This "Vodafone AirTouch's Bid for Mannesmann" case study examines the economic, financial, and corporate governance consequences of Vodafone's bid for purchasing Mannesmann.
Harvard Business School (201096-PDF-ENG)
April 18, 2001
Case questions answered:
Case study questions answered in the first solution:
- What is the strategic and economic rationale for Mannesmann’s acquisition?
- Did Mannesmann overpay Orange? Why or why not?
- In the proposed deal, each Mannesmann share would exchange for 53.7 Vodafone shares. As a Mannesmann shareholder, would you accept the current offer? Would you support the proposed transaction as a Vodafone shareholder? What is the breakeven synergy for these shareholders to accept the deal given the premium offered? Provide quantitative analysis to support your argument.
- What is the expected synergy based on Goldman Sach’s estimates? Should Vodafone’s shareholders support the proposed transaction based on Goldman Sach’s estimates? Why or why not?
- What are the market’s estimates of the implied synergy from the deal?
Case study questions answered in the second solution:
- What is the strategic and economic rationale for Mannesmann’s acquisition of Orange? Did Mannesmann overpay?
- What was the rationale for Vodafone AirTouch’s acquisition of Mannesmann?
- What are the sources of synergy and value in these deals? How would you categorize and value them on a relative basis?
- What would be the execution challenges of a Mannesmann acquisition and how would you prioritize your imperatives in creating value from a combined business?
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Case answers for Vodafone AirTouch's Bid for Mannesmann
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Overview – Vodafone’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 merge between Mannesmann and Orange, Vodafone 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 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 accepts 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 also only planned for developing global internet platform. As a result, acquiring Orange could generate Mannesmann’s great advantages that new ISP would help Orange attract more clients and consolidate Mannesmann’s status of being 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. And as Mannesmann focused on the European market and Orange held an interest in Austria, Swiss and Belgian, the risks which Mannesmann faced for the reason that it only focused on the European market can 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. And 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 who has the occupancy rate of 18% in UK’s market, resulting in enlarge the company’s size 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 of Vodafone AirTouch, 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 share are relatively the same, so does their UK. However, the EV/EBITDA ratio of Orange is much higher than One2One and the European average amount, we roughly draw the conclusion that Mannesmann paid about 300% premium of the average level.