This article has been written by Nikunj Arora, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

Introduction

It has been 21 years and to date, the Vodafone-Mannesmann Merger remains the largest merger so far. In 1999, British multinational telecommunication company ‘Vodafone Air Touch PLC’ of the Vodafone Group (“Vodafone”) decided to buy the German telecommunications giant ‘Mannesmann AG’ (“Mannesmann”), and offered the proposal to the company for the same. But, the German company refused Vodafone’s proposal because at that time the Germans were not open to allow foreigners to own such large businesses. Vodafone again offered two more proposals to Mannesmann after it had rejected the initial proposal, but the German company was not interested in that either. 

The long-running efforts by Vodafone finally paid off in February 2000, when the company came back with a 5% increase to the offer and Mannesmann accepted its offer for $180 billion acquisition and the combined entity had a market capitalization of $350 billion, making the takeover largest Merger & Acquisition (“M&A”) deal in the history. On February 3, 2000, the offer was accepted by Mannesmann’s board of directors and each shareholder received 58.96 Vodafone shares which were approximately equal to a 49.5% stake in the new company. 

At that time, it was decided by Mannesmann’s chairman, Mr Klaus Esser, and Vodafone chief executive, Mr Chris Ghent that Vodafone and Mannesmann would hold 50.5% and 49.5% respectively, of the merged company. Due to this merger, Vodafone gained huge access into the European market and it marked the first time a foreign company has succeeded with a hostile takeover of a large German company 

As the mobile market gained momentum across the globe and growth was at its peak, the larger value merger was accepted to reshape the global telecommunication’s landscape. But, the deal was a failure and Vodafone was forced to write off billions of dollars in the following years. 

Background 

Vodafone

In 1984, Vodafone was held as the telecom subsidiary of Racal Electronics and in 1998, Racal Telecom was sold to the public on the London and New York Stock Exchanges and renamed as Vodafone Group in 1999. Today, Vodafone is a leading telecommunications company in Europe and Africa. On March 20, 2017, Idea, India’s third-largest telecommunications company announced a merger with Vodafone, to which it is now renamed as Vodafone Idea.

Mannesmann

Mannesmann was a Germany industrial conglomerate that was originally established as a manufacturer of steel pipes. The name Mannesmann ceased to exist after Vodafone purchased the company in 2000. 

The overview 

In May 1999, Mr Klaus Esser was offered the senior-most job at Mannesmann and he had been pushing for a reorientation of the company from an industrial firm to a service and telecommunication provider because at that time the company was holding a controlling stake in D2, Germany’s second-largest cellular network. 

In October 1999, Esser decided to buy Orange, a British mobile phone operator and then on November 14th, 1999, Vodafone gave its first offer which amounted to be approximately 100 billion Euros, to which Esser rejected the said offer and considered it inadequate. The second offer by Mr Chris Ghent amounted to be approximately 125 billion Euros, to which several German analysts said that it was a hostile takeover attempt. Chris Ghent tried to avoid such statements and said that it was only an attempt for an acquisition based on a mutual agreement. 

After rejecting the offers and refusing every opportunity to negotiate, Vodafone saw Mannesmann’s shareholders as its last resort and approached them directly. Esser in London spoke to various journalists about the deal and said that the combined Mannesmann D2/Orange transaction was predicted to grow by 30% each year through 2003 and made it clear that the shareholders of the company shall stand by his team and rejected Vodafone’s offer. 

Now, Esser approached French media and telecommunications giant Vivendi and internet provider AOL Europe because Mannesmann was planning to enhance their strategy which would involve landlines, cellular network and the internet and at the same time Vodafone was pursuing Vivendi as well. Then, on January 30, 2000, the British and French companies announced that they would form a joint company when Vodafone acquires 50% of the shares in Mannesmann. Mannesmann’s largest shareholder, Hutchison Whampoa, Hong-Kong based company, urged Esser to accept the offer proposed by Vodafone.

