Corporate Governance
Vodafone AirTouch’s Bid for Mannesmann
(Individual Assignment)
WHU – Otto Beisheim School of Management
Burgplatz 2, 56179 Vallendar
Professor Dr.Christian Andres
Lennart Ulrich
Simran Ajay, 20002360
Vallendar, 20.11.2018
Table of Contents
Question 1: What was the strategic and economic rationale for Mannesmann’s acquisition of Orange? Did Mannesmann overpay for Orange? 2
Question 2: What hurdles is Vodafone AirTouch going to face to complete its acquisition of Mannesmann? Who is going to be its most likely supporter? Who is going to resist? 2
Question 3: Why is Gent so eager to do the deal? Why is Esser fighting so hard? 3
Question 4: How is the German Corporate Governance system different from the Anglo-Saxon system? What role do hostile takeovers play? In their absence what mechanisms perform the same function? 3
Question 5: How well can the different taxonomies of corporate governance systems explain differences in corporate governance around the world? 4
References 5
Question 1: What was the strategic and economic rationale for Mannesmann’s acquisition of Orange? Did Mannesmann overpay for Orange?
Mannesmann was behind in the industry consolidation race and therefore, an acquisition with Orange would boost its industry position. Orange, with a CAGR of 115%, was a great fit for Mannesmann from a strategic perspective as it was one of the fastest growing and most profitable wireless operators in the UK market.
Despite the strategic benefits arising from Mannesmann’s acquisition of Orange, the timing suggests that the move was more a defensive one against a possible takeover by Vodafone. This is because a combined entity of Mannesmann-Orange would create an anti-trust hurdle for Vodafone as Vodafone would not be allowed to takeover Mannesmann because of a combined 53% market share post acquisition. Additionally, Mannesmann locked in Hutchison Whampoa, the majority shareholder, for 18 months and these shares could not be sold to Vodafone.
From an economic perspective, Mannesmann overpaid for Orange. Mannesmann’s share price dropped 8% to a low of €141.3 post the acquisition, which reflects the shareholders sentiments that the expected synergies from combination cannot offset the premium that Mannesmann paid for Orange. Looking at comparables (Exhibit 8), Deutsche Telekom paid €4,745 EV/Subscriber while Mannesmann paid €8,857 EV/Subscriber, which is almost twice the industry average and clearly not justifiable. Therefore, Mannesmann overpaid despite potential growth predictions and/or synergies.
Question 2: What hurdles is Vodafone AirTouch going to face to complete its acquisition of Mannesmann? Who is going to be its most likely supporter? Who is going to resist?
Vodafone has to acquire 50% of the votes in Mannesmann to complete its takeover. However, Mannesmann, in contrast to the traditional German cross-shareholding structure, has diversified shareholding with only one large shareholder – Hutchison Whampoa (Exhibit 13a). Small shareholders have lesser incentives to tender their shares because of loss in post-acquisition shareholder value, and therefore Vodafone will have to reach out to multiple smaller shareholders to gain a substantial stake.
Another hurdle for Vodafone could be to convince their shareholders to give the go-ahead for the acquisition. The price quoted by Mannesmann – €350 per share – was more than double of the offer of €157.8 per share a few weeks earlier. Therefore, from Vodafone’s perspective, the shares of Mannesmann are overvalued. It could be difficult for Vodafone to convince its shareholders to pay for an overvalued bid.
The group that is most likely to be in support of the takeover is the shareholders of Mannesmann. The price per share that they would receive would be way above the market price of Mannesmann shares. They are unlikely to pass up this opportunity given that they are small institutional investors, who are more concerned about return on their investment.
But given the dual structure of Mannesmann, Vodafone will face resistance from employees of Mannesmann because of the fear of a large-scale layoff of employees post takeover. As labour unions have a strong foothold in German companies, the employees of Mannesmann would mobilize resistance against the takeover unless the existing employment rights, including pension rights of these employees, are fully safeguard.
Question 3: Why is Gent so eager to do the deal? Why is Esser fighting so hard?
