absolute-return, target date, global-asset allocation, flexible, income, and volatility funds , as
a well as liability-driven investments (LDIs)
Source: ICI, Preqin, HFR, Strategic Insight, Blackrock ETF report, IMA, OECD, Towers Watson, P&I; Lippers/Reuters, BCG Global Asset Management Market-Sizing Database (2013), BCG Global Asset
Alternatives will soon become the number one revenue source in Asset Management
Deutsche Bank
148
Deutsche Bank
Section 6
Initial Public Offerings
Overview
Due diligence and docum

mentation
Off structure
Offer
t t
Syndicate structure
Investment case & valuattion
Marketing and bookbuilding
G After-market support
Deutsche Bank
149
Deutsche Bank
Tab A
Overview
Broad variety of external financing sources

s
Debt securities
Cash flow
Convertibles
Capital increase
IPO
High yields
Bank loans
Venture capital
Angel round
Corp
porate lifecycle (time)
Pioneer/Start-up
Growth
Maturity
Private vs public owners fundamental diffe

erence
Deutsche Bank
150
Private vs public ownership
Bilateral contracts
Private
Limited liquidity/fungible ow
wnership
Relatively direct execution of control
Limited legal protection of owners necessary
or paramount
Protection of small investo
Public
High liquidity/fungibility
Indirect control/corporate governance
g
General rules
IPO: means to an end, not an end in itself
Deutsche Bank
151
Strategic rationale for IPOs
Benefits
v
vs
Costs
Financing for future growth/expansion of

business
Expenses of public issue

(6 8% of issue)
A
Access to
t capital
it l markets/diversification
k t /di
ifi ti off
financial sources
C
Continuous
ti
costs
t off administration
d i i t ti
and communication
Stock options as incentive systems for

management and employees
Tax expense
Strengthen capital structure

Reduced costs of borrowing
Publicly available information

Performance visibility
Efficient corporate governance structures
Acquisition currency
Exit of founders/financial investors
Public awareness/gain mind share
Access to capital markets to finance future grrowth as primary objective
Deutsche Bank
152
Goals of IPO
Optimise
p
offer p
price/maximise issue success
Ensure positive secondary market
Create a diversified shareholder base
Strengthen
g
the company
p yp
profile/corporate
p
image
g
Secure long-term access to equity and deb
bt capital markets
Deutsche Bank
153
Number of IPOs in Germany since 1985
146
6
132
73
47 43
6
2013
3
2012
2
2009
9
2011
1
3
2010
0
4
2008
8
2007
7
2006
6
2003
3
6
2005
5
2004
4
5
2002
2
2001
1
2000
0
1999
9
1998
8
1997
7
1996
6
1995
5
15 12
10
16
8
1994
4
1990
0
1993
3
11
24
22
16
1992
2
1991
1
1989
9
1986
6
1985
5
1987
7
1988
8
21
Source: Thomson Reuters (as of 27-Feb-2014)
Deutsche Bank
154
Going public key issues to consider (1/2)
Unique event in the life cycle of a company with ma

ajor strategic implications
Business plan/strategy
Use of proceeds
Corporate governance
Management incentives
erm
Short term/medium te
Financial targets
General corporate vss specific purposes
Board composition
Executive vs non-exe
ecutive directors
Performance-based compensation
c p
Stock vs cash
Type of accounts
Financial reporting
Timetable
Disclosure level
Management informa
ation system (MIS)
Deutsche Bank
155
Going public key issues to consider (2/2)
Unique event in the life cycle of a company with ma

ajor strategic implications
m
Primary/secondary mix
Capital structure
Leverage
Free float
Dividend yield
Dividend policy
Dividend pay-out ratio

o
Semi-annual vs annu
ual
Institutional vs retail
Shareholder base
Domestic vs internatiional
Employee ownership
p
Investor relations/
public relations
Staff/resources
Senior management involvement
Deutsche Bank
156
Key drivers of a successful IPO
Offer structure
Size
Shareholder
structure
t t
Listing strategy
Type of shares
Timing
Due diligence
g
&
documentation
Due diligence
- legal
- business
- bring down
Prospectus
Stock
exchange
admission
Syndicate
y
structure
Beauty contest
Investment
case &
valuation
Marketing
g&
bookbuilding
Company
fundamentals
Investor
targeting
Business
B i
plan
l
Pre-marketing
P
k ti
Syndicate
composition
Growth
potential
Marketing
Steering
committee and
project
organisation
Management
Pricing
Valuation
Allocation
Lead manager/
b k
bookrunner
Order taking
Legal counsel
After-market
support
Encourage
after-market
interest
Execution of
greenshoe
Ensure market
liquidity
Ongoing
research
coverage
Execution
Preparation
Investment banks can provide significant valu

ue in each of the main factors affecting
the long-term success of IPOs
Deutsche Bank
157
The new issue process
External
Internal project
organisation
Project organisation
Commitments
committee
Selection of advisors
Grey/restricted list
Management
checkings
Sales memo
Sales call
Post closing matters
(advertising
expenses)
Documentation
Due diligen
nce
Valuation
Prospectuses
Stock exchange
filings
Historical financials
Comfort letters
Disclosure opinions
Underwriting
agreement
Agreement among
underwriters
Agreement between
syndicates
Closing
documentation
Legal
Businesss/financial
Bring-dow
wns
Review of business
plan/financial
projection
Capital structure
Dividend policy
Valuation
Price range
Deutsche Bank
Offering structure/
marketing
Syndicate structure
Corporate
governance
Management
incentives
Employee tranche
Analyst presentation
Research reports
Red flash
Sales memo
Sales
S l callll
Pre-marketing
PR campaigns
Roadshows
Pricing & allocation
Trading
Settlement
Greenshoe
158
The costs of the listing decision
Listing
g dec
cision costs
Cost of going public
Direct costs
Cost of being public

Direct costs
IPO underwriting fees
SEO underwriting fees
Initial listing fees
Listing fees
Professional fees
Professional fees
Compliance costs
Compliance costs
Advert. and other costs rel. to IPO
Advert. and other costs rel. to SEO
Indirect costs
Indirect costs
SEO announcement discount
Underpricing
Trading costs
Loss of proprietary information
Loss of proprietary information
Note: SEO = Secondary offering
Source: Prof. Dr. Christoph
p Kaserer,, Prof. Dr. Dirk Schiereck
Deutsche Bank
159
Deutsche Bank
Tab B
Due diligence and documenta
ation
Due diligence
Legal
due diligence
Review of potential contra

acts, agreements, licences, legal disputes, etc
Counsel to prepare joint due
d diligence request list
Prepare data room
Business
due diligence
Bring down
due diligence
Update due diligence prior to printing, pricing, and closing
usiness information
Review of financial and bu
Prepare due diligence req
quest list
Arrange
g due diligence
g
me
eetings
g with senior management
g
Judgement on credibility
Critical responsibility (issuer vs investor intere

ests)
Credibility of investment bank at stake
Deutsche Bank
160
Documentation (1/3)
Prospectus
General rule: One basic documentation

d
for all markets
Wrap-around: Additional in
nfo related to local requirements
Prospectus types
pink
i k h
herring:
i
P
Pre-markketing
k ti prospectus
t without
ith t price
i range; unusual;l
most often used in US registered deals
ding prospectus including price range
red herring: Bookbuild
final: Prospectus
p
includ
ding
g final offer p
price
Stock
exchange
admission
SEC registered
Required
q
if there is a US p
public offer
reserve about 2 monthss
sec filings, acceleration
n requests, NYSE, NASD applications,
blue sky surveys
Not
N t SEC registered
i t d
US private placements (144A), pure international offerings
meet local stock exchange time-table
Deutsche Bank
161
Documentation (2/3)
SEC registered
i t d
5 year summary, 3 year audited consolidated P&L, cash flow and 2 year
audited balance sheet; US
S GAAP/US GAAP reconciliation
Historical financial
statements
Not SEC registered

onsolidated P&L, cash flow and 2 year audited
Typically 3 year audited co
balance sheet; IFRS or local standard
Pro-forma
Needed, if certain transacctions need to be eliminated/included
Pro-forma
Pro
forma combined
Used to show financials of
o businesses which historically were not
consolidated (eg - out of business
b
division)
Deutsche Bank
162
Documentation (3/3)
Comfort letter
Statement by the accounttants confirming the financial information in the

prospectus and negative assurance regarding absence of material changes
Di l
Disclosure
opinions
i i
Statement by legal counsel confirming the accuracy

of the prospectus
Needed from issuers and
d underwriters counsel
Underwriting
agreementt
Agreement between synd

dicate banks and issuer/selling shareholders
regarding
di the
th underwriting
d
iti g off the
th shares
h
Agreement among
underwriters
Regulates the relationship

p among underwriters
Agreement between
syndicates
p between syndicates
Regulates the relationship
Closing
documentation
Opinions, certificates, etc
Deutsche Bank
163
Deutsche Bank
Tab C
Offer structure
Calibrating the right offer structure
Size
Capital
p
demand
Sufficient after-market liquidity/leve
el of free float
Strength of equity story/compelling
g use of proceeds
Shareholder
structure
Institutional vs retail investors

International vs local investors
Creation of anchor market
Listing
g
Stock exchange (New York, Londo

on, Tokyo, Frankfurt, Stuttgart, Munich, etc)
Market segment
International listing (ADRs, Rule 14
44 A, global shares)
Shares
Bearer vs registered shares

Common shares vs preferred sharres
Primary vs secondary offering
Lock up agreement
Lock-up
Timing
Maturity of IPO candidate

General conditions of capital markkets
Other expected issuances/perform
mance of comparables
Determination of time table for IPO
O
Ensure access to broad investor base with

w clearly defined home market
Trade preferably on same exchange as comparable companies
Deutsche Bank
164
Market segments at the Frankfurt Stock Ex

xchange
Issuers can choose between
y to access the
two ways
public capital market
EU re
EU-re
egulated market
Regulated unofficial market
three statutory
market segments
Am
mtlicher Markt
Freiverkehr
Geregelter Markt
(Open market)
four transparency levels
Prim
me Standard
(parrtial segment)
Entryy Standard
(partial segment)
Gen
neral Standard
Open Market Standard
Source: Based on Deutsche Brse
Deutsche Bank
165
International comparison of IPO activity
IPOs (1985 2013)
USA
8,881
Japan
2,5
532
UK
Germanyy
1 753
1,753
644
Note: Excluding issues which are not underwritten

Source: Thomson Reuters (as of 17
17-Feb-2014)
Feb 2014)
Deutsche Bank
166
International listing considerations
Advantages
Disadvantages
Additional access to international markets and

investors
Access to investors likely to be small relative to

home market
International
I t
ti
l shareholder
h h ld b
base
Limited
Li it d liliquidity
idit
Strategic flexibility for acquisitions abroad

(acquisition currency)
Trading generally occurs in the most liquid

markets
International name recognition
Increased costs to market and

maintain investor relations
Foreign employee participation

in ESOPs
Relative merits of international listings

Not blue print for everyone
Deutsche Bank
167
Accessing US investors
SEC registered offering
Description
Advantages
Rule 144A offering
SEC registered public offering

of ADRs and ordinary shares
simultaneous with a US listing
Access to both retail and
institutional investors
Access to both retail and

Likely split 70-80% institutional
and
d 20
20-30%
30% retail
t il
Creates strong research focus
Creates strong impact on stock
liquidity
Disadvantages
Expensive
Requires compliance with
SEC reporting requirements and
US GAAP reconciliation
SOX compliance required
Global shares
Targe
eted offering made exclusive
to qua
alified institutional buyers
(QIBs)
Share
es offered in ADR or ordinaryy
form
Faste
est access to US market
(1-2 month
m
execution time)
Locall reporting with explanation of
diff ences sufficient
differe
ffi i t
Flexib
ble way of tapping US
invesstors
Laterr listing possible
Offering
g improves
p
stock liquidity
q
y
No acccess to retail investors

Limite
ed access to domestic
portfo
olios
Attraccts less research coverage
than a registered offering
Deutsche Bank
One common share around the

world
Global registered shares
Access to both, retail and

No derivatives such as ADR
or ADS required
i d
Worldwide share register
Creates strong impact on liquidity
and research coverage
Requires compliance with SEC
reporting requirements and US
GAAP reconciliation
Intensive marketing efforts
required
i d
Expensive
Global clearance necessary
Foreign shares
168
Deutsche Bank
Tab D
Syndicate structure
Selection of syndicate banks
Offering-related
Offering
related criteria
Bank-related
Bank
related criteria
Offer structure
Reputation/experience
(track record)
First drafts of equity story

