Vodafone’s takeover of Mannesmann was not only one of the largest acquisitions ever, it was the first time a UK company mounted a successful hostile bid for a German company. Dearbail Jordan reports on the battle of the telecoms giants.
It was the perfect acquisition. In October last year, German telecoms giant Mannesmann decided to purchase UK company Orange.
The deal meant that the company was effectively putting in place the final pieces of a jigsaw which would ensure complete European coverage.
Germany’s number two telecoms company – second only to Deutsche Telecom – had already established links in the Italian market through its interests in telecoms firm Infostrada and wireless carrier Omnitel.
In France, Mannesmann had invested in French carrier Cegetel and in Austria, it owned 75 per cent of wireless carrier tele.ring.
In March 1999, Mannesmann also paid £1.39bn for Otelo, which had links to the Belgium, Denmark, Luxembourg, Switzerland and UK markets.
The prospect of increasing its stake in the lucrative UK market, however, was too good to pass up.
Earlier in 1999, the company had missed out on the chance of buying UK company One2One to arch rival Deutsche Telecom after a bidding war pushed the company out of Mannesmann’s reach.
Orange remained the only UK company to remain independent and the temptation to fulfil its expansion plans was to prove too much.
But its bold bid to secure the company would ultimately lead to its downfall – resulting in the first successful hostile takeover bid of a German company and one of the largest acquisitions ever completed.
According to a well-worn Mafioso cliche, “enemies come with smiles”. Mannesmann’s came in the form of Vodafone AirTouch.
Vodafone and Mannesmann were already partners in Italy, France and Germany, where the UK telecoms giant owned a 35 per cent stake in Mannesmann Mobilfunk, which operates the country’s largest mobile network D2.
Mannesmann’s £19.8bn purchase of Orange, however, threatened Vodafone’s plan for domination of the telecoms market.
A company Vodafone had considered as ally had effectively double-crossed it on its own turf – something had to be done.
On 19 October, when Mannesmann smugly confirmed that it was in talks with Orange, Vodafone was already preparing both its key legal players and its war chest for its counter attack.
It contacted its UK lawyers, Linklaters & Alliance, which had previously advised on its audacious takeover of US operator AirTouch in January 1999.
David Cheyne, corporate partner at Linklaters, who worked in tandem with corporate partner Iain Fenn on the deal, says: “We began looking at the deal for Vodafone a day or two after it was announced.
“We studied the regulatory issues and we also started looking at German law.”
At this point German firm Haarmann Hemmelrath & Partner had also been brought into Vodafone’s inner circle.
The firm threw a 14-strong partner-heavy team behind the transaction, which included highly-rated telecoms partner Klaus Riehmer, partner in tax and corporate law Wilhelm Haarmann, and Rolf Uecker, a partner specialising in competition law.
One lawyer says: “It was not a complete surprise. Everyone knew that Vodafone had to act.
“If Mannesmann could have integrated Orange completely, Vodafone would have been rubbish.”
Mannesmann and Hutchinson Whampoa, the Hong Kong conglomerate which owned a 44.8 per cent stake in Orange, advised its lawyers to act accordingly.
Representing Orange, Nigel Boardman, head of corporate at Slaughter and May, began constructing a deal to ensure that the company was fully owned by Mannesmann before any outside party could threaten the transaction. He worked with the support of corporate partners Tim Boxell and Christopher Saul.
Mannesmann relied on Norton Rose as its legal counsel after its usual adviser, Freshfields, was conflicted out because it was already advising Orange on another matter.
However, the firm did pick up work on the deal, acting for Mannesmann’s financial advisers JP Morgan and Morgan Stanley Dean Witter, after it finished its work for Orange.
A senior lawyer says: “There was an unusual structure to the deal. It was the first time there was a bid that was not conditional on EU clearance.
“Orange was unwilling to take the risk of anything going wrong. It would only recommend the bid if it was a certainty.”
If a serious doubts investigation had been launched by the EU, the deal would have been held up by three months, leaving the company in limbo and therefore open to a counterbid from a rival.
One source says: “Mannesmann did have concerns about Vodafone, which it saw as a threat.”
Time was of the essence – the deal was agreed within three weeks.
On 14 November, however, Chris Gent, chief executive at Vodafone, arrived in Frankfurt to discuss a “friendly” merger with chief executive at Mannesmann, Klaus Esser.
