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6. Speculate as to why investors for both firms responded so favorably when news of the deal was
announced?
EUROPEAN MOBILE PHONE AND CABLE INDUSTRY
SHOWS SIGNS OF CONSOLIDATION
_____________________________________________________________________________________
Key Points
• Industry consolidation often is an important factor in triggering merger waves.
• In buying competitors, telecom firms realize substantial operating cost savings by cutting
duplicate functions, reduced capital outlays by not having to build networks, and additional
revenue from cross selling and bundling services.
____________________________________________________________________________
Europe’s telecommunications sector ignited a new round of consolidation in early 2014 when Vodafone
acquired Spanish cable company Ono, which owns high speed networks across Spain, for 7.2 billion euros
or about $10 billion including assumed debt. The firm inked a similar deal in late 2013 when it acquired
German cable operator Kabel Deutschland for 7.7 billion euros or approximately $10.7 billion including
assumed debt. In both deals, Vodafone financed about 55% of the purchase price through excess cash on
its balance sheet and the remainder through borrowing. Having sold its 49% stake in U.S. based Verizon
Wireless (a joint venture with U.S. telecommunications company Verizon Corporation) in early 2014,
Vodafone was flush with cash and motivated to buy up competitors. Vodafone’s objective is to achieve
substantial savings in operating expenses and capital outlays as well as revenue increases due to market
share gains.
The deals came amid a flurry of asset sales and consolidation among Europe’s fragmented
telecommunications firms. The Continent is characterized by numerous small competitors with operations
in specific countries and a few regional firms whose operations span multiple and often contiguous
countries. During the first quarter of 2014, Vodafone agreed to sell its ownership interest in Verizon
Wireless about the same time French media conglomerate Vivendi reached an agreement to sell its mobile
phone unit SFR to cable and mobile phone provider Altice, a multinational cable and telecommunications
firm.
Ono was acquired by a consortium of private equity investors in 2005 for 4.5 billion euros (about $5.9
billion) including Providence Equity Partners, CCMP Capital Advisors, Quadrangle Capital, and Thomas
Lee Partners. The firms invested an additional one billion euros ($1.3 billion) in Ono in recent years. While
private equity firms holding approximately 54% of the firm were planning to undertake an initial public
offering of Ono on the Madrid stock exchange, they changed their minds when approached by Vodafone’s
and its highly attractive offer price.
In 2013, Ono’s earnings before interest taxes and depreciation and amortization (EBITDA) declined
8.8% to about 686 million euros (about $900 million) from the prior year. The decline in EBITDA (a
commonly used proxy for cash flow in telecommunications firms) complicated the valuation of the firm. It
may take several years before the deteriorating cash flow can be turned around, making the timing of the
firm’s recovery problematic. Despite Ono’s subpar financial performance, investors greeted the
announcement that Vodafone would acquire Ono by driving up its share price by 1.6%.
Nestlé Buys Majority Ownership Stake in Chinese Candy Maker
____________________________________________________________________________
Key Points
Acquisition often is a more desirable option to a startup in a foreign country.
Cross-border acquisitions require substantial patience.
The size of the Chinese consumer market makes growth potential highly attractive.
______________________________________________________________________________
After being in negotiations for two years, Swiss giant Nestlé, the world’s largest food company, announced
on July 15, 2011, that it had reached an agreement to pay $1.7 billion for a 60% interest in candy maker
Hsu Fu Chi International. The remainder of the firm would be owned by the founding Hsu family. This
transaction constituted the biggest deal yet for Nestlé in China and one of the biggest in China by a foreign
firm. The deal represents Nestlé’s second major purchase in China in 2011, after the firm agreed to buy
60% of the Yinlu Foods Group in April.
The agreement called for Nestlé initially to buy 43.5% of the firm’s shares from independent
shareholders (i.e., non–founding family and noninstitutional investors) for 4.35 Singapore dollars
(equivalent to $3.56 per share), a 24.7 % premium over the six months ending on July 1, 2011, and a 16.5%
stake from the Hsu family. Hsu Fu Chi’s current CEO and chairman, Mr. Hsu Chen, would continue to
manage the firm. Nestlé paid 3.3 times revenue, as compared to 2.4 times what U.S. food manufacturer
Kraft Foods paid for British candy company Cadbury in 2010. However, the deal was less expensive than
Mars’ takeover of Wrigley at 4.2 times sales in 2008 and DANONE’s purchase of Dutch rival Numico for
4.5 times sales in 2007. Nestlé justified the multiple of revenue it paid by noting that the investment in Hsu
Fu Chi provides an opportunity to become the top player in this high-growth market. In addition, Hsu Fu
Chi provides a platform for future acquisitions that could in concept be relatively easily added to its
Chinese confectionary operations.
