Sunday Times
February 6 2000 BUSINESS FOCUS
Vodafone's chief, Chris Gent, secured a momentous breakthrough into corporate Germany by overcoming Klaus Esser of Mannessmann. Andrew Lorenz reports on how the historic battle was won and lost
V for Victory
It was midday last Sunday at the Hyatt hotel near Charles de Gaulle airport in Paris. Chris Gent, Vodafone AirTouch chief executive, cordially shook hands with Klaus Esser, executive chairman of Vodafone's bid target Mannesmann.
"Thank you for coming over," Esser said. "That's all right," Gent replied. "We had to be here anyway because of a meeting this afternoon."
That apparently innocuous statement hit Esser and his team like a thunderbolt. They understood what Gent was telling them: Vodafone had sealed a pact with Vivendi, the French telecoms-to-water combine that hitherto had always been viewed as the most likely partner with whom Mannesmann would repel the British bid.
The near-œ100 billion battle, the world's largest, was already on a knife edge. In the contest for strategic advantage, Vodafone had just secured a decisive edge.
Esser and his advisers, led by Morgan Stanley and Merrill Lynch, saw the details of the Franco-British agreement only when they were announced by Vivendi and Vodafone a few hours later. The reality was worse than Esser had feared.
Vodafone and Vivendi were forming a joint company, called Multi Access Portal (MAP), to deliver data and internet services via mobile phones across Europe. Gent's efforts to secure such a deal had been revealed by The Sunday Times last month, but few observers thought Messier would opt for the British against his long-time ally, Esser.
Few observers believed Meisser would opt for the British against his long-term ally, Esser
To win over Messier, Gent had to concede some plums. If Vodafone won Mannesmann, he would discuss the sale to Vivendi of all or part of the German company's fixed-line operations in Germany and Italy,
Most rewardingly for the French, Gent agreed to sell Messier half of Mannesmann's 15% stake in Cegetel, the holding company for fixed and mobile services in France, which also includes British Telecommunications and America's SBC Communications. That gave Vivendi, which already owns 44% of Cegetel, control. Vodafone will retain 20% of SFR, Cegetel's mobile arm.
IF all that was not enough, Messier - revelling in his chance to play kingmaker - personally delivered the coup de grƒce. Asked which side he thought would win the bid battle, Messier delighted Gent by saying he was "sure Vodafone would win control of Mannesmann".
One pro-Mannesmann investment banker said: "What do you expect from Messier? After all, he is not only a former investment banker, he is French."
For a moment, even the mild-mannered Esser, usually a model of detachment, was furious. For almost a year he and Messier had discussed a merger of the two groups. A merger document was drawn up, under which Mannesmann would have held a majority stake - commensurate with its larger market worth - in a combined group, which would then spin off Vivendi's water, electricity and rail interests. Esser and Messier were to be co-chairmen.
A Vivendi board meeting was called for Friday, nine days ago. But on the eve of the meeting the deal fell apart. Messier, it is said, made a series of demands - notably that Vivendi executives should hold most of the top positions below himself and Esser.
Observers say Esser would not accept conditions he believed would harm his colleagues, the business and therefore the interests of his investors. Despite the risk that his stance would drive Messier into Vodafone's camp, he stuck to his guns.
Esser says: "We were not prepared to do any transaction where we were diluting value for our shareholders in return for the favour of being rescued from a black knight."
The equation facing Gent was different. Although he would lose power in France by ceding control of Cegetel to Messier, the Vodafone boss knew he would be virtually clinching victory over Mannesmann.
To Gent, France was worth a lot less than Mannesmann's outstanding positions in Germany and Italy and the elimination of the threat it posed through its newly acquired Orange subsidiary in Vodafone's home market.
Just as his willingness to give in order to get had secured an alliance with Bell Atlantic in American mobile, so Gent's deft diplomacy won Vivendi.
When Vivendi's board gathered in its head office near the Arc de Triomphe, it duly rejected the Mannesmann deal. It also turned its back on rival proposals by BT and KPN of the Netherlands for a transEurope internet alliance. Gent could put the victory champagne on ice.
IT TOOK the world's stock markets about 24 hours to take the message from Messier to heart. Then the virtuous circle that Gent and his advisers, Goldman Sachs and Warburg Dillon Read, had worked throughout the bid to complete, took over. The more Vodafone looked like winning, the higher its shares flew and the stronger became its prospects of success.
The rise in price lifted its offer to the point where it passed even the œ219 level Esser had said was Mannesmann's true worth.
Esser bowed to the inevitable, encouraged by Canning Fok, head of Hutchison Telecom, Mannesmann's largest investor thanks to its 44% stake in Orange.