At this point Mannesmann had flanked itself with its UK firm Norton Rose, which was in the throes of acting on the Orange deal, and its German counsel Bruckhaus Westrick Heller Laber.
But Esser rejected Vodafone’s proposal of a £64bn all share merger.
According to one source close to Mannesmann: “[Gent] gave a letter to Esser on the Sunday and he left. We were going to put him out of the window sitting on the ledge, but we allowed him to take the elevator instead.”
And from that point on, all hell broke loose and war was declared.
On 15 November, Mannesmann sought a High Court ruling to restrain investment bank Goldman Sachs, which was advising alongside Warburg Dillon Read, from acting on behalf of Vodafone.
Mannesmann argued that since Goldman Sachs had advised both it and Orange in the past, it was privy to confidential information.
Three days later, the case went to the High Court to be heard before Mr Justice Lightman.
Christa Band, litigation partner at Herbert Smith, advised Goldman Sachs with support from corporate partner Henry Raine while Norton Rose telecoms partner Chris Pearson acted for Mannesmann.
Judge Lightman ruled that the evidence presented to him on the application of the case was “false and misleading” and “totally hopeless”.
One senior lawyer says: “It is very rare for an English takeover to have litigation. In other countries like France or the US, litigation is quite common.”
The case was thrown out on the same day, leaving both Mannesmann and Norton Rose with egg on their faces.
In December, however, Mannesmann decided to seek advice from its preferred UK law firm, Freshfields.
Commenting on his reasons for retaining two UK firms, Joachim Peters, director in corporate law at Mannesmann, remains tight-lipped.
But he is adamant that both firms were contracted to work on the takeover battle in November when Vodafone first approached Mannesmaan.
But Simon Marchant, corporate partner at Freshfields, who headed up the “small and compact” team of lawyers, says the firm did not begin acting on the deal until December.
Marchant says: “We looked at how the deal was structured, we looked at the German takeover code issue. We went in and got up to speed.”
The following day Esser presented his proposals for a £85bn bid to Mannesmann’s supervisory board.
Riehmer says: “Until that point we were working behind the scenes, dealing with the offer document itself.
“It was the first unsolicited takeover that was successful in Germany. A German takeover had never been treated in this way before. There were many issues that were not in the book so we needed to find out for ourselves.”
Cheyne says that problems were anticipated. Among the hurdles was the issue of shareholder voting. Under Mannesmann’s articles of association, shareholders could only vote with a 5 per cent share in the company.
This made the prospect of securing a foothold in the company within a short time span almost impossible. However, 60 per cent of Mannesmann’s shareholders were based outside Germany and so out of the immediate reach of the company.
But Marchant says that because both the UK and Germany have a voluntary takeover code as opposed to a statutory one, the process of advising Mannesmann was made more accessible.
He says: “We were grappling with the code like we do in the UK. We found that it was a huge advantage to be versed in the rules of the code and the solutions to the problems we encountered on behalf of our client.”
By December, Vodafone was under increasing pressure to launch its formal offer for Mannesmann and provide the targeted shareholders with an offer document.
Since a percentage of Mannesmann’s shareholders were based in the US, Linklaters had already submitted an offer to US regulator the SCC.
And Linklaters entered a race against against the clock to meet the 24 December deadline set by the German Takeover Commission to submit the offer document.
Clare Moulder, securities and banking partner at Linklaters, says: “I received a call at home that we were going to press ahead with the offer.”
Moulder then set about raising a staggering euro30bn (£18.4bn) syndicated loan – through a group of banks including Bank of America, Barclays, Citibank and Goldman Sachs – which had to be finalised before her corporate colleagues submitted the offer document on 23 December.
The firm had already advised Vodafone on raising US$10.5bn (£6.6bn), for what was then the largest ever syndicated loan when the company bought AirTouch.
The offer document also included a prospectus of Vodafone’s lisiting particulars, since the company was purchasing Mannesmann in shares.
But on submission of the listing particulars Mannesmann stated that because the prospectus had not been translated into German, its shareholders were at a disadvantage.
Riehmer says: “Mannesmann says its shareholders were not aware of the risk of the deal because it had not been translated.
“So we translated it from English into German, we didn’t have anything better to do.”
By 14 January, Mannesmann had submitted its defence document.
