Vodafone AirTouch - Essay Example

1 Introduction The takeover of Mannesmann GmbH of Germany by Vodafone AirTouch Plc of UK in 2000 was the largest takeover by merger and acquisition of any company in the corporate world. The whole deal was worth DM 390 billion. It displayed the power of the stock market which saw the force of a smaller player, 15 year old Vodafone AirTouch with only 12,600 employees and a turnover of DM 11 billion, subdue and capture the much bigger 109 years old rival with 130,000 employees and a turnover of DM 40 billion in a matter of three months. Vodafone is currently the largest global telecom operator in the world by number of customers. Vodafone currently has equity interests in 27 countries and Partner Networks (networks in which it has no equity stake) in a further 40 countries. It has achieved this status in about three decades with a spate of acquisitions and takeovers. This vertical expansion has never been let up since its formative years and has become its planned positioning strategy in its objective of becoming and possibly remaining number one globally. 2 The AirTouch and Verizon connections Although Vodafone was always on the lookout for expanding its reach and its markets, the opportunity provided to it by the takeover of the US AirTouch was unique. When it took over AirTouch, it automatically acquired AirTouch’s stake in Mannesmann, the largest German telecom operator. In the corporate world, companies have become marketable commodities. They are seen as commodities in terms of their financial contribution to increasing corporate value on the stock market. Corporates buy one another by way of merger in a friendly mutually agreed environment, or hostile takeovers during corporate wars, to augment their resources, power and market reach. Markets for corporate control create new opportunities for corporate managers to exercise power but they make relatively little contribution toward improving managerial efficiency. In all cases the intention is to grow vertically to become global players. It appears that the world is moving towards the eventual division of market share between a few global players in each field of economic activity. Apparently economies of scale as foreseen and foretold by Adam Smith (1776) have not just come true but are being pursued to the next level. In the Telecom industry too it appears that between five to eight players will eventually control the global markets. In June 1999 Vodafone bought the number two US wireless operator for 62 billion dollars cash plus stock transaction, the biggest ever deal of its time. Vodafone paid $9 cash and gave five of its shares for each AirTouch share. It also assumed $4 billion of AirTouch market debt. The resulting company, Vodafone AirTouch Plc, now had a market value of $110 billion, and served 23 million customers worldwide. Back in 1994, AirTouch was carved out of separation of PacTel Cellular from Pacific Telesis and was named AirTouch Cellular. AirTouch Cellular merged with Vodafone to become Vodafone AirTouch (VA) that became the number two cellular service provider in the US. (iwon) However there was many a condition that had to be made prior to getting approvals for this merger one of which was that Vodafone agreed with the EUs request that it shed its 17.2% stake in E-Plus Mobilefunk GmbH, the third-biggest German mobile phone operator. Vodafone also had to raise a loan of $ 10 billion to pay of the cash purchase of AirTouch shares. (Reinhardt Krause). Now the stage was set for formation of Verizon Wireless. Three months later, in September 1999 Vodafone AirTouch announced a joint venture with Bell Atlantic Corp and its affiliates. This venture was named Verizon Wireless and in 2000 with the addition GTE Wireless to its fold it became the top wireless service provider in the US, until it was relegated to number two position by AT&T Wireless in 2004. Vodafone already was the top mobile operator in the UK with 33% market share and Orange was next with 18%. Vodafone was also a large player in various European markets, including Germany where it held a 17.2% stake in E-Plus Mobilefunk, which it sold due to VA formation. But it became a partner with Mannesmann due to the holding that AirTouch had in it. . After having acquired AirTouch and becoming a true Global Mobile Company, it was imperative for VA to capture the European glory by acquiring a German company. It targeted Mannesmann which was the second largest mobile company in Germany and was a ripe case for takeover. 1 The Mannesmann Takeover Although all German companies have a very fractured ownership pattern, Mannesmann was even more uncommon. It had the most International ownership pattern amongst the German corporates. The US and UK holding amounted to 40% with other interests having 20% and only 40% were in German hands. Mannesmann’s ownership was fragmented and the stakeholders had little say in its management. This was a peculiar case, but quite common in Germany, and it made the company vulnerable to takeovers. VA made a friendly bid for it in the end of 1999 with an offer of 43.7 VA shares for every Mannesmann share which was however rejected by the management. VA came back with a hostile bid and raised the offer to 53.7 shares for each Mannesmann share with no cash component. The management of Mannesmann tried its best to muster support on political, labour and shareholder fronts, but seeing lukewarm support gave in just before the final deadline to make it appear as a friendly takeover. The whole affair took just three months. The German financial scene is quite different from that of the UK markets. According to De Jong (1996) a higher share of value additions go to the employees and a lower share to the shareholders. This is the reason behind high skill and high productivity of German companies. The creation of high wages and consequently rigid or inflexible employment also named “beneficial constraints”(Streek 1997) permits German companies to invest in high skills and to select markets that can accept their niche products. This distribution of profit or earning