investment banking

chapter 2 / business divisions / Investment Banking

Investment Banking

Business divisions

investment banking is sal. oppenheim’s second key strategic core business division after asset Management. With its broad range of client relationships and comprehensive product offering, Sal. Oppenheim has for years ranked among Germany’s leading investment banks and has also built up an excellent reputation in other German-speaking countries.

01 strategic approach

02 M&A activities

03 Privatisations

sal. oppenheim jr. & cie. | annual report 200560

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03

Client relations characterised by comprehensiveness, continuity and a sense of partnership, together with services and products distinguished by individuality and dynamic innovation – Sal. Oppenheim reaps the benefits of its commitment to this strategic approach. In 2005, therefore, Sal. Oppenheim was once again able to increase its market share in most fields and to further improve the good operating result of the previous year.

Investment Banking’s successful positioning is ref lected in transactions that attracted much public interest. Sal. Oppenheim advised and supported the Fortress Investment Group in the acquisition of Lower Saxony-based NILEG, which, with 30,000 residential units in its own and third-party portfolios, is one of the largest real estate companies in northern Germany. With a transaction volume of around € 1.5 billion, this deal was among the biggest domestic acquisitions in the real estate sector in 2005. Other M&A activities that also attracted supra-regional interest included the merger of mobilCom and freenet AG and EDEKA’s takeover of Spar Handels AG and Netto discounter business.

The Bank continues to play a leading role in both the privatisation of public shareholdings and the issue of derivative instruments – two contrasting fields that demonstrate the broad spectrum of Investment Banking at Sal. Oppenheim.

The expertise offered by Investment Banking benefits large listed companies, small and medium-sized enterprises, public and institutional investors, and high net worth individuals alike.

Investment Banking / business divisions / chapter 2

annual report 2005 | sal. oppenheim jr. & cie. 61

RAnKinG Investment bank Number of

deals

1. Deutsche Bank 45

2. Morgan Stanley 33

3. JPMorgan 30

4. Rothschild 29

5. Goldman Sachs 27

6. Sal. Oppenheim 26

7. Citigroup 23

8. UBS 20

9. Lazard 20

10. DrKW 16

11. Metzler 16

12. Merrill Lynch 15

13. Drueker 13

14. Lehman Brothers 12

15. Credit Suisse FB 12

16. Peters Associates 11

Source: Thomson Financial, 4 January 2006

ranking according to the number of transactions in 2005M&A TRAnsACTions, BAsed on GeRMAn TARGeT CoMPAnies


M&A TRAnsACTion ATTRACTs

WidesPReAd inTeResT

The takeover of Spar Handels AG and the Netto discount business by EDEKA Zen-trale AG & Co. KG in April 2005 attracted widespread interest on the market. This was due not only to its size, but also to its stra-tegic significance for the EDEKA Group. The transaction, which Sal. Oppenheim supported in both structuring and imple-mentation, enables the EDEKA Group to substantially build on its market position in German food retailing.

62 sal. oppenheim jr. & cie. | annual report 2005


In order to ensure optimum handling of our various clients’ requirements, Sal. Oppenheim offers sector-specific client support. The six sector teams in Investment Banking possess detailed knowledge of the particular conditions in their respective industry. They include experienced specialists, who are either bankers with extensive experience in a particular sector or who hail from the respective sector themselves. They therefore have excellent contacts and close links to key industry figures. As an investment bank for growth companies and SMEs, we focus on the following sectors: Energy/Public Sector, Healthcare, Banking/ Insurance, Technology / Media / Telecommunications / Logistics (TMT / Logistics), Trade / Consumer Goods and Automotive /Suppliers.

Income 47.0

Expenses -28.4

Risk costs 0.8

Profit / (loss) from ordinary activities 19.4

Cost / income ratio (%) 60.4 %

Income 63.6

Expenses -33.1

Risk costs -0.7



2005

€ M

2004

€ M

CoRPoRATe FinAnCe seGMenT RePoRT in ACCoRdAnCe WiTh iFRs

63annual report 2005 | sal. oppenheim jr. & cie.