The merger

The chronological developments of the merger are as follows:

Mannesmann’s deal with Orange PLC:

• On October 20, 1999, Mannesmann approached for a deal to Orange, a French multinational telecommunications corporation. 
• The acquisition of Orange by Mannesmann was a difficult situation for Vodafone as the company was considered to be a minority stakeholder in the markets outside the United Kingdom (“UK”) because Mannesmann and Vodafone were partners in various countries including Germany and Italy. 
• Vodafone’s takeover of Mannesmann was initially triggered by Mannesmann’s surprise agreement to acquire orange.

Vodafone’s chase for Mannesmann

• On October 22, 1999, Vodafone sought advice from the investment banks Goldman Sachs and Warburg Dillon regarding investment opportunities in Mannesmann.

• The deal between Mannesmann and Orange could not be broken down, so Vodafone was left with the only chance but to bid for Mannesmann. 

• On November 14, 1999, Vodafone approached for a friendly offer to pay 43.7 VOD shares for each share of Mannesmann, thereby, valuing Mannesmann stock at $243.36 a share.

• Mannesmann rejected the above offer and made it clear that it was not ready for the deal.

• On 19 November 1999, Vodafone announced its second offer to Mannesmann of 53.7 shares to 1, making the deal valued at $276.66 a share, or a 20% premium for the day.

• In addition to the above offer, Vodafone made it clear and provide the details that it would spin-off the non-telecom assets of Mannesmann and that it would deprive Orange to get regulatory approval.

• After analysing Mannesmann’s stock performance during the Orange transaction, the markets reacted positively to the above details provided by Vodafone and stated that both Vodafone and Mannesmann showed positive gains. 

• At this point, Mannesmann was clear that the deal had been turned hostile and it was a hostile takeover.

• Mannesmann made it clear that it was a superior company and it should be made worth at least $417.67 (€350 per share) a share and stated that Vodafone was not the right company to merge with. Mannesmann tried every way to ignore this merger.

• Then, Mannesmann approached Vivendi, but on January 30, 1999, there was an announcement of a joint mobile/internet portal by Vodafone and Vivendi and as a part of the deal Vodafone offered Vivendi half of Mannesmann’s 15% share of the French fixed-line firm Cegetel. 
• The markets stated that the Vodafone-Vivendi deal was quite positive and the Vodafone-Mannesmann deal would be a better way to capitalise on new wireless opportunities as compared to the Mannesmann-Orange deal.

Note

Spin-off: A spin-off is the process where a company is creating an independent company by selling or distributing new shares of business. 

Hostile takeover: A hostile takeover is a situation where the Acquirer Company or group of investors acquires the target company/public traded company against the wishes of such company. 

The final deal

• After a 3-month long battle, on February 3, 2000, Mannesmann’s shareholders accepted Vodafone’s offer. 
• Thus, under the terms of the revised deal, the deal was valued at a $180.95(£224) billion all-share deal.
• The shareholders of Mannesmann got 49.5% of the merged company with 58.96 shares of the Vodafone for each Mannesmann share.
• The revised offer valued Mannesmann shares at 350.5 Euros each and the share capital of the company was valued at € 181.4 billion, which was based on Vodafone’s closing price on February 3, 2000.
• Esser was joined as an executive director at Vodafone and other four members of the Mannesmann board joined the board of Vodafone. 
• The principal financial advisor of Vodafone was Goldman Sachs which is a multinational investment bank.
• While, Morgan Stanley and Merrill Lynch, leading investment banks acted as advisors for Mannesmann. 

Results of the merger

Vodafone paid about € 98 billion for the assets valued between € 110 billion and € 75 billion after divesting Orange and the non-telecom assets of Mannesmann which implied that Vodafone put the offer within the middle of the range. Now, the following are the results of the largest merger ever in history:

Short term effects

• There was an immediate drop in Vodafone’s stock after the transaction due to considerable dilution and the benefits from the synergies would not present themselves for some time.
• On the operations side, Vodafone misjudged the steps of integrating the companies in Germany and Italy.
• Vodafone marketed itself as a global company that commanded a premium over Telecom Italia Market (“TIM”) and charged higher prices. Therefore, the rebranding was done in phases.
• In 2010, Vodafone Italia ranked 4th in size in Europe after T-Mobile Germany, TIM, and Vodafone Germany. 