Indicative pricing/valuation
Preliminary offer structure
Overall quality of pitch book
Research strength/q
strength/quality
alit
Commitment/staffing
Relationship with company
People fit
Distribution/placement power
Fees/expenses
Beauty contest to select underwriters

Deutsche Bank
169
Composition of a global syndicate structurre
Global syndicate structure
Objectives
Full coverage of target investor base
Global coordinator
and bookrunner
Attractive valuation
Flexibility
National retail
offering
Global institutional
offering
National institutional offering
Lead manager
Bookrunner
Lead manager
Group of joint
leads
Co leads
Co-leads
Co leads
Co-leads
Motivation
M ti ti off banks
b k
Optimal distribution
Clear responsibilities
Long-term relationships
d encourage positive tension

Maximise commitment of selling banks and
Deutsche Bank
170
Tombstone of Deutsche Telekom AG
Deutsc
che Telekom AG
Hinweisbekanntmachung zum unvollstndigen
u
Verkaufsprojekt
Ein Exemplar des unvollstndige
en Verkaufsprospektes fr bis zu
DM 2.500..000.000,Stck 500.000.000 Inhaberstamma
aktien im Nennbetrag von je DM 5,sowie
i f
fr bi
bis zu DM
D 375.000.000,375 000 000
Stck 75.000.000 Inhaberstammak
ktien im Nennbetrag von je DM 5,im Hinblick auf die den Banken gewhrte Mehrzute
eilungsoption,jeweils mit voller Gewinnberechtigung
ab 1. Januar 1996, wurde am 3. Oktober 1996 beim Bu
undesaufsichtsamt fr den Wertpapierhandel hinterlegt.
Globale Koo
ordinatoren
Deutsche Bank AG
Dresdner Bank AG
Goldman Sachs & Co

Co.
Deutsches Konsortium
Dresdner Bank AG
DG Bank
Commerzbank
Landesbank Hessen-Thringen
Baden-Wrttembergische Bank
Goldman,, Sachs & Co. oHG
Joh. Berenberg, Gossler & Co.
Bankhaus Max Flessa & Co.
IKB Deutsche Industriebank
Landesgirokasse
Deutsche Bank
Deutsche Bank AG
Westdeutsche Landesbank
n- und
Bayrische Hypotheken
Wechsel-Bank
Bankgesellschaft Berlin
Sdwestdeutsche Landesbank
g ellschaft
BHF-BANK Aktiengese
Sal. Oppenheim jr. & Cie.
C
BfG Bank AG
Hamburgerische Landesbank
ampe
Bankhaus Hermann La
B. Metzler seel. Sohn & Co.
Bayrische Landesbank
Bayrische Vereinsbank
Norddeutsche Landesbank
CS First Boston Effectenbank
g & Co.
M.M. Warburg
Delbrck & Co. Privatbankiers
Georg Hauck & Sohn Bankiers
Landesbank Rheinland-Pfalz
SchmidtBank KGaA
171
Typical breakdown of economics
Breakdown of g
gross spread
p
((in %))
100 %
80 %
Underwriting
fee
15 - 20%
Compensates all syndicate members for their under-writing

commitmen
nt and their costs of after-market stabilisation
Management
fee
15 - 20%
Motivates syndicate
s
members to participate in structuring, organising
and manag
ging the offering. 25 - 50% of management fee paid to lead
managers as
a a praecipium
60 %
Typical gross
spread
100%
40 %
Selling
concession
60 - 70%
Rewards sy
yndicate members for actual sales made
20 %
0%
Source: MSDW
Deutsche Bank
172
Other parties of transaction team
Advertisement
agents
IR-Con
nsultants
Lawyers
Invesstment
ba
ank
Printers
Management
consultants
Accountants
Tax
consultants
Investment bank as project coordinator

Deutsche Bank
173
Deutsche Bank
Tab E
Investment case & valuation
Successful approach
Shares ((securities)) as a p
product
Investors as customers
Research analysts as opinion leaders
Banks/brokers/stock exchange as distributtion channels
Key questions?
Who are my actual and potential customers?
What are their needs?
Deutsche Bank
174
Similar to customers, investors are very div

verse
Retail investors
Hedge
g funds
Insurance companies
Dedicated funds
Pension funds
Banks
Mutual funds
Industrial companies
etc, etc ...
Germany
G
vs Euroarea
E
vs EU vs USA ...
Therefore, generalisations are dangerous and inaccurate; however ...

Deutsche Bank
175
What do investors want ?
Return or total shareholder return too simple

pe
Reminder
Share price = expectations about future cash flows
Investors are different with regard to:
Risk assessment
Time
Ti
h
horizons
i
Ability to plan
Information/transparency/comparability
Opportunity costs
Performance benchmarks
Key problems:
Asset allocation
Selection
Deutsche Bank
176
What do equity analysts want ?
Deliver accurate assessments

Be quicker than others
Analyze key stocks
Achieve top rankings from investors
age problem)
Clear equity stories (conglomerate/covera
Key problem: surprises

Credibility of manageme
ent is key
Underpromise and overrdeliver also not a success strategy
Focus on accurate proje
ections
Deutsche Bank
177
Equity story and capital markets
Branding
g increasingly
g y important
p
Relative attractiveness of equity story
Credibility of management
Search for simple and clear yardsticks
EVA (Economic Value Added) as an examp

ple
Deutsche Bank
178
Equity story and capital markets
Company
Capital m
markets
Investors
Company value
Markett value
Portfolio value
EPS
P/E Ratio
P/E-Ratio
Facts
Assessments
Management
credibility
Growth/earnings
expectations
Equityy Story
Steering problem
(cost of capital)
Selection problem
(variety of investments)
EVA
MV
VA
P/E-Ratio
Economic
Economic Value Added
Added
Difference between
ROCE and WACC multiplied
by Capital Employed
Market
Market Value Added
Added
Difference
e between
market va
alue and
capital em
mployed
Price
Price-to-earnings-Ratio
to earnings Ratio
Multiple of adjusted
EPS to reach
current share price
Deutsche Bank
179
Strategic pillars of a successful investmen

nt case
Industry
conditions
Long-term
Long term growth prospects
Competition/barriers to entry
Cost structure
Drivers of supply and demand

Significant market opportunity
Company
position
Market share/position
Competitive advantages
mer
(products, technology, custom
base, innovation etc)
Management capability
Stability of strategic plan
Visibility and momentum
of business model
Operating
management
Vision/mission
Strategic business/
strategic priorities
Execution
Operating profitability/
returns to shareholders
Financial
management
Financial strategy/structure
Disclosure
Rating
Flexibility
Convincing equity story presenting unique selling points as key marketing tool
Deutsche Bank
180
Building the investment story
Basic types of in
nvestment stories
The growth story
The stable return

n story
The management story
Market leadership
Significant above-average
organic growth
Growth in profitability is
greater than growth in sales
High capital needs for
financing of organic and
external growth
Limited cyclica
ality of major
subsidiaries
Stable historic returns
d free cash flows
High projected
Charismatic, experienced
management team
Turn-around situations
Proven experience with
acquisitions and integration of
companies
Readiness to dispose
unprofitable business divisions
Clear performance goals with
incentive structure for senior
and middle management
Source: Merrill Lynch
Detailed preparation of the investment storry critical to differentiate

IPO candidates from competitors and to ma
aximise offering proceeds
Deutsche Bank
181
Valuation as critical part of the offering pro

ocess
Discounted cash
cash-flow
flow analysis
Comparable com
mpanies
Precedent transactions
Valuation based on the present

value of projected free cash
flows and terminal value
Comparison witth publicly-traded

companies
Comparison to transactions with

similarly structured companies
sold to strategic or financial
investors
WACC used as basis for riskadjusted discount factor

Appropriate exit multiple for
terminal value
Assessment of q
qualitative
factors
Multiples accesss the markets
valuation and outlook
o
of a
company
Price-earnings ratio (P/E) is
v
multiple
most common valuation
Trend towards operational
op
valuation multip
ples
(EV/EBITDA, EV/EBIT)
In-depth analysis and access to

internal data critical
Deutsche Bank
Peer group se
election critical
Important operating multiples/

margins: EBITDA, EBIT
Multiples are a reflection of the
strategic value of company
Strategic premiums to be
considered
Prevalent market conditions and

strategic premiums critical
182
Selection criteria for comparable companie

es
Operating characteristics
Peer g
groups
Financial characteristics
Sales volume
Direct compettitors
Gearing/leverage
Market share
Competitors with
w similar
business/markket structure
Capitalisation
Financial liquidity
Geographic presence
Companies with similar value

drivers
Country risk
Sector indicess
Liquidity of shares
Cost structure
International vs
v national
comparisons
Earnings growth
Profitability/margins
Drivers of demand
Dividend policy
Rating
Growth potential
Direct competitors with similar operating an

nd financial
characteristics as most suitable peer group
p
Deutsche Bank
183
Fixing of price range
Offering-related
g
Prior to roadshow based on pre-marketing feedback
Potential conflict issuer vs investors
Serious market judgement, credibility and integrity required
Potential games between (lead) advisors
Difficult psychology (desire for over-subsccription)
Deutsche Bank
184
Deutsche Bank
Tab F
Marketing and bookbuilding
The bookbuilding process
Preparation
Project
management
Due diligence/
documentation
Valuation
Equity-research
report
Pre marketing
Pre-marketing
Press conferences
Research analyst
presentation
(approx 1 month to
publication date)
Research
publication
Investor targeting
Warm-up meetings
with institutions
Preliminary
d
demand
d analysis
l i
Mark
keting
Corporate
e
presentations with
top-mana
p
gement
g
Road sho
ows
One-on-O
Ones
with inves
stors and
key analysts
Start orde
er-taking
Analysis of
o
demand
After-market
activities
Bookbuilding
Shares offered
within pricing range
((book-building
g
range)
Investor indications
are collected in the
book
Price
P i estimates
i
off
global demand
Final issuance
price
Allocation
direct allotment
free retention
Gearing/leverage
Capitalisation
Dividend policy
Financial liquidity
Rating
Liquidity of shares
Announcement of
pricing range
(10 15%)
Maximises issue success through a market oriented

o
price discovery
Deutsche Bank
185
Example: Allianz international roadshows
Europe roadshow targets
US roadshow targets
Week 1
Week 2
London
San Francisco
Fidelity
Capital Group
Legal & General
GIC
JP Morgan
Dodge & Cox

Artisan
Standard Pacific
Frankfurt
DWS
Union Invest
Deka
Cominvest
P i
Paris
Crdit Agricole
IXIS A.M.
AXA
BNP Paribas
Stockholm
Edinburgh
London
The Hague
g
Amsterdam
Zurich
UBS Global
Julius Baer I.M.
Credit Suisse A.M.
Citadel
Harris
UBS
Instit. Capital Corp
William Blair
Frankfurt
Paris
Zurich
Milan
Milan
Nextra
BPU
Fideuram
Sanpaolo
Chicago
Madrid
San Francisco
Boston
Chicago
C
cago
Los Angeles
N
New
Y
York
k
Denver
San Diego
Boston
Fidelity
Wellington
Putnam
GMO
New York
Additional cities visited during the year:
Stockholm
Edinburgh
Madrid
M d id
Amsterdam
The Hague
Toronto Montreal
Artisan
TIAA Cref
Deutsche Asset
Lazard
Oppenheimer
Funds
Additional cities visited during the year:

Montreal
Toronto
Los Angeles
Denver
San
S Di
Diego
Tokyo
Sydney
Provide access to key investors across the

e world
Deutsche Bank
186
Investor segmentation
Investment
es e style
sye
Institutional differentiation
Investment philosophy
Deutsche Bank
187
Investor targeting philosophy
Segmenting the
e investor base
Target investor groups
Valuation
leaders
Valuation
followers
Nature of marketing effort
Dedicated sector/
value/growth
l /
th buyers
b
Sophisticated ma
arketing based on global sector comparisons
Multiple points off contact within each account
Specialists research and dedicated sales dialogue
Pan-European growth/
value buyers
General international funds
Non domestic funds
Core domestic
institutions and
index funds
Few dedicated se
ector analysts, marketing focused on PMs
Index inclusion a key driver
uation followers
Traditionally, valu
Retail
Retail demand prrice insensitive, but competing offerings could have substantial
impact on deman
nd in domestic market
h/value supply in Europe will drive demand

