Merger Final 1
Merger Final 1
Merger Final 1
Table of Contents
Introduction ................................................................................................................................................... 3
The Merger Story .......................................................................................................................................... 4
Merger Highlights ......................................................................................................................................... 6
Regulatory Issues .......................................................................................................................................... 7
Strategic Perspective of the Merger .............................................................................................................. 7
Post-merger Integration .............................................................................................................................. 10
Acquisitions by Vodafone AirTouch ...................................................................................................... 11
Merger Analysis .......................................................................................................................................... 11
Comparison of Mannesmann AG and Vodafone AirTouch PLC, March 2000 ...................................... 12
Highlights for Mannesmann in 1999 ...................................................................................................... 12
Operating Performance Analysis ................................................................................................................ 13
Stock Wealth Analysis: Acquirer ................................................................................................................ 15
Daily returns surrounding merger announcement period for Acquirer: Vodafone ................................. 15
Cumulative returns for Vodafone ........................................................................................................... 16
Cumulative returns surrounding the merger announcement for Vodafone ............................................. 16
Average stock returns surrounding the merger period ............................................................................ 16
Wealth Analysis of Target Firm.................................................................................................................. 17
References ................................................................................................................................................... 18
Introduction
Vodafone was established as the telecom subsidiary of Racal Electronics in the year 1984. In the
year 1988, approximately 20% of the stock of Racal Telecom was sold to public on the London
and New York Stock Exchanges. In 1991, Racal Telecom was fully divested from Racal
Electronics and renamed Vodafone Group. Vodafone had undertaken a series of alliances and
mergers and acquisitions (M&A) activity as a strategic pursuit for growth. During the mid-1999,
Vodafone merged with AirTouch Communications Inc. of the United States to create Vodafone
AirTouch. This $60 billion acquisition of US-based AirTouch Communications by Vodafone was
focused on becoming the global leader in wireless communication. Vodafone AirTouch pursued a
strategy in which customers in certain market segment were offered a package of integrated
wireless and wired services. Vodafone was well known for its focused strategy of technological
innovation and pioneering new product development. By 1999, Vodafone AirTouch PLC had a
customer base of 31 million worldwide and business interests in 24 countries across 5 continents.
The operations of Vodafone AirTouch extended to Europe, Africa, and Middle East. Vodafone
was the largest UK operator for a very long time period. Vodafone AirTouch had a 45% stake in
a planned joint venture with Bell Atlantic which covered more than 90% of the US population.
Bell Atlantic was the largest wireless operator in the United States. This venture resulted in the
creation of Verizon Wireless during April 2000. This joint venture had 23 million customers which
included 3.5 million paging customers. This joint venture covered 49 out of top 50 US markets.
During the late 1999, Vodafone AirTouch had a market capitalization of approximately £90 billion
and was the second largest company in the FTSE 100 and third in the Euro Top 300. Earlier
AirTouch had a number of tie-ups with Mannesmann in Europe. Mannesmann was an engineering
company headquartered in Germany and established in the year 1890. After World War II, the
company transformed itself from steel and coal manufacturer into a diversified conglomerate with
business interests in automotive components, information technology, and plastics. The major
businesses included the telecommunications, engineering, and automotive markets. During the
1990s, Mannesmann emerged as the largest mobile phone operator in Europe. In 1991,
Mannesmann launched Mobilfunk with technical support from AirTouch. In 1996, Mannesmann
formed the business named Mannesmann Arcor by acquiring the fixed-line subsidiary of Deutsche
Bahn in partnership with Deutsche Bank and AT&T. Mannesmann had also acquired interests in
Cegetel in France and Tele. Ring in Austria. In 1999, Mannesmann acquired majority stakes in
Italian operators Omnitel and Infostrada. During the period October 1999, Mannesmann paid
Hutchison Whampoa £20 billion for 44.82% stake in Orange. With this acquisition Mannesmann
became Europe’s largest mobile network operator.