coffee, bottled water, milk powder, and other products for the food service industry. With the addition of
Hsu Fu Chi, Nestlé’s sales in China jumped to $4.2 billion. Nevertheless, its market share in the food
business still lagged that of rivals Unilever and DANONE. With its revenues in China growing at 8% to
10% annually, Nestlé has stated publicly that it intends to derive at least 45% of its total annual revenue
from emerging countries by the end of the decade, as compared to about one-third in 2010.
With the founding family owing 57% of the shares and Baring Private Equity Asia owning 15%, there
were few independent shareholders to whom to sell shares. As the controlling shareholder, the founding
family had little incentive to buy out the minority shareholders except at a significant discount from what
investors believe is the firm’s true value in order to take the firm private by buying out the public
shareholders. Consequently, the independent shareholders had ample reason to support the Nestlé proposal.
Hsu Fu Chi, which currently generates all of its revenue in China, may need Nestlé to expand overseas. The
firm has stated that it wants to enter the international market, but it may not have the requisite resources to
do so. Nestlé’s strong international network and name recognition may make such expansion possible.
Discussion Questions
1. What were Nestle’s motives for acquiring Hsu Fu Chi? What were the firm’s alternatives to
acquisition and why do you believe they may not have been pursued?
2. What alternatives did the majority shareholders in Hsu Fu Chi in growing the firm? Speculate as
to why they may have chosen to sell a controlling interest to Nestle?
3. Speculate as to why Nestle used cash rather than its stock to acquire its ownership interest in Hsu
Fu Chi?
4. Why do you believe the independent and non-institutional shareholders in Hsu Fu Chi, whose
shares were listed on the Singapore stock exchange, were willing to sell to Nestle? What were
their other options?
5. Nestle is assuming that it will be able to grow its share of the Chinese confectionary market by a
combination of expanding its existing Chinese operations (so-called organic growth) and by
acquiring regional candy and food manufacturers. What obstacles do you believe Nestle could
encounter in its efforts to expand in China?
6. Do you believe that multiples of revenue paid by other food companies is a good means of
determining the true value of Hsu Fu Chi? Why? Why not?
7. Despite having similar profit margins, Hsu Fu Chi traded at a ratio of 22 times trailing earnings
compared with 28 for comparable firms. Why do you believe Hsu Fu Chi’s share price on the
Singapore stock market sold at a 21% discount from the share price of other firms?
A Tale of Two International Strategies: The Wal-Mart and Carrefour Saga
______________________________________________________________________________________
Key Points
Integrating foreign target companies and introducing improved operating and governance can be a daunting
task.
What works in the acquirer’s country may not be transferable to the target’s local market.
______________________________________________________________________________________
Wal-Mart began expanding aggressively outside the United States in the 1990s. Its principal international
rival at that time was French retail chain Carrefour. After opening the world’s first superstore in 1963,
Carrefour spent the next four decades expanding its grocery and general merchandise stores across Europe,
South America, and Asia.
To understand how Carrefour floundered, we need to look at the global strategies of the two firms.
Intended to offset sluggish growth in France, Carrefour expanded too rapidly internationally as it entered
24 countries during the 10 years ending in 2004. While it succeeded in China, with annual revenue totaling
$5.8 billion, it fell short in a number of other countries. Since 2000, Carrefour has sold off operations in 10
countries, including Mexico, Russia, Japan, and South Korea. The firm also has announced that it will
withdraw from other countries.
This success has not come without considerable challenges. The year 2006 marked the most significant
retrenchment for Wal-Mart since it undertook its international expansion in the early 1990s. In May 2006,
Wal-Mart announced that it would sell its 16 stores in South Korea. In July 2006, the behemoth announced
that it was selling its operations in Germany to German retailer Metro AG. Wal-Mart, which had been
trying to make its German stores profitable for eight years, announced a pretax $1 billion loss on the sale.
The firm apparently underestimated the ferocity of German competitors, the frugality of German shoppers,
and the extent to which regulations, cultural differences, and labor unions would impede its ability to apply
in Germany what had worked so well in the United States. Wal-Mart has not been alone in finding the
German discount market challenging. Nestlé SA and Unilever are among the large multinational retailers
that had to change the way they do business in Germany. France’s Carrefour SA, Wal-Mart’s largest
competitor worldwide, diligently avoided Germany.