results in low value for shares and low return for capital invested helps in retained earning being deployed for product innovations and retention of high skilled labour at high cost. This also means the company can spend more on R&D activities. This low return does not deter the German investor as his investment is low too. But this exposes the company as it is undervaluing its abilities. The mass market is much bigger than the niche markets and products of mass appeal such as mobiles invite the company to unlock shareholder value. This meant that when the shareholder is shown that his investment can fetch greater value and even greater returns, his loyalties shift and takeovers become possible. Shleifer/Summers 1988; Chelma 1998) state that breaches of trust resulting from net losses of efficiencies lead to larger premiums that account for transfer of wealth from stakeholders to shareholders. Whenever the shareholders feel that other stakeholders like the management and labour are getting better of them, they perceive it is low efficiency and punish them with loss of faith in them, inviting and getting premiums on their holding through takeovers. The shareholding pattern in Germany is very fragmented and the case of Mannesmann became a prime example. There was no significant shareholding by any corporate or individual and over 50% of the shares were held by overseas shareholders, mostly from US and UK. They saw value addition in the takeover and were for it. The price offered was not only at a premium, but the possibility of greater earning due to enhancement of the local and global reach of the larger global company was very lucrative. For these reasons they were not in agreement with the management when they refused the friendly takeover attempt. Mannesmann was therefore undervalued as it had assets that were capable of producing higher value for the shareholders but were not doing so. This was a ripe case for a merger or takeover. Since the company was amongst the largest in Germany, there was scant possibility of a takeover or merger attempt from within the country. For long the German corporates were also protected as the institutions that were both shareholders and financiers were reluctant since the profit from such change in shareholding was taxable. But the German tax laws changed during the nineties and the institutions, particularly the banks, become advocates of takeovers and mergers in the interest of their own investments and lending. In all fairness the undervaluation of the Mannesmann’s share capital was one major factor that supported thee takeover, although it was not the VA objective. However VA stated that the value of their combined capital was to become far greater due to synergies that would be created as a result of this exercise. The labour in Mannesmann was mostly an uninterested bystander. The reason is not far to see. Of the total labour force of 130,000 less than 29000 were employed in the Telecom division comprising of both mobile and fixed telephony. The labour force was also of the view that since the nineties more attention was being paid to the Telecommunication division to the detriment of the other division. Employees constitute an important part in the overall performance of a company and in Germany they had a Codetermination Act of 1951 that allowed them to participate in decision making in a big and important way. Codetermination refers to the rights of information, consultation, and codetermination in the decision-making structure of companies through both works councils and the employee representation on the Supervisory Board of German companies. . Indeed in Germany the management structure is two-tiered and there is a Supervisory Board over the normal Board which makes the strategic decisions. Labour is an important constituent of this Supervisory Board and is represented by a member. They also perceived, and correctly so, that after takeover the company will be broken and that they shall become independent once again. Therefore they did not perceive any threat to their jobs. Their member in the Supervisory Board did not reportedly block the deal. As a result there was only a resemblance of resistance to the takeover attempts and that too was perfunctory. 2 The Merger Motives Much has been said about the supposed motives of VA in the hostile takeover of Mannesmann. The most is bout the supposedly retaliatory step taken by VA against the takeover of Orange Plc by Mannesmann. It was considered to be a breach of trust or even a breaking of a gentleman’s code by Mannesmann to have encroached upon the territory of a partner with whom it had been cooperating in other areas. Mannesmann bid for Orange with 30 billion Euros in October with schedule for the takeover by 9th November. This was seen as a threat to the VA home market, despite it being a market leader, and Orange being a distant second, and rumors of a reaction immediately spread in the market. VA’s intentional strategy of vertical acquisitions was by now accepted as standard practice, and their recent acquisitions of AirTouch and formation of Verizon were adequate enough pointers for a big move on Mannesmann itself. The market was certainly right about the xpected move, but that was not the motive. It may have been a clincher for a quicker decision but was certainly not the prime motive. VA already had a stake in E-Plus of Germany, but could not push for more and was indeed requested by EU to relinquish its stake. There was no urgent need for its takeover bid for this reason alone. In fact the takeover was imminent for other reasons. After having set its footprint over the US, VA needed to stabilize itself in Europe before making concerted efforts in the rest of the globe. Its strategy had been to either establish itself as a leading player in Europe, or to become partners with other existing operators. These partnerships were again both with major or minor holdings. The central idea was presence in all markets and a positioning strategy. 