Scarcity of growth
Generalist funds will seek guidance from their in-house sector experts
May include secto
or related portfolio allocation within general funds
Marketing now fo
ocused on individual PMs managing large portfolios
Scarcity of growth
h/value supply in Europe will drive demand
Source: MSDW
Focus management and syndicate resourcess on large global institutional investors

Deutsche Bank
188
Allocating shares to investor
Book of demand
Orders
Institution 1
Institution 2
Institution 3
Institution 4
Institution 5
Institution 6
Institution 7
Institution 8
Institution 9
Institution 10
R il
Retail
Syndicate
Quality filter
nstitution
Importance of in
Ownership in the
e sector
Participation in tthe roadshow
Transparency off purchase
intentions
Deal feedback
eness
Price aggressive
Distribution Objecttives
Limited stock flo
owback
Appropriate institutional/retail mix
Critical mass allocations to
important institutions
ding premium
After-market trad
Exercise of Gree
enshoe
Allocations
Institution 1
Institution 2
Institution 3
Institution 4
Institution 5
Institution 6
Institution 7
Institution 8
Institution 9
Institution 10
R il
Retail
Syndicate
Source: MSDW
Allocation decision depends on quality of in

nstitutions and distribution
objectives of the issuer
Deutsche Bank
189
An illustrative allocation model
+
Name of
investor
Syndicate
bank
Number of
shares
Weighting of criteria
Time
Price
Investor
20%
20%
60%
Result
Weighted
shares
Percentage
of total
weighted
i ht d
shares
Allocated
shares
Bank 1
20,000
0.5
0.109
0.2
0.809
16,180
19.5%
9,750
Bank 2
50,000
0.35
0.055
0.133
0.538
26,900
32.4%
16,200
Bank 3
80,000
0.1
0.2
0.2
0.5
40,000
48.1%
24,050
83,080
100%
50,000
Total
150,000
During the bookbuilding marketing phase, the

t bookrunner maintains an
electronic book containing the indication off orders from institutional buyers
Deutsche Bank
190
Alternative pricing methods
Bookbuilding
Advanced pricing
Auction model
Establishment of a market
determined issuance price
Issuance price determined by

damentals, comparable
fund
com
mpanies and general market
cond
ditions
Establishment of an auction
determined issuance price
Level of demand and price

sensitivity of indications are
taken into consideration when
setting
tti the
th offer
ff price
i
Limited underwriting risk for
the banks
Small IPO discount
Distribution to a balanced
shareholder base
Certtainty of exact offering

procceeds
No intensive marketing efforts
requ
uired
Limited underwriting risk for

the banks
No IPO-discount
Broad marketing efforts place

high demands on management
Price discoveryy could
be affected by negative
developments during
marketing phase
Leve
el of demand and price
senssitivity not considered
when setting issuance price
Priciing discount (15%)
High
h underwriting risk
Issuer vs syndicate
No improvement of
performance in the secondary
market
Description
Advantages
DisDis
advantages
Deutsche Bank
191
Deutsche Bank
Tab G
After-market support
Trading and after-market support
Provide
Ongoing research coverage following blackout-period
Manage press strategy
Continue investor relations program
Maintain liquidity
Stabilise after-market trading activities (Greenshoe)
Commitment to long-term after-market suppo

ort
Deutsche Bank
192
The Greenshoe
Reduces risk of underwriters to stabilise

stock price during initial days of trading
Flipping of certain investors in the

IPO
Burden of stabilising stocks at issue

price
Syndicate can over-allot the issue

prior to offering date (short position)
Scenario 1
Buying
y gp
power for lead underwriter
Usually 15% of the offering size
Positive share price performance
Issuance price
Underwriter purchases
additional shares from company
Scenario 2
P
Negative share price performance

Underwriter buys shares
in the open market
Underwriters over-allotment option to purchase from the issuer a number of

additional shares beyond the registered shares in the offering
Deutsche Bank
193
Potential timetable for stock offering

Status-quo meetings
Month 1
Month 2
1 2 3 4 12 3 4
Month 3
Month 4
12 3 4
12 3 4
Phase I - preparation
Kick-off
Kick
off meeting
Conclusion of transformation of distribution to stock company
Analysis and selection of distribution of shares to management and employees
Selection and underwriters
Offering structure, accounting standards
Phase II - documentation / investment case
Business due diligence (inspection of business, presentations, operating management)
Realistic business plan / valuation
Creation of 6-month figures for review
Legal due diligence
Underwriting agreement
Agreement among managers
Drafting of the prospects
Development of equity story (positioning)
Phase III - marketing / bookbuilding
Development of the PR-concept, work with the press
Press release for the quarterly results
q y story
y to analysts
y
Presentations of equity
Analysts presentation and reports
Blackout period
Pre-marketing
Pricing range
Roadshow
g
Bookbuilding
Determination of offering price
Distribution of shares
Phase IV - secondary market
First day of trading
After-market stabilization / execution of Greenshoe
Investor database
Deutsche Bank
194
Deutsche Bank
Section 7
Understanding the M&A Busin
ness
Deutsche Bank
Understanding
g the M&A business
b
M&A observations
E
Excursus:
2013 M&A iin Germany
195
Deutsche Bank
Tab A
Understanding the M&A busin
ness
Understanding the M&A business
Drivers
Strategic
Global competition
European
E
integration
i t
ti
Buy vs build
Scale and scope
Capital
C
it l markets
k t
Shareholder value
Economic value added
Value gaps
Market for corporate control

Acquisitions
Disposals
Mergers
Company specific
Strategic position
Succession issues
Best owner principle
Personalities
Deutsche Bank
196
Drivers
Strategic
Global competition
European
E
integration
i t
ti
Buy vs build
Scale and scope
Capital
C
it l markets
k t
Shareholder value
Value gaps

Acquisitions
Disposals
Mergers
Company specific
Strategic position
Succession issues
Personalities
Deutsche Bank
197
Key drivers of the M&A business
M&A Impact
p
Keyy Drivers
Globalisation
Redefinition of relevant markets
Financial
Strategic
Product market integration

Logistics/
Costs
Global
competition
Technology
Regulatory
changes
Research
transparency
Institutional
shareholders
Capital markets convergence
Increased transparency/competition
Improved planning parameters
EMU
Government retrenchment/privatisations
Competitive equity stories through M&A
Creation of Euroland infrastructure
Demographic challenges
Deutsche Bank
198
World-wide M&A activity
M&A volume in US$bn (1995 2013)

4,130
3,616
3,258
3 395
3,395
2,879
2,674
2,504
2,432
1,,882
1,645
927
1 115
1,115
2,519 2,543
2,409
1,999
1,688
1 204
1,204
1,343
1995 1996 1997 1998 1999 2000 2001 2002 2003 20

004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Thomson Reuters (as of 27-Feb-2014)
Deutsche Bank
199
Bid premiums in takeover
1999
2000
2002
2003
2004
2005
Global
20
006
2007
2008
2009
2010
2011
2012
22.5%
26.1%
%
28.0
0%
33.3%
29
9.4%
29.0%
9.3%
29
31.8%
24.5%
23.2%
25.7%
20.1%
22.4%
19.0%
24.6%
20.3%
24.2%
18.3%
1
17
7.8%
22.5%
%
26.0%
23.6%
32.8%
2001
25.5%
25.5%
30.3%
3
7%
27.7
33.8%
31.6%
35.9%
Premium in % (1999 - 2013)
2013
Europe
Note: Based on the offer price versus share price one month before offer; includes transactions >US$100m, where acquirers sought at least 50% of the share capital; premia >100% have been ignored.
Source: Dealogic (as of 28-Feb-2014)
Deutsche Bank
200
World-wide M&A activity by regions (distrib

bution of volumes)
100%
49%
46%
40%
40%
36%
38%
10%
11%
15%
2006
2007
2008
Africa/Middle East/Central Asia
Japan
48%
47%
48%
47%
51%
28%
26%
28%
31%
23%
16%
19%
18%
16%
2009
2010
2011
2012
Asia-Pacific (ex Japan and Central Asia)
Europe
19%
2013
Americas
Note: Ranking value incl net debt of target

Source: Thomson Reuters (as of 17
17-Feb-2014)
Feb 2014)
Deutsche Bank
201
Buy vs build strategy
Organic
g
g
growth often too expensive
p
or time-consuming
g ((eg
g branded g
goods))
Aggressive management of market share more
m
important than ever
Critical mass required in core business
Sale of non-core activities possible at attracctive prices
Acquisitions by competitors require swift co
ounteraction
Strategic alliances completely change comp
petitive position
Sale of companies is politically acceptable
Decreasing stigma of failure as entrepreneu
ur
Deutsche Bank
202
Economies of scale and scope
Not the big

g eat the small but the fast eat th
he slow
Size is not a goal in itself
Relevant and relative size matter
Market capitalisation is important size mea
asurement
Potential economies need to be realised
Tendency of many products to become com
mmodities
Economies vs diseconomies of scale (real or
o excuse?)
In people/service businesses: economies of shared experience
In new economy: economics of attention (brand,
(
image)
Why not large and fast?

Deutsche Bank
203
Drivers
Strategic
Global competition
European
E
integration
i t
ti
Buy vs build
Scale and scope
Capital
C
it l markets
k t
Shareholder value
Value gaps

Acquisitions
Disposals
Mergers
Company specific
Strategic position
Succession issues
Personalities
Deutsche Bank
204
Shareholder vs Stakeholder is a fake dis

scussion
Custom
mers
Lenders
Suppliers
Manage
ement
Shareholders
Employees
Gene
erall
Public
The key criterion is relative power, which means

m
Shakeholder rather than shareholder
or stakeholder value
Deutsche Bank
205
The balance of power is shifting
Stakeholder
Customer
Suppliers
Lenders
Shareholders
Employees
Influence
Impact
p
Increasing competition
Better flow of information
Fierce p
pricing
g war
(
(most)
)
Outsourcing
(Value-added)
Disintermediation
(Banks)
Securitisation
(Capital markets)
Institutional Investors
Private owners
Increasing professionalism
(Experts
Low-wage countries/unemploym
ment
(Unions)
Politics
General public
Media/
Media/Pressure
Pressure Groups
Groups
Regulators
Customers and investors increase their influence

Deutsche Bank
206
Illusion of satisfactory underperformance is being uncovered ...
People
p tend towards satisfactory
y ((but not optimum)
op
)p
performance
What counts as satisfactory depends on co
omparative values
International benchmarking shows theoreticcal potential
Best of class approach with new definition of class
International institutional investors do not acccept satisfactory
Potential risk of hostile takeovers
Increasing influence and sanctioning powe

er of institutional investors
Conventional management increasingly under
u
pressure
Deutsche Bank
207
German managers/entrepreneurs cannot escape

e
this development
Germanyy is an importer
p
of capital
p
Transition from bank loan-based to capital market-based
m
economy
Integration of European capital markets
International accounting standards
Analyst community
Venture capital and buy out market
etc, etc ...
Deutsche Bank
208
Importance of capital markets
Byy consistentlyy tapping

pp g into capital
p
marketss,, companies
p
((managers)
g ) can obtain
sustainable competitive advantages in strattegic areas
or to put it negatively:
or,
Lack of success in capital markets severelyy restricts a companys strategic room
for maneuver
Deutsche Bank
209
Remember: capital markets framework
Company
Capital m
markets
Investors
Company value
Markett value
Portfolio value
EPS
P/E Ratio
P/E-Ratio
Facts
Assessments
Management
credibility
Growth/earnings
expectations
Equityy Story
Steering problem
(cost of capital)
Selection problem
(variety of investments)
EVA
MV
VA
P/E-Ratio
Economic
Economic Value Added
Added
Difference between
ROCE and WACC multiplied
by Capital Employed
Market
Market Value Added
Added
Difference
e between
market va
alue and
capital em
mployed
Price
Price-to-earnings-Ratio
to earnings Ratio
Multiple of adjusted
EPS to reach
current share price
Deutsche Bank
210
Value management framework
Economic
value added
Industry B
Industry A
Relative
market share
Corporate strate
egies
Financial strategies
Best in class
Operational efficie
ency
WC management
Pla to win
Play
in
Market share gain

ns
Optimal financing (WACC)
Choose the game
Portfolio changess
Allocation of capital
Change the rules
Industry innovatio
on
Multiple expansion
EVA = (ROCE
Deutsche Bank
WACC)
CE
211
Drivers
Strategic
Global competition
European
E
integration
i t
ti
Buy vs build
Scale and scope
Capital
C
it l markets
k t
Shareholder value
Value gaps

