I.

Mannesmann’s acquisition of Orange

A Back grand introduction

Mannesmann, formed in 1890 as a producer of seamless steel tubes, entered the

telecommunications industry in 1990 by establishing and operating D2, the first private mobile
phone network in Germany, and then it quickly became one of Europe’s largest telecommunications
companies. By 1999, it had gained a leading position in four of the largest European mobile markets.

Orange, formed in 1994, was the third largest wireless operator in the UK with a market share of
18%. It was the last major operator in the UK market which was not part of an international
telecommunications group.

B Rationales behind

Mannesmann acquired Orange on October 20, 1999. The agreement specified that Mannesmann
would pay 6.4 in cash and 0.0965 newly issued Mannesmann shares for every orange share.

In terms of strategic rationales, firstly, to enter the UK market, the best way for Mannesmann is to
acquire a company that has big market share. The customer is relatively hard to attract to a new
operator. If the M enters the UK and develops its own customer, it has to attract the customer from
other competitor, which means it has to provide low cost but better quality service. It is a painful
process. From the wireless Players in the UK market, we see that Orange has the No.3 market share,
which is 18%. This market share could help Mannesmann to directly enter the UK market. If it
acquires orange, it could use the orange customer and fix assets, to further invest and develop new
customer, which is far more easier than grow own customer. Secondly, the further strategic concern
may be that the Mannesmann owns the market share of Germany, which makes it a goal for
Vodafone. If Mannesmann acquires Orange, it is a good way to develop itself. This acquisition also
provided Mannesmann a greater bargaining power when negotiate with Vodafone.

In terms of economic rationales, firstly, Orange is expected to grow rapidly in the future.
Mannesmann was attracted by Orange’s spectacular growth- it had a CAGR of 115% over 1994-1998.
Secondly, this acquisition can create a great synergy. In the telecommunication industry, the
operator needs to invest in fixed assets heavily. It could be a big cost to establish own network. This
is a “save in cost” synergy.

C Valuation of Orange

Did Mannesmann overpay for Orange?

Mannesmann paid 6.4 Pounds in cash and 0.0965 newly issued Mannesmann shares for every
Orange share. This valued Orange at 20 Pounds (30 Euros) billion, a premium of 17% over the then-
prevailing value of Orange. On October 18, prior to its announcement of the Orange acquisition,
Mannesmann’s share price was at 154.1 Euros, but by October 22, it had dropped 8% to a low of
141.3 Euros.

From Exhibit 3, we know European Average EV/EBITDA is 21.9, and European Median EV/EBITDA is
21. However, EV/EBITDA of Orange is 77.5, which use the acquired price to estimate the enterprise
value.

Furthermore, we think in a communication industry, a company’s value is largely defined by the

equity subscribers.
From Exhibit 8, which describes the European Mobile Transactions in 1999, we found that the
EV/Sub of Mannesmann – Orange is much higher than others.

From the market perspective, 17% of premium and a decrease in the price of Mannesmann’s stock
of 8% both shows that this acquisition might be an overpaid one.

Although, based on the strategy, there are huge growth of Orange itself and the synergies. We
cannot say that the synergies are big enough to cover the premium. Therefore, based on the analysis
above, we think Mannesmann overpaid of Orange.

Although some time later, Mannesmann stock price kept increasing, we think it is because that
Vodafone want to acquire Mannesmann. Vodafone want to pay a 20% premium to acquire
Mannesmann.

II. Vodafone’s proposal for the acquisition of Mannesmann

A Rationales behind

It is costly to do a hostile acquisition, and Vodafone has to face many obstacles even from the
government. However, Vodafone still insists on acquiring Mannesmann.

Firstly, the acquisition could help expand the area of business. Mannesmann has the business in the
telecommunication equipment, internet service, hydraulic, material handling, plastics technology
and steel tubes. 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, the Vodafone could greatly reduce the cost the call from German to UK as they will be in
the same system, while it could attract more users based on this kind of advantage. Besides, the
merge 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”.