04

05

sector-specific teams

individual product solutions

05

04

Client support services are not geared towards the sale of off-the-shelf products for specific situations, but instead focus on using their comprehensive industry expertise to develop individual and detailed product solutions that are tailored to client requirements. Sal. Oppenheim’s successful cooperation with IKB Deutsche Industriebank AG was further intensified in 2005, thanks to a large number of transactions.

Corporate Finance

mergers and acquisitions

Sal. Oppenheim again ranked among the leading M&A advisors in Germany and other German- speaking countries in 2005. With a transaction volume of US$ 4.7 billion, however, the Bank was unable to maintain the high level of the previous year, although it nevertheless secured sixth place in Thomson Financial’s M&A ranking for transactions with German target companies, based on number of mandates, thus defending its position in the top ten.

The transactions in which our M&A professionals, who now number almost fifty, provided advisory services spanned the entire scope of M&A business, and involved target companies from all the sectors supported by the Bank. Particularly on the buyer side, the growth in interest among both German and international financial investors for equity investments in Germany continued. Private equity is involved in more than every second transaction. Business with the public sector, however, remains one of the key sources of income.

06 Leading M&A advisor

07 Trade and Consumer Goods

08 Media and Telecommunications

09 Automotive and suppliers


07

06

08


09

Sal. Oppenheim carried out a series of high-profile M&A mandates in Germany and Austria in the Trade /Consumer Goods sector. The acquisition of Spar Handels AG and Netto discounter business by EDEKA Zentrale AG & Co. KG in particular was highly visible in the market due to its size as well as its strategic importance for the EDEKA Group.

Thanks to sustained and ongoing client support, Sal. Oppenheim has established itself as a leading investment bank for the media and telecommunications industry. Our expertise was called on in many cases, including the merger between mobilCom AG and freenet AG. In the chemical sector, which saw much restructuring of business portfolios, advisory services provided to Singulus AG in the takeover of Steag Hamatech AG were as successful as those provided to Lanxess AG relating to the disposal of iSL-Chemie GmbH & Co. KG.

In the Automotive/Suppliers sector, Sal. Oppenheim was commissioned by the Austria-listed Frauenthal AG to provide a fairness opinion for the plumbing wholesaler SHT. The Bank also acted as monitoring trustee for the takeover of another Austria-listed company, VA Tech AG, by Siemens VDO.

real estate and privatisations

The previous year’s trend in the German and international real estate sector was sustained in 2005; US financial and European investors have rediscovered the German market for residential and commercial properties. The natural consequence was a large number of high-volume portfolio and corporate disposals, which were not limited to the public sector. The Real Estate & Privatisations product team was again involved in many transactions in 2005, defending its position as a leading advisory unit in the German market.



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Real estate

Advisor to the City of hamburg

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In consortium with HSH Nordbank AG and Ernst & Young Real Estate GmbH, Sal. Oppenheim is advis-ing the City of Hamburg on the sale of a portfolio of office and commercial properties with a total volume of well over € 1 billion. The first successful disposal of 39 properties with a transaction volume of € 815.5 million was concluded at the end of January 2006. This was one of the largest transactions of its kind to date in the German public sector. The properties were bought by the real estate fund Captiva Capital Partners of the French investment bank IXIS, which, as a subsidiary of Caisse National des Caisses d’Épargne, is part of the third-largest banking network in France. The City of Hamburg intends to offer another property package for sale with the support of Sal. Oppenheim and the other members of the consortium.

In 2005, the team was involved in numerous transactions as advisor to the seller, a role which it continues to adopt in 2006. This also applied in the major real estate transactions of the year, such as the sale of Viterra AG, where Sal. Oppenheim, together with Goldman Sachs, advised one of the three final bidders right up to the last round. With a transaction volume of around € 2 billion, the acquisition of Dresdner Bank AG’s real estate portfolio was one of the largest transactions of 2005 in Germany, and in advis-ing the Carlyle Group in this venture, Sal. Oppenheim provided support to one of the world’s largest financial investors. The intensive support for Fortress Investment Group in its acquisition of Lower Saxony-based NILEG, a subsidiary of NORD/LB with around 30,000 residential units, was another significant milestone at a transaction volume of around € 1.5 billion.

