Vodafone Mannesmann - Case Study

Yogesh Joshi, Suhas Kabra, Amit Satbhai, Rashi Munshi (PGDIE, NITIE)

Vodafone’s made a hostile takeover bid for Mannesmann in 1999.


Vodafone Group Plc is a mobile network operator headquartered in Newbury, Berkshire, England, UK. It is the largest mobile telecommunications network company in the world by turnover and has a market value of about £84.7 billion (July 2007). Vodafone currently has equity interests in 27 countries and Partner Networks (networks in which it has no equity stake) in a further 40 countries. At 31 January 2007 Vodafone had 200 million proportionate customers in 27 markets across 5 continents. The company is involved in the operation of mobile telecommunication networks and the provision of related telecommunication services. The company’s principal business is the operation of the cellular radio networks.

Mannesmann AG (“Mannesmann”) is a German-based engineering and telecommunications company. Its’ core activities in the telecommunications sector relate to mobile and fixed line telephony. It has interests in joint ventures in France, and Austria and owns businesses in Germany, Italy, the United Kingdom and the USA.

Initial Discussions:
In the year 1999 telecom industry was opening up for competition. It was forecasted that telecoms revenue will rise from about £650bn in 1996 to about £1.2trillion in 2002. At the same time as technology was making rapid progress, markets everywhere are opening up to competition. The spread opened up many more opportunities for large and small companies and a search by big players for company alliances worldwide to compete with newcomers. Analysts had expected the UK's leading mobile phone operator, Vodafone, to bid for Mannesmann, as merger fever spread. At that time German engineering giant Mannesmann was hoping to cash in on the expanding markets by setting up its telecoms subsidiary as a separate company. Vodafone itself won a transatlantic bidding war in January to snap up US firm AirTouch Communications for £37bn, the biggest deal struck by a UK firm, creating Vodafone Airtouch. Vodafone Chief Executive Chris Gent said at the time that the intention was to create "a Microsoft of mobile phones". The new company serves more than 24 million mobile customers on four continents. A takeover of Mannesmann would give Vodafone control of mobile operations in Germany, France and Italy and strengthen its position as the world's largest mobile phone company. According to a report in Wall street journal Vodafone AirTouch was moving ahead with plans to mount a hostile bid for German telecoms and engineering group Mannesmann. The deal was expected to value the pair together at more than $100bn.

Earlier, Vodafone Airtouch was said to be planning a joint bid with France Telecom for Mannesmann. The speculation followed Mannesmann's £19bn bid for UK mobile telecom company, Orange. Vodafone Airtouch has long been a suitor of Mannesmann and the German company hoped that buying Orange would place it outside of Vodafone Airtouch's reach. This hope was based on the belief that UK competition rules would not allow Vodafone Airtouch to own two mobile operations. Analysts said the logic of a joint Vodafone/France Telecom deal is strong. France Telecom would buy Orange, while Vodafone would buy Mannesmann's other assets, in particular its German and Italian mobile operations.
Analysts View:
“A bid would be unwelcome and, given Mannesmann's company structure, it may be difficult to launch a hostile takeover.” “Mannesmann company rules limit individual shareholders' voting rights to a maximum 5% tranche, even if they hold a larger block of shares” "Because of Mannesmann's structure, it is very difficult to launch a hostile takeover. So one will have to wait for a comment from the companies involved to see whether a friendly agreement would be an option" “Mannesmann is too proud to accept a takeover." “Contested takeovers are rare in Germany.” “if Mannesmann bought Orange it would put it out of the price range of potential buyers, such as Vodafone Airtouch.” “Vodafone would also face difficulties in mounting a hostile bid in Germany, where competition law is tough on such deals.”

Announcement:
In Nov 1999 Vodafone offered to exchange 43.7 of its shares for each Mannesmann share with no cash added. This was estimated to be worth up to £65bn, was rejected by the German company
Then Vodafone initiated a hostile takeover and proposed a stock swap whereby each Mannesmann share would be exchanged for 53.7 Vodafone shares. Vodafone would issue 27.8 billion new shares and, with 517.9 million Mannesmann shares outstanding, Mannesmann would then own 47.2% of the combined entity. The Vodafone offer had been estimated to be worth up to £75bn. Vodafone had been tipped to make an offer for Mannesmann ever since the German company announced a deal to buy UK Company Orange. The German telecommunications giant Mannesmann rejected the takeover bid, Mannesmann's board said the offer did not contain a cash offer and was unattractive to shareholders. According to them offer was “wholly inadequate”. There was no immediate comment from Vodafone. The stock market was on tenterhooks, awaiting news of the expected move when Vodafone releases its half-year financial results. Vodafone may have to lift its offer for Mannesmann to win shareholders over in what would be the world's biggest ever hostile takeover battle. Investors were worried about the prospect of Vodafone paying over the odds and shares in the company slipped 3.75p to 292.5p on Monday. Shares in Mannesmann rose 17.68 euros (£11.24) to 202.98 euros (£129) on the German stock market.

