Hostile Takeovers:

Strategy and Defenses

Case study:
Mannesmann vs.
Vodafone
Jan Harrer, Pavel Hrbek, Radek Zelenka

7.1.2008
 Content
Mergers and Acquisitions
Hostile takeovers
Takeover strategies
Hostile takeover defenses
Case study:
Mannesmann vs. Vodafone
 Merger activity
Mergers and acquisitions (M&A) and
corporate restructuring are a big part
of the corporate finance world
But they are nothing new in the
business world
 First Merger wave appeared already at the
end of the 19th century
 Merger Waves

1. wave: 1887-1904 – Industrial revolution

2. wave: 1920-1929 – Vertical and
conglomerate mergers
3. wave: 1965-1975 – Economies of scale
4. wave: 1984-1988 - Hostile takeovers
5. wave: 1995-2001 – Globalization and
deregulation
 Hostile Takeovers
most mergers are negotiated by the two
firms‘ top management and boards of
directors
if this fails, the acquirer can go over the
heads of the target firm‘s management
and appeal directly to its stockholders
„hostile takeover“
 Hostile Takeover
…the technique
in general, three strategies for hostile
takeovers can be distinguished:

 Bear hug Increasing

 Proxy fight degree of
hostility
 Tender offer

mostly accompagnied by some

preliminary steps
Preliminary Takeover Steps
Toehold
Initial accumulation of target´s shares
Reduces number of target shares that must be
purchased at a costly premium
Casual pass
Informal first contact to target company to test
reactions
Could alert target
 Takeover Strategies
Bear Hug
least aggressive of hostile takeovers
works well when the target is not strongly
opposed to the merger
contact the target‘s board with expression
of interest in acquiring the target
sometimes accompanied by public
announcement of bidder‘s intent to make
a tender offer
 Proxy Fight
target management actually or probably
reluctant to merge
acquirer seeks the support of target firm‘s
shareholders at next annual meeting in
addition to own votes
not very expensive, but in general not very
successful in mergers
 Tender Offer
the most unfriendly
offer directly to shareholders of target firm
two-tiered offers (also: front end-loaded tender
offer) provide superior compensation for a
first-step purchase (often cash)
inferior compensation for second-step
purchase
exerts pressure on shareholders to be in
the first tier
A hostile takeover is defined as an
acquisition by one company of the other
company’s shares or main assets against
its management will.

Should the management of the target firm

defend itself against unwelcome buyers?
Hostile Takeover Defenses
Why?
bargaining hypothesis: target managers
resist hostile offers to improve the terms of
a takeover offer

entrechment hypothesis: target

managers resist hostile offers to avoid
being taken over
Characteristics of vulnerability to
a takeover
The firm seems to be undervalued
Low Q-ratio
Low P/EPS ratios
Subsidiaries or properties that could be
sold off without significantly impairing cash
flow
Relatively small stockholdings under the
control of incumbent management
Preoffer and Postoffer Defenses
Preoffer defenses Postoffer defenses
(preventative (active antitakeover
antitakeover measures )
measures)
take its place after the
much more effective takeover attempt is
started
 Preoffer Defenses

Poison Pills
existing shareholders are issued rights
which, if there is a significant purchase of
shares by a bidder, can be used to
purchase additional stock in the company
at a bargain price
make the firm less valuable in the eyes of
a hostile bidder
 Poison Puts
existing bondholders can demand
repayment if there is a change of control
as a result of a hostile takeover
cashing of the bonds creates large cash
demands for the merged firm - makes the
takeover prospects unattractive
 Corporate charter amendments
Antitakeover amendments to a firm´s corporate
charter often called „shark repellents“
the benefits for potential raiders are unsure
create new conditions on the transfer of
managerial control of the firm through a merger
or tender offer or by replacement of the board of
directors
Types:
 supermajority provisions,
 fair price provisions,

classified boards
 authorization of preffered stock
 Waiting Period
unwelcome acquirers must wait for a
specified number of years before they can
complete the merger
Control over the Register
Golden Parachutes
special - lucrative - compensation
agreements that the target company
provides to upper management
provides payments on termination of
employment
 Postoffer Defenses
Greenmail
targeted repurchase of a large block of stock
from specified shareholders at a premium
negative publicity to both sides
White Knight
another company that would be a more
acceptable suitor for the target
 White Squire
modified form of white knight
a firm that consents to purchase a large
block of the target´s stock
white squire will not sale to hostile bidder
Asstets Restructuring
buy assets that bidder does not want or
that will create
an antitrust problem

Liability restructuring
 Litigation
file suit against bidder for violating antitrust or
securities laws

Pac Man
target makes an offer to buy the acquirer
very costly and can have serious financial effects
for both players
Mannesmann | Vodafone
case study
Mannesmann | Vodafone
case study

 biggest hostile takeover till 2000

 almost all anti-acquisition techniques
 influence on German capitalism
model
 Brief history of the firms
Mannesmann
 Traditional German steel tubes producer, engineering
and car components supplier
 Since 1990 telecommunications branch [Telecom D2,
Arcor, Omnitel, Cegetel (France), Infostrada (Italia), Tele.ring
(Austria)]