Jurgen Schrempp, chairman of DaimlerChrysler and a member of Mannesmann's supervisory board, was also influential. Schrempp is a champion of Anglo-Saxon attitudes to shareholder value. His views chimed with those of Esser, who took pride in the internationalisation of Mannesmann's investor base - uniquely for a German-domiciled company, two thirds of Mannesmann shares are held by foreigners.
In the face of criticism by Gerhard Schroder of aggressive takeover bids, Schrempp had long said only two things counted in weighing up the merits of an offer: was it good for shareholders and did it make commercial sense?
Esser had always said a protracted takeover would do more harm than good to Mannesmann, potentially losing it market share. "Settle now for 49% and let's get on with business," Schrempp is said to have urged Esser.
Schrempp was preaching to the converted. By midnight on Wednesday, in Mannesmann's Dusseldorf offices, Esser and Gent had agreed in principle that the German company would accept an increased offer giving its investors 49.5% of the equity, up from the original 47.3%. When the deal was struck, it valued Mannesmann at œ113 billion.
At 2.30 in the morning, Gent's team flew back to London while a meeting of Mannesmann's supervisory board was convened for Thursday afternoon to approve the deal. But then came a big hitch: disagreement over some of the deal's terms almost derailed the deal. Over-enthusiastic members of the Vodafone camp were pushing for the immediate resignations of the supervisory board members.
Mannesmann insisted Gent drop his plan to hive off fixed line interests in Germany and Italy. Gent eventually complied - an undertaking that may cause trouble with Vivendi.
It was not until 9.35 on Thursday night, British time, that final agreement was reached, and not until Friday morning that the supervisory board approved the deal.
Vodafone formally became the first foreign company to succeed with a hostile bid in Germany - and not just any bid. Its offer, despite a slight decline in its value on Friday when Vodafone shares slipped from their all-time high, is the largest in corporate history.
The prize could be equally great. Without Mannesmann, Vodafone would have faced the grim prospect of marginalisation in Europe's mobile telecoms industry. With its crown jewels, its mobile market leadership in Germany and Italy, Vodafone can ride the data wave - the market for mobile data services that many experts see as tidal in its potential. "The development of wireless internet will be bigger even than the internet itself," says one investment banker.
Vodafone still faces some hard work to fuse the two businesses. But the potential beyond Mannesmann is now vast. On Friday, Gent was already talking about further acquisitions - he declined to name them, on the ground that "that tends to put the price up". There is the longer term possibility that the enlarged group could return to America and take over its partner, Bell Atlantic.
GENT'S assault on Mannesmann may have been triggered by necessity - Vodafone could not afford to let Esser's strategy succeed - but that should not detract from the brilliance with which he conceived and executed the bid campaign.
Gent led from the front, taking the fight on to Mannesmann's home ground to defuse initial opposition from German politicians and unions. "This could never have succeeded without Chris Gent's unwavering focus on the strategy and its execution," says Goldman's Scott Mead.
The ramifications of the victory go much further than the telecommunications industry. Had Mannesmann combined with Vivendi, it would have been only the latest of several Franco-German mega-mergers. Instead, the takeover is the first capture by the British of one of the commanding heights of corporate Germany.
Many American and British firms will be hoping to follow where Vodafone led. There are several reasons for this. The weakness of the euro gives German companies an export advantage British firms do not have. Buying a German firm would bring an instant boost to margins, while opening up access to Europe's biggest market.
Moreover, unlike French industry, which remains in the dark ages with moves to a 35-hour week and huge barriers to job cuts, German companies are better structured than at any time in the past 10 years. Wage settlements are low, productivity is high and many workforces have been cut to the bone. The country's infrastructure is also better than Britain's.
But most aspiring foreign bidders will have to wait. The key development could come next year, with the promised repeal by Schroder's government of the German law that imposes a 40% tax on realised share gains by German institutions.
German banks and insurance groups, such as Deutsche Bank and Allianz, own vast chunks of corporate Deutschland. If, as promised, the tax comes into effect in 2001, they are expected to embark on a sweeping reduction or wholesale disposal of their investments.
Such a move would open the door to foreign investors and could potentially put many other companies in Mannesmann's position. The overseas bids would surely follow.
So even though Vodafone's history-making success is unlikely immediately to unleash a flood of follow-on bids, it may, in time, be seen as a pivotal moment in the conflict between Anglo-Saxon freemarket capitalism and the continental mixed-market model.
The acquisition itself, creating Europe's largest company by market worth and the fourth largest in the world, is already a landmark in corporate history. Deals have never come any bigger. But, as one weary but delighted investment banker noted on Friday: "This was so much more than just a deal." |