Long term effects

• Vodafone dominated as a global mobile player, having only recently surpassed in total subscribers by China Mobile whose subscribers were all domestic.
• There was a Telecom crash which was a stock market crash in 2002 after the bursting of the dot-com bubble which was burst out in the late 1990s during which many internet companies were failed and shut down. 
• By the year 2005, Vodafone stock was nearly $2.78 and the market equity value of the company got dropped to less than € 100 billion. 
• In 2010, the market equity value of Vodafone stood at less than € 90 billion which was considerably less than € 154 billion in 1999. However, Vodafone still ensured that it was a globally dominant player. 
• Vodafone had to record significant losses amounting to $41 billion for the fiscal year 2006.
• The company lost another $10 billion in the fiscal year that ended March 2007 and at the end of 2009, the company’s stock remained 37% below its peak level before the merger.
• On the other hand, the merger helped Vodafone becoming the world’s largest mobile carrier at the time and this position is usually maintained through various acquisitions and joint ventures around the globe. 

Issues(S)/Challenges

Legal compliance

• As per Article 4 of Council Regulations (EEC) No 4064/89, the merging parties are required to notify the European Commission (“Commission”). Thus, on January 14, 2000, the Commission received notification under Article 4 of Council Regulations by which Vodafone was acquiring sole control over Mannesmann within the meaning of Article 3(1) (b) of the Regulation.
• The Commission on February 22, 2000, declared the notification as incomplete, to which Vodafone, the notifying party, completed the notification on February 29, 2000. The Commission approved the notification and stated that it was falling within the scope of Council Regulations (EEC) No 4064/89 and was compatible with the European Economic Area Agreement (“EEA Agreement”). 
• Vodafone had to submit undertakings in the form of a proposal following the terms of Article 6(2) of European Commission Merger Control (“ECMR”), which allowed third parties access to its network. The order can be accessed here. 

Reaction of Mannesmann employee’s representatives

• Just after the public announcement of the takeover plans by the companies, the representatives from the German Metal Workers’ Union and the Mannesmann group works council did not approve the deal and immediately rejected Vodafone’s bid.
• On November 18, 1999, the Mannesmann group works council organised various short-term strikes in different Mannesmann companies and protested against the deal.
• The President of the said works council in an interview made a statement and declared that the workforce of Mannesmann would do anything to prevent such takeover. 
• On November 23, 1999, the workforce of Mannesmann held a meeting under the slogan “against hostile takeover”. 

The support of the US trade unions

• The American Trade Union Confederation AFL-CIO controlled approximately 13% of Mannesmann’s shares and influenced the company through bargained benefit funds.

• On November 22, 1999, AFL-CIO unexpectedly supported the Mannesmann’s employee’s representatives and stated that the investment mergers of the fund had been asked to oppose the said hostile takeover.
• The American trade union believed that the managers of the worker capital had responsibility for the bargained funds in the long-term interest of the beneficiaries. 

Political debates

• The hostile takeover of the Mannesmann by Vodafone initiated many strikes and protest by the Mannesmann employees and American trade unions. Apart from these protests, the takeover also leads to various political debates in Germany and there were criticisms from the German politicians.
• Mr Gerhard Schroder, the Chancellor, stated in a statement that such a hostile takeover could ‘damage the corporate culture’ and ‘underestimates the virtue of co-determination.
• There were various accusations on Vodafone, such as Mr Wolfgang Clement, the Social Democratic Prime Minister of the Federal State of North-Rhine Westphalia accused Vodafone that the company was playing monopoly with Mannesmann against the interests of the workforce, the work councillors, the management and the supervisory board. 

What went wrong?

The takeover was decided when Mr Esser’s strategy of ‘White Knight’ failed. A White Knight is a defensive strategy against a hostile takeover. The agreement between Vodafone and Mannesmann stated various promises regarding the continuation of the integrated telecommunications strategy at Mannesmann. The agreement stated the following:

• The subsidiaries of Mannesmann Arcor and Infostrada were given assurance by Vodafone that would not be sold. 

• The Initial Public Offering (“IPO”) of the Atecs engineering and the automotive businesses would be going forward as planned without the divisions being broken.