B The Stock Swap Proposal

Vodafone Air Touch proposed that each Mannesmann share would receive 53.7 Vodafone AirTouch
shares, so that in aggregate Mannesmann shareholders would own 47.2% of the equity of the new
combined firm. This is a stock swap acquisition.

Describe the stock swap. As of December 17, what was the market value of Mannesmann’s
contribution to the combined firm? As a Mannesmann shareholder, would you accept the current
offer? As a Vodafone shareholder, would you support the proposed transaction?

Vodafone issued 27.8 billion new Vodafone AirTouch shares, it will give 47.2% of the combined
company to Mannesmann shareholders.

The stock swap is one Mannesmann share could be exchanged to 53.7 new issued Vodafone
shares. It valued Mannesmann at around 232 a share, the Vodafone share is the market price which
is 4.32. No cash involved in the stock swap.

On December 17, the market value of Mannesmann ‘s contribution is 121billion while the
Vodafone Air Touch is about 154 Billion. The propose transaction is to give 47.2% of the combined
company to Mannesmann, the situation is Mannesmann only worth 44%. The proposed transaction
is over estimate and should not have been supported.
C Estimation of Synergies

On December 17, 1999, based on real stock prices of the two firms, it seemed that the market
estimated the probability of Vodafone AirTouch successfully acquiring Mannesmann at around 0.6.
Under the assumption that if the bid fails both firms would trade at prices prevailing on Oct. 21,
1999, what is the market’s estimate of implied synergies from the deal?

The market’s estimate of the implied synergy is

l If acquisition is completed : 67055.44 million

l 60% probability of success : 40233.26 million

l If acquisition fails :0

What is the present value of the expected synergies (in pounds) as shown in Exhibit 10 as of March
2000? (You may want to assume that the synergies related to the revenues and costs would grow at
4% annually past 2006, but savings from capital expenditures would not extend beyond 2006, and
that the merger will not affect the firm’s level of working capital). Use the average exchange rate of
1 pound = 1.5789 Euro to convert pound synergies into Euros.

l The expected total synergy in Pounds is £18,942,.86 million

l The expected total synergy in Euros is € 29,929.72 million

D Discount Rate

UK equities returned 7.7% (in pounds) over the UK risk-free rate for the period 1919 – 1993 and
6.8% over the UK risk-free rate for the period 1970-1996. How might this observation affect your
decision?

The revised WACC is approximately 12.68%, which lowers the estimated synergy to € 13,406.61from
€ 18,942.86. However, this should not change the merging decision as the merge has more strategic
significance than monetary meaning

III. Stakeholders Analysis

A Vodafone: Hurdles to face

Obviously, the acquisition of Mannesmann proposed by Vodafone AirTouch was far from smooth
and easy. It once met a series of hurdles all along the process.

The most direct and crucial obstacles were definitely the confrontations from inside Mannesmann,
both of management level and staff level. For management of Mannesmann, they were not fond of
such proposal for mainly three reasons: Firstly, they have already taken steps to combine with
Orange, which was a better alternative for Mannesmann by offering more autonomies, higher
growth rate and exact what Mannesmann needed in its long-run strategy concerning regional
expansion and brand establishment; Secondly, the hostile acquisition initiated by Vodafone would
push Mannesmann into a rather passive position with the potential risk of losing control of its own
company, which could be very unbearable for Mannesmann, especially at the stage of implementing
acquisition with ideal target for further promising development. Lastly, since German CEOs usually
cannot gain the huge benefit of ‘Golden Parachutes’, a contract provides benefits to a top executive
in the event that a takeover of the company resulted in his losing his job with a package of severance
pay, stock options or a bonus, as many of their US and UK peers do, the CEO of Mannesmann, Esser,
was not motivated to accept the acquisition proposal, since the offer would actually made him
‘flying without no parachute’.

Staff in Mannesmann would also oppose to the acquisition, since large-scale of dismissals were often
accompanied with a hostile acquisition, or at least staff had to make incredible efforts to understand
and adapt new management team, during which conflicts and misunderstanding were unavoidable.
Moreover, the opposition of staff really accounted under German corporate governance system
while that could not be the case under its Anglo-Saxon counterparts. And we will further discuss this
point in later part of corporate government system comparisons.