After opening its first store in mainland China in 1996, Wal-Mart faced the daunting challenge of the
country’s bureaucracy and a distribution system largely closed to foreign firms. In late 2011, Chinese
officials required the firm to close 13 stores due to allegations of mislabeling pork as organic. Wal-Mart
also has had difficulty in converting firms used to their own way of doing things to the “Wal-Mart way.”
Specifically, it has taken the firm more almost four years to integrate the 100-plus stores of Trust-Mart, a
Chinese chain it acquired in 2007. Overall, Wal-Mart realized its first profit in 2008, a dozen years after it
first entered the country.
a firestorm of public protest. At the end of 2011, Wal-Mart has no retail presence in the country. Nor does
Wal-Mart have a retail presence in Russia, where, unlike in India, foreign retailers are welcome but
corruption is rife. The combination of corruption, bureaucracy, and administrative processes has
discouraged Wal-Mart from making acquisitions in Russia, even though there have been opportunities to do
so.
Wal-Mart’s past mistakes have taught it to make adequate allowances for significant cultural
differences. With respect to Massmart Holdings, there appears to be no immediate plans to rebrand the
chain. The first changes customers will see will be the introduction of new products, including private-label
goods and the sale of more food in the stores. Wal-Mart also has publicly committed to honoring current
union agreements and to work constructively with the unions in the future. Current Massmart management
also will remain in place.
SABMiller Acquires Australia’s Foster’s Beer
_____________________________________________________________________________________
Key Points
Properly executed cross-border acquisitions can transform regional businesses into global competitors.
Management must be nimble to exploit opportunistic acquisitions.
_____________________________________________________________________________________
With the end of apartheid in South Africa in 1994, South African Breweries (SAB) moved from a
sprawling conglomerate consisting of beer, soda bottling, furniture, apparel, and other businesses to a focus
on beverages only. Seeking to expand beyond South Africa’s borders, SAB executives studied the global
practices of multinational corporations like Unilever and IBM to adopt what they believed were best
practices before undertaking strategic acquisitions in Africa and elsewhere. The firm’s overarching
objective was to create a global brand. After a series of cross-border transactions, SAB’s international
operations accounted for more than 40% of its annual sales by 2001. In a transformational transaction, SAB
bought Miller Brewery from Philip Morris for $5.6 billion in 2002 and renamed the combined companies
SABMiller. Since then it has filled out its global portfolio, adding breweries in Latin America, Asia, and
Africa.
During the last decade, the global beer industry experienced increasing consolidation. Following
InBev’s acquisition of Anheuser-Busch for $56 billion in 2008 and Heineken’s purchase of Mexico’s
The firm’s initial bid on June 21, 2011, valued the target at $9.5 billion in Australian dollars ($9.7
billion in U.S. dollars), or $4.90 Australian dollars per share ($5 U.S.); however, Foster dismissed the offer
as too low. On August 17, 2011, SABMiller adopted a hostile strategy when it went directly to Foster’s
shareholders with a tender offer. To win the backing of its shareholders, Foster’s said in late August that it
would pay out at least $525 million in Australian dollars ($536 U.S.) to shareholders through a share
buyback or dividend. To counter this move, SABMiller said that it would reduce its purchase price by the
amount of any dividend paid to shareholders or share buyback undertaken by Foster’s.
The acrimonious takeover battle came to an end on September 1, 2012, as SABMiller offered to raise its
cash bid by 20 cents to $5.10 in Australian dollars ($5.20 U.S.). As part of the deal, Foster’s made a one-
time payment of $.43 per share ($.44 U.S.) to its shareholders. The total value, including the value of
assumed debt, was $11.5 billion in Australian dollars ($11.7 U.S.). SABMiller now holds about 12% of the
global beer market, second to Anheuser-Busch InBev’s 25%. Foster’s has one of the highest profit margins
of any large brewery worldwide, reflecting its greater-than-50% market share in Australia. While synergies
would appear to be limited, SABMiller’s reputation for aggressive cost cutting could result in profit
improvements. SABMiller also received tax loss carryforwards totaling $817 million Australian ($833
million U.S.) resulting from the spin-off by the Foster Group of its wine operations in 2010. The
acquisition is expected to be accretive after the first full year of operation.
Overcoming Political Risk in Cross-Border Transactions:
China’s CNOOC Invests in Chesapeake Energy
Cross-border transactions often are subject to considerable political risk. In emerging countries, this may
reflect the potential for expropriation of property or disruption of commerce due to a breakdown in civil
order. However, as Chinese efforts to secure energy supplies in recent years have shown, foreign firms
have to be highly sensitive to political and cultural issues in any host country, developed or otherwise.