Acquisitions
Disposals
Mergers
Company specific
Strategic position
Succession issues
Personalities
Deutsche Bank
212
Power/politics
Company
history
Organisational
structure
I di id l
Individuals
Balance of power
Image
Corporate culture
Economic environment
Internal growth
Global competition
Economies of scale/scope
Capital expenditures
Industry consolidation
Customers/suppliers
Reorganisations
Technology cycles
Barriers to entry/exit
Deregulation
g
Relative factor costs
External growth
Determination
of strategic
goals of the
company
as whole
Comp
petitive
p
ana
alysis
of strrategic
busiiness
un
nits
Gap
analysis
Financial environment
Full acquisitions
Partial acquisitions
J i t
Joint-ventures
t
Divestitures
M
Merger
Sale
MBO
Global capital markets
Speculators/Raiders
Spin-off
p
FX dynamics
Arbitrageurs
LPD
Interest rate development
Liquidation
Shareholder activities
Deutsche Bank
213
M&A and the Mittelstand
Problems of the p
post-war/founding
gg
generatiion to find suitable successors
Opening-up of traditional Mittelstand marke
ets
Competition increases sharply
Lack of scale to be successful on European
n scale
Attractive premium for well-managed
well managed companies
Significant drawbacks for companies that re
eact too late
IPO as alternative exit strategy only solves part of challenges
Deutsche Bank
214
Corporate
p
orphans
p
vs core focus
Synergies and economies
Illusion
Illusion of satisfactory underperformance
underperformance
Family ownership vs wealth diversification
Management stock options
Deutsche Bank
215
Drivers
Strategic
Global competition
European
E
integration
i t
ti
Buy vs build
Scale and scope
Capital
C
it l markets
k t
Shareholder value
Value gaps

Acquisitions
Disposals
Mergers
Company specific
Strategic position
Succession issues
Personalities
Deutsche Bank
216
Market for corporate control: Historical M&

&A pattern in the US
Turn of the century

Prevalent merger type: horizontal
Motivation: monopolies
1920s
Prevale
ent merger type: vertical
Motivatiion: oligopolies
1960s
Prevalent merg
ger type: lateral
Motivation: con
nglomerates
1980s
Prevalent merger type: financial
Motivation: restructuring
Current
Deutsche Bank
Prevalent merger
P
g type:
yp strategic
g
M
Motivation:
expansion/consolidation
217
Diversification as strategic goal in the 60s

s and 70s
Arguments
g
for diversification
Believe in continuous growth environment
Cyclical ups and downs seen as key challen
nge
Believe that good manager just need the rig
ght numbers
A manager is a manager is a manager
BCG-matrix (stars, question marks, cows, stops)
Aim to generate stable free cash flow by dive

ersifying into countercyclical businesses
Deutsche Bank
218
Changing landscape in the 1980s: trend to

owards greater focus
Strategic
flexibility
Strategic partnerships
Broader M&A activities
Analyst
coverage
g
Increase in coverage by analys

sts due to higher transparency
Need to conform to expert cate
egories
New
investors
Investors may want to invest on

nly in particular divisions
Pure plays are easier to unders
stand and to evaluate
Managementt
M
limits
Di
Discontinuous
ti
growth/technol
th/t h logy descriptions
d
i ti
require
i experts
t
Finance alone not enough to make
m
a good manager
Incentive
systems
Management more directly awa

arded for performance
Management can push accoun
ntability deeper into organisation
Operating
performance
On average, empirical evidence shows increasing operating performance

angible through lower competition
New accountability becomes ta
Option value easier to identify
y in
i pure plays
y
Restructuring of capital and assets to boost shareholder

s
value
Deutsche Bank
219
1980s US takeover model
Arbitrageurs
Creation of
conglomerates and
diversification strategies
of the 1960s
Shareholder
activities
Value gap
Illusion
Illusion of satisfactory
Under-performance
Mergers
Raiders
Junk bond
financing
Legal
environment
Deutsche Bank
Acquisitions
Sales
R t t i
Restructuring
220
The role of financial buyers
LBO or MBO are highly

g y levered transactions ((debt to be
repaid out of cash flows or through asset sa
ales)
Financial buyers cannot reap synergies
Exit strategy and alignment of interests of parties
p
involved are key
Financial buyers play an important role in th
he US and UK
H
Having
i started
t t d with
ith medium-sized
di
i d ttransactitions, there
th
iis a growing
i iinterest
t
t
in large transactions in Germany
At present, very cash-rich funds
Interesting alternatives to industrial buyers
involvement of management/employees
maintain independence/no synergies
highly flexible transaction structures
Deutsche Bank
221
Private equity deals have gained significan

nt importance in global
M&A activity
Private equity deals as % of global M&A volumess (1999 2013)
25%
24%
23%
20% 19%
14%
12%
24%
25%
20%
14%
12%
7%
5%
5%
1999 2000 2001 2002 2003 2004 2005 20

006 2007 2008 2009 2010 2011 2012 2013
Note: Private equity deals are defined as transactions where the acquirer, the seller, or both are a fina
ancial buyers; excluding equity carve-outs, withdrawn deals and open market repurchases
Source: SDC from Thomson Reuters (as of 27-Feb-2014)
Deutsche Bank
222
Strategic vs financial acquirers
Strategic acquirers
Financial acquirers
Basic types
Industry players
Funds
Main motivation
Strengthen existing bussiness
Realise financial gain
Key tool
Synergies
Leverage
Typical structure
Integration
Stand-alone
Key issue
Best owner
Value gap
Deutsche Bank
223
Strategic alliances vs acquisitions
Advantages
g of Strategic
g alliances
Disadvantages
g of Strategic
g alliances
Can result in same strategic advantages as

acquisitions
Limited flexibility due to lack of control
If objective is to expand distribution

or to get access to technology, then
acquisition is an overkill
No access to cash flows

Operational improvements difficult to realise
Termination may be difficult or costly
Control p
premium frequently
q
y too high
g
Advantageous if partners have strong desire
to remain independent
Advantageous if risks/costs of integration are
excessive
Deutsche Bank
224
M&A is not only buy, but also sell
Traditional barriers against

g
the sale of a com
mpany
p y
image of failure
structural/fiscal
Neglected subsidiaries vs focusing on corre business
Family control vs asset diversification
Dominating shareholder vs minority/majoritty rights
Deutsche Bank
225
Drivers
Strategic
Global competition
European
E
integration
i t
ti
Buy vs build
Scale and scope
Capital
C
it l markets
k t
Shareholder value
Value gaps

Acquisitions
Disposals
Mergers
Company specific
Strategic position
Succession issues
Personalities
Deutsche Bank
226
Deutsche Bank
Tab B
M&A observations
Feasibility of hostile takeovers
Hostile are sales against

g
managements
g
ad
dvice
Decision results ultimately with owners (sha
areholders)
Natural element of developed capital marke
ets
Valuation gap vs best owners
Illusion of satisfactory underperformance
Crucial issue is not whether a takeover is frriendly or hostile,
but rather whether it makes sense or not
In most cases,
cases hostile takeovers do not makke sense because of
lack of transparency/information (no due diligence)
winner/loser mentalityy ((difficult integration
g
n))
risk of overpaying (bidding war)
Deutsche Bank
227
Overview of potential (unsolicited) approac

ches
Comments
Invests in undervalued companies
Hedge fund/
Usually acquires minority stake
professional
Agitates for change (eg cash distribution, change in management, change in strategy) and captures short-term
rebel/
financial gains
private individual
ction, prepare an unfriendly takeover, etc
Means: force a value creating transac
Agitator
scenario
Investor expresses its interest in the acquisition

a
of a single division
Divisional
bear hug
public or non-public private approac

ch to individual board members or
written proposal to Board of Manage
ement or Supervisory Board
Approach to institutional shareholders to create pressure on management to consider a divestiture
Dawn raid
Tender offer
Predator/
takeover
approach
Public
bear hug
Investor announces in the morning after having secured a substantial interest in the target companys share
capital that it is planning to bid for the target companys shares
Public offer to acquire up to 100% of the target companys share capital
Investor announces to the press beforre meeting with the target company that it is planning to bid for the target
companys shares and discloses its intention to meet with the Board of Management of the target company
Offerors goal is to use public opinion to
t push the target company into accepting a meeting
In contrast to the dawn raid, the offerror has not secured a significant interest prior to the announcement
Source: Deutsche Bank
Deutsche Bank
228
Big hostile takeovers
Annoucement/
effective date
Target
Nov 99/Apr 00
Mannesmann AG
Vodafone AirTouch PLC
202.8
Apr 07/Nov 07
ABN-AMRO Holding NV
RFS Holdings BV
98.2
Nov 99/Jun 00
Warner-Lambert Co
Pfizer Inc
88.8
Jul 01/Nov 02
AT&T Broadband & Internet Svcs
Comcast Corp
72.0
Jan 04/Aug 04
Aventis SA
Sanofi-Synthelabo SA
65.7
Jun 08/Nov 08
Anheuser-Busch Cos Inc
InBev NV
60.4
Jun 99/Jun 00
US WEST Inc
Qwest Commun Intl Inc
58.8
Jul 99/Mar 00
Elf Aquitaine
Total Fina SA
55.3
Apr 99/Jun 00
MediaOne Group Inc
AT&T Corp
48.9
Jul 08/Mar 09
Genentech Inc
Roche Holding AG
46.7
Target country
Acquiror
Value of target
Acquiror country (incl net debt; US$bn)
(a)
S
Strategic
i raiders
id ((often
f
bl
blue chip
hi companies)
i ) co
ommence unsolicited
li i d activity
i i against
i
companies
i
focused on internal change
Financial buyers play a key part as well:
private equity companies work together jointlyy on buyouts
hedge funds may become important factor in the future due to lesser restrictions on their ability
to pursue unfriendly activity
(a) Equity value only
Source: Thomson Reuters (Special Merger Sectors; as of 14-Feb-2014)
Deutsche Bank
229
Shareholder value creation in German de

efence situations
Development of offer prices in unsolicited transactions

Initial offer pricce
(premium)
Final offer price

(premium)
MAN/Volkswagen
95.00 (8.9%)
Demag Cranes/Terex
41.75 (18.7%)
+9%
45.50 (29.3%)
Tognum/Daimler & Rolls-Royce
24.00 (20.4%)
+8%
26.00 (30.5%)
Colonia RE/TAG Immo

Hochtief/ACS
Continental/Schaeffler
5.55 (25.6)%
59.89 (17.5%)
+8%
64.49 (26.5%)
70 12 (0.
70.12
(0 0%)
+7%
75 00 (7.0%)
75.00
(7 0%)
Volkswagen/Porsche
Techem/Macquarie
Schering/Bayer
100.92 (6.2%)
44.00 (18.9%)
+25%
55.00 (48.6%)
77 00 (31.5%
77.00
(31 5%
%)(a)
+16%
89 00 (52.0%)
89.00
(52 0%)
Sd-Chemie/One Equity Partners
35.00 (8.7%)
HeidelbergCement/Merckle
60.00 (23.7%)
Phoenix/Continental
15.00 ((28.2%))
Buderus/Bosch
29.15 (16.9%)
Kamps/Barilla
12.00 (15.6%)
+4%
12.50 (20.4%)
(a) No BaFin reference price available for original Merck offer announced on 13 March 2006; VWA
AP reference price based on Datastream data
S
Source:
D t h B
Deutsche
Bank
k analysis
l i
Deutsche Bank
230
Key issues of the German takeover law (W

WpG)
Obligatory offer after acquiring a minimum of 30% of the target company

lack of transparency/information (no due diligencce)
30% is a fixed threshold (on the assumption of avverage AGM attendance of 60%)
actual trigger for an obligatory bid is a change off control ie reaching the threshold limit
existing holdings of 30% or more remain unaffected by this rule
squeeze out at 95%(a): This rule came into force in the Company Law simultaneously with the WpG
coming into force; following a takeover offer, squeeze-out at PTO price in case >90% take-up obtained
through offer
Main methods of compensation either cash or liquid shares traded on European stock exchanges
price rule: average stock market price for the lastt 3 months (exception: reduction of up to 15% for stock
acquired in the last few months in order to avoid paying potential share block premiums to all
shareholders)
Conduct of the Board of Management: defensive me
easures only require the approval of the Supervisory
Board. AGM resolutions are only necessary when exxplicitly required by the Company Law (Aktiengesetz),
eg
g capital
p
increases
Regulation by the BAWe: advisory board (Beirat) - made
m
up of experts from industry and academia. In the
event of disputes an arbitration process/appeal com
mmittee applies. If deadlocked, appeal to the courts only
to improve efficiency of process
(a)
Since 2011, German Transformation Act provides for a 90% squeeze-out threshold in connection with a merger of two stock corporations
Deutsche Bank
231
Results of selected auction processes
In p
percent of sales p
prices
100
90
80
70
60
50
40
30
20
10
0
1
Deutsche Bank
10
11
12
13
14
15
232
Example: Sale of a medium-sized German

n pharmaceutical company
Potential buyers
Valuation
Strategic rational
Only interested in products, R&D
Big German
pharmaceuticals
companies
Conservative
Rationalisation of production and

distribution
Medium sized German

Pharmaceuticals
companies
Aggressive
Merger to achieve critical size
EU pharmaceuticals
companies
Very aggressive
Interested in German distribution

network R&D co
co-operation
operation and
product range attractive
Non EU
pharmaceuticals
companies
Extremely aggressive
Deutsche Bank
Mainly interested in access to EU