Apart from the inside factors of Mannesmann, external factors of German corporate governance and
unfavorable local environment could also be the hurdles to the acquisition. First of all, the
differences of German corporate governance system and its Anglo-Saxon counterparts in
governance goals, determination modes, supervisory boards control were all big obstacle to the final
success of the acquisition; and we will give detail discussion of each of these differences in later
parts. Secondly, the German locals held very negative attitudes towards hostile acquisition,
especially this ever largest hostile acquisition proposed by Vodafone. Many German officials, even
Gerhard Schroeder, the prime minister of Germany, opposed to this case by clearly stating that ‘the
acquisition would seriously break the cultures of German companies, and Mannesmann finally can’t
be a British company.’

In addition, the acquisition also faced pressures from its own sides. Some shareholders of Vodafone
highly doubted the reasonableness of such acquisition, given the unbelievable high price offered by
the company. It was said that Vodafone had to take 12.3 billion dollars annually to write off the
liabilities of this acquisition, which definitely influence the financial performance of Vodafone in long
run. Plus, it is commonly believed that the final price of 20.5 billion dollars was far beyond the true
value of Mannesmann, and made shareholders suspicious of the significance of spending so much
money on this acquisition.

B Support VS. Opponent

When jumping out of the case to consider its supporter and opponent, We apply the benefit-
oriented measures to answer this question.

Undoubtedly, the international telephone fees, especially the roaming fee, could be greatly reduced
as a result of the joints of Vodafone and Mannesmann. Hence, cell phone users, except the German
users with strong sense of patriotism, could be the supporters of this proposal based on the
increased customer surplus. Additionally, the shareholders of Mannesmann cannot stand still in face
of such an attractive price that were as twice as the price of its previous acquisition. They were
actually the most important force to make the acquisition possible regardless of the various hurdles
mentioned above.

As the other side of one coin, price reduction badly hurt the competitors of Vodafone while
benefited the customers. The ever lowest prices would corner them since they were unable to
attract customer back by offering competitive lower price with similar big volume network of the
acquisition of Vodafone and Mannesmann. Hence, they should be the opponents of the joints. And
exactly for this reason, the European Committee was closely supervising each stage of this
acquisition in the name of Anti-trust. Moreover, some other parties, such as Mannesmann insiders
and local external factors, as analyzed in ‘hurdles’, can also be categorized opponents above.

C CEO’s Perspective: Gent VS. Esser

As we studied, Gent had at least four reasons for his ambitious acquisition plan: Firstly, it could help
to quickly develop Vodafone’s business in various markets other than mobile telecommunications.
Vodafone once set its focus exclusively on mobile telecommunication and enjoyed a high
profitability by then. However, what Mannesmann currently owned could offer Vodafone a great
opportunity to seek for bigger success in multiple business in related or even unrelated areas, such
as telecommunication equipment, internet service provider, hydraulics, materials handling, plastics
technology and steel tubes. Since Mannesmann had already won leading positions in such areas,
Vodafone could avoid the entrance risk and just simply continue the success by taking advantage of
the accumulated resources and experiences of Mannesmann in other industries. Secondly, the
acquisition plans was also a response, or revenge, to Mannesmann’s purchase of orange. Since the
sudden decision of purchase broke the promise of Vodafone and Mannesmann about ‘not invade
counterpart’s local market, Vodafone had to response to Mannesmann’s expansion in UK. Hence,
acquisition of Mannesmann became the most direct and powerful measures. Thirdly, the
combinations of Vodafone and Mannesmann could generate considerable synergies. By revenue
enhancement, cost savings, and savings on capital expenditure, the synergy on voice business was
estimated up to $500 million in 2003 and $600 million in 2004. Moreover, the synergy of data
business was hard to be predicted but certainly cannot be avoided. Fourthly, the acquisition of
Mannesmann, a top telecommunication operator in Germany, perfectly met the need of expansion
strategy of Vodafone in European continent.

