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Hedging of M&A Transactions

Jörg WiemerSenior Vice PresidentHead of Global TreasuryOctober 27th 2010

© SAP AG 2010. All rights reserved. / Public

Agenda

1. IntroductionAbout SAPSybase tender offer

2. Financial Risks in M&A TransactionsLiquidity riskInterest rate risk, counterparty risk, settlement risk, FX risk

3. Hedging of Financial Risks in M&A TransactionsDriving forces for M&A hedging decision processDecision matrix: Hedging instruments


The World’s Leading Provider of BusinessApplication Software

A solid track record of growth and return toinvestors

Strong sales opportunity into installed base –business with existing customers accountsfor ~80% of order entry

Steadily increasing share of recurringrevenues – over 50%

Recognized global brand (27th most valuablein the world according to BusinessWeek*)

Deepest industry knowledge with more than25 industry solutions available

Strong focus on ecosystem to foster co-innovation

Leading product and technology innovationwith ~14,500 developers

Undisputed market leader with >100,000 customers in 120 countries– the largest customer base in enterprise applications

* Source: Interbrand / BusinessWeek 2009


SAP’s Long-Term Success – Selected KPI’s

Note: 1999 and 2005 based on US-GAAP; 2006 and 2007 based on IFRS; 2008 and 2009 based on Non-IFRS; in € billion, unless stated otherwise* Cash flow from operations less capital expenditure

SAP’s business modelcontinuously proved to be

sustainable, robust andlong-term oriented

Total RevenueCAGR 7.7%

1999 2005 2006 2007 2008 2009 1999 2005 2006 2007 2008 2009

SSRS RevenueCAGR 10.2%

5.1

8.59.4 10.3

11.710.7

3.1

6.0 6.67.4

8.6 8.2

Operating ProfitCAGR 13.9%

1999 2005 2006 2007 2008 2009

0.8

2.32.5 2.7

3.32.9

Operating Margin

1999 2005 2006 2007 2008 2009

16%

27% 27% 26%28% 27%

Free Cash Flow*CAGR 25.7%

0.3

1.3 1.5 1.51.8

2.8

1999 2005 2006 2007 2008 2009


Sybase Tender Offer

On May 12th, 2010, SAP and Sybase Inc. signed a definitive merger agreementSAP America, a subsidiary of SAP AG, makes an all cash tender offer for Sybase representingan enterprise value of approximately USD 5.8bnThe transaction is funded from SAP’s cash on hand (partially USD) and a €2.75bn loan facilityClosing of tender offer is conditioned of a majority of outstanding shares (50,1%) and clearanceby the relevant antitrust authorities (both the US and Europe)As of the expiration of the tender offer, 92,1% of Sybase’s outstanding shares of common stockwere tenderedThe acquisition was immediately completed via a short-form merger under Delaware law

Accelerate the reach of SAP solutions across mobile platforms to help companies managing andanalyzing business information and processes on any deviceDrive forward the realization of SAP’s in-memory computing vision

Rationale for this strategic move


Agenda





-2.500-1.500

-500500

1.5002.5003.5004.5005.5006.5007.500 SAP Group

Gross Liquidity in€m

Gross LiquidityMinimal LiquidityCredit Line

Scenario IEUR/USD 1,30

€1.5bn minimum strategic liquidity

€1.5bn Syndicated credit lineApprox. €500m Bilateral credit lines

Financial Risks in M&A Transactions (1/2)

Liquidity risk Significant appreciation of USD against EUR will create additional liquidityneeds measured in EURActions taken Loan facility was established before final decision from supervisory board wasmade and merger agreement was signed. In addition to available cash this guaranteedminimum requirement of strategic liquidity level

EUR/USD ECB Fixing on May 12th: 1.2686

Example: Potential cash outflow forUSD 5.8bn acquisition

€4.5bn €5.0bn €5.8bn

€2.75bnloan facility

Scenario IIEUR/USD 1,15

Scenario IIIEUR/USD 1,00


Financial Risks in M&A Transactions (2/2)

Interest rate risk Value at Risk calculation showed no significant impact for changes in 2 yearEUR swap rate in the period between beginning and closing of tender offer. Given SAP’s strongcash flow generation a repayment of the loan facility will be possible within 2 years

Tender Offer risk Acceptance ratio for tender offer might be too lowForeign exchange risk No P+L risk, only translation risk. Higher EUR counter value of futurefree cash flow from Sybase to SAP compensates for “higher” purchase price if USD increases.However, FX risk leads to liquidity risk

Settlement risk Settlement of USD FX deals with different counterparties and same day valuepayment to the US is a huge challenge

Acceptance ratio Financing Volume in €m Value at Risk in €m50% 1.375 12,5075% 2.063 18,76

100% 2.750 25,01

50 day 99% VaR

Acceptance ratio Exposure in USDm Value at Risk in €m50% 2.400 29375% 3.850 469

100% 5.300 646

50 day 99% VaRAn increase of the acceptance ratio by 1% leads to additional VaR of € 7m


Agenda





Uncertainty aboutapproval of antitrust

authorities

Hedging decision

Driving Forces for M&A Hedging DecisionProcess

Uncertainty aboutsuccess of tender offer /

acceptance ratio

Avoidance of P+Lvolatility created via

pre-hedge

IFRS Accounting ofhedging instruments

Intercompany structure /Internal Financing

Volatility in CapitalMarkets

Market squeeze when(FX) hedging activities

are started

Deal contingent hedging /Definition of “highly

probable”


Some Thoughts on Choice of HedgingInstruments

Example 1• Do nothing does not create P&L volatility as a higher purchase price increases goodwill• However, a further depreciation of the EUR bears significant liquidity risks

Example 2• Plain Vanilla Forward hedges liquidity risk if the tender offer is successful• However, significant P+L and cash effect possible if tender offer is not successful

Example 3• Enter into an at-the-money Plain Vanilla Option to hedge against liquidity risk• However, significant premium has to be paid which does not qualify for Hedge

Accounting (time-value)


Some Thoughts on Choice of HedgingInstruments

Example 4• Deal contingent forward hedges liquidity risk at considerable cost, regardless of success

of tender offer• However, there is no flexibility on the acceptance ratio of the tender offer (over-hedging

might happen)• Usage of this instrument may lead to discussion with auditor on definition of “highly

probable”, which might not allow hedge accounting treatment

Example 5• Deal contingent option hedges liquidity risk regardless of success of tender offer• However, Hedge Accounting might not be applicable (“highly probable”) and increased

premium has to be paid in case of successful transaction

Example 6• Define a critical level at which liquidity risk is still acceptable• In case the critical level is triggered: Enter into an at-the-money Plain Vanilla Option


Decision matrix: Hedging Instruments

Do nothingPlain Vanilla

Forward*Plain VanillaOption atm*

Deal ContingentForward**

Deal ContingentOption**

Wait and hedgeworst-case

Tender offer successful

Liquidity risk

UnexpectedP&L Volatility

Costs (Premium)

Tender offer not successful

Liquidity risk

UnexpectedP&L Volatility

Costs (Premium)

Summary

* Assumption: Hedge Accounting is obtained as transaction is highly probable** Assumption: Hedge Accounting is not obtained as transaction is not highly probable


Thank you!


Q&A


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