Mergers and acquisitions refer to the corporate strategies to finance and manage a business entity by buying or combining two or more separate entities to grow without having to create one from the scratch. This paper looks at the mergers and acquisitions between Vodafone, Air Touch communications, and the Mannesmann group of companies.
Nature of the industry
It’s a cellular industry that dominates the European telecommunications market and they deal in a wide range of transmission of information through phone to phone, broadband media, cable systems, and data communications whereby these companies have been competitors.
Economic and financial rationale
Vodafone and Mannesmann had varying determinations of the value where Vodafone AirTouch valued Mannesmann at $138 billion while Mannesmann claimed that it was worth $350billion. The cellular industry was generally growing rapidly and in 1998 it had global revenue of above US $ 1 trillion which was 5% of the world GDP. The average revenue of the merger activities reached its peak in 1999 with 20-25% of the total revenue.
German corporate governance
It makes hostile mergers difficult to execute. It dictated that the board be divided into supervisory that would oversee the management and have the powers to appoint and dismiss board members. The management on the other hand would be charged with the responsibility of running the company. Voting restrictions in articles of association of the Mannesmann also deterred voting in excess of 5% which the German rules also adopted whenever decisions of merges, consolidations and spin-offs were to be made.
Roles of the hostile take-over bid
This is the takeover that’s done against the wishes of the board of directors by the acquirer giving attractive prices to lure the shareholders into accepting the offer against the wishes of the management. This destroys the company cultures as said by the chancellor and that it results in the borderless telephony markets.
Strategic and economic rationale for Mannesmanns acquisition of orange
Orange was the third largest telephone company in UK with a market share of 18% and 17.45% interests in Connect Austria and 45.5% in orange communications of South Africa. Mannesmann was willing to pay $6.4 in cash and 0.0965 in shares and this valued orange at with $31billion which was a premium of 17%. As a result Mannesmann share prices dropped from $154.1 to $141.3 which was a 8% drop. Hence it means that Mannesmann had overpaid Orange.
The Mannesmann decision to refuse being acquired by Vodafone AirTouch was unbelievable since it has been promised to be paid $232 per share by Vodafone which was a 20%premium. The CEO claimed that they were worth $350 a share and yet they were willing to issue the 117 million shares at $157.8 per share to fund their acquisition of Orange as at December 17. If I were a shareholder of Mannesmann I would press for AirTouch – Mannesmann – Orange merger that would increase the sales to $13 billion and operations in 25 countries and 42 million equity subscribers as opposed to Mannesmann- Orange merger that garnered $5, 76 sales volumes operating in only 7 countries with14 million subscribers.
The market values at 17 December
The market values at the December 17 was 117 million shares of $157.8per share in Mannesmann Company
Average exchange rate =1pd = 1.5789 euros
Revenue synergy- 50 + 155 + 469 +656 = 1330 * 1.5789 =2099.937
Cost synergy-80 + 200 + 500 + 656 = 1436 * 1.5789 =2267.3004
The UK equities returns were 7.7% (1919-1993) and 6.8% in 1970-1990. This may affect the managers’ decisions that they should be keener in mergers and acquisitions to reduce the unnecessary costs since competition has become tight as compared to earlier periods when the market was less sensitive to competition.
The hurdles which the Vodafone AirTouch is facing are to try convincing Esser, the CEO of Mannesmann to accept the merger offer by trying to demonstrate the importance of the merger. Gent, the CEO of Vodafone AirTouch should use the shareholders by convincing them to vote against Esser and allow the merger to take place for their own benefit hence the shareholders are going to be Gents major supporters. The managing group including Esser is not going to support Esser in the take over bid
Gent was so much involved in realization of the merger so that a better financial position is created by capitalizing on the new opportunities to obtain important synergies. Revenues would also be enhanced, cost savings would be attained and savings in the capital expenditures would be realized.
On the other hand Esser is fighting against the offer on the grounds that the merger is quite inadequate and added that Mannesmann had superior strategies and products than Vodafone AirTouch which did not own even one fixed operation line.
Some of the roles of hostile takeovers include reduction of costs of transport, improving technology and avoiding competition through monopolies creation. Also help in forming synergies by reducing fixed costs and also increases revenue. Companies would also be able to reap the economies of scale while reducing taxation
In the absence of hostile takeover bids, acquirers may friendly acquire the targeted company by engaging in mutual negotiations with the management. Mergers can also be undertaken where two relatively equal companies combine together.
The German corporate governance differ from that of the Anglo-Saxon in that the later encourages the managing team to increase the shareholders wealth by giving them stocks while the former believes that the entire stakeholders are responsible for increasing shareholder wealth and not the management only.
Conclusion
The mergers and acquisition by the bidders should not be done in a hurry but managers should study the economic conditions in the concerned industry and make decisions in respect to their expansion needs. Some viable prospects may be attained by expanding from within.
Reference
Semi Kedi (2003). Vodafone Air Touch’s Bid for Mannesmann.