Products/R&D are secondary
233
Examples of acquisition rationales
Rationale (among others)
Exam
mple
Brands
Ford/J
Jaguar, Berkshire/Kraft
Products
Novo//Ferrosan, Roche/Genentech
Rationalisation
Krupp
p/Thyssen, BNP Paribas/Fortis
Cost synergies
Postkkonsortium/TNT, Bank of New York/Mellon
Distribution
Sankyyyo/Luitpold,
p , Swiss Life/AWD
Technology
Roche
e/Genentech, Microsoft/Skype
Customer base
DB/De
eutsche Postbank, Liberty Global/Virgin Media
Supplier base
Griffith
h Energy/Gibbs Gas, SAP/Ariba
Talent
DB/Morgan Grenfell, VW/Porsche
Market share
Procte
er & Gamble/Gillette, American Airlines/US Airways
Fend off competition
Sieme
ens/Nixdorf, Facebook/Instagram & WhatsApp
EGO
Deutsche Bank
?
234
Mergers of Equals rarely work
Confusing
g and dubious terminology
gy
Does not work in the case of cross-border transactions
t
Purchase method exclusively applicable forr business combinations
pooling of interest method ruled out since
e 2001 in
US-GAAP and since 2004 in IFRS
goodwill:
d ill IImpairment
i
t ttestt vs regular
l d
deprreciation
i ti
Deutsche Bank
235
Key drivers of increasing importance of prrofessional advisors
Traditionallyy limited role of external advisorss in M&A

& transactions outside the USA and
the UK
Anglo-Saxon investment banks penetrate Continental
C
Europe
Advisors provide the M&A market with liquid
dity
Significant improvements with respect to tra
ansparency and availability of information
Use
U off sophisticated
hi ti t d valuation
l ti methods
th d
Increase in controlled sales processes
Increase in complex cross-border transactio
ons
Provision of international know-how
Deutsche Bank
236
Different types of M&A advisors
Company
p y brokers
Lone fighters
Lawyers
Auditors
Management consultants
Universal banks (Hausbank)
M&A boutiques
Investment (merchant) bankers
Deutsche Bank
237
What is M&A advisory really about?
Generally
Advise and support co

ompanies (corporate bodies), institutions or
private individuals in connection
c
with the purchase or sale of
companies (or parts th
hereof)
Specifically
Get the job (transactio

on) done!
(Over)achieving the clients objectives
Project manager not
strategic
g advisor
Tasks
integration advisorr/manager
auditor
lawyer
broker
Deutsche Bank
238
Relationship characteristics
M&A
& advisors as the clients execution help
p
(Largely) identical interest/no conflicts of intterests
Mutual exclusivity/trust
Strict
St i t confidentiality/Chinese
fid ti lit /Chi
Wall
W ll or Need
N d tto know
k
b
basis
i
Success-based fees
Transaction vs relationship oriented (investm
ment)
Types of mandates
Buy-side
Sell-side
Merger
Fairness opinion
Anti-raid defense
Deutsche Bank
239
Success factors in the M&A business
Individual
Institutional
Project management capability

Transaction experience
Access to decision makers
Industry expertise
C it l market
Capital
k t competency
t
Valuation know-how
No conflicts of interest
Zero defect mentality
Credibility
Hum
man capital
Deutsche Bank
Brand franchise
240
Challenges for investment banks
Competence
Culture
Capital
Compensation
Coordination
Creativity
Control
Cooperation
Competition
Customer
C
focus
Customers
Costs
Credit ((bank-loan)) based economy

y
Capital markets based economy
Deutsche Bank
241
Deutsche Bank
Tab C
Excursus: 2013 M&A in Germany
German M&A activity by

y sectors
Over the last ten years,

M&A volumes with
German involvement were
driven by deals in the real
estate, finance, and
utilities sector
Development of total deal volumes by sectors (H2

(
2003 H2 2013)
180
160
140
H2 2013 volumes were

mainly driven by deals in
the telecoms (13.2bn),
healthcare (12.5bn) and
real estate sector (9.1bn)
120
Tota
al ( bn)
The largest number of

deals over the last ten
years was announced in
the computers &
electronics, real estate,
and
d professional
f
i
l services
i
sector, indicating a
relatively small average
volume per deal
100
80
60
40
20
0
H2 03 H1 04 H2 04 H1 05 H2 05 H1 06 H2 06 H1 07 H2 07 H1 08 H2 08 H1 09 H2 09 H1 10 H2 10 H1 11 H2 11 H1 12 H2 12 H1 13 H2 13
Utility & Energy
Chemicals
Professional Services
Finance
Real Estate/Property
Consumer Products
Telecommunications
Other
Metal & Steel
Oil & Gas
Transportation
Healthcare
Computers & Electronics
Auto/Truck
Insurance
Construction/Building
Note: Announced transactions; anyy German involvement

Source: Dealogic
Deutsche Bank
242
German M&A volumes total market
Last four quarter deal volume development
Average:
g 69.5
%
5%
Germany total (lhs)
10
0
0%
Q1 12
40
% of total European
n volume (rhs)
16.3
% of
Europe
11%/10%
11%/18%
15%/11%
Q4 13
10%
19.1
28.3
Q4 12
80
20
37 1
37.1
23.3
Q3 13
15%
24.5
Q3 12
120
33.8
30.4
30
Q2 13
20%
Q2 12
160
40
Q1 13
25%
(bn)
200
H2 03
H1 04
H2 04
H1 05
H2 05
H1 06
H2 06
H1 07
H2 07
H1 08
H2 08
H1 09
H2 09
H1 10
H2 10
H1 11
H2 11
H1 12
H2 12
H1 13
H2 13
The German market

activity measured against
European volumes
increased to a ratio
of ~14% in Q4 2013 which
is broadly in line with
hi t i averages
historic
Development of total deal volumes (H2 2003 H2 2013)
(bn)
Q4 2013 German M&A

volumes amounted to
28.3bn, indicating lower
deal volumes than in Q3
2013 and Q4 2012
14%/14%
Top five LTM transactions (by size)
Q4 2013 was mainly

dominated by the CelesioMcKesson transaction
(5 6bn) contributing as
(5.6bn),
much as 20% to total
German deal volumes
Date
Deal value (bn)
Target
Acquiror
Deal technique
Deal type
Deutsche Bank role
24-Jun-13
8.7
Kabel Deutschland (76.6%

%)(a)
Vodafone
Public offer
Strategic
23-Jul-13
8.6
E-Plus Mobilfunk
Telefonica
Divestment
Strategic
24-Oct-13
5.6
Celesio(b)
McKesson
Divestment
Strategic
20-Aug-13
3.5
GSW Immobilien (91.1%)
Deutsche Wohnen
Public offer, stock swap
Strategic
19-Jun-13
3.3
Springer Science+Busines
ss Media(c)
BC Partners
Divestment
Sponsor
Note: Announced transactions; any German involvement

2
domination agreement as well as agreement to acquire remaining shares signed on 20 December 2013
(a)
Vodafone acquired as much as 76.57% as per 14 October 2013,
(b)
Sale of 50.01% stake owned by Franz Haniel & Cie followed
d by a pre-emptive voluntary takeover offer
(c)
Seller (EQT) will keep a stake of ~10%
Source: Dealogic, Mergermarket
Deutsche Bank
243
Cross-border activity in Germany

G
160
80%
120
60%
80
40%
28 5
28.5
30
Total cross border volume (lhs)
15
19.1
17.0
10.8 12.0
12.9
18.0
11.1
10
20%
% of total Gerrman volume (rhs)
% of total
Germany
56%/73%
53%/56%
47%/57%
Q4 13
Q4 12
Q3 13
Q3 12
Q2 13
Q2 12
0%
Q1 13
H2 03
H1 04
H2 04
H1 05
H2 05
H1 06
H2 06
H1 07
H2 07
H1 08
H2 08
H1 09
H2 09
H1 10
H2 10
H1 11
H2 11
H1 12
H2 12
H1 13
H2 13
20
Q1 12
Average: 40.3
40
(bn)
25
(bn)
The trend towards crossborder transactions

remains a significant M&A
volume driver in Germany,
with still more than half of
all transaction volumes
g classified as crossbeing
border
77%/64%

Date
Deal value (bn)
Target
Acquiror
Deal technique
Deal type
Deutsche Bank role
24-Jun-13
8.7
%) (DE)(a)
Vodafone (UK)
Public offer
Strategic
23-Jul-13
8.6
E-Plus Mobilfunk (DE)
Telefonica (E)
Divestment
Strategic
24-Oct-13
5.6
Celesio (DE)(b)
McKesson (US)
Divestment
Strategic
26-Sep-13
2.8
Grohe Group (DE)(c)
Lixil (JP), Development

Bank of Japan (JP)
(50/50)
Divestment
Sponsor
15-Jan-13
2.6
Slovensky Plynarensky Prriemysel

(SK)(d)
Energeticky a
Divestment
Prumyslovy Holding (CZ)
Strategic
Note: Announced transactions; any German involvement; cross-bo

order defined as acquirer and target from different countries
(a)
Vodafone acquired as much as 76.57% as per 14 October 2013,
2
domination agreement as well as agreement to acquire remaining shares signed on 20 December 2013
(b)
Sale of 50.01% stake owned by Franz Haniel & Cie followed
d by a pre-emptive voluntary takeover offer
(c)
Seller TPG Capital and DLJ Merchant Banking Partners will sell 87.5%, remaining shares are held by the management of the Joyou (Grohe subsidiary)
((d))
Seller: E.ON ((24.5%)) ((DE)) and GDF Suez ((24.5%)) ((F))
Deutsche Bank
244
Strategic transactions in Germany
40
100%
31.9
80%
Total strategic volume (lhs)
10
Q1 12
% of total
Germany
96%/88%
91%/69%
93%/94%
Q4 13
0%
% of total Germ
man volume (rhs)
14.3
Q4 12
20%
20
25.0
Q3 13
40
40%
33.4
21.7
Q3 12
Average: 60.0
6
22.3 21.0
Q2 13
80
18.3
Q2 12
60%
30
(bn)
120
Q1 13
160
H2 03
H1 04
H2 04
H1 05
H2 05
H1 06
H2 06
H1 07
H2 07
H1 08
H2 08
H1 09
H2 09
H1 10
H2 10
H1 11
H2 11
H1 12
H2 12
H1 13
H2 13
private
Due to increased p
equity activity, Q4 2013
shows a slightly lower
level of strategic
transactions compared to
the previous quarter with
88% off allll G
German
transactions being
classified as strategic
(bn)
Strategic transactions
have been significantly
driving German M&A
volumes over the recent
years
90%/88%

Date
Deal value (bn)
Target
Acquiror
Deal technique
Deal type
Deutsche Bank role
24-Jun-13
8.7

%)(a)
Vodafone
Public offer
Strategic
23-Jul-13
8.6
E-Plus Mobilfunk
Telefonica
Divestment
Strategic
24-Oct-13
5.6
Celesio(b)
McKesson
Divestment
Strategic
20-Aug-13
3.5
Deutsche Wohnen
Strategic
13-Sep-13
3.1
43 hospitals(c)
Fresenius
Acquisition of assets,
divestment
Strategic
Note: Announced transactions; any German involvement