5 Defining Strategies It has been stated by Hamel and Prahalad that companies that desist from competing for future market opportunities are doomed and forgo corporate value creation that they had achieved in the past. (Hamel and Prahalad). Growth is dependant on momentum and it is an integral part of business strategy. Growth is a also a very difficult decision as it involves investments; and an investment may become wasteful or a burden if there is no adequate return in a reasonable period of time. Corporate strategies have been divided into Five Ps by Mintzberg (1987) and they are Plan, Ploy, Position, Pattern and Perspective. While each is a separate type of strategy with its attendant qualifications, yet they are usually present in all strategies to some degree. The real difference lies in the fact that one of them will be dominant and others will play a supportive role. (Mintzberg 1985). Then there is a “fitness to landscape” theory from Kaufmann stating that states that all companies work hard to achieve glorious heights that can be viewed like a mountainous landscape with high and low peaks. In this case the height of a feature is a measure of its fitness. It is further explained that these are not static highs and lows but are dynamic and corporates change positions to gain maximum advantage. (Kaufmann). This is how Micheal Porter (1996) explains these efforts as “jockeying for position”. (Micheal Porter). In this scenario too outwardly the company struggles to come to terms with the various stakeholders, but the underlying cold calculation is again aimed towards catching customer attention resulting in higher sales and returns. The more the company tries to fit the landscape the more customer appreciation they earn; it is incidental that they earn a higher profit in the process. There for the two most important motives for VA, were Growth and Positioning. Both would bring in new and bigger corporate customers as well as the masses. These would assist in getting manufacturers of handsets and accessories in their fold for offering innovative services. The next motive was to bring internet on the mobile for the customer. VA knew that the next big jump was to be in technology and it wanted to be in position to offer it to the customer ahead of competition. The fourth motive was of course to protect its own turf. Through Orange, Mannesmann would have been in position to capture its home territory. VA could not by itself takeover Orange as there was the Competition law that denied it monopoly. But it could beat that by weakening it. The fifth motive was to gain entry into other areas of Europe which were already being served by Mannesmann, most notably the Italian Omnitel. Through acquisitions of various domestic and foreign companies Mannesmann had already become a central player in European telecommunications next to Vodafone and VA vied for that slot. It could come most easily through this acquisition. This would easily and quickly fulfill its objective to be in control of Europe. 6 The Timing For VA the year 1999 was historic. First it had successfully taken over AirTouch in the then largest takeover in corporate history. Secondly it had partnered a joint venture with AT&T to become the largest player in the US and the world. It was appropriate to keep the momentum going by acquiring Mannesmann to get a strong grip over Europe. The entire West would be won, and it was. Now only the emerging markets and the Asian countries would be left. It was indeed a masterstroke and it was carried out to perfection. There were other more mundane factors too. Until the takeover of Orange by Mannesmann both it and VA were considered to be allies strengthening their hold over various markets by synergizing, despite the fact that VA did not believe in value of Fixed Telephony. Then suddenly at the end of 1999 it seemed that they might become competitors in UK, VA’s home country and by extension in Europe. This would have hurt VA badly which had already acquired the image of the top player in the world and a giant slayer of sorts. It would also have hurt VA as it could not have got a firm footing in France through Vivendi with whom it was tying up for wireless internet coverage in Europe. It would also prevent it from entering the Italian market. That it would have set it back in its positioning strategy by a great deal would not be an exaggeration. In fact by 2006 VA, now Vodafone again, has got hold of 43.9 % of SFR, the mobile unit of Vivendi. (Vodafone-Vivendi). In Italy it has rebranded Italia Omnitel as Vodafone. 7 Impact VA takeover of Mannesmann has left an indelible mark on both the corporate world in general as well as on the Telecommunication market globally. First and foremost it has spelled out that nothing is sacrosanct in the financial markets today. Davids will continue to eat up Golliaths and the markets will rise in cheer. What matters is the fundamentals and returns to the shareholder. One has to be powerful to be a visionary. In this age of runaway technology, mobility has come to be recognised as the most potent of all mediums. This generation wants everything here and everywhere 24x7. This gives the unique opportunity to the likes of Vodafone to rise to the occasion and in fact lead the technology revolutions through innovations. But innovations are feasible with scale of operations to reduce the gestation period. This is possible only when one has the global footprint and Vodafone had realized this very early in its strategic path that this positioning is essential for its growth and sustenance. The Mannesmann takeover has opened the gateways to consolidation of nut just power, but of possibilities and the customer is the winner who takes it all. 8 Bibliography Chelma, Gilles, 1998: Hold-up, Industrial Relations and Takeover Threats. CEPR Discussion Paper No. 2021. London: Centre for Economic Policy Research. De Jong, Henk W., 1996: European Capitalism Between Freedom and Social Justice. In: William Bratton et al. (eds.), International Regulatory Competition and Coordination: Perspectives of Economic Regulation in Europe and the United States. Oxford: Clarendon Press, 185–206. 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