CASE 5: Acquisition of Mannesmann by Vodafone
Vodafone AirTouch is UK’s leading cellular service provider. By the late 1980s, the company started expanding its global reach through series of acquisitions, joint-ventures and by 1999 had grown to be the largest mobile company in the world. Sales and operation profits were up by 34% and 17% respectively by September 1999 and Vodafone had captured markets across US, UK and continental Europe. To increase its presence in all-important US market, it acquired AirTouch Communications in January 1999 and later forged a 55-45 partnership with Bell Atlantic.
On the other hand, ...view middle of the document...
Vodafone could enter into such areas without taking the risk of entrance. Secondly, the Mannesmann’s big market share in Germany will help Vodafone to ensure the leadership in the European market and even become the biggest operator in the word. Thirdly, the combination will bring Vodafone big synergies from both revenue side and cost saving side. For example, Vodafone could greatly reduce the call cost from Germany to UK as they will be in the same network, while it could attract more users based on this kind of advantage. Besides, the merger reduces the cost of purchasing. The more investment in the oversea markets also reduces the unsystematic risk, and increases the value of the brand Vodafone.
Various levels of problem identified in the case
To start with the initial bid placed by Vodafone was hugely undermined Mannesmann’s own expectations. While Vodafone valued Mannesmann at 138 Bn Euro i.e. 266 Euro/share, laters own assessment was 350 Euro/share.
Mannesmann was itself on trajectory of growth and had future plans under which it acquired Orange PLC. Making things complicated for Vodafone were the facts that Germany has strong laws to protect its companies from takeovers by foreign firms. An interconnected shareholding pattern, with vast amount held by banks ensured a takeover attempt is not an easy task. The principal of codetermination, where worker representatives held half the seats on the supervisory board implied that takeovers that intend to increase the shareholder value would not necessarily be approved by the board and hence despite Vodafone’s assurance of worker’s cause the labor union opposed the merger. Another issue was that under AoA of German companies like Mannesamann, the shareholder was not allowed to have more than 5% of voting rights even if he holds more shares.
Further, Germany has more of ‘stakeholder culture’ rather than UK’s ‘shareholder culture’, so while in former mangers work in tandem with labor unions, institutional shareholders, suppliers and dealers etc., in the later, top managers are given company’s stock options to incentivize them to work towards enhancing shareholders value and were also given golden parachutes if required to be pushed out of the firm for control. Hence, in this environment an acquisition of firm and future control would be difficult.
There was also concern about response to such a large level cross-country bid and ensuing political debates across Europe, with leaders of both UK and German government already expressing their support for their local companies. In such a case if the transaction fails, the political repercussions of the same would be huge.
Details of background knowledge required for solving the problem
The case primarily requires to assess the value of Mannesmann hence the premium that Vodafone should finally offer at given the potential synergy that the combined entity can create. Vodafone’s CEO Gent and Mannesmann’s CEO Esser had entered in to talks...