Vodafone AirTouch Acquires Mannesmann in a Record-Setting Deal

question 58

Essay

Vodafone AirTouch Acquires Mannesmann in a Record-Setting Deal
On February 4, 2000, Vodafone AirTouch PLC, the world's largest wireless communications company, agreed to buy Mannesmann AG in a $180.0 billion stock swap. At that time, the deal was the largest transaction in M&A history. The value of this transaction exceeded the value of the AOL Time Warner merger at closing by an astonishing $74 billion. Including $17.8 billion in assumed debt, the total value of the transaction soared to $198 billion. After a protracted and heated contest with Mannesmann's management as well as German labor unions and politicians, the deal finally closed on March 30, 2000. In this battle of titans, Klaus Esser, CEO of Mannesmann, the German cellular phone giant, managed to squeeze nearly twice as much money as first proposed out of Vodafone, the British cellular phone powerhouse. This transaction illustrates the intricacies of international transactions in countries in which hostile takeovers are viewed negatively and antitakeover laws generally favor target companies. (See Chapter 3 for a more detailed discussion of antitakeover laws.)

Vodafone AirTouch Corporate Profile
Vodafone AirTouch, itself the product of a $60 billion acquisition of U.S.-based AirTouch Communications in early 1999, is focused on becoming the global leader in wireless communication. Although it believes the growth opportunities are much greater in wireless than in wired communication systems, Vodafone AirTouch has pursued a strategy in which customers in certain market segments are offered a package of integrated wireless and wired services. Vodafone AirTouch is widely recognized for its technological innovation and pioneering creative new products and services. Vodafone has been a global leader in terms of geographic coverage since 1986 in terms of the number of customers, with more than 12 million at the end of 2000. Vodafone AirTouch's operations cover the vast majority of the European continent, as well as potentially high-growth areas such as Eastern Europe, Africa, and the Middle East. Vodafone AirTouch's geographic coverage received an enormous boost in the United States by entering into the joint venture with Bell Atlantic. Vodafone AirTouch has a 45 percent interest in the joint venture. The JV has 23 million customers (including 3.5 million paging customers). Covering about 80 percent of the U.S. population, the joint venture offers cellular service in 49 of the top 50 U.S. markets and is the largest wireless operator in the United States.

Mannesmann's Corporate Profile
Mannesmann is an international corporation headquartered in Germany and focused on the telecommunications, engineering, and automotive markets. Mannesmann transformed itself during the 1990s from a manufacturer of steel pipes, auto components, and materials-handling equipment into Europe's biggest mobile-phone operator. Rapid growth in its telecom activities accounted for much of the growth in the value of the company in recent years.

Strategic Rationale for the Merger
With Mannesmann, Vodafone AirTouch intended to consolidate its position in Europe and undertake a global brand strategy. In Europe, Vodafone and Mannesmann would have controlling stakes in 10 European markets, giving the new company the most extensive European coverage of any wireless carrier. Vodafone AirTouch would benefit from the additional coverage provided by Mannesmann in Europe, whereas Mannesmann's operations would benefit from Vodafone AirTouch's excellent U.S. geographic coverage. The merger would create a superior platform for the development of mobile data and Internet services.

Mannesmann's "Just-Say-No" Strategy
What supposedly started on friendly terms soon turned into a bitter battle, involving a personal duel between Chris Gent, Vodafone's CEO, and Klaus Esser, Mannesmann's CEO. In November 1999, Vodafone AirTouch announced for the first time its intention to make a takeover bid for Mannesmann. Mannesmann's board rebuked the overture as inadequate, noting its more favorable strategic position. After the Mannesmann management had refused a second, more attractive bid, Vodafone AirTouch went directly to the Mannesmann shareholders with a tender offer. A central theme in Vodafone AirTouch's appeal to Mannesmann shareholders was what it described as the extravagant cost of Mannesmann's independent strategy. Relations between Chris Gent and Klaus Esser turned highly contentious. The decision to undertake a hostile takeover was highly risky. Numerous obstacles stood in the way of foreign acquirers of German companies.