(a)
Vodafone acquired as much as 76.57% as per 14 October 2013, domination agreement as well as agreement to acquire remaining shares signed on 20 December 2013
(b)
Sale of 50.01% stake owned by Franz Haniel & Cie followed by a pre-emptive voluntary takeover offer
(c)
Seller: Rhoen-Klinikum
g , Mergermarket
g
Source: Dealogic,
Deutsche Bank
245
Private equity activity in Germany
O
Overall,
ll private
i t equity
it
activity has increased in
2013
A
Average:
14
14.3
3
10%
%
Total private equity volume (lhs)
0%
17
1.7
Q1 12
10
5.8
% of total German volume (rhs)
% of total
Germany
4.2
3.5
9%/21%
24%/34%
5.7
18%/17%
5.6
Q4 13
20%
Q4 12
20
Q3 13
30%
Q3 12
30
10.2
Q2 13
40%
13.4
Q2 12
40
16
14
12
10
8
6
4
2
0
Q1 13
50%
(bn)
50
H2 03
H1 04
H2 04
H1 05
H2 05
H1 06
H2 06
H1 07
H2 07
H1 08
H2 08
H1 09
H2 09
H1 10
H2 10
H1 11
H2 11
H1 12
H2 12
H1 13
H2 13
In Q2 2013, private equity

transactions were a major
driver of total volumes,,
significantly higher
compared to Q4 2013
(34% vs. 20% of German
volumes)
(bn)
Private equity deal

volumes in Germany
remain volatile
36%/20%

Date
Deal value (bn)
Target
Acquiror
Deal technique
Deal type
19-Jun-13
3.3
Springer Science+Busines
ss Media(a)
BC Partners
Divestment
Sponsor
18-Apr-13
3.1
ista
CVC
Divestment
Sponsor
26-Sep-13
2.8
Grohe Group(b)
Lixil, Development Bank

of Japan (50/50)
Divestment
Sponsor
10-Oct-13
1.8
OXEA(c)
Oman Oil
Divestment
Sponsor
28-Mar-13
1.6
NET4GAS
OMERS/
Allianz Capital Partners
Divestment
Sponsor
Deutsche Bank role
Note: Announced transactions; any German involvement; any finan

ncial sponsor involvement
(a)
Seller (EQT) will keep a stake of ~10%
(b)
Seller TPG Capital and DLJ Merchant Banking Partners will sell 87.5%, remaining shares are held by the management of the Joyou (Grohe subsidiary)
(c)
Selling sponsor: Advent International
Deutsche Bank
246
Public M&A activity in Germany
In Q4 2013, volumes were

mainly
i l d
driven
i
b
by th
the
GSW-Deutsche Wohnen
(3.5bn), the AZ-Merck
(2.1bn) as well as the
Algeta-Bayer (2.0bn)
transactions
Total public M&A volume (lhs)
4.5
3.3
3.1
4
2
0%
% of total Gerrman volume (rhs)
0.4
0.3
2.2
0.7
% of total
Germany
2%/2%
12%/29%
3%/13%
Q4 13
Q4 12
0
Q3 13
10%
H2 03
H1 04
H2 04
H1 05
H2 05
H1 06
H2 06
H1 07
H2 07
H1 08
H2 08
H1 09
H2 09
H1 10
H2 10
H1 11
H2 11
H1 12
H2 12
H1 13
H2 13
10
20%
Q3 12
Average: 7.3
3
20
Q2 13
30%
8.8
Q2 12
30
10
Q1 13
40%
Q1 12
40
(bn)
(bn)
After public M&A volumes

in the first half of 2013
significantly increased
inter alia driven by the
Kabel DeutschlandVodafone transaction,
public M&A activity
p
y in
Germany remains at a
stable level in Q4 2013
around historic averages
6%/12%

Date
Deal value (bn)
Target
Acquiror
Deal technique
Deal type
Deutsche Bank role
24-Jun-13
8.7

%)(a)
Vodafone
Public offer
Strategic
20-Aug-13
3.5
Deutsche Wohnen
Public offer; stock swap
Strategic
05-Dec-13
2.1
AZ Electronic Materials
Merck
Public offer
Strategic
26-Nov-13
2.0
Algeta
Bayer
Public offer
Strategic
14-Jan-13
0.9
Sky Deutschland (9.1%)
News Corp
Share placement
Strategic
Note: Announced transactions; German target

(a)
Vodafone acquired as much as 76.57% as per 14 October 2013, domination agreement as well as agreement to acquire remaining shares signed on 20 December 2013
Deutsche Bank
247
Unsolicited/hostile activity in Germany
30%
5.1
25%
10%
5%
Total unsolicited/hostile vol (lhs)
0%
09
0.9
% of total German
G
vol (rhs)
0.4
1.3
1.0
1.0
% of total
Germany
4%/11%
15%/1%
4%/15%
Q4 13
Q4 12
Q3 13
0
Q3 12
Average: 9.6
Q1 12
10
1.8
Q2 13
15%
(bn)
20
3.7
20%
Q1 13
30
Q2 12
40
H2 03
H1 04
H2 04
H1 05
H2 05
H1 06
H2 06
H1 07
H2 07
H1 08
H2 08
H1 09
H2 09
H1 10
H2 10
H1 11
H2 11
H1 12
H2 12
H1 13
H2 13
The Deutsche WohnenGSW transaction (3.5bn)

as well as the Allianz-Yapi
Kredi Sigorta transaction
(0.7bn) are marked as
i iti ll unsolicited
initially
li it d
approach
(bn)
Following a period of
larger hostile/unsolicited
transactions throughout
2006 2009, 2012/2013
YTD hostile/unsolicited
activity has been very low
4%/4%
Selected transactions
Date
Deal value (bn)
Target
Acquiror
Deal technique
Deal type
Deutsche Bank role
20-Aug-13
3.5
Deutsche Wohnen
Strategic
27-Mar-13
0.7
Yapi Kredi Sigorta
Allianz
Divestment, public offer
Strategic
25-Sep-13
0.5
ThyssenKrupp (5.2%)
Cevian Capital
Open market purchase
Sponsor
09-Sep-13
0.3
(
Laboratorios Andromaco (81.6%)
Grnenthal
Divestment
Strategic
Note: Announced transactions; any German involvement; neutral in

nitial board attitude; excluding exercise of options by financial institutions
Deutsche Bank
248
Deutsche Bank
Section 8
M&A Products and Services
M&A products/services
Key tasks
Type
yp of
mandate
Buy side
Sell side
Mergers
Fairness
opinion
Raid
defense
Project management
Valuation
Due diligence
Structuring
Negotiations
Communication (IR)
Deutsche Bank
249
Sell-side and buy-side M&A processes
Sale of company or participating interest

Pre M&A phase
Analysis of
initial situation
Documentation of
object of sale
Objectives of
search for
partner
Analysis of data
Draft concept
for sale
Company valuation (if applicable)

Draft of detailed
selling memo
M&A ph
hase
Identification
of buyers
Identification of
potential buyers/
investors
Short-listing of
b
buyers
Establish criteria
for assessing
buyer interest
Contacting
buyers
Distribute selling
memo against
signed confidentiality agreement
Due
D dili
diligence
Letter of intent
Valuation
Post M&A phase

Sales negotiations
and signing
of contract
Re-orientation
Determine negotiation strategy

Financial, tax
and legal struct i
turing
Definitive assessment of partners
and signing of
contract
Acquisition of company or participating inte

erest
Pre M&A phase
Corporate
strategy
Build or buy
decision
Develop
search profile
Develop abstract
and operational
criteria
Deutsche Bank
M&A ph
hase
Identification
of target
Compare search
profile with candidate profiles
(
(create
t short
h t list)
li t)
Contact
and valuation
Assess interest
to sell
Due
D e diligence
Post M&A phase

Contract negotiations and signing
Financial, tax
and legal structuring
Integration
Degree and
speed of integration
250
Overview of buyer vs seller general interes

st
Buyer
Minimise purchase price/valuation
Valuation
and financing
sive
Show high headline valuation, but more extens
EV adjustments
Lock-in
L k i ttransaction
ti subject
bj t tto acquisition
i iti fi
finan
ncing
i
Avoid competitive process and establish
bilateral discussion
Sale process
Get access to target management at an early sstage

Build trusted relationship with seller
Transaction scope
Due diligence
Seller
Maximise purchase price/valuation
Focus on net proceeds/cash flow to seller
Ideally
y committed financing
g upon
p binding
g offer
Create competitive tension through auction process and/or

dual-track (ie parallel IPO process)
Avoid
A id th
thatt managementt develops
d
l
a preference
f
ffor a
specific buyer early in the process
In case not all activities of target are of interest transaction

scope to exclude less attractive parts
Single step sale; avoid piece meal transaction with risk of

'cherry
cherry picking
picking'
If target has significant free-float, closing only upon

sufficient acceptance to achieve control
Major shareholder will aim for sale of its stake

independent of acceptance of others, eg free-float
Full due diligence access including manageme

ent early on,
ie prior to an indicative offer
Controlled and sequential disclosure of information upon

milestones to lock-in valuation at early stage
Possibility to meet second level management and to

address key issues/question
Limit broader access to management in order to avoid

rumours and management distraction
Deutsche Bank
251
Acquisition
q
p
process
Sales process
V l ti
Valuation
Excursus: Bank valuation

n
Legal issues
Transaction structuring
G Negotiation
Deutsche Bank
252
Deutsche Bank
Tab A
Acquisition process
Phases of an acquisition process
Clearly defined strategic

s
objective
Selection on the basis of strategic criteria
Valua
ation
Con
ntact
Hostile bid
Due
diligence
Negotiation
Integration
Deutsche Bank
253
Tasks in a buy-side mandate
Discussion of strategic
g p
priorities
Identification/selection of potential targets
Assessment/valuation of potential targets frrom external point of view
Getting in contact
Preparation of due diligence process
Due diligence
Company valuation
Identification/evaluation
Id tifi ti /
l ti off other
th potential
t ti l b
bidders
bidd
Co-ordination of the team of advisors
Conduct of negotiations
Deutsche Bank
254
Comments on the acquisition process
Development and communication

of the acquisition strategy
Information gathering (due diligence)

Preliminary analysis and prioritisation
of potential targets
Determination of selection criteria

minimum and maximum criteria
knock-out criteria
Setting up of the team
confidentiality
consensus building
external advisors
Other potential bidders

Determination of best way of
establishing contact
Establish contact
If pos
sitive
Detailed company analysis, internal and external audits

a
(auditors, corporate development team, investmen
nt bankers, accountants, lawyers)
Risk
Ri k off ffollowing
ll i a strongly
t
l bi
biased
d approach
h
Frustration and deal fever
Integration
g
p
planning
g
Deutsche Bank
255
Selection criteria
Company universe
G H
Size
Too large equity
Too small revenues
> x m
< x m
Geographic position
More than x% of revenues from
abroad
Business mix
Less attractive segments > x%
of revenues
General situation
In merger negotiations,
bankruptcy
Availability
Likelihood that company will
fend off acquisition
Surviving candidates
Deutsche Bank
256
Organisation of the due diligence process
Confidentialityy and restricted use agreemen

g
nts
Involvement and co-ordination of different advisors
a
Draft (customised) due diligence checklists
Set up data room (if applicable)
Obtain information for buyers
due diligence requests
participation in management presentatio
on
analysis of information available in data room
tour of company facilities
follow-up questions
Letter of intent and statement of completeness
Due diligence report
Deutsche Bank
257
Sample due diligence checklist
Company
p y documents
Assets
Liabilities
Contracts and agreements
Tax and balance sheet issues
Labour and administrative law issues
Environmental issues
Lawsuits/official
L
it / ffi i l iinvestigations
ti ti
Miscellaneous
Deutsche Bank
258
Common due diligence problems
Valuation of inventories
Pending lawsuits
Valuation of receivables
Unprofitable investments
Quality of management
Tax liabilities
Pension liabilities
Special agreements in privately-held firms
Poor financial management/accounting
g
g sys
ystems
Environmental liabilities
Dependence on suppliers/customers
Non-recurring items (extraordinary vs exceptional)
Window dressing
Deutsche Bank
259
Public acquisitions (1/2)
Gradual
acquisition
Tender offer
Insurance policy
policy, legitim
macy/levers
Price
Danger of price increasses/arbitrage
Statutory limits (5%) 25
5%
Dawn raids (UK)
Determination of offer price

p
Pre-emption vs low ba
all
Planned revision of offe
er
Partial offers (front-load
ded tenders)
Documentation/prospecctus
Obligation to make full bid
b
Take over code/regulatiions
Take-over
Deutsche Bank
260
Public acquisitions (2/2)
Common
t h i
techniques
Proxy fights
Bear hug
Press campaign
Political influence
Public comparisons
Lawsuits
White knights
Particular aspects
Legal requirements:
timing
documentation
disclosure requireme
ents
Risk arbitrage and specculation
Leveraged financing
Green mail
Deutsche Bank
261
Thus, specifics around

potential post-PTO
integration measures
have to be considered
already when structuring
an offer
Securing stakes in target
prior to offer
ff and
conducting open market
purchases have proven to
be key success factors
Public offer
Acquisition of up to 30%(c,d)
(Voluntary) Takeover offer