On 19 Nov 1999, Vodafone launched a £79bn (124bn euro) hostile takeover bid for German mobile phone company Mannesmann followed by Mannesmann's rejection of a friendly merger offer. Which is set to be the world's biggest ever contested takeover battle till date.
Valuation:
Value offered per share: €240
No. of Shares Outstanding: 0.5179 billion Total value of the company: €240 X 0.5179 billion ≈ €124 b


If successful this would result in Mannesmann shareholders owning 47% of the combined group. The offer represented a 20% increase on Vodafone's initial bid. This estimate excludes the value of Orange PLC, since Mannesmann’s offer to Orange was not yet bounded.

Synergies Claimed:

 Deal would turn Vodafone AirTouch into the world's biggest mobile phone company. The offer would create an unmatched European mobile phone network, and a global brand. The merger would generate savings of more than £1bn by 2004. The deal would add the UK to Mannesmann's existing mobile businesses in Germany, France and Italy. A merger would create a company with mobile phone interests in 15 European countries with 30 million customers. Worldwide the group would have the equivalent of 42 million customers. Deal would enable data business via mobile phones. If Vodafone succeeds in its bid, the combined group could be worth around £200bn - or nearly 17% of the value of the whole of London's top 100 companies. Merger would allow savings of £500m in 2003 and £600m in 2004.

Steps subsequent to announcement of the deal:

On Nov 19, 1999 Vodafone AirTouch launched a £79bn (124bn euro) bid for German group Mannesmann, Mannemann has already made clear in a letter that it wants the company to withdraw the bid. Managing director of Mannesmann said: "Jointly with Orange, Mannesmann will be an outstanding company and better positioned than Vodafone for the future opportunities in the telecom business. The combination of Orange and Mannesmann is, in my opinion, very powerful and offers the best opportunity for Hutchison's shareholders." Mannesmann then planned to build on its telecoms strength and bring forward the flotation of its engineering and automotive business to the middle of next year, one year earlier than expected. It will cut its stake in the engineering/automotive unit to under 50%. Mannesmann rejected the takeover bid bf $125bn by Vodafone-Airtouch. The decision came at a meeting of Mannesmann's supervisory board in Duesseldorf, setting the scene for Vodafone to proceed with the world's biggest-ever takeover ever by putting its offer directly to shareholders.
Meanwhile, Mannesmann continued to try to strengthen its defences by entering into talks with France's Vivendi about acquiring a majority stake in Cegetel, France's second-largest mobile phone operator. That would give Mannesmann control of the number one or number two mobile phone company in Europe's four biggest markets - France, Germany, Italy and the UK. On Dec 23, 1999 Vodafone launched launch an £83bn hostile bid for the company On Jan 30th, 2000 Vodafone announced plans to set up Europe's first integrated telecommunications and internet operation, which will be linked with French firm Vivendi. Vodafone's raised the deal on Feb 2, 2000, to now worth £90bn ($150bn), would have given Mannesmann 48% of the combined group. Shares in Mannesmann have risen 119% since October. On Feb 2, 2000 they reached a new high of 310 euros, ahead of Vodafone's 300 euro offer. Vodafone AirTouch showed a killer instinct in putting together the resulting £112bn ($182bn) deal. Vodafone AirTouch and Mannesmann have agreed terms for a friendly merger. The Mannesmann directors are said to be about to approve the deal, according to sources close to the companies. It is understood they are haggling over the fine detail before making an announcement. Under the terms of the £112bn ($182bn) deal, Mannesmann shareholders are expected to get 49.5% of the merged company, with Vodafone providing 59 of its shares for each Mannesmann share. Vodafone AirTouch has finally succeeded in taking control of Mannesmann after last-minute concessions overcame the objections of the German group's board on Feb 10, 2000.

Structuring of the deal: Implications


The structure of the deal suggests that Vodafone’s management wants to share the risk of achieving the synergies with Mannesmann’s shareholders, (as well as the understandable limitation of raising a 86 B₤ for an all cash deal.) For Vodafone’s shareholders this is a worthwhile deal to take; It suggests tremendous market synergies and prevents increased competition in the UK. In addition, partnerships that Vodafone has with Mannesmann in other European markets are very valuable. If the deal is not accepted Vodafone and Mannesmann would become competitors throughout Europe and the companies may become less valuable than before the merger was proposed.


