Vodafone Group PLC’s acquisition
The selection of this case study was made due to the nature of the takeover. It was a hostile bid by the biggest mobile phone company in the world for the biggest telecommunications in Europe. It turned out to the largest hostile takeover bid in the world at the time, to create the 4th largest firm in the world. Other factors like a UK company buying a German one were unheard of until the outcome of this takeover.
All this influenced my decision to choose this takeover. The deal signed signalled a more aggressive approach to mergers. Until now it had been conducted on a more co-operative basis in Europe than in the UK and the USA. Hostile takeover bids are extremely rare in Germany and at the time was seen to be significant in that other German firms are liable for takeovers, particularly the banks and other telecommunications companies. Many even as far to say that the takeover battle has left Germany’s business culture irreversibly changed.
Mannesmann was originally a steel firm. Only when it was awarded Germany’s first private mobile phone license in 1990 did it come into the telecommunication market. Since then it has set up Arcor, a landline phone business in Germany, created Omnitel, a mobile phone company in Italy, and bought a stake in Cegetal in France, followed by the purchase on tele.ring in Austria. It also bought Orange PLC, which at the time the 3rd largest mobile phone company in the UK in 1999. Before the takeover, the head of Mannesmann Klaus Esser announced that it was to split these two interests into two separate entities. This still went ahead after the takeover, leaving the reputation of Gent intact. If Esser had not announced the split before that takeover, Gent would have been seen to be a “ruthless shark”.
Control of the two major players in the UK mobile market by Vodafone was a concern for the regulators in the UK and the EC. Vodafone were aware of this and knew that to avoid the major difficulties, they would need to de-merge Orange PLC from Mannesmann. However, the EC made it clear that it would keep an eye on the selling of the Orange and how it was conducted. Concerns were made public by how this was done. In August 2000, France acquired Orange plc from Vodafone for a total of 1 billion.
Selling Orange was one concern that the EC had. They also laid down several conditions; the main one being that all competitors would have fair access to the Vodafone-Mannesmann network. This is needed when customers of rival firms use international roaming. The EC also must approve rules for setting fair tariffs for roaming. They also warned that the acquisition would be blocked if it were not in the interests of European customers.
Under EU rules, the Commission’s merger task force undertook an investigation into the market conditions to determine whether operation is compatible with EU law – in particular, with the prevention of creating or reinforcing a dominant position. The EC gave the go-ahead in April 2000, after Mannesmann had accepted the bid in February. The transaction was approved after the parties’ submitted commitments to de-merge Orange PLC and to give other mobile operators access to their inter-operator roaming tariffs and wholesale services.
The takeover of Mannesmann followed the academic theories stated in various textbooks. However, recently Esser and five other Mannesmann bosses are being investigated for financial favours that helped the process of the takeover. The process of the takeover took place in the normal manner. A bid was made and when this was rejected, it led to a hostile bid, which led to outcries. Eventually, negotiations led to an improved offer. Once accepted, the new management team was agreed. Vodafone had calculated how much saving they are expected to make, over a billion dollars up until 2004.
Academic theories state that target firms, i.e. Mannesmann in this case, are normally those that are maximising profit. In fact, Mannesmann’s telecommunications division accounted for 95% of their pre-tax profit for the financial year before the takeover. Another theory is shareholders of the acquirers generally give poor returns on average. This is supported by looking at the below ratios. On the other hand there is some empirical evidence to support that target shareholders gain from takeovers. (See graph 1.0). This shows due to the bidding, share prices went up and therefore Mannesmann shareholders would get more for the same shares.
The directors of the acquirer all gain. Sir Chris Gent received ï¿½2.4m for the success of the takeover occurring. Corporate Governance The bid for Mannesmann led to a broad debate on the future of the German model of capitalism. German trade unions and the Mannesmann work councils strongly rejected Vodafone’s bid, in order to defend the German culture of corporate governance that is based on strong employee involvement and co-determination. With the employees’ viewpoint supported by almost all major political parties in Germany, Vodafone reacted to the criticism by saying that, after a takeover of Mannesmann, it would fully accept the German system of industrial relations and corporate governance. However, it is important to note that over 60% of the shareholders of Mannesmann were foreign.
Tony Blair, the UK Prime Minister was in support of this merger but refused to get involved in any bidding war for Mannesmann. He welcomed the thought that a UK company was at the forefront of the telecommunication sector. This was in contrast to the German Chancellor, Gerhard Schroeder who told a French newspaper “hostile takeover destroys a company’s culture”. Schroeder’s fellow German politicians shared his view that one of the best-known German companies was to be bought by a foreign company, never mind a UK company.