In addition to a desire to satisfy future energy needs, the Chinese government has been under pressure to
tap its domestic shale gas deposits due to the clean burning nature of such fuels to reduce its dependence on
coal, the nation’s primary source of power. However, China does not currently have the technology for
recovering gas and oil from shale. In an effort to gain access to the needed technology and to U.S. shale gas
and oil reserves, China National Offshore Oil Corporation Ltd. in October 2010 agreed to invest up to
$2.16 billion in selected reserves of U.S. oil and gas producer Chesapeake Energy Corp. Chesapeake is a
Having been forced in 2005 to withdraw what appeared to be a winning bid for U.S. oil company
Unocal, CNOOC stayed out of the U.S. energy market until 2010. The firm’s new strategy includes
becoming a significant partner in joint ventures to develop largely untapped reserves. The investment had
significant appeal to U.S. interests because it represented an opportunity to develop nontraditional sources
of energy while creating thousands of domestic jobs and millions of dollars in tax revenue. This investment
was particularly well timed, as it coincided with a nearly double-digit U.S. jobless rate; yawning federal,
state, and local budget deficits; and an ongoing national desire for energy independence. The deal makes
sense for debt-laden Chesapeake, since it lacked the financial resources to develop its shale reserves.
Perhaps somewhat naively, the Chinese government viewed the low-cost loans as a way to "recycle" a
portion of the huge accumulation of dollars it was experiencing. While the Chinese remained largely silent
through the political maelstrom, CNOOC's management appeared to be greatly surprised and embarrassed
by the public criticism in the United States about the proposed takeover of a major U.S. company. Up to
that point, the only other major U.S. firm acquired by a Chinese firm was the 2004 acquisition of IBM's
personal computer business by Lenovo, the largest PC manufacturer in China.
Many foreign firms desirous of learning how to tap shale deposits from U.S. firms like Chesapeake and
to gain access to such reserves have invested in U.S. projects, providing a much-needed cash infusion. In
mid-2010, Indian conglomerate Reliance Industries acquired a 45 percent stake in Pioneer Natural
Resources Company’s Texas natural gas assets and has negotiated deals totaling $2 billion for minority
stakes in projects in the eastern United States. Norwegian oil producer Statoil announced in late 2010 that it
would team up with Norwegian oil producer Talisman Energy to buy $1.3 billion worth of assets in the
Eagle Ford fields, the same shale deposit being developed by Chesapeake and CNOOC.
Discussion Questions
1. Do you believe that countries should permit foreign ownership of vital scarce natural resources?
Explain your answer.
2. What real options (see Chapter 8) might be implicit in CNNOC’s investment in Chesapeake? Be
specific.
3. To what extent does the Chesapeake transaction represent the benefits of free global trade and
capital movements? In what way might it reflect the limitations of free trade?
4. Compare and contrast the Chesapeake and Unocal transactions. Be specific.
5. Describe some of the ways in which CNOOC could protect its rights as a minority investor in the
joint venture project with Chesapeake? Be specific.
InBev Buys An American Icon for $52 Billion
For many Americans, Budweiser is synonymous with American beer, and American beer is synonymous
with Anheuser-Busch. Ownership of the American icon changed hands on July 14, 2008, when beer giant
Anheuser Busch agreed to be acquired by Belgian brewer InBev for $52 billion in an all-cash deal. The
combined firms would have annual revenue of about $36 billion and control about 25 percent of the global
beer market and 40 percent of the U.S. market. The purchase is the largest in a wave of consolidation in the
global beer industry, reflecting an attempt to offset rising commodity costs by achieving greater scale and
purchasing power. While expecting to generate annual cost savings of about $1.5 billion, InBev stated
publicly that the transaction is more about the two firms being complementary rather than overlapping.
The announcement marked a reversal from AB's position the previous week when it said publicly that
the InBev offer undervalued the firm and subsequently sued InBev for "misleading statements" it had
allegedly made about the strength of its financing. To court public support, AB publicized its history as a
major benefactor in its hometown area (St. Louis, Missouri). The firm also argued that its own long-term
business plan would create more shareholder value than the proposed deal. AB also investigated the
possibility of acquiring the half of Grupo Modelo, the Mexican brewer of Corona beer that it did not
already own to make the transaction too expensive for InBev.
