Vodafone AirTouch’s bid for Mannesmann

Mannesman & Vodaphone

•  Jan 99: rumor that VD wants to buy MS – Esser (MS) calls Gent (MS); Gent denies

•  Feb-oct: talks about cooperation •  Oct 19: rumors that MS wants to buy Orange

– Gent calls Esser: a more « constructive » route? – MS-VD talks cancelled – 0.0965 MS share + 6.4GBP / orange share

•  Takeover premium = 17%

– MS share price drops from 154€ to 141.3€

Mannesman & Vodaphone

•  Oct 22: Gent contacts Wargubrg & GS •  Nov 14: Gent makes offer to Esser

– 43.7 VD shares per MS share (à 202€) •  9% premium

– Esser finds it « inadequate » / fights it in court •  Nov 19: Gent makes public offer

– 53.7 VD share per MS share (à 232€) •  25% premium!

– MS board advises sh. to reject the offer •  Says true price = 350€

the telecom business in 99

•  mobile only vs triple play •  voice then data (3g, gprs, edge) •  GSM norm in europe / no norm in the US •  fast growth / low penetration rate

what are the economic forces conducive to consolidation?

Mannesmann’s reasons for acquiring Orange

•  Gain presence in the UK •  Gain presence in mobile internet •  Synergies

–  Cost savings –  Revenue increases due to bigger size –  Capex

Would merging with Vodafone be a better idea?

•  Complementary geographical presences –  Mannesmann: Continental Europe –  Vodafone: UK, US, Japan

•  Complementary strategies –  Mannesmann: Fixed telephone, internet –  Vodafone: Mobile

•  Size •  Existing partnerships

–  France, Italy

Did Mannesmann overpay for Orange?

Risk arb

•  What is the probability that the deal goes through, as estimated by the market on dec 17? – Assume that, if failure, MS and VD prices go

back to their oct 21 levels – Assume deal completed in 3 month – Take risk free rate = 5.5%

Estimating synergies •  Using goldman sachs’ projections (ex 10)

– Assume WACC = 7.6%

Surplus sharing

•  Take Goldman’s valuations of VD and MS •  What fraction of synergies do VD and MS

shareholders get?

What is wrong with Goldman’s valuation?

Valuing target & acquiror

•  Same estimates with a 13.5% WACC –  PV of synergies €14.8bn –  Value of Vodafone €48bn –  Value of Mannesmann €52bn

•  What fraction of synergies do VD’s shareholders get?

Surplus sharing

Why did GS choose such a ridiculously low WACC?

Takeover defenses

•  Why could the deal fail?

•  Why is Esser fighting so hard?

Mannesmann, Dec. 1999: “It has a lot planned”

Vodafone’s reply: “Every Mann knows: If you want to grow, you need a good mother”

Mannesmann’s reply: “A hostile mother is the worst thing in the world”

•  Esser’s last defense –  Call a white knight:

Vivendi Universal

The conclusion

•  Jan. 2000: –  Vivendi announces joint-venture with Vodafone in

the Internet business •  Feb. 2000:

–  New offer by Vodafone: Mannesmann is offered 49.5% of the new company

–  Mannesmann accepts

The aftermath •  Orange is sold to France Telecom •  Other Mannesmann businesses are sold •  Esser accuses J.M. Messier of being “indecent

and dishonorable” ⇒ Messier sues him

•  Esser accused of receiving $30m for accepting the deal ⇒  Sued by shareholders

•  Gent criticized for receiving $15m for completing the deal

Stock prices