By contrast, Mannesmann was trying hard to fight back for the other side of similar reasons. First of
all, it preferred combination with Orange other than Vodafone, as former choice was not only
enjoying a higher CAGR but also a perfect move to enter UK market. Secondly, the partnership with
Vodafone was not inconsistent with Mannesmann’s strategy in long run. Specifically, Mannesmann
was considering being a single supplier of fixed lines, wireless, and internet activities as integrated
products while Vodafone only focused on mobile telecommunications which could not offer any
resources for Mannesmann’s further strategic development. Finally, Mannesmann absolutely took
the passive and weak role in the M&A case with Vodafone, it thus would lose overall control in
further operation and development.

IV. Business Environment

A Hostile Takeovers and Alternatives

The hostile takeovers feature at the confrontation of acquirers and the targets during the acquisition
negotiation process. Such confrontations made hostile takeovers one of the most important external
corporate governance mechanisms in modern business world.

The confrontations between acquirers and target takeovers mutually give positive effects to
shareholder’s interests and the value of the target companies, regardless of the final result of the
acquisition. On one hand, acquirers have to pay many premiums to the shareholders of the target to
make the deal. And high premiums signify that the acquirers are confident to make the target
company to be at least as profitable as the premiums they pay. Once the deal is made, the target
company could probably take a step forward by the reforms and restructures of new management
board. On the other hand, the only way for target companies to take down the offer is to prove to its
shareholders that the company could be even better with current management team. In order to
demonstrate this point, management board is highly motivated to carry out a series of reforms,
innovations and promising future plans to make the company excel. Such governance actions are
considered as ‘anti-acquisition’ strategies that are of great significance of company’s future
development. Hence, regardless of the final result of a hostile acquisition, the target company could
have overall improvement by a more capable management team from either side of the acquirer or
the target company.

However, there are also many other effective approaches of external corporate governance
mechanism, such as product competition, manager competition, legal and regulation system, and
ethical considerations.

Both of the product and manager competitions are market oriented. Product competition is simply
to take corporate governance in order to develop products meet the needs of dynamic market in
long run, otherwise the company would be finally eliminated by the market. Manager competition,
on the other hand, regards to the motivations to professional managers to implementing better
corporate governance. Personally speaking, managers are motivated to take efforts in corporate
governance to make better career records themselves. Undoubtedly, brilliant career records reflect
your professional abilities and thus mean more opportunities for promotions within the company as
well as other potential attractive offers from other notable companies.

Legal and regulation systems consist of the supervision of law protecting the interests of
shareholders, especially the minority interests of shareholders, accounting policies and auditing
services. These external mechanisms guarantee the basic governance level of companies by keep
them from frauds and corruptions.

Ethical considerations represent the corporate governance in a higher level of human kindness,
which usually reflected in Corporate Social Responsibilities (CSR), social integrity and other non-
benefit sponsorships performed by the company.

B Differences in Corporate Governance Systems

As mentioned above, the differences between German corporate governance system and the Anglo-
saxon system made the majorities of the hurdles of the acquisition.

For Anglo-saxon system, the final goal for corporate finance is to maximize the value of
shareholders; and managers usually have incentive to maximize the shareholders’ value since a large
part of their compensation is stock or stock options. Moreover, the board of directors is consisted of
executive and non-executives, who were usually taken by managers or external directors. Finally, the
voting rights are based on the amount of owned shares, one vote for one share. In other words, the
shares one owns, the more influential he is to the final result.

For German system, the final goal for corporate finance is to maximize the value of all ‘stakeholders’,
and the manager seldom receive any stock related compensations. And the German Law divides the
board of directors of companies into two independent functions of management boards and
supervisory boards. The former function is like management team in its Anglo-saxon counterpart,
however, the supervisory boards consisted of twenty members, among which seven seats were
selected from work force. Hence, Gent had to take staff issue into great consideration to best satisfy
the requirement of employees, otherwise the supervisory board is very likely to reject the
acquisition case. An alternative measures to take control the supervisory board is to gain 75% of the
votes, and Gent gladly found that the majority of Mannesmann are not German companies.
Moreover, the voting system once had a restriction that is ‘no shareholder was entitled to vote in
excess of 5% of the outstanding capital stock of a German company regardless of the share amount
he/she holds’. However, the restriction has been abolished on June 1st of 2000.