By the end of 2010, the combined firms seemed to be progressing well, with the debt accumulated as a
result of the takeover being paid off faster than planned. Earnings per share exceeded investor expectations.
The sluggish growth in the U.S. market was offset by increased sales in Latin America. Challenges remain,
however, since AB Inbev still must demonstrate that it can restore growth in the U.S.2
Discussion Questions:
1. Why would rising commodity prices spark industry consolidation?
2. Why would the annual cost savings not be realized until the end of the third year?
3. What is a friendly takeover? Speculate as to why it may have turned hostile?
Arcelor Outbids ThyssenKrupp for Canada's Dofasco Steelmaking Operations
2 Schultes, 2010
Arcelor Steel of Luxembourg, the world's second largest steel maker, was eager to make an acquisition.
Having been outbid by Mittal, the world's leading steel firm, in its efforts to buy Turkey's state-owned
Erdemir and Ukraine's Kryvorizhstal, Guy Dolle, Arcelor's CEO, seemed determined not to let that happen
again. Arcelor and Dofasco had been in talks for more than four months before Arcelor decided to initiate a
tender offer on November 23, 2005, valued at $3.8 billion in cash. Dofasco, Canada's largest steel
manufacturer, owned vast coal and iron ore reserves, possessed a nonunion workforce, and sold much of its
steel to Honda assembly plants in the United States. The merger would enable Arcelor, whose revenues
were concentrated primarily in Europe, to diversify into the United States. Contrary to their European
operations, Arcelor found the flexibility offered by Dofasco's nonunion labor force highly attractive.
Moreover, by increasing its share of global steel production, Arcelor's management reasoned that it would
be able to exert additional pricing leverage with both customers and suppliers.
Serving the role of "white knight," Germany's ThyssenKrupp, the sixth largest steel firm in the world,
offered to acquire Dofasco one week later for $4.1 billion in cash. Dofasco's board accepted the bid, which
included a $187 million breakup fee should another firm acquire Dofasco. Investors soundly criticized
Dofasco's board for not opening up the bidding to an auction. In its defense, the board expressed concern
about stretching out the process in an auction over several weeks. In late December, Arcelor topped the
ThyssenKrupp bid by offering $4.2 billion. Not to be outdone, ThyssenKrupp matched the Arcelor offer on
January 4, 2006. The Dofasco board reaffirmed its preference for the ThyssenKrupp bid, due to the breakup
fee and ThyssenKrupp's willingness (unlike Arcelor) to allow Dofasco to continue to operate under its own
name and management.
In a bold attempt to put Dofasco out of reach of the already highly leveraged ThyssenKrupp, Arcelor
raised its bid to $4.8 billion on January 16, 2006. This bid represented an approximate 80 percent premium
over Dofasco's closing share price on the day Arcelor announced its original tender offer. The Arcelor bid
was contingent on Dofasco withdrawing its support for the ThyssenKrupp bid. On January 24, 2006,
ThyssenKrupp said it would not raise its bid. Events in the dynamically changing global steel market were
not to end here. The Arcelor board and management barely had time to savor their successful takeover of
Dofasco before Mittal initiated a hostile takeover of Arcelor. Ironically, Mittal succeeded in acquiring its
archrival, Arcelor, just six months later in a bid to achieve further industry consolidation.
Discussion Questions and Answers:
1. What were the motives for Arcelor’s and ThyssenKrupp’s interest in Dofasco?
2. What do you think was the logic underlying Arcelor and ThyssenKrupp’s bidding strategies?
Be specific.
3. Why do you believe that Dofasco’s share price rose above ThyssenKrupp’s offer price per
share immediately following the announcement of the bid?
4. Why do you believe that Dofasco’s board was concerned about a lengthy auction process?
discussion of the Mittal–Arcelor transaction.
Ford Sells Volvo to Geely in China’s Biggest Overseas Auto Deal
Despite a domestic car market in which car sales exceeded the U.S. market for the first time in 2009,
Chinese auto manufacturers moved aggressively to expand their international sales. In an effort to do so,
Zhejiang Geely Holding Company, China’s second largest non-government-owned car manufacturer,
acquired Ford’s money-losing Volvo operation in mid-2010 for $1.8 billion. The purchase price consisted
of a $200 million note and $1.6 billion in cash.
Geely sees this acquisition as a way of moving from being a maker of low-priced cars affordable in the
Chinese mass market to selling luxury cars and penetrating the European car market. Geely has publicly
stated that it hopes to have one-half of its revenue coming from international sales by 2015. With 2,500
dealerships in more than 100 countries, acquiring Volvo is seen as a significant first step in achieving this
goal.
