Finance Case Study: Analyzing Vodafone's Hostile Bid for Mannesmann

This case study examines Vodafone AirTouch's hostile takeover bid for Mannesmann in 1999, focusing on the strategic rationale, financial implications, and market dynamics of the proposed merger. The analysis covers Mannesmann's initial rejection of Vodafone's friendly offer, the valuation discrepancies between the two companies, and the potential synergies that could result from a successful acquisition. It delves into the swap ratio offered to Mannesmann shareholders, the acceptability of the offer from both Vodafone and Mannesmann shareholder perspectives, and the market's expectations regarding the deal's success. The study also calculates the present value of synergies, identifies potential hurdles Vodafone faced, and discusses the reasons behind Vodafone's eagerness to complete the acquisition, ultimately assessing the valuation and strategic implications of the proposed merger in the context of the rapidly consolidating telecommunications industry.

Running head: FINANCE MERGER AND ACQUISITION
Finance Merger and Acquisition
Name of the Student:
Name of the University:
Authors Note:

1FINANCE MERGER AND ACQUISITION
Contents
The rationale behind the acquisition of Orange by Mannesmann:..................................................2
Strategic implications to Vodafone:................................................................................................2
Description of swap:........................................................................................................................2
Acceptability of offer to shareholders of Mannesmann:.................................................................3
Acceptability of offer to shareholders of Vodafone:.......................................................................3
Market expectations of deal:............................................................................................................3
Present value of synergies:..............................................................................................................4
Hurdles in front of Vodafone:..........................................................................................................4
The reason for eagerness:................................................................................................................4
References:......................................................................................................................................6

2FINANCE MERGER AND ACQUISITION
The rationale behind the acquisition of Orange by Mannesmann:
The objective behind the acquisition of Orange by Mannesmann was mainly to be the leader in
telecommunication industry in the European market. It was expected that the resulting synergy
subsequent to the merger of Orange and Mannesmann would help the later to not only be the
leader in the European telecommunication market but also to achieve significant amount of
operating profit in the future. The acquisition of Orange would help Mannesmann to effectively
become the leader in the European market and subsequently to be the world leader with
additional acquisitions in the future. With the opportunity to be the leader in the European
market Mannesmann paid a 22% premium over the existing stock price of Orange at the time of
acquisition. The payment of 22% premium was understandable as the expected synergies
subsequent to the acquisition of Orange was significantly huge (Jeong and Weidhaas, 2016).
Strategic implications to Vodafone:
The successful acquisition of Orange by Mannesmann helped the later to come close to be the
leader in the telecommunication market in Europe right behind Telecom Italia Mobile. With the
subsequent synergies that resulted from the acquisition of Orange PLC to the Mannesmann
helped the company to strongly compete against the Vodafone Airtouch PLC. Thus, the
acquisition of Orange PLLC by Mannesmann certainly affected the Vodafone and its hostile
takeover bid of Mannesmann.
Description of swap:
The Vodafone PLC on 17th December valued Mannesmann at €138 billion. The swap ratio on the
basis of the above valuation was 53.7 Vodafone shares for each share of Mannesmann. On that
date the takeover bid was calculated by adding 72.2% premium on the closing share price of

3FINANCE MERGER AND ACQUISITION
Mannesmann as on October 18. The market value of Mannesmann’s contribution to the firm
estimated at $121 billion as on the 17th December.
On December 17, 1997
Mannesmann Vodafone
Number of outstanding shares: 517.9 million
shares
31,105 Million
Swap ratio 53.7 shares for each share of
Mannesmann
Number of shares to be issued to Mannesmann
(517.9 million x 53.7)
27811.2 million shares of
Vodafone to acquire
Mannesmann
Acceptability of offer to shareholders of Mannesmann:
Since a 72.2% premium over the closing price of shares on October 18 was offered by Vodafone
and an affordable swap rate of 53.7shares in Vodafone for each share at Mannesmann is certainly
preferable for the shareholders of Mannesmann. From the point of view of Vodafone
shareholders however, the offer made to takeover Mannesmann is not acceptable. Hence, the
shareholders of Vodafone would feel hard done by the offer of the company to take over
Mannesmann with a swap rate 53.7 shares in Vodafone for each share of Mannesmann (Kinsella,
2017).

4FINANCE MERGER AND ACQUISITION
Acceptability of offer to shareholders of Vodafone:
The hostile takeover bid of Vodafone to acquire Mannesmann was always under the cloud due to
the continuous rejection of the offer by the management of Mannesmann. The market analysts
have always emphasised the importance of mutual consensus for any merger and acquisition to
go through and achieve desired objectives. Seldom hostile takeovers have resulted success. Thus,
the market was quite aware that the deal have significantly less chance of going through and
even slimmer chance of resulting in synergies.
The acceptability and non-acceptability of respective shareholders of Mannesmann and
Vodafone can be understood from the calculation of shareholding in merged company below:
Mannesmann shareholders' holding in Vodafone would be (%) 47.2
0
27811.20 x 100/ (31105 million + 27811.20 million)
Holding of Vodafone shareholders (100- 47.20)% 52.8
0
Market expectations of deal:
The takeover bid proposed by Vodafone to acquire Mannesmann would have helped the former
to be the undisputed world leader in the telecommunication market. Vodafone expected to be the
worldwide leader in telecommunication market and to gain huge synergy by improving the