Vodafone

Founded in 1984, first mobile phone company and
market leader in UK

Merger with AirTouch (USA), global market leader
In January 1999 first speculation in media
Klaus Esser, CEO of Mannesmann phoned Chris Gent,
CEO of Vodafone
In January 1999 first speculation in media
Klaus Esser, CEO of Mannesmann phoned Chris Gent,
CEO of Vodafone

Esser was reassured that there will be discussion first

both firms were involved in discussions regarding their
partnership interests and opportunities
In January 1999 first speculation in media
Klaus Esser, CEO of Mannesmann phoned Chris Gent,
CEO of Vodafone

Esser was reassured that there will be discussion first

both firms were involved in discussions regarding their
partnership interests and opportunities
Last meeting on October 18, 1999
on October 19, 1999
Mannesmann expressed asset restructuring
interest in buying Orange, antitrust problems
Vodafone’s rival in the UK
mobile phone market
on October 19, 1999
Mannesmann expressed asset restructuring
interest in buying Orange, antitrust problems
Vodafone’s rival in the UK
mobile phone market
Chris Gent tried to discuss „a more constructive
route“ for Mannesmann and Vodafone
on October 19, 1999
Mannesmann expressed asset restructuring
interest in buying Orange, antitrust problems
Vodafone’s rival in the UK
mobile phone market
Chris Gent tried to discuss „a more constructive
route“ for Mannesmann and Vodafone

 Rejected (the deal was signed already)

Hutchinson Whampoa, a diversified investment
company from Hong Kong got a 10.1% stake in
Mannesmann in exchange for large stake in
Orange
Hutchinson Whampoa white squire
promised not to sell the block
of shares for 18 months
Hutchinson Whampoa, a diversified investment
company from Hong Kong got a 10.1% stake in
Mannesmann in exchange for large stake in
Orange
Hutchinson Whampoa white squire
promised not to sell the block
of shares for 18 months

on October 22, 1999 Vodafone hired Goldman

Sachs and Warburg Dillon read as advisors for
potential acquisition of Mannesmann
 Any German bank wanted to advise Vodafone in this
case
on November 14, 1999 Gent wrote a letter to Esser
offering the acquisition and setting the price of 43.7
Vodafone shares for one Mannesmann share

valuation of Mannesmann of ~ € 100 bn

Mannesmann rejected the offer because it was inadequate

on November 14, 1999 Gent wrote a letter to Esser
offering the acquisition and setting the price of 43.7
Vodafone shares for one Mannesmann share

valuation of Mannesmann of ~ € 100 bn

on November 15, 1999 Mannesmann

filed an application with UK high court to litigation
restrain Goldman Sachs from advising
Vodafone because of conflicting interests

dismissed on November 18

Mannesmann rejected the offer because it was inadequate

on November 19, Vodafone announced an
amended offer of 53,7 Vodafone shares per
Mannesmann share, thereby valuating
Mannesmann at ~ € 125 bn (20% premium over
share prices that day)
proposed spin-off of Orange and other assets of
combined firm
on November 19, Vodafone announced an
amended offer of 53,7 Vodafone shares per
Mannesmann share, thereby valuating
Mannesmann at ~ € 125 bn (20% premium over
share prices that day)
proposed spin-off of Orange and other assets of
combined firm

Mannesmann‘s board still rejects the offer, claiming it

inadequate
declared superior strategy and prospects
made out a worth of €350 per share (actual worth
€232)
Mannesmann keen to show its superior business
opportunities when operating on its own
a large number of agreements with other firms are
published, to work together on integrated products
(mobile internet etc.)
 none of them became effective
Mannesmann keen to show its superior business
opportunities when operating on its own
a large number of agreements with other firms are
published, to work together on integrated products
(mobile internet etc.)
 none of them became effective

Mannesmann talks to Vivendi in France

about possible merger
white knight
Mannesmann keen to show its superior business
opportunities when operating on its own
a large number of agreements with other firms are
published, to work together on integrated products
(mobile internet etc.)
 none of them became effective

Mannesmann talks to Vivendi in France

about possible merger

Vodafone answers by building a joint white knight

venture with Vivendi
Mannesmann keen to show its superior business
opportunities when operating on its own
a large number of agreements with other firms are
published, to work together on integrated products
(mobile internet etc.)
 none of them became effective

Mannesmann talks to Vivendi in France

about possible merger

Vodafone answers by building a joint white knight

venture with Vivendi

only share offer - credibility of Vodafone crucial for

Mannesmann‘s shareholders willingness to exchange their
shares
on February 3, 2000, after the marathon of talks, the
Mannesmann's management board recommended a
fresh, all-share offer of 58.98 Vodafone shares per
mannesmann share
 End of hostilities

due to a parallel dramatic increase in the share prices of

both companies,
the offer placed indeed an implied value on
Mannesmann‘s stock of €353 per share (firm value ~ €
190 bn)
on February 3, 2000, after the marathon of talks, the
Mannesmann's management board recommended a
fresh, all-share offer of 58.98 Vodafone shares per
mannesmann share
 End of hostilities

due to a parallel dramatic increase in the share prices of

both companies,
the offer placed indeed an implied value on
Mannesmann‘s stock of €353 per share (firm value ~ €
190 bn)

golden parachutes to all members of managing and

supervisory board

roughly €30m for Klaus Esser
Thank you for your attention