Vodafone Airtouch's Bid for Mannesmann

Vodafone AirTouch's Bid for Mannesmann

Question 1

1a

When the probability of Vodafone successfully acquiring Mannesmann is 60%, it means that 60% of the expected synergies, resulting from the merger, would be reflected in the share price. This is because of the Law of One Price. We compute the combined value of both Vodafone and Mannesmann on December the 17th (after merger rumors) and on October the 21st (before latest merger rumors, but after Mannesmann's acquisition of Orange) by measuring the market capitalization and divide it by the probability of a successful merger. The resulting amount is the market's estimate of the synergies of the deal. In this calculation, we assume that the macro-economic conditions, and therefore the systematic risk, has not changed or influenced the value of Mannesmann or Vodafone.

Market capitalization

in €,- Vodafone Mannesmann Combined

# shares Price Market capitalization # shares Price Market capitalization Market capitalization

Oct. 21 31105M 4.186 1 130 207M 517.9M 145.35 75 276.8M 205 483.8M

Dec. 17 31105M 4.957 154 186.4M 517.9M 234 121 188.6M 275 375M

The market's estimate of synergies is (275 375 – 205 483.3 / 0.60) = 116 486.17M = € 116.5 bn.

1 £ 2.70 / 0.645 = € 4.186

Mannesmann's potential contribution to the combined firm is 47.2% of 275 375M, which is €129 997M. Vodafone offers €4.957 per share x 53.7 x 517.9M shares = € 137 860.3M, a premium of €7 863M.

The share price could be distorted and thus overstating the potential synergies resulting from the merger. When the merger doesn't succeed, the competition in Europe on the cell phone market will intensify and Mannesmann and Vodafone are interesting takeover targets for American or Japanese companies, where synergy benefits are lower. The intensification of the competition also could possibly reduce future free cash flows and therefore lowering enterprise value.

1b

Values in M of £ 2001E 2002E 2003E 2004E 2005E 2006E Terminal Value

Operating profit impact 90 246 688 984 1 221 1 489

Taxes at 35% 31.5 86.1 240.8 344.4 427.35 521.15

After-tax operating profit impact 58.5 159.9 447.2 639.6 793.65 967.85 26884.721

Savings in capital expenditures 60 147 360 420 469 506 0

Total