Vodafone AirTouch’s Bid for Mannesmann – Case Solution

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Vodafone AirTouch's Bid for Mannesmann Case Answers

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Overview – Vodafone AirTouch’s bid for Mannesmann

In October 1999, Mannesmann paid ₤6.40 in cash and 0.0965 newly issued Mannesmann shares for every Orange share. Our group is to analyze the strategic and economic rationale for Mannesmann’s acquisition of Orange and to calculate whether this was a fair price. Besides, in response to the merger between Mannesmann and Orange, Vodafone AirTouch decided to consider the acquisition of Mannesmann.

Mannesmann rejected Vodafone’s friendly offer, which was about 138 billion euros, and Mannesmann claimed that its value was close to €350 per share. Our group first calculated the breakeven synergy for two companies. Then, we used the DCF model to get the present value of implied synergy.

Compared with Goldman Sach’s estimates, our group thought that Vodafone accepted the transaction. Finally, our group provided the market’s estimates of the implied synergy from the deal.

Q1. What is the strategic and economic rationale for Mannesmann’s acquisition?

From the strategic aspect, Orange was poised to launch its own free ISP (Internet Service Provider ) to support rapid and stable internet for customers; in contrast, not only did Vodafone announce its mobile data strategy, but it also planned to develop a global internet platform.

As a result, acquiring Orange could generate Mannesmann’s great advantages in that the new ISP would help Orange attract more clients and consolidate Mannesmann’s status as one of the largest telecommunication companies in Europe.

Moreover, the acquisition helps Mannesmann to increase its global reach—Mannesmann-Orange would be present in 7 countries with 14 million equity subscribers. As Mannesmann focused on the European market and Orange held an interest in Austria, Swiss, and Belgian, the risks that Mannesmann faced for the reason that it only focused on the European market could be diversified.

From the economic aspect, as the wireless or mobile segment was experiencing fast growth from 1990 to 1999, there would be a huge demand in the industry of telecommunication. The mobile customers and the penetration rate were expected to increase rapidly in the coming decade.

Firstly, Mannesmann, one of Europe’s largest telecommunications companies, acquired Orange, the third-largest wireless operator in the UK, which has an occupancy rate of 18% in the UK market, resulting in getting the company’s size larger and a significant reduction in the cost of network operators to reach the economies of sales.

Secondly, as Orange’s spectacular growth, CAGR of 115%, reached almost three times Vodafone AirTouch’s CAGR of 46.1%, Orange was considered to generate great revenue for Mannesmann after the acquisition.

Q2. Did Mannesmann overpay Orange? Why or why not?

We conclude that Orange has been overpaid for several reasons.

To start with, as we have seen from the wireless player in the UK market, Orange and One2One’s market shares are relatively the same, and so is their UK.

However, the EV/EBITDA ratio of Orange is much higher than One2One and the European average amount, so we roughly draw the conclusion that Mannesmann paid about 300% premium of the average level.