Discussion Questions
1. With the world’s largest and fastest-growing domestic car market, why do you believe Chinese
carmakers are interested in expanding internationally?
2. What factors are likely to motivate Geely and other Chinese carmakers to ensure strict
enforcement of intellectual property laws?
Cadbury Buys Adams in a Sweet Deal
Cadbury Schweppes PLC is a confectionary and beverage company headquartered in London, England.
Cadbury Schweppes (Cadbury) acquired Adams Inc., a chewing gum manufacturer, from Pfizer
Corporation in 2003 for $4.2 billion. The acquisition enables Cadbury to gain access to new markets,
especially in Latin America. The purchase also catapulted Cadbury to the top spot in the global
confectionary market. Adams's major brands are in the fastest growing segments of the global market and
complement Cadbury's existing chocolate business.
Cadbury bought 100 percent of the business of the Adams Division of Pfizer. The decision whether to
transfer assets or stock depended on which gave Cadbury and Pfizer optimum tax advantages. Furthermore,
many employees had positions with both the parent and the operating unit. In addition, the parent supplied
numerous support services for its subsidiary. While normal in the purchase of a unit of a larger company,
this purchase was complicated by Adams operating in 40 countries representing 40 legal jurisdictions.
requirement that the law governing the contract be that of the local country.
A team of 5 Cadbury in-house lawyers and 40 outside attorneys conducted the legal review. Cadbury
staff members carried out separate environmental due diligence exercises, because Adams had long-
standing assets in the form of plant and machinery in each of 22 factories in 18 countries. Cadbury filed
with antitrust regulators in a number of European and non-European countries, including Germany, the
Czech Republic, Turkey, Greece, Italy, Portugal, Spain, the United Kingdom, South Africa, and Brazil. The
requirements varied in each jurisdiction. It was necessary to obtain regulatory clearance before closing in
countries where prenotification was required. The master agreement was conditional on antitrust regulatory
approval in the United States, Canada, and Mexico, Adams's largest geographic markets.
Cadbury wanted all 12,900 Adams employees across 40 countries to transfer to it with the business.
However, because not all of them were fully dedicated Adams employees (i.e., some had both Adams and
Pfizer functions), it was necessary to determine on a site-by-site basis which employees should remain with
Pfizer and which should transfer to Cadbury. Partly due to the global complexity of the deal, the preclosing
and closing meetings lasted three full days and nights. The closing checklist was 129 pages long (Birkett,
2003).
Discussion Questions
1 Discuss how cross-border transactions complicate the negotiation of the agreement of purchase
and sale as well as due diligence. Be specific.
2 How does the complexity described in your answer to the first question add to the potential risk of
the transaction? Be specific.
3 What conditions would you, as a buyer, suggest be included in the agreement of purchase and sale
that might minimize the potential risk mentioned in your answer to the second question? Be
specific.
Vodafone AirTouch Acquires Mannesmann in a Record-Setting Deal
On February 4, 2000, Vodafone AirTouch PLC, the world's largest wireless communications company,
agreed to buy Mannesmann AG in a $180.0 billion stock swap. At that time, the deal was the largest
transaction in M&A history. The value of this transaction exceeded the value of the AOL Time Warner
merger at closing by an astonishing $74 billion. Including $17.8 billion in assumed debt, the total value of
the transaction soared to $198 billion. After a protracted and heated contest with Mannesmann's
management as well as German labor unions and politicians, the deal finally closed on March 30, 2000. In
this battle of titans, Klaus Esser, CEO of Mannesmann, the German cellular phone giant, managed to
squeeze nearly twice as much money as first proposed out of Vodafone, the British cellular phone
powerhouse. This transaction illustrates the intricacies of international transactions in countries in which
hostile takeovers are viewed negatively and antitakeover laws generally favor target companies. (See
Chapter 3 for a more detailed discussion of antitakeover laws.)
Vodafone AirTouch Corporate Profile
Vodafone AirTouch, itself the product of a $60 billion acquisition of U.S.-based AirTouch
Communications in early 1999, is focused on becoming the global leader in wireless communication.
Although it believes the growth opportunities are much greater in wireless than in wired communication
systems, Vodafone AirTouch has pursued a strategy in which customers in certain market segments are
offered a package of integrated wireless and wired services. Vodafone AirTouch is widely recognized for
its technological innovation and pioneering creative new products and services. Vodafone has been a global
leader in terms of geographic coverage since 1986 in terms of the number of customers, with more than 12
million at the end of 2000. Vodafone AirTouch's operations cover the vast majority of the European
continent, as well as potentially high-growth areas such as Eastern Europe, Africa, and the Middle East.
