Managerial Economics Report: Vodafone and Mannesmann Merger Analysis

This report provides a detailed analysis of the Vodafone and Mannesmann merger, examining the reasons behind the deal, the economic factors involved, and the implications of the merger. The report explores the strategic motivations of Vodafone, including its desire to expand its operations and consolidate its position in the European market. It delves into the economic factors that led to the merger, such as the strong economic conditions and the increasing number of mobile subscribers. The analysis includes an examination of the concept of economies of scale, horizontal and vertical integration, and the application of Porter's Five Forces. Furthermore, the report discusses the theories of the firm and demand, and the strategic use of elasticity. The report also analyzes structural and non-structural barriers to market entry using the example of Lidl. This comprehensive analysis offers valuable insights into the managerial economics of mergers and acquisitions and market dynamics.

MANAGERIAL
ECONOMICS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Question 1........................................................................................................................................1
Why and when merger took place?.............................................................................................1
Economic factors have led to merger..........................................................................................2
Things happened in merger and economics behind it.................................................................2
Question 2........................................................................................................................................5
Structural barriers........................................................................................................................5
Non structural barriers.................................................................................................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
M&A is done by most of giant firms to increase their business. In current report case of
Vodafone and Mannesmann is discussed in detail and reason behind M&D deal and economics
behind it is identified. In second part of the report, different structural and non structural barriers
in respect to entry of new firms in market are discussed in detail. In this way reseaerch is
completed.
Question 1
Why and when merger took place?
Merger took place in year 2000 when Vodafone finally after long round of negotiations
takeover Mannesmann. There were numeber or reasons behind it as Vodafone was one of the
laregest operator in UK an wants to increase its operations consistently. Mannesman was in
trying to gain position in the market from where it can give stiff challenge to giants. Mentioned
firm earlier was involved in manufacturing steel pipes but in past couple of years it successfully
expand its business and enter in to telecommunication industry (Vodafone AirTouch, 2000).
Since its inception in this new domain fast growth rate was observed as Klaus Esser was leading
organization and fully committed towards achievement of objective where it wants to expand
Mannesmann business across Europe. Mentioned company was already at leading position in the
German market and there was high growth prospects for the firm which would be seen to be
materalized in future as CEO was preparing aggreive expansion plan. Vodafone see this thing as
big for it because Mannesmann if would achieve success in its plan then it can be threat for
former firm and can beocme roadblock in achievemment of its objectives. Hence, in order
consolidate position more strong in entire Europe Vodafone decide to aquire Mannesmann at any
cost.
Apart from this, there was second major reason behind acquisition and it was that
German company aquire cellular firm Orange and news comes in the market that relevant firm
soon become one of the largest mobile operator in the world (Vodafone AirTouch, 2000). All
these things make it clear few things and one of them is that firm was focusing on multiple
dimensions and it was eager to expand its business not only in telecomunication networking but
also in cellular services. There was sound infrastructure and good growh prosepects associated
with the firm. Expansion of Mannesmann would suerly create threat for Vodafone and due to this
reason it decide to aquire Mannesman even by paying very high amount to relevant entities.
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Economic factors have led to merger
There were number of economic facors that led to this merger. In year 2000 economic
condition of the nation was good. However, some fluctuation was observed by this does not have
impact on addition of customers as mobile subscribers in its business. It can be seen from
company annual report that in year 2000 Vodafone was in very strong position. In mentioend
year EMEA customrers elevate to 15,662,000 and this number increased by 6,492,000 which
was 71% plunge in comparison to previous year (Suppliers, 2017). Due to consistent increase in
subscribers pace and good economic growth in the nation firm Director see it best time to do
aqusition deal. Between 1999 to 2000 Vodafone increase its shareholding in number of
companies like Omnitel Pronoto of Italy which provide GSM network. In this company stake
increased from 17.8% to 21.6%. In Romania based GSM operator also stake increased from 10%
to 20.1%. Hence, good amount of profitability and positive response from customers in terms of
value addition in customers based number were two major economic factor that motivate firm to
do acquisition of Mannesmann.
Things happened in merger and economics behind it
In Merger Vodafone aquire 76% stake in Mannesmann and take control of its assets. As
per agreed deal it give 58.96 shares for each unit that investor hold in latter sort of firm. In initial
stage Essar reject proposal and then Vodafone give more lucrative deal and issue mentioned
number of shares for each individual unit. There was economics behind it and concept of
economies of scale was behind it. This concept state that with increase in production of number
of units variable cost decline in the business which lead to increase in profitability. This is
verified from the fact that after aquisiton of Mannesman total customer based increased by 13.3
million to 28.9 million from which customers that are related to Organge a subsidiary of
Mannesman were excluded. Infrastrure remain same and new one are not developed and from
same servcies were given to increased customers of Vodafone which lead to decline in cost in
business (Vodafone seals deal, 2000). As per annual report of Vodafone due to aquisiton
potential synergy benefits were received both on cost and revenue in terms of infrastructure and
improved product offering.
