© The Author(s), under exclusive license to Springer Nature Switzerland AG 2022

M. Dreher, D. ErnstMergers & AcquisitionsManagement for Professionalshttps://doi.org/10.1007/978-3-030-99842-4_2

2. David and Goliath: Mid-cap and Large-cap Companies

Maximilian Dreher¹   and Dietmar Ernst²

(1)

MBG Mid-Market Investment Company Baden-Württemberg, Stuttgart, Germany

(2)

University of Nürtingen-Geislingen (HfWU), Nürtingen, Germany

 

• When exactly do we speak of a medium-sized company and when of a large company?

• What special features do most medium-sized companies have in common and what usually characterizes a large company?

These questions are examined in the following subsections and, after a precise delineation of the two groups of companies, their respective characteristics in the individual phases of an M&A sales process are analyzed.

2.1 Medium-sized Companies (Mid-caps)

Entrepreneurs—by definition, 99% of them are small- and medium-sized enterprises (SMEs)—have a key structural advantage over corporate managers: if they want to be successful, they are not forced to ask capital market experts what they want and what they are interested in, to enter into a dialog with them and then to fulfill their wishes. After all, they are the owners, partners, or even shareholders themselves (Rickes & von Hassell, 2008, p. 20).

The term medium-sized company (mid-cap) covers a broad spectrum of companies, which will now be narrowed down.

Definition

A common definition of medium-sized enterprises in Germany is provided by the Center for small- and medium-sized business research in Bonn. According to this definition, all companies with a workforce of 50 to 499 and annual sales of between 10 and 50 million euros fall in the medium-sized company segment (Institut für Mittelstandsforschung Bonn, 2016).

The European Commission has also developed a definition for medium-sized companies that takes into account the company’s total assets as an alternative criterion. The EU Commission classifies all companies with 50–249 employees and annual sales of 10 to EUR 50 million or total assets of 10 to EUR 43 million as medium-sized companies (European Commission, 2022).

Concerning the subsequent M&A process analysis, it seems useful to deviate slightly from the preceding purely quantitative mid-cap definitions. In addition to the classic mid-caps according to the Center for SME business research or the European Commission, the following section will also include companies that are actually located in the lower segment of large companies.

This adjusted definition of medium-sized companies includes all companies that have between 50 and 2000 employees and annual sales of between 10 and 500 million euros (Becker & Ulrich, 2012, p. 21; Furtner, 2011, p. 21; Marks et al., 2012, pp. 5–6). This extension is justified by the fact that analogous conditions in an M&A process apply to both segments (classic mid-caps and the lower segment of large companies). Characteristic for both segments is that the companies are often not listed on the stock exchange or, if listed, then on rather smaller stock exchange segments with low liquidity and little free float. They are usually characterized by a sustainable and long-term strategic orientation, as they are not subject to the short-term value enhancement pressures of the capital markets. Moreover, they are often family-run companies or groups of companies (Furtner, 2011, p. 21) (Table 2.1).

Table 2.1

Definitions of medium-sized companies

Medium-sized companies	Number of employees	Annual turnover (EURm)	Balance sheet total (EURm)
Center for SME business research in Bonn	50 to 499	10 to <50	n/a
European Commission	50 to 249	10 to ≤50	10 to ≤43
Adjusted definition	50 to 2000	10 to 500	n/a

2.2 Large Companies (Large-caps)

The maxim for large-cap companies can usually be summed up in one word: more.

It is no coincidence that a supreme discipline of corporations and large companies is the cost-effective production of large quantities for a large demand for highly standardized products and services of the same quality—in the consumer goods market as well as in the capital goods and services market (Rickes & von Hassell, 2008, p. 24).

In addition, large companies often make headlines in newspapers through spectacular takeovers, exciting business expansions, or legal proceedings. The following section describes which companies can be classified as large enterprises and what role they play in the German economy.

Definition

Analogous to the definition of medium-sized enterprises, the Center for small- and medium-sized business research in Bonn defines all enterprises with a workforce of at least 500 employees and annual sales of at least 50 million euros as large enterprises (Institut für Mittelstandsforschung Bonn, 2016).

Derived from the previously mentioned definition of the European Commission large companies are those companies that have a workforce of at least 250 employees and an annual turnover of more than 50 million euros or a balance sheet total of more than 43 million euros (European Commission, 2022).

At this point, too, for later M&A process analysis, an adjusted definition for large companies will be developed for the subsequent M&A process analysis, as was already the case for mid-caps. The adjusted segment of large companies includes all companies that have a workforce of over 2000 employees and annual sales of more than 500 million euros. This extension is justified by the fact that different conditions apply in an M&A process for companies that fulfill these two criteria than for companies from the adjusted mid-cap segment. It is characteristic of large companies that they are often listed on larger stock exchange segments with high liquidity and a high free float. As a result, they are subject to short-term shareholder value interests. In most cases, managers with in-depth knowledge of corporate management are at the helm of large companies. The organizational structure is often complex as well as independent of individuals. In addition, there are prescribed information paths and a high degree of formalization. As a rule, large companies have broad access to the capital market and thus significantly more financing options than smaller companies (Hackspiel, 2010, p. 132) (Table 2.2).

Table 2.2

Definitions of large companies

Medium-sized companies	Number of employees	Annual turnover (EURm)	Balance sheet total (EURm)
Center for SME business research in Bonn	≥ 500	≥ 50	n/a
European Commission	≥ 250	> 50	>43
Adjusted definition	> 2000	> 500	n/a

References

1. Becker, W., & Ulrich, P. (2012). Aufsichtsräte und Beiräte im Mittelstand. Theorien, Konzeption und Handlungsempfehlungen. W. Kohlhammer.
2. European Commission. (2022, January 1st). Retrieved February 1st, 2022, from www.​ec.​europa.​eu: https://​ec.​europa.​eu/​growth/​smes/​sme-definition_​en
3. Furtner, S. (2011). Management von Unternehmensakquisitionen im Mittelstand. Erfolgsfaktor Post-Merger-Integration (2nd ed.). LINDE.
4. Hackspiel, T. (2010). Unternehmensbewertung von KMU - Prozessuale und quantitative Besonderheiten. In G. Müller-Stewens (Ed.), M&A Review (pp. 131–138). GoingPublic Media.
5. Institut für Mittelstandsforschung Bonn (Ed.). (2016, January 1st). Retrieved February 1st, 2022, from www.​ifm-bonn.​org: https://​www.​ifm-bonn.​org/​definitionen-/​kmu-definition-des-ifm-bonn
6. Marks, K., Slee, R., Blees, C., & Nall, M. (2012). Middle Market M&A: Handbook for investment banking and business consulting. Wiley & Sons.Crossref
7. Rickes, S., & von Hassell, J. (2008). So gewinnt der Mittelstand! Die Erfolgsmethode kleiner und mittlerer Unternehmen (und was die großen von ihr lernen können). Gabler.