Vodafone AirTouch's geographic coverage received an enormous boost in the United States by entering
into the joint venture with Bell Atlantic. Vodafone AirTouch has a 45 percent interest in the joint venture.
The JV has 23 million customers (including 3.5 million paging customers). Covering about 80 percent of
the U.S. population, the joint venture offers cellular service in 49 of the top 50 U.S. markets and is the
largest wireless operator in the United States.
Mannesmann's Corporate Profile
Mannesmann is an international corporation headquartered in Germany and focused on the
telecommunications, engineering, and automotive markets. Mannesmann transformed itself during the
1990s from a manufacturer of steel pipes, auto components, and materials-handling equipment into
Europe's biggest mobile-phone operator. Rapid growth in its telecom activities accounted for much of the
growth in the value of the company in recent years.
Strategic Rationale for the Merger
With Mannesmann, Vodafone AirTouch intended to consolidate its position in Europe and undertake a
global brand strategy. In Europe, Vodafone and Mannesmann would have controlling stakes in 10
European markets, giving the new company the most extensive European coverage of any wireless carrier.
Vodafone AirTouch would benefit from the additional coverage provided by Mannesmann in Europe,
whereas Mannesmann's operations would benefit from Vodafone AirTouch's excellent U.S. geographic
coverage. The merger would create a superior platform for the development of mobile data and Internet
services.
Mannesmann's "Just-Say-No" Strategy
What supposedly started on friendly terms soon turned into a bitter battle, involving a personal duel
between Chris Gent, Vodafone's CEO, and Klaus Esser, Mannesmann's CEO. In November 1999,
Vodafone AirTouch announced for the first time its intention to make a takeover bid for Mannesmann.
Mannesmann's board rebuked the overture as inadequate, noting its more favorable strategic position. After
the Mannesmann management had refused a second, more attractive bid, Vodafone AirTouch went directly
to the Mannesmann shareholders with a tender offer. A central theme in Vodafone AirTouch's appeal to
Mannesmann shareholders was what it described as the extravagant cost of Mannesmann's independent
strategy. Relations between Chris Gent and Klaus Esser turned highly contentious. The decision to
undertake a hostile takeover was highly risky. Numerous obstacles stood in the way of foreign acquirers of
German companies.
Culture Clash
Hostile takeovers of German firms by foreign firms are rare. It is even rarer when it turns out to be one of
the nation's largest corporations. Vodafone AirTouch's initial offer immediately was decried as a job killer.
The German tabloids painted a picture of a pending bloodbath for Mannesmann and its 130,000 employees
To defuse the opposition from German labor unions and the German government, Chris Gent said that
the deal would not result in any job cuts and the rights of the employees and trade unions would be fully
preserved. Moreover, Vodafone would accept fully the Mannesmann corporate culture including the
principle of codetermination through employee representation on the Mannesmann supervisory board.
Because of these reassurances, the unions decided to support the merger.
The Offer Mannesmann Couldn't Refuse
When it became clear that Vodafone's attempt at a hostile takeover might succeed, the Mannesmann
management changed its strategy and agreed to negotiate the terms for a friendly takeover. The final
agreement was based on an improved offer for Mannesmann shareholders to exchange their shares in the
ratio of 58.96 Vodafone AirTouch shares for 1 Mannesmann share, an improvement over the previous offer
of 53.7 to 1. Furthermore, the agreement defined terms for the integration of the two companies. For
example, Dusseldorf was retained as one of two European headquarters with responsibility for
Mannesmann's existing continental European mobile and fixed-line telephone business. Moreover, with the
exception of Esser, all Mannesmann's top managers would remain in place.
Epilogue
Throughout the hostile takeover battle, Vodafone AirTouch said that it was reluctant to offer Mannesmann
shareholders more than 50 percent of the new company; in sharp contrast, Mannesmann said all along that
it would not accept a takeover that gives its shareholders a minority interest in the new company. Esser
managed to get Mannesmann shareholders almost 50 percent ownership in the new firm, despite
Mannesmann contributing only about 35 percent of the operating earnings of the new company.