 Horizontal integration: Vodafone do horizontal integration and under this it aquire 76%
stake in Mannesman and stake equal to percentage that was owned by latter firm in
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Organge a cellular operator. Due to acquisition Vodafone also aquire stake in Arcor in
Germany, Inforstrada in italy and Cegetel in France as well as Telerig in Austria. These
companies were really performing well will boost Vodafone performance.
 Veritical integration: As part of Vertical integration Vodafone developed strategic
business unit and manage all telecommunication related operations under single
department. Vertical integration support a lot to the company in its business (Vodafone
seals Mannesmann deal, 2000).
 Porter 5 forces: There are some of the important components of porter 5 forces anlysis
and same are explained below.
1. Competitive rivalry: It can be observed that there is high competitive rivalry in the
market as there are number of telecom operators in the UK and entire Europe which can
give tough competition to Vodafone.
2. Supplier power: There are less suppliers in the busines and due to this reason they have
bargaining power. However, Vodafone is one of the largest company and have its own
T&C which suppliers have to followe. Hence, it can be said that suppliers power is
moderate in nature.
3. Buyer power: Buyer power is high as they have many options and in case Vodafone
failed to fulfill their expectations they can move to other available alternative.
4. Threat of substitution: Threat from substitutuion is very high and due to this reason it is
very important for the firm to upgrade its plans so that leading position can be maintained
in industry. Threat of new entry: There is less threat of new entery as firms have to pass some
parameters that are determined by relevant authority before entering in to this industry.
 Demand and elasticity: Vodafone products have high elasticity to demand because with
change in economic factors and other like service quality and tariff plans demand of
Vodafone products may heavily get affected (Suppliers, 2017). Thus, after aquisiton it
was very important for Vodafone to review plans that aquired firm was operating and
way in which it can be made better. It must be noted that after acquisition sales revenue
increased to 4498 million from 3360 million.
 Strategic use of elasticity: Vodafone have lot of stratgic use of elasticity of demand
because by identifying elasticity of demand it can be determine that if single change
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made in tariff plan that in what way it can affect customers sentiments. This will also
help them in understanding that to what extent change will come in number of customers
and revenue earned in the business. Hence, it can be said that it is very important for the
firm to deeply understand concept of elasticity of demand in the business. Lots of
alternatives are available and due to this reason it is very easy for customers to get shift to
other operator. Expansion of business is not sufficient as at initial stage it reflect
elevation in customer base but with passage of time it may shrink if firm failed to make
available good quality of service to them (Jackson and Senker, 2011). Hence, it become
very important for the firm to do analysis of its strategy and tariff plans time to time.
 Economies of scale: After acquisition good amount of economies of scale generated in
the business as number of customers increase in busines and firm capacity to serve them
also increased at rapid rate. This reflect that per unit cost of service decline in the
business and economies of scale oroginate in business. Apart from this, due to sufficient
addition in infrastructure firm will not need to add more on its infrastructure and in future
less capital investment requred. On other hand, revenue increased in multifolds. Hence,
economies of scale generated by Vodafone in its business.
 Theory of firm: There are number of theories that are encompased by theory of firm.
Team production is one of theory which state that emergence of any firm as successful
player and elevation in production depends on teams that runing an organization. This is
proved from the fact that initially Vodafone proposal was rejected by Mannesmann CEO
and even big offer was given proposal was rejected second time by same person
(Atkinson and Stiglitz, 2015). Team of Vodafone that intend to do M&A deal at any cost
decided to appproach shareholders directly and make them understand that aqusition of
firm by Vodafone is beneficial for them. This was team work that lead to final execution
of M&A deal between both firms after long time period. Hence, it can said that thory of
team production practically applied in business.
 Demand theory: Theory of demand state that with increase in price of product demand
decline and if price is decreased then demand increased in the market (Karpik, 2010).
This is the theory that is followed by Vodafone under which it is making avilable tariff
plans at reasonabl price to customers and it is the main factor that after M&A it
successfully retain old customer base in its business.
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 Classification by relatedness: Strategy followed by Vodafone is related to it as reflected
by Rumelt taxonomy. There are four segments of this taxonomy namely consistency,
consonance, advantages and feasibility. Aquisiton strategy was formulated and
implemented by firm from long time as reflected in upper part of report. Accoridng to
internal and external enviornment syncronization of strategy happened as economic
environment was good and firm was profitable. This strategy have advantage in terms of
sudden increase in infrastructure. Strategy was feasible as big amount paid but in return
million of customers were also obtained. Hence, this straegy generate positive results for
the firm.
Question 2
Lidl is one of the largest German retail chain that is operating in UK and it is incresing its
market share at fast rate then giants like Tesco, Morrison and Sainsbury etc. Below analysis of
Lidl is done in terms of structural barriers and non structural barriers.