Hurdles Vodafone Must Overcome to Acquire Mannesmann

A large number of Mannesmann’s board members are employees and union representative which will make it difficult for Vodafone to get the boards approval. In addition, even if Vodafone get the required number of shares to take over Mannesmann (75%), the voting restrictions placed on large shareholders of Mannesmann may prevent it from taking control. If this is the case, it may have to wait until June 2000 to replace the board and take control of management. The merger may also be complicated by anti-competitive regulations. Since Mannesmann acquired Orange, the UK government may appose the deal unless it agrees to spin-it off, which it has. Companies such as D2 and SFR, which are jointly owned by Vodafone and Mannesmann, will support the merger because if it fails, Vodafone and Mannesmann will become competitors and this would complicate joint operations. In addition, the merger will be supported by Vodafone shareholders because it would expand Vodafone’s global presence, and provide the company with significant synergies and a strong U.K presence. Hutchison Wampoa and Mannesmann’s shareholders, except those who are employees, should also support the merger because it would provide them with a significant return. The groups that would appose the merger include Mannesmann’s employees, Mannesmann’s unions and the German Government as they will be concerned about job losses. Mannesmann’s board is also likely to reject the merger since 50% of its supervisory board is controlled by employees and union representatives.

Gent’s Support for the Vodafone-Mannesmann Acquisition and Esser’s Resistance

The Vodafone-Mannesmann battle is a clear example of principle-agent problems that can arise when a company’s management does not have the same objectives as the company’s shareholders. Since Gent has stock options in Vodafone, would remain in control of company and would receive a large bonus, he is in support of the merger. Esser on the other hand does not have a large equity interest in Mannesmann, he would not receive a large pay-out and he would not likely be retained in the company. Therefore, he is opposed to the deal.
Hostile Takeovers and the Battle between Vodafone and Mannesmann
In the market for corporate control hostile takeovers play an important role. Hostile takeovers are a mechanism to remove incumbent managers, induce corporate restructuring, and free up resources that could be used more efficiently elsewhere. The threat of a hostile takeover also improves management’s performance. Most importantly

however is that hostile takeovers are a mechanism to deal with poor corporate governance structures that do not act in the best interest of shareholders

Mannesmann is a German based company and as such it has a supervisory board and a management board. The supervisory board appoints and dismissed members of the management board while the management board runs the day to day operations of the company. Since the company has over 2000 employees, the supervisory board will consisted of 10 shareholders, 7 members from the workforce and three members from trade unions. Even thought the shareholders may have wanted Mannesmann’s management to accept the Vodafone offer, the board was unlikely to force them to do so since the supervisory board had a large number of employees and union members on it. A hostile takeover by Vodafone would remove this board and force the company to accept the deal. In contrast to the German corporate governance system, the Anglo Saxon system has only one tier. The board members are elected by the shareholders, are known for their business abilities and usually have a vested interest in the company. Although the number of directors can vary substantially between companies, at least 50% need to be independent. As a result, Anglo-Saxon boards are more likely to act in the best interest of their shareholders since their interests are aligned.


Financing of the Deal:
Vodafone financed the bid by issuing bonds of approximately a 135 billion euro

Closure of the Deal:
Vodafone AirTouch was finally succeeded in taking control of Mannesmann. Under the terms of the revised £112bn deal, Mannesmann shareholders got 49.5% of the merged company, with Vodafone providing 58.96 of its shares for each Mannesmann share. The revised deal values Mannesmann shares at 353 euros each. This brought to an end months of rancorous negotiations, claims and counterclaims in a bidding battle mixing big business, politics and union uproar. The new company - which will have some 42 million customers - will be run from Vodafone's Newbury headquarters, although Mannesmann will continue to have a head office in Dusseldorf. The new company will be called Vodafone Airtouch, although the Mannesmann name will be retained in Germany. The total value of the Vodafone group on the stock market, after paying $183bn for Mannesmann in shares, will be $365bn (£228bn), making it by far the largest company on the London stock market and the fourth-largest in the world. The merger creates a huge IT group under Vodafone chief executive Chris Gent, with some 42 million customers and interests ranging from the Americas and Australia through the UK, France, Germany and Italy. However, Orange, which was bought last year by Mannesmann, will have to be put up for sale to satisfy competition regulators in the UK. Also Vodafone split off Mannesmann's engineering and automotive operations into a separate company.
The London Stock Exchange had announced special measures to deal with an anticipated avalanche of trade in Vodafone. Dealers had predicted a surge of demand as many index tracker funds were now permitted to buy the heavyweight stock to reflect the increased weighting the enlarged company will have in the FTSE 100 index. It is expected to account for about 15% of the index. The combined group will be Europe's telecommunications leader and the deal seals Vodafone's position as the world's major mobile telephone operator.


References:

http://news.bbc.co.uk/2/hi/business
http://finance.sauder.ubc.ca/~fisher/courses/bafi580d_2005/Case4VodafoneStudents/Vodafone-Memo-FINAL.pdf
http://www.investmentandbusinessnews.co.uk/ibn/Q4smartSite.dll/main?nav=10&article=761&mode=view
http://specials.ft.com/wmr2000/FT3VYC2VNGC.html
http://www.vodafone.com/start/about_vodafone/who_we_are/history.html
http://www.eurofound.europa.eu/eiro/1999/11/feature/de9911220f.html
http://ec.europa.eu/comm/competition/mergers/cases/decisions/m1795_en.pdf