2005 was a good year for real estate and was rounded off by a series of additional transactions, including the sale of the German government and four federal states’ majority stake in Deutsche Baurevision Wirt-schaftsprüfungsgesellschaft to Deloitte & Touche, in which Sal. Oppenheim also advised the seller.

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sale of viterra

dresdner Bank’s real estate portfolio

Sal. Oppenheim was also able to build on its success in the public sector, and achieved very pleasing results, with an income exceeding expectations. The noticeable decline in transactions in the public utilities sector was more than compensated for by numerous purchase mandates in the areas of sewage and waste disposal. In the area of waste disposal, we were able to successfully advise public utilities company Stadtwerke Krefeld AG in the acquisition of RWE Umwelt West GmbH, Grevenbroich. In addition, the sale of Europe’s largest underground gas storage facilities in Eztel, East Frisia, in spring 2005, where Sal. Oppenheim acted as advisor to the Federal Republic of Germany, concluded a long and highly complex privatisation process, in which the German federal government was able to secure the highest price for this asset as a result of an international bidding contest.

14 Public sector

15 Österreichische Rundfunksender Gmbh & Co. KG

16 equity Capital Markets


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Equally worth highlight-ing is the advice given to Österreichische Rundfunksender GmbH & Co. KG, a subsidiary of Austrian broadcaster Österreichischer Rundfunk, which privatised more than 40% of shares in its mast infra-structure in the summer of 2005. Sal. Oppenheim reinforced its excellent reputation with regard to complex deregulation actions in advising the seller on this disposal of shares.

financing

Sal. Oppenheim sustained the low level of commercial lending, maintaining the framework of a restrained, risk-oriented and selective lending policy. The Bank participated in syndicated and borrower’s note loans, albeit only involving clients from sectors where our industry expertise allowed us to make confident estimations of future development. Moreover, such financing must also be made in the context of a more comprehensive business relationship. For medium-sized clients, we also offer individually structured mezzanine financing, generally in the form of participation certificates and rights.

equity capital markets

Sal. Oppenheim provides support for companies and majority shareholders in raising and structuring equity via securities transactions at all stages of business development. In the past financial year, Sal. Oppenheim assumed either leading or participatory roles in a total of eight IPOs. A successful premiere for all involved was SQS Software Quality Systems AG’s IPO on London’s Alternative Investment Mar-ket (AIM). As a member of the IPO consortium, the Equity Capital Markets team also supported the

IPOs of Interhyp AG, Lloyd Fonds AG, SkyEurope Holding AG, MTU Aero Engines Holding AG, HCI Capitalberatungsgesellschaft mbH and ErSol Solar Energy AG, as well as the € 7 billion IPO of Electricité de France, Paris, where Sal. Oppenheim, acted as co-manager. In the field of capital increases, the Bank’s role as lead manager for Fluxx and Computerlinks among others, and as bookrunner for MVV Energie AG, deserve particular mention.

Income 103.5

Expenses -65.3

Risk costs -0.1



Income 140.6

Expenses -82.6

Risk costs -0.1



2005

€ M

2004

€ M

FinAnCiAL MARKeTs seGMenT RePoRT in ACCoRdAnCe WiTh iFRs



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18

iPos

Privatisations on the hospital market

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19 Biotechnology

The pace of privatisation on the German hospital market continued unabated in the financial year under review. Private operators have increased their market share from 7% to 10% over the past three years, and, according to estimates by Sal. Oppenheim, this will grow to one-third over the next few years. Substantial funding is therefore required by such private clinic operators to finance takeovers and restructuring. Sal. Oppenheim has actively supported the development of the healthcare industry via a series of transactions. The Bank assumed the role of lead arranger in a financing strategy for the clinic operator Asklepios which involved the structuring and private placement of a € 60 million participation certificate.

The biotechnology industry also requires substantial capital to enable innovative drug discovery and development. Sal. Oppenheim supported the listed biotechnology company evotec OAI AG in a PIPE transaction (Private Investment in Public Equity) with a volume of € 28 million.

Financial Markets

BesT issueR oF

Bonus CeRTiFiCATes

For the third year in a row, Sal. Oppenheim was judged the best issuer for bonus certificates by the jury at the “ZertifikateAwards”. In achieving first place for these investment products, which were in particularly high demand in 2005, the Bank reinforced its leading position in derivatives busi-ness and trading.



institutional equity advice

Equity Sales saw extremely dynamic order activity with institutional clients whose investment decisions focus on the European equity market. Income increased 120% year-on-year and ref lected the high esteem in which the Bank is held by this client group, in terms of both quality and the continuity of services provided.