While hostile bids were relatively rare at the time of the Vodafone–Mannesmann transaction, they have
become increasingly more common in recent years. Since 2002, Europe has seen more hostile or
unsolicited deals than in the United States. In part, Europe is simply catching up to the United States after
many years in which there were virtually no hostile bids. For years, national governments and regulators in
Europe had been able to deter easily cross-border deals that they felt could threaten national interests, even
though European Union rules are supposed to allow a free and fair market within its jurisdiction. However,
the rise of big global rivals, as well as a rising tide of activist investors, is making companies more
assertive.
Case Study Discussion Questions:
1. Who do you think negotiated the best deal for their shareholders, Chris Gent or Klaus Esser? Explain
your answer in terms of short and long-term impacts.
2. Both firms were pursuing a similar strategy of expanding their geographic reach. Does this strategy
make sense? Why/why not? What are the risks associated with this strategy?
3. Do you think the use of all stock, rather than cash or a combination of cash and stock, to acquire
Mannesmann helped or hurt Vodafone AirTouch’s shareholders? Explain your answer.
4. Do you think that Vodafone AirTouch conceded too much to the labor unions and Mannesmann’s
management to get the deal done? Explain your answer.
5. What problems do you think Vodafone AirTouch might experience if they attempt to introduce what
they view as “best operating practices” to the Mannesmann culture? How might these challenges be
overcome? Be specific.
Political Risk in Cross-Border Transactions—CNOOC's Aborted
Attempt to Acquire Unocal
In what may be the most politicized takeover battle in U.S. history, Unocal announced on August 11, 2005,
that its shareholders approved overwhelmingly the proposed buyout by Chevron. The combined companies
would produce the equivalent of 2.8 million barrels of oil per day and the acquisition would increase
Chevron's reserves by about 15 percent. With both companies owning assets in similar regions, it was
easier to cut duplicate costs. The deal also made Chevron the top international oil company in the fast
growing Southeast Asia market. Unocal is much smaller than Chevron. As a pure exploration and
production company, Unocal had operations in nine countries. Chevron operated gas stations, drilling rigs,
and refineries in 180 countries.
Sensing an opportunity, Chevron moved ahead with merger talks and made an all-stock $16 billion offer
for Unocal in late February 2005. Unocal rebuffed the offer as inadequate and sought bids from China's
CNOOC and Italy's ENI SPA. While CNOOC offered $17 billion in cash, ENI was willing to offer only
$16 billion. Chevron subsequently raised its all-stock offer to $16.5 billion, in line with the board's
maximum authorization. Hours before final bids were due, CNOOC informed Unocal it was not going to
make any further bids. Believing that the bidding process was over, Unocal and Chevron signed a merger
agreement on April 4, 2005. The merger agreement was endorsed by Unocal's board and cleared all
regulatory hurdles. Despite its earlier reluctance, CNOOC boosted its original bid to $18.5 billion in late
June to counter the Chevron offer. About three fourths of CNOOC's all-cash offer was financed through
below-market-rate loans provided by its primary shareholder, the Chinese government. On July 22, 2005,
Chevron upped its offer to $17.7 billion, of which about 60 percent was in stock and 40 percent in cash. By
the time Unocal shareholders actually approved the deal, the appreciation in Chevron's stock boosted the
value of the deal to more than $18.1 billion.
CNOOC's all-cash offer of $67 per share in June sparked instant opposition from members of Congress,
who demanded a lengthy review by President George W. Bush and introduced legislation to place even
more hurdles in CNOOC's way. Hoping to allay fears, CNOOC offered to sell Unocal's U.S. assets and
promised to retain all of Unocal's workers, something Chevron was not prone to do. CNOOC also argued
that its bid was purely commercial and not connected in any way with the Chinese government. U.S.
lawmakers expressed concern that Unocal's oil drilling might have military applications and CNOOC's
ownership structure (i.e., 70 percent owned by the Chinese government) would enable the firm to secure
low-cost financing that was unavailable to Chevron. The final blow to CNOOC's bid was an amendment to
an energy bill passed in July requiring the Departments of Energy, Defense, and Homeland Security to
spend four months studying the proposed takeover before granting federal approval.
Cross-border transactions often require considerable political risk. In emerging countries, this is viewed
as the potential for expropriation of property or disruption of commerce due to a breakdown in civil order.
However, as CNOOC's aborted effort to takeover Unocal illustrates, foreign firms have to be highly
sensitive to political and cultural issues in any host country, developed or otherwise.
Discussion Questions:
1. Should CNNOC have been permitted to buy Unocal? Why? Why not?
2. How might the Chinese have been able to persuade U.S. regulatory authorities to approve
the transaction?
3. The U.S. and European firms are making substantial investments (including M&As) in China.
How should the Chinese government react to this rebuff?
