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6. Speculate as to why investors for both firms responded so favorably when news of the deal was
announced?
Answer: The sharp jump in Forest Lab’s share price represented investors bidding up its share price to
EUROPEAN MOBILE PHONE AND CABLE INDUSTRY
SHOWS SIGNS OF CONSOLIDATION
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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.
Vodafone Group PLC is a British multinational telecommunications firm headquartered in London. It is
the second largest mobile phone company in terms of subscribers and revenues behind China Mobile.
Vodafone owns and operates networks in 21 countries and has partner networks in 40 other countries. Ono
is the second-largest provider of broadband internet, pay television and fixed line telephone services in
Spain. The company’s network coverage extends to 70% of the country’s population. In addition, Ono has
1.5 million broadband customers and about 1 million mobile subscribers. However, the source of its real
competitive advantage is its technologically cutting edge fiber-optic network. The firm’s network speed is
as much as 20 times the average speed of its primary competitors.
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%.
Investors saw the complementary nature of the Ono acquisition following shortly after the buyout of
Kabel Deutscheland and expect both deals to bolster Vodafone’s ability to compete with Telefonica of
Spain and Deutsche Telekom of Germany in offering bundled services. Following the two acquisitions,
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
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
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.
Despite having had a presence in China for more than 20 years, Nestlé has found it difficult to grow its
distribution system organically (i.e., by reinvesting in its existing operations). As of 2010, Nestlé operated
23 plants and two research centers with more than 14,000 employees in the country, with annual sales of
$3.3 billion. Nestlé’s existing product portfolio in China at that time included culinary products, instant
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.
Founded in 1992, Hsu Fu Chi has four factories and 16,000 employees in China and is the leading
manufacturer and distributor of confectionery products in China. With an estimated 6.6% market share and
annual sales of $800 million, the firm makes chocolate, candies, and pastries popular in China and had
annual sales of $800 million at the time of the transaction. Profits rose 31% in 2010 to $93 million. Located
in the southern Chinese city of Dongguan, the firm operates an extensive distribution network and has
numerous retail outlets, which should facilitate the distribution and sale of Nestlé products in China. Hsu
Fu’s annual revenue is growing three times faster than Nestlé’s global annual sales. The firm’s direct
distribution network forms a large barrier to entry for competitors.
With Hsu Fu Chi listed on the Singapore stock exchange, the deal helped unlock value for Hsu Fu Chi’s
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?
Answer: Nestle wanted to accelerate growth in the confectionary products market by acquiring an
existing market leader with established distribution and logistics networks. Nestle reasoned that it
could grow more rapidly in the future by acquiring regional competitors and integrating them into
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?
Answer: Hsu Fu chi could have continued to grow the firm organically and could have taken the
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?
Answer: Such multiples often are poor metrics for valuing businesses. First, they include target
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?
Answer: This discount may reflect the comparative illiquidity of Hsu Fu Chi’s shares, i.e., the
limited number of attractive options available for existing independent shareholders. Independent
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.
While the chain grew rapidly through the 1990s, Carrefour has experienced difficult times in recent
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.
Wal-Mart has shown considerable success in growing its international operations. Having expanded at a
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.
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.”
reforms allowing foreign retailers to own a majority holding in local supermarket chains were halted due to
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.
Carrefour SA, Germany’s Metro AG, and the United Kingdom’s Tesco PLC. South Africa has embraced
shopping malls for years, and an increasingly affluent middle class has emerged since the demise of
apartheid. South Africa also has little regulatory oversight. Furthermore, there is an established
infrastructure of roads, ports, and warehouses as well as effective banking and telecommunications
systems. While the country has a relatively small population of 50 million, it provides access to the entire
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.
Its decision to buy less than 100% of Massmart’s outstanding shares reflected a desire by institutional
investors in Massmart to retain exposure to the region and by the South African government to continue to
100% of its Asda operations in the United Kingdom and 68% of Wal-Mart de Mexico.
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
Carlsberg) controlled more than 50 % of the global beer market, up from 20% in the late 1990s.