The very dynamic business development of the two newly-structured teams for the United Kingdom, Ireland and the USA was particularly encouraging. In terms of capital market transactions, the Bank supported 37 successful placements. For the first time, these transactions included two replacements in Greece. Sal. Oppenheim placed 45% of Neochimiki LV Lavrentiadis S.A.’s share capital and 35% of Newsphone Hellas S.A. with European financial investors.



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500 Roadshows

Leading derivatives issuer

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20Investment Banking once again organised over 500 individual events worldwide for institutional cli-ents. These included five conferences, some of which took place over several days, in London, Zurich, Frankfurt and Athens. With some 35 sales specialists now responsible for the German-speaking equity market (Germany, Switzerland and Austria), Bankhaus Sal. Oppenheim is one of the top international providers of advisory services to discerning international institutional investors.

derivatives

Trading in derivatives based on equities and other underlyings recorded one of its most successful years in 2005. With over 7,000 leverage and investment products, and a market share of around 7.5%, Sal. Oppenheim continues to rank among the top five derivatives issuers in Germany. Business in this area is characterised by intense pressure of competition and rapid evolution, a challenge which the department meets by means of a five-pronged expansion strategy. This includes ongoing infrastructure development on the basis of attractive pricing models and risk control combined with cutting-edge information technology. Broadening the product range to include new underlyings, such as additional international indices, German and Swiss small caps, Austrian and eastern European stocks, and augmenting it with innovations such as TWIN-WIN, victory or cash collect certificates, paved the way for continued revenue growth. Our main

GoLden BuLL –

TWin-Win CeRTiFiCATes innovATion oF The YeAR 2006

At the “FINANZEN-Nacht” in Munich on 30 January 2006, Sal. Oppenheim was awarded the “Golden Bull 2006” for inventing TWIN-WIN certificates. In a close public vote, the majority of readers of “€URO/FINANZEN” and “EURO am Sonntag” magazines backed the certificates with double yield potential.

With TWIN-WIN certificates, a leverage factor offers investors extra returns if the price of their underlying rises. And even if the price falls, they benefit up to a certain level, as the decline is converted 1:1 into returns.



focus lay on expanding the sales platform. We were able to place our products with high-sales agents, including private banks and asset managers in particular. We also extended our alternative sales channels and boosted awareness for our products with intensive marketing campaigns, where Sal. Oppenheim Asset Management received active support. We were able to further increase cooperation agreements with direct brokers. At the same time, collaboration with third-party banks, via white-label products, for instance, was stepped up again.



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international Business

derivate Forum

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small and mid cap segment

designated sponsor

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We also continued our pro-active expansion of business in Italy, Austria and Switzerland. On 11 November 2005 we were one of the first banks to report successful transition to the new trading system, Quotematch, on the Swiss stock exchange. This facilitates both competitive pricing and transparency on the market. Increasing direct placements, targeted appeals to independent asset managers and trade sponsoring via the discount brokers significantly boost our fundamental market potential. The emission of derivatives based on Austrian equities and the stock market index ATX strengthened Sal. Oppenheim’s position as a leading local issuer in Austria. In Italy, sales cooperation with a local investment firm paved the way for expansion. Products that have been established in the German and Swiss markets for three years are still regarded as innovations here. We are therefore focussing on the placement of investment certificates, in particular in close cooperation with the selected banks.

Our founder membership of Derivate Forum e.V. has been a resounding success. After just one year of existence, the Forum is already one of the most important certificate associations in Germany. Gathering valid market volume data, developing a new, uniform method for risk classification based on the established value-at-risk (VaR) approach, setting up a Strategic Board at management level to represent the interests of the industry and preparing an industry-standard code of conduct, for instance, substantially increase the level of transparency.

2005 was a very successful year in terms of proprietary trading and securities lending. Proprietary trading focused on small and mid cap equities, and the Bank was also repeatedly called on to arrange securities lending and repo transactions for clients, in particular with equities.

