Vodafone Airtouch’s Bid for Mannesman

ASSIGNMENT 2: VODAFONE AIRTOUCH’S BID FOR MANNESMAN

1. Suppose you are the CEO/CFO of Vodafone. What are the strategic arguments favoring the acquisition of Mannesmann?

• The combined company would be the global leader in the telecommunication industry, operating 25 countries and 42 equity subscribers, and be able to capitalize on new business opportunities at a time when the industry was forecast to grow at 29% per annum in the near future.
• Vodafone could avoid direct competition with Orange PLC, a Mannesmann’s fully owned subsidiary, in the UK market.
• Vodafone could gain footprints in Germany again after selling its stake in E-Plus to France Telecom.
• Vodafone could continuously work together with Mannesmann for joint holdings in Germany (D2), Italy (TIM900) and France (SFR).
• Vodafone could own fixed line operations.
• Significant synergies (as per Vodafone’s board) could be created such as revenue enhancement, cost savings and savings on capital expenditure for voice business, totaling GBP500mil in 2003 and GBP600mil in 2004 on after-tax basis respectively.
• In addition, additional synergies for data and internet business could also be generated (though difficult to estimate).

1. What are the strategic arguments against the acquisition of Mannesmann?

• The resulting company would be exposed to significant challenges from companies such as BT, Deutsche Telekom and France Telecom because Mannesmann provides integrated services covering fixed lines, wireless and internet activities.
• German corporate governance system requires maximization of stakeholder value, especially including workers, rather than shareholder value, which could force Vodafone to change their management style.
• Due to the Mannesmann’s article of association (associated with the aforesaid German system), Vodafone would not be able to replace the supervisory board and take control of Mannesmann’s management straightaway (until this restriction is rescinded on June 2000).
• The general response in Germany to this hostile takeover bid was quite negative and the environment in which Vodafone will be operating after merger would be against them.

1. Are there any unusual barriers to a successful hostile takeover of Mannesmann? How might you try to work around them as the Vodafone CEO?

• Again, due to the Mannesmann’s article of association (associated with the German corporate governance system), Vodafone would not be able to replace the supervisory board and take control of Mannesmann’s management because no shareholder was entitled to vote in excess of 5% out of the outstanding capital stock of Mannesmann, even if Vodafone acquires 100% shares of Mannesmann. Therefore, one way for Vodafone to work around this barrier is to work with the supervisory board members coming from the workforce and trade unions of Mannesmann. To do this, Vodafone would have to demonstrate that the proposed takeover is beneficial not only for shareholders but also for stakeholders including workforce. This should include job security, compensation, and work environment, etc.
• Vodafone’s bid is one of the largest foreign hostile bids in Germany. Germany would have to give up one of its largest companies in view of global capitalism, but majority of the German public response has been against the merger as they do not want Mannesmann to be taken over by another European company.

1. In all questions below, treat stock prices on 21 October 1999 as representing your best estimate regarding the respective stand-alone values of Vodafone and Mannesmann. With this in mind, consider Vodafone’s amended offer on 19 November 1999. Is the amended offer “fair” given the two firms’ stand-alone values?

Based on our synergy calculations and a 50-50 split of synergies between Vodafone and Mannesmann, we believe that a fair exchange ratio would be 35.79. Since Vodafone has offered an exchange ratio of 53.7, the offer is ‘fair’.

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1. How large of a synergy must the deal generate such that Vodafone shareholders are no worse off should the deal be consummated under the terms of the amended offer? Perform the analysis in Euros.

Based on the share prices of Vodafone and Mannesmann on 17th December, the market capitalization of the combined company is €275bil. Given that Mannesmann will hold 47.2% of the combined company, Mannesmann’s contribution to the combined company is €130bil (=47.2% * €275bil). In the meantime, Vodafone’s offer to the Mannesmann’s shareholders is €138bil  (=€5.0 *518mil *53.7/1000).