Offer for all outstanding shares,
Mandatory offer
Offer for all outstanding shares
when aiming for 30% stake(d)
Selected preparatory tasks

Key ph
hases of a
German takeover(a)
Usually, a takeover offer

only represents a first step
towards a full integration
of the target
Target management support
Announcement
Due diligence
Publication of offer document
Offer conditions
Acceptance period (4 10 weeks)
Open market purchases/

SPAs/irrevocables with main
target shareholders
Additional acceptance period

(2 weeks)(b)
Regulatory approvals
Cash confirmation/certain
funds statement by bank
Actual acceptance rate unknown

to bidder when latest decision on
min acceptance
p
threshold to be
taken
following an acquisition of 30%(d)
Offer
Last minute tender decision

Key
y issues
inv
volved
Remember: public
takeovers in Germany are
highly regulated
Offer typ
pes
Details on German public takeovers
Integration
M&A arbitrage
Hedge funds speculation on delta

between market and offer price
50% control
voting majority at GM
indirect control of management
75% supermajority
full control and access to cash flows
domination agreement
90%/95% squeeze-out
Back-end speculation
Speculation on higher price to be

achieved when bidder implements
integration
g
measures
(a) Voluntary takeover offer/mandatory offer

(b) Voluntary takeover offer
(c) Also applicable when acquirer holds already more th
han 30% in the target
(d) Voting rights
Deutsche Bank
262
Anti-raid defense
Structural measures
Specific counter measures
Shark repellants
Poison pills
Public relations
(eg performance comparisons)
Voting rights limitation
Shareholder relations
Registered shares
Lawsuits
Golden/tin/lead parachutes
Employees/politicians
Lock-up
Lock up
Sale of specific
p
activities ((crown jjewels))
Two-tiered board structure
Scorched earth
Cross shareholdings
Special dividends (eg re-capitalisation)
Acquisition of treasury stock
Special
p
p
program
g
((acquisitions,
q
, etc))
White knight/squire
Counter offer (PacMan)
Change
g of business mix ((eg
g acquisition
q
in
defense industry to fend off foreign bidders)
Green mail
Deutsche Bank
263
Comments on private transactions
Can be freelyy structured

Often triggered by succession problem
Confidentiality
Reputation and image
Earn-out arrangements
Flexible/erratic decision process
Few publication requirements
Often missing acquisition experience
No stock market valuation
Tax aspects
Seller keeps symbolic role
Deutsche Bank
264
Deutsche Bank
Tab B
Sales process
Phases of the sales process
Selection
S
l ti and
d
evaluation of
potential
buyers
Identification
and
d
formulation
of objectives
Company
p y
analysis and
valuation
Documentation
Negotiations
N
ti ti
Closing
Transaction
structure
Deutsche Bank
265
Illustrative disposal timetable
Week
Month 1
3
4
Month 2
7
8
10
11
Month 3
12
13
14
15
Month 4
16
17
18
19
20
Month 5
21
22
23
Month 6
24
25
Steering committees
Preparation
Mandate advisers
Project kick-off
Initial information gathering
Financial analysis and valuation
Prepare 'teaser'
Draft information memorandum
Prepare dataroom & proposed sale & purchase agreement
Prepare vendor due diligence
Draft process letters
Financing sounding with banks
Approach
Definition of potential buyers to be approached
Undertake 'investor education', with teaser
Short-list buyers
IM and first round bids
Agree and sign NDA
Issue process letters & IMs
Bidders review IM
Moderation of partnering/consortia considerations
First round bid submissions
Review and assessment of first round bids
Selection of second round bidders
Detailed due diligence and 'final' round bids
Issue 'final' round process letters
Bidder access to VDD and dataroom (incl SPA)
Management presentations
Q&A process
Receive draft SPA mark-up
SPA guidance session
Final round bids
Review and assessment of final round bids
Short-list buyers
Final negotiations & Completion
Final/confirmatory due diligence
Final negotiations/contract race
Signing & completion
= Key process steps
Deutsche Bank
266
Tasks in a sell-side mandate
Identification of sellers interests/objectives

j
Identification of potential buyers
Company valuation
Creation of organisational prerequisites
Analysis of information
Selection of appropriate sales method
Establish contact with and inform and motivvate potential buyers
Due diligence visits
Co-ordination of advisors
Gather information for interested parties
Protection and control functions vis--vis management
m
Conduct of negotiations
Deutsche Bank
267
Factors influencing the sales process
Seller
Company
Interests groups
Buyer
Motivation
Industry
Banks
Type
Hierarchy of goals
Competitive position
Customers
Number
Alignment of
interests
Management
strength
Suppliers
Competitive position
Municipality/country
Culture
Type
Dependencies
Public
Financial position
Number
Employees
p y
Strategic motivation
Financial position
Culture
Rarityy value
Hierarchy
y of g
goals
Confidentiality
Urgency
Deutsche Bank
268
Public sales
Degree of
confidentiality
Number of
potential buyers
Degree of
f
formalisation
li ti
Universe of sellers
Universe of potential buye
ers
Individual negotiations
Group negotiations
Controlled auction
Informal talks
Deutsche Bank
269
Controlled auction
Value maximisation as priority (fiduciary duty)

Confidentiality only secondary
Large
g number of p
potential buyers
y
Controlled auction is only one of many metho

ods
Deutsche Bank
270
Different sales processes
Negotiated
g
sale
Bullet shot
approach only the best/most obvious buyers
Shotgun
broader approach
pp
Auction
oup of buyers
limited approach a pre-determined gro
public initiation to tender
Deutsche Bank
271
The three most important success factors
Credibility
Credibility
Credibility
Deutsche Bank
272
Deutsche Bank
Tab C
Valuation
Traditional valuation methods
Net asset value method
Earning power method
Sum of current values of assets

on balance sheet
Measure of costs of establishing equivalent
company (net asset value)
Present value of expected cash flows

Net asset value for non-operating assets
Key determinants: cash flows, interest rates,
terminal value
Combined methods/P
Practitioners methods
Discounted free cash flow

Free cash flow (ie adjusted for necessary operattive capital expenditures)
Definition:
Net income
+
Non-cash expenses
Non-cash income
Cash flow
Capital expenditures
Change in working capital
Free cash flow
Terminal value/perpetual discounting

Deutsche Bank
273
The key principle of the M&A-market
Buyers and sellers estimate the value of a company

c
differently
Different buyers assess the value of a comp
pany differently
The value of a company is the price which th

he best buyer is willing to pay
Deutsche Bank
274
Remember: Results of selected auction prrocesses
In p
percent of sales p
prices
100
90
80
70
60
50
40
30
20
10
0
1
Deutsche Bank
10
11
12
13
14
15
275
Potential buyer groups
Public/stock
market
Financial buyers
Industria
al buyers
Deutsche Bank
276
LBO valuation and market value in the valuation analysis
LBO valuation as floor forr seller
LBO
valuation
Ability to pay interest and repay principal

depends on free cash flow
w
Variation of different capittal structures as basis
for valuation
Actual market value as ba

asis for valuation
Market
value
Theoretical market value for

f unlisted companies
Comparison with listed co
ompanies on the basis of
market/book values
values, EBIT
T multiples,
multiples EPS,
EPS price/
earnings ratio and other growth and earnings ratios
Deutsche Bank
277
The merger market in the valuation analys

sis
Comparable transactions as a valuation aid

Consideration of case-spe
ecific factors
Relative competitive posittion
Determinants of
merger-market
value
Rarity value of company

Potential buyer universe (national
(
and international)
Potential synergies
Industry outlook
General financing environ
nment (FX, credit and capital markets, etc)
Financial strength of comp
pany
Deutsche Bank
278
Determinants of company valuation
Buy vs build
Competitive
position
Comparable
transactions
Financial
environment
Financial
strength
Buyer interest
Company
valuation
LBO analysis
(DCF)
Potential
synergies
Industry structure
and outlook
Comparable listed
companies
Financial buyer
universe
Deutsche Bank
279
Deutsche Bank
Tab D
Excursus: Bank valuation
Market cap and book value selected Europ

pean banks
Market capitalization as of 17-Feb-2014 (bn)

HSBC
134.4
Book value 2013E (bn)

HSBC
129.2
BNP Paribas
70.5
BNP Paribas
79.0
UBS
56.3
Barclays
67.7
Barclays
45.1
Unicredit
61.8
Unicredit
37.7
Crdit Agricole
41.3
Standard Chartered
34.6
UBS
40.0
Crdit Agricole
28.4
Standard Chartered
32.9
Swedbank
23.3
Commerzbank
25.9
Commerzbank
14.1
Swedbank
12.6
7.2
Julius Br
4.1
Julius Br
Source: Bloomberg (as of 17-Mar-2014)
Deutsche Bank
280
The correlation of Return on Equity and Prrice-to-Book valuation levels
2.0x
SHB
Swedbank
y = 10.254x + 0.0979
R = 0.7652
Julius Br
1.5x
P/B 2013E
Bank of Ireland
UBS
Premium
1.0x
Sabadell
RBS
Unione
Commerzbank
dei Paschi
Banco Popolare
0.5x
SEB
EFG International
Nordea
Lloyds
Vontobel
BBVA
Emiliano
HSBC Chartered
Standard
Santander
Banco Popula
ar
Credit Suisse
Danske
A
Aareal
Erste Bank
BNP Paribas
Unicredit
SocGen
Intesa
Crdit Agrricole
di Milano
Barclays
Discount
0.0x
0%
10%
5%
15%
oE (post-tax) 2014E
Ro
Source: Bloomberg (as 17-Mar-2014)
If capitalisation levels of banks are perceived

d adequate by the market, ie. not as too low
implying a prospective capital increase, RoE is the key valuation driver for banks
Deutsche Bank
281
Capital management strategy
Organic growth
Financing RWA increase
Growth
External growth
Covering Goodwill and
Intangibles
Business performance:
RoE target
Strong capital formation
Maintain strong
Core Tier 1
ratio
ti
Dividends
Rewarding of
shareholders
Share buybacks
RoE determines growth options and apprecia

ation by shareholders/capital market
Deutsche Bank
282
Value drivers and RoE Tree illustrative example

e
Interest income
(Revenues x (1-CIR) Risk) x (1 Tax)
Credit risk
Capital
Net Income
Capital
= RoE
Commission income
+
Net revenues
Other income
+/CIR
Compensation costs
+
Costs
Non compensation costs
Operating profit
Trading positions
1-tax
rate
RoE
posttax
Risk weighting
Loans
Guarantees
Business volume
Assets
ROE
pre-tax
Credit
Market
Core Tier 1
ratio
Core Tier 1
capital
p
Operational
RoE of any bank is driven in particular by: revvenues, costs, risk and capital requirement
Deutsche Bank
283
Overview on most common bank valuation

n methods
Multiple valuations (relative valuation)

Trading multiples
Values th
he company based on
multipless at which comparable
transacttion have taken place
Example: P/E, P/B, P/TBV, P/AuM,