Structural barriers Economies of scale in business: Firm generate economies of scale in its business as it
make entire purchase from local producers that produce goods of best quality but their
products does not have much popularity in the market (Schumacher, 2011). Due to this
reason Lidl make purchase of bulk items from these suppliers at very low price due to
high bargaining power and this lead to geenratiion of economies of scale in business. Marketing advantage: Lidl is doing markeitng from its stores as it is not making
spending on TV and newspapers as already its products are popular among people and
due to this reason it does not spend huge amount of money on moden channel of
communication. Control of resources: Firm have control on its resources as it maintain strong contact
with it suppliers and consistently items are procured from them. This is the one of the
main reason due to which firm successfully manage cost in its business.
Non structural barriers
Pricing Predatory pricing: It is one of the pricing strategy under which Lidl is selling its products
at very low price relative to Tesco, Sainsbury and Morrison in its business. It is the low
price of the product that help firm in competing with its rivals (Becker, 2010). Lidl is in
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position from where it can consistenly follow this pricing strategy in its business and low
price act as barrier for those who want to newly enter in retail sector. Suppliers are
already offeering products at very price to the firm because they does not have any image
in the market and bargaining power in front of Lidl and other retailers. Hence, by
charging specific percentage as margin firm successfully sale its product at low price
relative to giants Tesco and ASDA etc.
Non pricing strategy Excess capacity: Lidl have excess storage capacity in the business. In UK it have its own
distribution hubs and there is less distance between these hubs. Hence, transportation cost
is low in business and on time sufficient amount of supplies is ensured in specific retail
shop. All these things lead to supply of goods of specific type to customers on demand
(Sahlins, 2017). Thus, it can be said that excess capacity is there in the business in terms
of supply of goods. Hence, firm is able to meet demand of customers on time and in
proper manner. Advertisment: As part of non pricing strategy Lidl is following strategy under which it is
doing entire markeitng of its products through traditional channel of communication
which is instore sales. Means that heavy investment is not made on advertisment of
production under common channel of communication. Innovation: As part of innovation Lidl follow different approach. It used floor space to
do marketing of its brand name and to atract as well as retaining customers in the
business. Lidl understand psycology of customers and and ecouraged browsing with
combination of aisles. In traditional manner like seen in case of retail shops waist high
displays can be observed in retail store where entire information about products and their
prices are available to the customers. Weekly brochures are attached at varied places in
reail shops where customers get information about schemes that are going to launch few
days after. This is the thing that is not observed in case of other retail stores (Kolstad,
2011). This innovation in operation give some input to the customers to think about doing
shopping from retail store of Lidl. It can be said that Lidl completely inonovate its
business operations and by doing so it consistently maange to grow its business at rapid
rate in the industry and is able to give tough competition to rivals like Tesco and
Sainsbury. It must be noted that Tesco like giant firms are earning very low profit in
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their business as these firms are only serving branded products at their retail shop. Hence,
they are offering products at low price but at same time are earning very low amount of
profit in their business and facing loss in the current time period. It can be said that
innovation is done by Lidl and it is its effectiveness that firm is able to compete with
rivals even it s very small in size in front of them.
CONCLUSION
On the basis of above discussion it is concluded that there is significent importance of
costing for the business. Selling product at low strategy can always not give benefit to the firm.
To implement this strategy some unique ways need to be identified. It is also concluded that
M&A deals must be done only when firm is in good condiition and economic conditiion of the
nation is in business support.
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REFERENCES
Books and Journals
Atkinson, A.B. and Stiglitz, J.E., 2015. Lectures on public economics. Princeton University
Press.
Becker, G.S., 2010. The economics of discrimination. University of Chicago press.
Jackson, T. and Senker, P., 2011. Prosperity without growth: Economics for a finite
planet. Energy & Environment. 22(7). pp.1013-1016.
Karpik, L., 2010. Valuing the unique: The economics of singularities. Economics Books.
Kolstad, C., 2011. Intermediate Environmental Economics: International Edition. OUP
Catalogue.
Sahlins, M., 2017. Stone age economics. Taylor & Francis.
Schumacher, E.F., 2011. Small is beautiful: A study of economics as if people mattered. Random
House.
Online
Suppliers, 2017. [Online]. Available through:<
http://www.vodafone.com/content/index/about/suppliers.html>.
Vodafone AirTouch, 2000. [PDF]. Avaialble through:<
https://www.vodafone.com/content/dam/vodafone/investors/annual_reports/
annual_report_accounts_2000.pdf>.
Vodafone seals deal, 2000. [Online]. Available through:<
http://money.cnn.com/2000/02/04/europe/vodafone/>.
Vodafone seals Mannesmann deal, 2000. [Online]. Available through:<
http://news.bbc.co.uk/2/hi/business/630293.stm>.
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