Merger Highlights
The public bid announcement of the takeover was on December 20, 1999. The formal offer was
accepted by 98.62% of Mannesmann’s shareholders at the closing date on March 27, 2000. The
transaction was effected by an all-share offer of Vodafone AirTouch shares in exchange for
Mannesmann shares. Under the terms of the revised deal valued at £224 billion, Mannesmann
shareholders got 49.5% of the merged company with 58.96 shares of Vodafone AirTouch for each
Mannesmann share. The revised deal valued Mannesmann shares at 350.5 euros each. The key
terms of the merger were as follows: 1. (de Donald, 2009) A revised offer of 58.9646 Vodafone
AirTouch shares for each Mannesmann share. 2. (Higson, n.d.) The revised offer valued each
Mannesmann share at € 350.5 and Mannesmann’s share capital at € 181.4 billion, based on
Vodafone AirTouch’s closing price of 368.5 pence on February 3, 2000. 3. (Streamingmedia,
2000) Dr. Klaus Esser joined the Vodafone AirTouch Board as an executive director. Four
members of Mannesmann’s supervisory board joined the Board of Vodafone AirTouch. Goldman
Sachs was the principle advisor for Vodafone AirTouch, while Morgan Stanley and Merrill Lynch
were advisors for Mannesmann.
Regulatory Issues
The European Commission approved the merger on the condition that all shareholdings in Orange
need to be divested. The commission also stipulated that the entire share capital of any subsidiary
or future holding company of Mannesmann or the divestor through which such participations are
also required to be divested. As a result of the merger, Mannesmann was delisted from Frankfurt’s
Xetra Dax share index.
Post-merger Integration
The integration of culture and skills of Mannesmann was one of Vodafone AirTouch’s biggest
challenges. Vodafone had committed to the principle of codetermination in Mannesmann’s
governance structure. An integration committee was established with representatives from both
Vodafone AirTouch and Mannesmann. Mannesmann had 5 representatives (1 executive and 4
nonexecutives) out of a total of 19 on the new Vodafone AirTouch Board. Dr. Klaus Esser, the
chief at Mannesmann, joined the Board of Vodafone AirTouch as an executive director and
continued to be the CEO of Mannesmann. Klaus Esser had the additional responsibility of the
separation of the industrial businesses. On the successful separation of the industrial businesses,
Dr. Esser gave up his executive responsibilities at Mannesmann and became the nonexecutive
deputy chairman of Vodafone AirTouch.
Acquisitions by Vodafone AirTouch
Vodafone AirTouch continued to develop Mannesmann’s wireless Internet business within the
combined group. Another strategic objective of the combined group was to integrate and develop
Mannesmann’s tele-commerce activities. Vodafone AirTouch decided to retain all current ongoing
existing facilities and activities in the Dusseldorf area. In addition, the emphasis was on expanding
data products and services at Dusseldorf area. Vodafone AirTouch also focused on the
repositioning of Mannesmann’s tube businesses. Mannesmann agreed to remove the 5% voting
restriction in its articles of association.
Merger Analysis
The period of merger was in the midst of dot.com euphoria and Internet hype. The strategic focus
of Mannesmann had been for the reorientation of the company from industrial firm to service and
telecommunication provider. On February 4, 2000, the Mannesmann supervisor board approved
the takeover. The board also authorized millions of euros in bonuses for Mannesmann executives.
The CEO of Mannesmann received 30 million euros which in fact triggered breach of trust
allegations and years of legal wrangling which ended in multimillion euro settlement. The
2.5 months of corporate takeover battle saw Vodafone and Mannesmann spending half a billion
euros on legal fees and publicity campaign alone. It is said that when all formalities were complete,
Vodafone paid 190 billion euros for Mannesmann which made the deal the most expensive hostile
takeover in the history of corporate world. However, in reality Vodafone plunged into massive
losses after one-off costs of more than £23.5 billion connected to the Mannesmann deal.
The sales figures increased by 134% in the year 2000 to account for the merger. The sales increased
by 91% and 52%, respectively, in the year 2000 and 2001, respectively. In 2002 the sales increased
by 33% and by 10% in the year 2003. The stock return amounted to 52% in the year 2000. The
stock returns declined by 44% and 32% in the year 2001 and 2002, respectively. The 5-year post-
merger (2001– 2005) average sales growth was 33%. The 5-year average growth rate in cash flow
in the post-merger period (2001–2005) was approximately 39%. During the period 1996–1999,
Vodafone’s gross, operating, and net margins, return on assets, and return on equity were higher
than its competitors. During the period 1996–2000, Vodafone was less liquid on an average basis
compared to its competitors. This was since they maintained lower inventory levels as a percentage
of working capital. During the period 1997–2000, the debt ratios of Vodafone were above the
industry averages. During the merger period, Vodafone was in a superior financial position
compared to its competitors. After Mannesmann acquisition, Vodafone doubled in size.