Regression analysis
Refers to
o strategic value (change of
control)
Relatively simple and intuitive
Based on projected business

plan/estimates
Net p
present value of dividends
available for distribution to
shareholders
Example
e: P/E, P/B, P/TBV, P/AuM
Reflects required capital reserves to

underpin RWA growth
Relativelly simple and intuitive
Clearly linked to valuations being

achieved by comparable institutions
Indicatess a range for likely prices, as

well as potential
p
demand
Allows detailed modelling of future

earnings capacity
Allows for sensitivity analyses
No truly comparable traded

companies
Information requirements are greater

than for any other method
Need to make adjustments to capture

normalised earnings levels/book
values
Compara
able transaction are limited
and pastt transactions are not
directly comparable
Fails to capture
c
movements in the
equity market
m
Assumptions based on management

information
Produces a fundamental value which

may differ from that envisaged by
potential purchasers owing to
differing assumptions
Key
shortcomings
Dividend discount model
Description
Key
advantages
T
Transaction
multiples
Values the company based on

multiples at which comparable
companies trade on the stock
market
k t
Cash flow based
May not reflect differing growth

expectations of management and
market
Does not reflect control premium

usually paid in transaction
Data on past transactions can be

blic or misleading due to
non-pub
different synergies, earnings
expectattions and strategic values
which diffferent bidders may place on
an assett
Deutsche Bank
284
Relative valuation with multiples
The equity of banks can be valued by applying valuation rattios (= multiples) of other listed peer banks or
fi
financial
i l services
i
companies
i
Typical multiples used
Price/Earnings ratio
P/E ratio =
P/E ratio =
Market cap
Net profit
Share price
Earnings per share
Price/Book ratio
o
Other multiples for financial institutions
P/B ratio =
ap
Market ca
Shareholders equity
P/AuM =
P/TBV ratio =
Market ca
ap
Tangible book
k value
P/GPW =
P/EV =
Market cap
Assets under management
Market cap
Gross written premiums
Market cap
Embedded value
Such multiples can be found in broker reports, FactSet or Bloomberg
Deutsche Bank
285
Trading multiples analysis is a powerful technique

based on assumption that current market is right
Pros
Market values incorporate perception of all
investors reflecting firm prospects, industry
trends, business risk, market growth, etc
Cons
Difficult to identify 100% comparable companies
Differing accounting treatments and charges may
impact validity
Basic
tool for
f estimating market value
Difficult to use across borders
Quick
Easy to understand
Thinly traded, small capitalisation and poorly

followed stocks may not reflect fundamental
value
Provides check for DDM

Values obtained are reliable indicator of the value
of bank for minority investment
Deutsche Bank
Stock market may reflect sentiment and not the

true
true picture
picture (lack of efficiency)
286
Transaction multiples provide historic estim

mate for
transaction price today
Pros
Cons
Indicate range for likely prices
Past transactions are rarely directly comparable
Recent transactions in same industry can reflect

supply and demand for saleable assets
Historical data can miss latest trends, US

equity market up 75% from 1995
Trends consolidation, industry attractiveness to

foreign or financial buyers may become clear
Interpretation of data requires familiarity with the

industry and the properties involved: many
special cases
Data on past transactions can be non-public or
misleading
Values obtained often vary over a wide range
Deutsche Bank
287
The DDM measures the intrinsic value of a bank based

on forecast performance
Pros
Can quantify synergy values
Can quantify impact of different
assumptions/analysis of key risks sensitivity
analysis is possible
Can determine value at different discount
rates/hurdle rates
Cons
Results are dependent on assumptions and
discount rates
Model may become complex
Easy to make errors (checking mechanism
essential)
Ascribes value to items that may not be

contained in short-term forecasts
No distortion due to mis-pricing of comparables
Can estimate market value where analysis of
comparables is difficult or where there are no
public comparables
Easily understood
Deutsche Bank
288
Bank Dividend Discount valuation at a glance
Dividend Discount value is equal to the net profit value of all fu

uture dividends available to the
shareholders
Cost of equity or applied as discount rate (equity approach):
COE = Rf + * M
Rf =
Risk free rate of return
Measure of systematic risk of a compan

ny in relation to market
M=
Market risk premium (eg 4 6%)
Dividends are estimated as annual net income less additional regulatory capital necessary to back
business growth (ie risk weighted assets)
dividends
di id d can b
be d
derived
i d ffrom b
business
i
plans
l
tto b
be d
develop
l ped
d ffor eg 5 10 years
dividends after the last planned period are aggregated as th
he continuing value (CV)
CV
CV=
DT+1
DT+1 =
COE-g
g
DT+1
dividend in the first period after

a
explicit forecasting period
eternal growth rate of divide
ends (should be similar to long-term nominal GDP
growth, eg 2 4%)
can be calculated by the following formula

ET
DT+1= ET* (1+g) * (RoET g)
Equity at the end of last exp

plicit forecast period T
RoET =
Return on Equity after tax in

nT
(RoET g)
Net income of future years reduced by regulatory capital required to back business
Deutsche Bank
289
Analysis of key value drivers
Assets
B/S
Key driver of balance sheet

is loan growth
A dividend discount model is based on an assumed financial forecast

The financial forecast should be deve
eloped by making use of value drivers to generate the different
financial items, eg
Liabilities
Driven of asset side
me, number of clients, assets under management)

growth assumptions (credit volum
risk weighted assets of different business
b
units
Revenues
Inherently linked to balance
sheet and driven byy margins
g
interest revenue on the asset and the liability side (margins according to
matched-opportunity-rate concept)
P&L
average commission income per customer, average fees for asset management
Costs
Derive assumptions
from past
staff expenses as a product of plan

nned headcount and assumed average salary
The business plan should be plausibility-checked by applying appropriate ratios
(eg implied Cost-Income Ratio, RoE, RORC)
hrough sensitivity analysis by varying different value drivers and
Further validation may be achieved th
measuring their impact on the valuatio
on
Deutsche Bank
290
Aggregated sum-of-parts bank valuation model

m
Group division 1
Group division 2
2014 2015 2016 2017 2018

D1
D2
D3
D4
D5
2014 2015 2016 2017 2018

CV
D1
D2
D3
Discounted
by COE
NPV
Group division 3
D4
D5
2014 2015 2016 2017 2018

8
CV
D1
D2
D3
Discounted
by COE
NPV
D4
D5
Corporate
centre/consolidation
Group division 4
2014 2015 2016 2017 2018
CV
D1
D2
D3
Discou
unted
by CO
OE
NPV
D4
D5
2014 2015 2016 2017 2018

CV
D1
D2
D3
Discounted
by COE
NPV
D4
D5
CV
Discounted
by COE
NPV
= NPV of group divisions

- Corporate center/Consolidation
ns
+ Market value of industrial shareholdings
Group valuation of bank
Deutsche Bank
291
Deutsche Bank
Tab E
Legal issues
Legal aspects of corporate acquisitions
Detailed preparation
Draft contract/ownership
Sales talks vs contract negotiations
Price formula and terms/conditions of payment
p
Liability and representations/warranties
s
Verification
To the best of ones knowledge and be
elief
Culpa in contrahendo
Non-competition clause/protection of co
ompany name
Splitting of costs
Merger control/anti
control/anti-trust
trust law
Deutsche Bank
292
Deutsche Bank
Tab F
Transaction structuring
Transaction structuring overview
Acquisition
method
Share deal vs asset deal
Payment
method
Cash offer vs share offer
Financial and
tax structure
Capital market situation
Legal
structure
Representations and warran

nties
Asset step-up/goodwill and associated tax implications
EPS implications
National tax-laws
Other liability issues
Deutsche Bank
293
Transaction structuring acquisition method
Share
S
a e dea
deal
Description
Shares are shown in

buyers balance sheet
at the purchase price
No scheduled
depreciation/amortisation
Accounting
treatment
Evaluation
Purchase of all shares

of target
Goodwill issue
Deutsche Bank
Asset
sset dea
d
deal
Purc
chase of all assets of the target
Targ
get becomes empty company shell
Sing
gular succession (Einzelrechtsnachfolge)
Set up of takeover company (if applicable)
Capitalisation of assets by buyer and simultaneous release of

hidden reserves
Depreciation/amortisation in subsequent years (including

good
dwill paid)
+ Bu
uyer: tax advantage from increased depreciation
Se
eller: capital gains on asset sales are taxable
inc
come
294
Transaction structuring payment method

d
Cash o
Cas
offer
e
Share
S
aeo
offer
e
Description
Evaluation
Payment in cash
Preferred method in
periods off stock market
weakness
Consolidation pursuant to
purchase method with
P&L effect
Deutsche Bank
Shareholders of target are paid in shares of acquirer or of

anotther company
Susp
pension of preemption rights or share buybacks necessary
High
her premium necessary due to
uncertainty
u
about future stock price development
change
c
in risk profile
Change of old companys shareholder structure (dilution)
ds signal about value of companys own stock
Send
Poss
sibility
y of p
pooling-of-interests
g
net
n assets brought forth at book value/
n re-valuation
no
no
n depreciation potential without tax effect
impacting group earnings
Impo
ortance of investor relations
SEC
C listing required for takeovers in the US
295
Dilution of stand-alone EPS share offer vs

s cash offer
% change of
stand-alone EPS
20
15
Cash offer
10
5
Share offer
0
1
10
Years
(5)
(10)
Deutsche Bank
296
Excursus: Shares as an acquisition curren

ncy
Expected accreditation/dilution of earniings per share (EPS)

is critical in mergers
Example: A buys B for 100% shares
New EPS =
Earnin
ngs A + Earnings B
Existing shares A + New shares B
The higher As P/E ratio, the lower the number

n
of shares A needs
to offer for the shares of B
High P/E ratio considerably increases a comp

panys strategic room for maneuver
Deutsche Bank
297
Transaction structuring legal structure off contract
Legal structure of
purchase price
Fixed price vs price
formula
Reps and warrranties
Jurisdiction
Warranties for
f (broadly
or narrowlynarrowly-defined)
defined)
information
Particularly choice of
applicable law
Use of price formula

right to terminate
contract
binding rules
(accounting/valuation)
Warrantyy of net asset

value and/or earning
power
Takeover or merger agreement
Deutsche Bank
298
Deutsche Bank
Tab G
Negotiation
Negotiation tactics
See also Roger Fisher
Fisher, Getting
Getting to yes
yes , Harvard Law School
No winners or losers
Avoid positional conduct of negotiation
ns
Separate
p
between p
people
p and p
problem
ms
Focus on interests rather than positions
s
Generate options
p
in mutual interest
Establish objective criteria
Price usually as final issue
Everybody thinks he/she is best negotiator

(Personal) credibility is key
Deutsche Bank
299
Common negotiation tricks
Untruth
Lack of authority
Psychological pressure
Personal attacks
Good cop/bad cop
Threats
Refusal to negotiate
Step-up demands
Lock-in
Delays
Uncompromising partner
Time limits
Last
Last word
word
Deutsche Bank
300
Case Study: Lobster fishermen
The Lobster fishermen of New Harbor/

Maine have divided their fishing grounds in
the Atlantic ocean into grid squares, each
side taking a 2-hour sailing time
John, the eldest fishermen, likes to

retire and go hunting. His fishing rights
are known as being very lucrative and
are therefore much sought-after
George and Bill both have shown a
strong interest in acquiring these rights.
H
th
hi co-operative
ti
However,
the llocall fifishing
has also offered to buy back the rights
at a fixed price of US$50.00
What further information is needed to
solve this case?
What are the key considerations?
Deutsche Bank
John
New Harbour
George
Bill
301

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Investment Banking 2014

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Deutsche Bank

Introduction to Investment Banking

The Financial Crisis of 2007/08

The European Sovereign Debt Crisis

The New Normal

Initial Public Offerings

Understanding the M&A Business

M&A Products and Services

The Financial Crisis 2007/08

The European Sovereign Debt crisis

Initial Public Offering

Underrstanding the M&A business

Underrstanding the M&A business (continued)

What is investment banking?

Its all about services to capital markets participants

Capital markets serve as a means of finan

Two types of clients, investors and issuers

Traditionally banks can be classified by prroducts and clients

Investment banks traditionally engage in underwriting of and investments in securities

A systemisation of investment banking acttivities

Various investment banking business mod

Size of balance sheet

Market and liquidity risk

Consolidation: Size matters ...

Economies of scale and scope

Disaggregation: ... being best matters eve

Specialised niche players

Fluctuation: ... but who is best in what?

Adaptability of organisation is key

Universal bank in or out?

Balance sheet important or not?

Key factors in Investment Banking

Market cap matters to capital

Becomes more of a commodity

Leverage and cost factor

Most valuable asset

War for talent decides everything

Its all about people

To set the stage:

In a crisiss, markets can remain irrational

Agenda for section 2

Excursus: Overview of assset backed securities (ABS)

What happened? An illustrative interpreta

Economyy as human bodyy

What happened? A historic interpretation

the ascent of money has been one of the d

99% of financial history happened within two standard deviations

Two types of bubbles:

Globalisation and securitisation as important legacies of leverage boom

What happened? A macroeconomic interp

Inflation (CPI, 2002 to 2007, % pa)

Fed funds target rate

Average EMU inflation

10Y govt. bond yields

Source: Fed, BLS, Global Insight

Source: ECB, Eurostat

Real house prices (1997 = 100)

What happened? A macroeconomic interp

National savings rate (in % of GDP)

Growth (in %, pa)

since 1980 since 1990

Source: Global Insight, Allianz Research

What happened? A political interpretation

What happened? A systemic interpretation