5FINANCE MERGER AND ACQUISITION
financial performance and position of the company. One of the biggest reasons behind the
strategy of Vodafone to acquire Mannesmann is to expand the business operations of Vodafone.
Mannesmann has number of different types of business including equipment in
telecommunication industry, internet services, technology in plastics handling, technology in
steel tubes, hydraulic and many more. The takeover if successful would have helped Vodafone to
expand business operations in different fields. Mannesmann has big market share in Germany
and Vodafone will be able to expand its telecommunication operations to the whole of Germany
subsequent to the acquisition of Mannesmann (Mager and Meyer-Fackler, 2017).
Present value of synergies:
The market estimated that the success of acquiring Mannesmann is around 0.6 and with the
expected market synergy 69,890.68 million in Euro. The calculation of market synergy is
provided below:
Amounts are in Euro million Mannesmann Vodafone
Share price on that date 234 4.9569
Number of outstanding shares: (million) 517.9 31105
Market value 121188.6 154184.375
Combined market value after acquisition (121189 + 154184) 275372.975

6FINANCE MERGER AND ACQUISITION
Contribution of each firms (121189 x
100/275373); (154184 x 100/275373)
44.01 55.9
9
Market value of the combined firm on October 21 (Excluding synergy)
Amounts are in Euro million Mannesmann Vodafone
Outstanding number of shares (Millions) 517.9 31105
Share price 145.35 4.186
Market value 75,276.77 130,205.5
3
Combined market value 205,482.3
0
Market value on December 17 (including
synergy)
Outstanding number of shares (Millions) 517.9 31105
Share price 234 4.9569
Market value 121,188.60 154,184.3
7

7FINANCE MERGER AND ACQUISITION
Combined market value 275,372.9
7
Value of synergy (275372.97 - 205482.30) 69,890.6
8
Hurdles in front of Vodafone:
It is clear that the Vodafone would face number of hurdle in acquiring Mannesmann as the
management of the later was not in favour of the takeover. The ethical practice by corporates
does not allow hostile takeover as it is against the standard business practices. It is important to
discuss the matter and come to an amicable solution as hostile takeovers seldom results in
successful acquisition and synergies (Whalley and Curwen, 2014).
The reason for eagerness:
Gent is eager to ensure that the deal goes through as subsequent to the successful acquisition of
Mannesmann by Vodafone the later would become the largest telecommunication company to
boost its already established status in the market. The huge market of Germany and other parts of
Europe will be opened top Vodafone hence, Gent is eager to ensure that the deal goes through.
Opinion on valuation:
Year
end
2000E 2001E 2002E 2003E 2004E 2005E 2006E

8FINANCE MERGER AND ACQUISITION
Synergy in revenue
- 50.00
1
53.00
46
9.00
656.
00
977.
00
1,22
1.00
Cost of revenue synergy
-
(
40.00)
(1
07.00)
(28
1.00)
(328.
00)
(488.
00)
(61
0.00)
Synergy cost
- 80.00
2
00.00
50
0.00
656.
00
732.
00
87
9.00
Impact on operating profit (in
total) - 90.00
2
46.00
68
8.00
984.
00
1,221.
00
1,48
9.00
Reductions and savings in
capital expenditures - 60.00
1
47.00
36
0.00
420.
00
469.
00
50
6.00
Profit after tax
- 58.50
1
59.90
44
7.20
639.
60
793.
65
96
7.85
After tax synergy in total
- 118.5
0
3
06.90
80
7.20
1,059.
60
1,262.
65
1,47
3.85
110.1
3
2
65.08
64
7.95
790.
48
875.
43
94
9.69

9FINANCE MERGER AND ACQUISITION
On the basis of following assumptions the present value of after tax synergies and Vodafone
approximation have been calculated below.
Assumptions:
Assuming Weighted average cost of capital
(WACC)
7.60%
Perpetual growth rate 4%
Tax rate 35%
Particulars Amount
(€ million)
Present value of after tax synergy by using perpetual growth model
Formula {Profit after tax of last year / (Cost of capital - growth rate)}
Present value of synergies {967.85/ (7.60% -4.00%)} 26,884.7
2
Less: Tax @35% (26884.72 x 35%) 9,409.6
5
Vodafone's approximation from synergies 17,475.0

10FINANCE MERGER AND ACQUISITION
7
As can be seen that the premium paid is EURO 7,863 million to purchase Mannesmann shares
however the approximation of synergy is EURO 17,475 million is significantly higher thus, it is
a great proposition from the point of view of Vodafone.

11FINANCE MERGER AND ACQUISITION
References:
Jeong, D.H. and Weidhaas, M., 2016. Executive Compensation: Mannesmann v. Disney-A Case
Study.
Kinsella, M., 2017. Hostile takeovers—An analysis through just war theory. Journal of Business
Ethics, 146(4), pp.771-786. Kinsella, M., 2017. Hostile takeovers—An analysis through just war
theory. Journal of Business Ethics, 146(4), pp.771-786.
Mager, F. and Meyer-Fackler, M., 2017. Mergers and acquisitions in Germany: 1981–
2010. Global Finance Journal, 34, pp.32-42.
Whalley, J. and Curwen, P., 2014. Managing tax by organizational means: the case of
Vodafone. Public Money & Management, 34(5), pp.371-378.