Culture Clash
Hostile takeovers of German firms by foreign firms are rare. It is even rarer when it turns out to be one of the nation's largest corporations. Vodafone AirTouch's initial offer immediately was decried as a job killer. The German tabloids painted a picture of a pending bloodbath for Mannesmann and its 130,000 employees if the merger took place. Vodafone AirTouch had said that it was interested in only Mannesmann's successful telecommunications operations and it was intending to sell off the company's engineering and automotive businesses, which employ about 80 percent of Mannesmann's total workforce. The prospect of what was perceived to be a less caring foreign firm doing the same thing led to appeals from numerous political factions for government protection against the takeover.

German law at the time also stood as a barrier to an unfriendly takeover. German corporate law required that 75 percent of outstanding shares be tendered before control is transferred. In addition, the law allows individual shareholders to block deals with court challenges that can drag on for years. In a country where hostile takeovers are rare, public opinion was squarely behind management.

To defuse the opposition from German labor unions and the German government, Chris Gent said that the deal would not result in any job cuts and the rights of the employees and trade unions would be fully preserved. Moreover, Vodafone would accept fully the Mannesmann corporate culture including the principle of codetermination through employee representation on the Mannesmann supervisory board. Because of these reassurances, the unions decided to support the merger.

The Offer Mannesmann Couldn't Refuse
When it became clear that Vodafone's attempt at a hostile takeover might succeed, the Mannesmann management changed its strategy and agreed to negotiate the terms for a friendly takeover. The final agreement was based on an improved offer for Mannesmann shareholders to exchange their shares in the ratio of 58.96 Vodafone AirTouch shares for 1 Mannesmann share, an improvement over the previous offer of 53.7 to 1. Furthermore, the agreement defined terms for the integration of the two companies. For example, Dusseldorf was retained as one of two European headquarters with responsibility for Mannesmann's existing continental European mobile and fixed-line telephone business. Moreover, with the exception of Esser, all Mannesmann's top managers would remain in place.

Epilogue
Throughout the hostile takeover battle, Vodafone AirTouch said that it was reluctant to offer Mannesmann shareholders more than 50 percent of the new company; in sharp contrast, Mannesmann said all along that it would not accept a takeover that gives its shareholders a minority interest in the new company. Esser managed to get Mannesmann shareholders almost 50 percent ownership in the new firm, despite Mannesmann contributing only about 35 percent of the operating earnings of the new company.

Vodafone, currently the world's largest (by revenue) cell phone service provider, has experienced continuing share price erosion amidst intensifying price erosion from competition in western European markets and new technologies, such as Internet calling, that are slowing revenue growth and shrinking profit margins. Shares in Vodafone have underperformed the UK market by 40 percent since the firm acquired Mannesmann. In 2006, the company recorded an impairment charge of $49 billion. This charge reflected the lower current value of the Mannesmann assets acquired by Vodafone in 2000, effectively making it official that the firm substantially overpaid for Mannesmann.

While hostile bids were relatively rare at the time of the Vodafone–Mannesmann transaction, they have become increasingly more common in recent years. Since 2002, Europe has seen more hostile or unsolicited deals than in the United States. In part, Europe is simply catching up to the United States after many years in which there were virtually no hostile bids. For years, national governments and regulators in Europe had been able to deter easily cross-border deals that they felt could threaten national interests, even though European Union rules are supposed to allow a free and fair market within its jurisdiction. However, the rise of big global rivals, as well as a rising tide of activist investors, is making companies more assertive.=
-Do you think the use of all stock, rather than cash or a combination of cash and stock, to acquire Mannesmann helped or hurt Vodafone AirTouch's shareholders? Explain your answer.

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Definitions:

Discount Rate

The discount rate employed in the evaluation of discounted cash flow (DCF) to ascertain the current worth of prospective cash flows.

Overhaul Costs

Expenses associated with performing major maintenance or repairs to extend the life of an asset.

Salvage Value

The anticipated remaining worth of an asset when it reaches the end of its operational lifespan.

Net Present Value

The difference between the present value of cash inflows and the present value of cash outflows over a period of time.