The development of the “Designated Sponsor” business area, where Sal. Oppenheim provides support for particular equities on behalf of the respective companies, has also been extremely successful. At the end of the year we held 30 mandates, predominantly from companies listed on the MDAX, TecDAX and SDAX.

sal. oppenheim jr. & cie. | annual report 2005

currency management

On forex markets, 2005 was a year of historic lows in volatility. For most of the year, currency trading took place within very narrow ranges, which in turn affected Sal. Oppenheim’s trading profit. In light of the fact that many banks continued to cut down or even ceased proprietary forex trading, the remaining providers concentrated their efforts in the past year on client business, focusing in particular on SMEs.

Sal. Oppenheim responded to the intense pressure of competition, which has been augmented by the increasing deployment of electronic trading platforms, by launching a product offensive. Last year we introduced trading in eastern European currencies and price hedging with non-convertible currencies (non-deliverable forward). Currency warrants also premiered in the summer.

26 Currency trading

27 Relationship Banking

28 strategic cooperation with JPMorgan


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We expect relationship banking in conjunction with lending activities to become increasingly important in future, not least because it is no longer possible to market individual products in the forex field. In order to build on last year’s successes in client business, we shall continue to focus on high-quality, personal advisory services in 2006. But we will also continue to concentrate on expanding our product range. Efforts will primarily focus on structured products in OTC business, and structured yield enhancement products for private clients. Products with price hedging guarantees combined with trading positions continue to arouse a lot of client interest.

OutlookThe new strategic cooperation with JPMorgan, one of the most renowned players in international bank-ing and a market leader in terms of placement power, is set to play a major role in 2006. In conjunction with its partner, Sal. Oppenheim will in future provide support for capital market transactions in the German real estate sector, and further improve its market position in this field. This formidable combi-nation should offer a good chance of securing a leading advisory role on the anticipated introduction of so-called REITs (Real Estate Investment Trusts) – dividend-oriented, tax-privileged investment vehicles in the form of German public limited companies – in Germany at the turn of the year 2006/2007.

In light of equity market performance, the outlook for Investment Banking is positive. Given the moder-ate market valuation, the high level of price-propelling corporate action, such as rising dividends, share

buybacks and sustained vigour in M&A activity, and the fact that corporate profits are still heading up, we expect German and European share prices to keep climbing in 2006.



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Corporate Finance switzerland

iPos

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net interest income and net commission income

derivatives

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We continue to enjoy an excellent position, in particular in German-speaking countries. Having reinforced our market position in Switzerland by founding Sal. Oppenheim jr. & Cie. Corporate Finance (Switzerland) Ltd. and expanded our activities in Austria, business activities on the whole look set to intensify in 2006.

Capital market developments demonstrated that the capacity to absorb IPOs and placements has increased again. We thus expect more transactions in the field of hybrid capital and cash offers, and to win additional international mandates. Provided the stock exchange climate remains favourable, we believe this will lead to greater enthusiasm for mid-sized media and telecommunications companies, which in turn will trigger a rise in initial public and secondary offerings.

Conservative and risk-conscious portfolio expansion notwithstanding, we expect to grow net interest income and net commission income thanks to individual financing structures, the selective introduction of a mezzanine financing portfolio with subordinated loans as well as participation certificates and rights, and expansion of our debt advisory activities. Financial year 2006 is set to witness growing demand for mezzanine capital from the consumer goods sector, which predominantly comprises medium-sized companies. Sal. Oppenheim will once again be looking to intensify advisory services in this sector. We will also continue to participate in borrower’s note loans and syndicated loans in our target sectors.

Derivatives business is subject to specific conditions of production and demand. It is therefore impossible to compare it with traditional investment banking in terms of cost structures. Our leading market position in this field requires ongoing investment in infrastructure if we are to keep up with the major international investment banks and maintain the high quality of our products. This incurs intensive sales and marketing activities in order to ensure continued placement of our products. Flexible product structures and successful expansion of the sales platforms in Germany, Switzerland, Austria and Italy should thus be prerequisites for future growth.

investment banking

Documents

ce rti ficates

spar handels ag

borrowers note loans

fortress investment group

capital market transactions

investment banking

market share

edeka group