• No large-scale dismissals of the employees, though there was no formal guarantee.
• Shareholders of Mannesmann expected to realise gains through the takeover battle as a result of increase offer to the said shareholders.

The above promises in the said agreement were not kept and Vodafone did the following:

• Vodafone generated 14 billion Euros through selling off divisions of Mannesmann.
• Sold Orange to France Telecom and traditional tubes business to Salzgitter, which is globally networked in the flat steel/heavy plates, etc for 1 Euro.
• The subsidiaries of Mannesmann including Atecs engineering was sold to Seimens AG which was promised to undergo an IPO.
• Out of the 14,778 telecom workers at Mannesmann, Vodafone employed only 10,124 workers in Germany in 2006.

Other consequences: 

• There was a dispute on the amount of compensation given to Esser as he had lost his office.
• Finally, Esser got 30 million Euros on the account of his impeachment from his position as CEO. But, this amount could be gained by him anyway as the result of the rise in the share price. 
• On September 3, 2003, a District Court of Du¨sseldorf put Esser and the supervisory board on a trial for breach of fiduciary duty, although the court held the accused not guilty. 
• The biggest challenge of the companies was to adapt to the culture of the workforce
• It was argued by several analysts that the case of Vodafone-Mannesmann should not be interpreted as highlighting the emergence of a market for corporate control in Germany because the institutional barriers to hostile takeovers were insufficient. 

•  By the year 2005, Vodafone stock was nearly $2.78 and the market equity value of the company got dropped to less than € 100 billion. In 2010, the market equity value of Vodafone stood at less than € 90 billion which was considerably less than € 154 billion in 1999. The company accounted for significant losses in the fiscal year 2006.

Conclusion 

“Mannesmann, unlike many other companies, was not taken over because of management weakness but because of its strength,”. On February 6, 2008, CIO Magazine analysed and stated its ‘Top 10 M&A deals of all time’ in which the Vodafone-Mannesmann merger was at the top. The magazine analysed the consequences of the deal and presented the same. 

The Vodafone-Mannesmann deal was named as the biggest cross-border bid of all time. The deal had various impacts on the European economy because, after the takeover, the European companies became the takeover candidates. The threat of political interference in M&A activities fell tremendously. The victory of Vodafone in acquiring a big giant like Mannesmann implied that a big company headquartered in Europe could buy a German company against its will by a foreign competitor. The demand for currency rose because Vodafone needed a large amount of debt to finance the acquisition, thus, the traders preferred the economic activity of M&A rather than going to the Central Bank.

This merger made Vodafone the biggest dominant global player in the telecom industry. While the deal got many benefits associated with it, it did had drawbacks such as cultural differences, Vodafone not living up to the promises as per the agreement which led to a fall in the valuation of Vodafone and there was a huge difference in the valuations of the company before and after the acquisition. Therefore, though this deal was termed as the biggest cross-border merger in history, it lacked some aspects making us question whether the deal was positive or not? 

References

1. https://www.dw.com/en/mannesmann-the-mother-of-all-takeovers/a-5206028.
2. https://link.springer.com/chapter/10.1007/978-3-030-02363-8_2#Sec3.
3. https://www.slideshare.net/ozuolmez/vodafone-mannesmann-case.
4. https://www.eurofound.europa.eu/fr/publications/article/1999/vodafones-hostile-takeover-bid-for-mannesmann-highlights-debate-on-the-german-capitalist-model.
5. https://www.studeersnel.nl/nl/document/universiteit-utrecht/mergers-acquisitions-and-restructuring/samenvattingen/vodafone-case/4307525/view.
6. https://www.independent.co.uk/news/business/goldman-sachs-and-warburg-dillon-reed-in-line-for-vodafone-bonanza-1127509.html.
7. https://www.wsj.com/articles/SB949581016407171705.
8. https://ec.europa.eu/competition/mergers/cases/decisions/m1795_en.pdf.
9. https://www.mpifg.de/people/mh/paper/HoepnerJackson%202006%20EMR%20-%20Revisiting%20Mannesmann.pdf

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