Calm set in, but only until the end of the month, when Mannesmann disclosed that it was talking to US internet giant AOL about a possible tie-up and Vodafone delivered a fait accompli by announcing a joint venture with French telecoms giant Vivendi.
Vodafone’s move was inspired. It sold a 7.5 per cent stake in Cegetel to Vivendi, in which Mannesmann also held a share. French firm Bredin Prat advised on the deal.
Vivendi, which had been rumoured to be a potential white knight for Mannesmann, already owned 44 per cent of the company.
Riehmer says: “Vivendi was the turning point. It was a positive move for Mannesmann’s shareholders.”
From that point on the deal began to flow in Vodafone’s favour.
Riehmer says: “On the morning of 3 February I received a call that I should go to Dusseldorf to negotiate with Mannesmann.
“We were situated in a discreet part of Mannesmann’s office while all the reporters were waiting at the head office. Time was of the essence as the offer period was ending on 7 February.”
By the end of the day, however, Esser and Gent were able to face the press with a significantly increased £113bn recommended offer.
This chapter may be over but the story is set to continue.
There is still a question mark hanging over the future of Orange, which Vodafone has always been quite open about spinning off. The EU will review the situation very carefully since keeping Orange would effectively give Vodafone blanket coverage of the UK telecoms market.
And as the next stage of the so called new e-conomy rolls out across a Europe with a telecoms infrastructure ready to exploit it (see box), it is unlikley that Vodafone will remain content with having completed the only successful hostile takeover of a German company. They will have their eyes on other prizes.
The year of the mobile
Last year may have been the year of the dot coms, but 2000 is set to be the year of the mobile.
Behind the complexities and corporate machinations of the Vodafone-AirTouch-Vivendi-Orange-Mannesmann deals lies a simple aim, to control the airwaves in preparation for the next big business-to-business and consumer explosion – or what the analysts are calling m-commerce.
Mobile phones have been able to access the internet for some time but only at a snail’s pace. The latest generation of phones using WAP (Wireless Application Protocol) technology have bigger, brighter screens, increased speed and websites specially designed to be viewed on a phone. The new third generation phones will offer that and more.
Vodafone is determined to have access to the network infrastructure capitalising on the GSM standard across Europe. AirTouch in the US and Mannesmann in Europe were key parts of that jigsaw but Vodafone’s ambitions are bigger than simply becoming the world’s biggest network – it is looking at becoming a publisher on the new mobile internet, hence its deals with internet business Vivendi, digital broadcaster BSkyB and Manchester United and its development of what it calls a ‘mobile internet portal’. With AOL Europe (the Bertelsmann-AOL joint venture) out in the cold after the Time Warner-AOL merger, Vivendi executives are openly talking about adding the internet service provider to the group.
It is a clear indication that your takeover bid for a foreign company is ruffling a few feathers when Prime Minister Tony Blair begins throwing his weight around.
In late November, the premier expressed his concern that his German counterpart Gerhard Schroder was opposed to Vodafone’s bid for the country’s sacred cow Mannesmann.
The bid was the perfect platform to test if the single European currency worked.
However, German politicians were being thrown into a situation they had never experienced before – a foreign company that had the audacity to launch and succeed in a hostile bid for one of its most prized possessions.
The last major hostile takeover bid to take place in Germany occurred in 1990, when Pirelli AG attempted to takeover Continental AG. It failed.
The German market has traditionally been very closed. A voluntary takeover code was only introduced five years ago, and the market has a worldwide reputation of insulating itself behind a wall of rules and regulations.
However, many people believe that the success of Vodafone’s bid will show Germany the benefits of opening markets to global competition.
One lawyer says: ‘Capital markets were less developed in Germany. The private investor was more conservative but now shares are very fashionable.
‘People will now take the chance to look at something international.’
The European Union directive on takeovers is still at its draft stage, but is expected to create an all-encompassing code for consolation throughout Europe.
It would be a mistake to assume, however, that the German company remained in a state of shock throughout the Vodafone battle.
On the contrary, Mannesmann threw itself whole-heartedly into a bloody fight by launching an advertising campaign imploring its shareholders not to accept the Vodafone offer.
Klaus Riehmer, telecoms partner at Haarmann Hemmelrath & Partner, says: ‘It was a very intense ad campaign. It has never happened before [in Germany] in a takeover situation. Mannesmann’s campaign was on the emotional side.’ Something the Germans are not used to.