Vodafone AirTouch Acquires Mannesmann in a Record-Setting Deal On February 4, 2000, Vodafone…

Vodafone AirTouch Acquires Mannesmann in a Record-Setting
Deal

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 On February 4, 2000, Vodafone AirTouch Plc, the world’s
largest wireless communications company, agreed to buy Mannesmann AG in a $180
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 eye-popping $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 for
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 a joint venture with Verizon. Vodafone AirTouch
has a 45% interest in the joint venture. The JV has 23 million customers
(including 3.5 million paging customers). Covering about 80% 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. (See Chapter 12 for a
more detailed discussion of this JV.)

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 has
accounted for much of the growth in the value of the company in recent years.

Strategic Rationale for the Merger

With Mannesmann, Vodafone AirTouch intends to consolidate
its position in Europe and then to undertake a global brand strategy. In
Europe, Vodafone and Mannesmann will have controlling stakes in 10 European
markets, giving the new company the most extensive European coverage of any
wireless carrier. Vodafone AirTouch will 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 will
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 had
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. Such takeovers are even rarer when they turn 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 only in Mannesmann’s
successful telecommunications operations and that it was intending to sell off
the company’s engineering and automotive businesses, which employ about 80% 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 also stood
as a barrier to an unfriendly takeover. German corporate law requires that 75%
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. As a consequence
of these reassurances, the unions decided to support the merger.

The Offer Mannesmann Couldn’t Refuse

Epilogue

Undoubtedly, the Mannesmann shareholders could celebrate
their sweet victory. Throughout the hostile takeover battle, Vodafone AirTouch
had said that it was reluctant to offer Mannesmann shareholders more than 50%
of the new company; in sharp contrast, Mannesmann had 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%
ownership in the new firm, despite Mannesmann contributing only about 35% of
the operating earnings of the new company. The Vodafone AirTouch-Mannesmann struggle
highlighted the failure of the rest of Europe to adopt a U.S.-style and
British-style takeoverfriendly environment. The Mannesmann battle drew
attention to the slow pace of corporate law overhaul in Germany, which has been
trying to replace a voluntary takeover code and remove a host of antitakeover
defenses open to target managers.

 Case Study Discussion Questions

 1. Who do you think negotiated the best deal for their
shareholders, Chris Gent or Klaus Esser? Explain your answer in terms of short-
and long-term impacts.

2. Both firms were pursuing a similar strategy of expanding
their geographic reach. Does this strategy make sense? Why or why not? What are
the risks associated with this strategy?

 3. 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.

4. Do you think that Vodafone AirTouch conceded too much to
the labor unions and Mannesmann’s management to get the deal done? Explain your
answer.

 5. What problems do you think Vodafone AirTouch might
experience if it attempts to introduce what it views as “best operating
practices” to the Mannesmann culture? How might these challenges be overcome?
Be specific.

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