Chris Gent is eager to takeover Mannesmann was the acquired entity would be very beneficial to Vodafone. The takeover would allow the combined entity to gain a more dominant market position, raise barriers to entry and reap economies of scale. Additionally, it would also generate significant synergies with huge estimated increases in revenue enhancement as well as cost savings and savings on capital expenditure (Exhibit 10).
Furthermore, Vodafone’s sale of its stake in E-Plus would mean that they had to reinvent themselves in the German market. Bad relations with Mannesmann also served to derail Vodafone’s plans of competing more in France and Italy. If a deal were not to be reached, Mannemann would instantly become Vodafone’s immediate competitor in the UK, and also adversely affect Vodafone’s presence in Germany, Italy and France.
From Mr. Klaus Esser’s perspective, he has to take into account the impact that a takeover would have on the goals and objectives of Mannesmann. He is fighting hard against a takeover because having control over the company is important while running a successful business. The combined entity would give Mannessman less than a 50% stake, and therefore lesser control over the activities and management of the organisation. Furthermore, Esser believes that Mannesmann’s superior strategy of integrated products makes it more valuable compared to what Vodafone is offering.
Lastly, German CEO’s do not benefit from ‘Golden Parachutes’ after an acquisition and therefore, Esser is hesitant to accept the acquisition proposal since the takeover would strip him off his job as a CEO, and he would be ‘flying without a parachute’.
Question 4: How is the German Corporate Governance system different from the Anglo-Saxon system? What role do hostile takeovers play? In their absence what mechanisms perform the same function?
The German Corporate Governance system is insider oriented, banks play an important role and ownership is concentrated. Workers are believed to be one of the key stakeholders in the company and therefore, corporate governance is carried out through two boards – management board (composed entirely of insiders) and a supervisory board (composed of labour/employee representatives and shareholder representatives). On the other hand, the Anglo-Saxon system is outsider oriented, shareholding is dispersed and markets are central to the company. As shareholder rights supersede those of other stakeholders, shareholders have the right to elect all the members of the Board, which directs the management of the company. The main feature of this system is to rely on the capital market as the place of control over the corporation.
In outsider systems, the threat of hostile takeover plays a key role in aligning managerial decision-making with the interests of minority shareholders. Hostile takeovers are usually triggered when an underperforming firm’s share price drops. The acquirer puts in place better management and then turns around the firm to ultimately sell it off. Therefore, the threat of hostile takeover is deemed to discipline managerial decision-making according to the norms of shareholder value. But in the absence of hostile takeovers, corporate governance mechanisms of incentivisation can be used to align the interest of shareholders and managers. This can be done through performance shares or executive stock options that incentivise the managers for meeting objectives of shareholders.
Question 5: How well can the different taxonomies of corporate governance systems explain differences in corporate governance around the world?
There are three main taxonomies of corporate governance systems – insider vs. outsider, bank based vs. market based and common vs. civil law. Continental European countries where stock markets are relatively underdeveloped, ownership is concentrated and large shareholder exercise control. In contrast, an outsider system has highly developed and organised capital markets, most companies are listed and shareholders have dispersed ownership. For example: US, Australia and Canada.
In a bank-based system, banks are allowed to hold equity in companies under the bank-based system, and they influence companies with the proxy votes they receive from small shareholders, as in the case of Japan, Germany and France. On the other hand, a market-based system is where banks and insurance companies act as financial intermediaries and rarely hold equity interests in companies. For example: UK and US.
Lastly, shareholder protection and creditor protection are highest in common law countries and lowest in civil law countries. The level of protection in a country depends on the size of capital markets. Countries with developed capital markets, such as the US and UK, have a greater level of investor protection, while France and other civil law countries have the lowest. Countries under German law and Scandinavian law are somewhere in between with intermediate protection for investors.
Mannesmann, though a German company, did not completely follow a bank based or an insider systems – it had a dispersed ownership structure and banks did not play an important role due to Mannesmann’s unusual shareholding. Conversely, Vodafone was a typical example of an outsider and market-based system of corporate governance with a dispersed ownership and a reliance on stock markets. The shareholders of Vodafone also had significant protection under the law.