In 2011, SABMiller’s annual revenue exceeded $31 billion, just behind the industry leader, Anheuser-
Busch InBev. About 70% of SABMiller’s revenue is in emerging markets. With the number of sizeable
independent and profitable breweries declining rapidly, SAB moved to acquire the Foster Group,
Australia’s largest brewer, with more than 50% of the domestic beer market. SABMiller believed the
timing was right because both Anheuser-Busch InBev and Heineken were saddled with too much debt from
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-
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
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
additional $1.08 billion to cover 75 percent of the costs of developing the 600,000 acres included in this
field. Chesapeake will be the operator of the JV project in Texas, handling all leasing and drilling
operations, as well as selling the oil and gas production. The project is expected to produce as much as
500,000 barrels of oil daily within the next decade, about 2.5 percent of the current U.S. daily oil
consumption.
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
In contrast to the Chesapeake transaction, CNNOC tried to take control of Unocal, triggering what may
be the most politicized takeover battle in U.S. history. Chevron, a large U.S. oil and gas firm, had made an
all-stock $16 billion offer (subsequently raised to $16.5 billion) for Unocal, which was later trumped by an
all-cash $18.5 billion bid by CNOOC. About three-fourths of CNOOC's all-cash offer was financed
through below-market-rate loans provided by its primary shareholder: the Chinese government.
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.
Perhaps somewhat naively, the Chinese government viewed the low-cost loans as a way to "recycle" a
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?
Answer: The focus on free trade and unrestricted capital movements is on minimizing barriers to
products, services, technologies, and capital flowing to regions in which there is the greatest
demand. For years, the Chinese have been running a trade surplus with the United States and in
4. Compare and contrast the Chesapeake and Unocal transactions. Be specific.
Answer: In the Unocal transaction, a largely state-owned corporation was attempting to take
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.
Answer: As a minority partner, CNOOC could be expected to negotiate the usual and customary
protections. These could include specific rights to selected technologies including the ability to
apply such technologies owned by Chesapeake under certain circumstances, the right of first
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
While it publicly professed to want a friendly transaction, InBev wasted no time in turning up the heat.
The firm launched a campaign to remove Anheuser's board and replace it with its own slate of candidates,
including a Busch family member. However, AB was under substantial pressure from major investors to
agree to the deal, since the firm's stock had been lackluster during the preceding several years. In an effort
given two seats on the board, including August A. Busch IV, AB's CEO and patriarch of the firm's
founding family. InBev also announced that AB's 12 U.S. breweries would remain open.
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?
Answer: Higher prices for basic ingredients tended to erode brewer profit margins. By merging,
2. Why would the annual cost savings not be realized until the end of the third year?
Answer: Cost savings would be more rapidly realized if InBev had plants and warehouses
geographically close to AB’s operations which could be consolidated. However, there are few
3. What is a friendly takeover? Speculate as to why it may have turned hostile?
Answer: A takeover is said to be friendly if the suitor’s bid is supported by the target’s board
and management. Friendly takeovers often are viewed by acquirers as desirable to minimize the
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
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
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?
Answer: Arcelor, whose dominance was centered in Europe, was eager to diversify into
North America. It sought to do so via the non-union steelmaking operations of Dofasco’s steel
2. What do you think was the logic underlying Arcelor and ThyssenKrupp’s bidding strategies?
Be specific.
Answer: ThyssenKrupp may have been motivated more by its desire to boost the cost to
Arcelor than actually completing the transaction given its already highly leveraged state.
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.
Answer: The potential lengthening of the time to closing could be very harmful to Dofasco.
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.
As part of the agreement, Ford will continue to sell Volvo engines and other components and to provide
engineering and technology support for an unspecified period. Geely intends to maintain car production in
Sweden and to build another factory in China within the next several years.
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
Cadbury and Pfizer representatives agreed on a single asset and stock sale and purchase agreement (i.e.,
shares in non-U.S. Adams's subsidiaries to local Cadbury subsidiaries depending on which provided the
most favorable tax advantages and where necessary to accommodate differences in local legal conditions.
The parties entered into more than 20 such agreements to transfer asset and stock ownership. All the
agreements used the master agreement as a template. Written in English, the various contracts were
governed by New York law, the state in which Pfizer is headquartered, except where there was a
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.
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.
Answer: Cross-border transactions are necessarily more complex than home country transactions,
because they involve facilities located in different countries, differing legal systems, and cultures.
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
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.
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.
political factions for government protection against the takeover.
German law at the time also stood as a barrier to an unfriendly takeover. German corporate law required
that 75 percent of outstanding shares be tendered before control is transferred. In addition, the law allows
individual shareholders to block deals with court challenges that can drag on for years. In a country where
hostile takeovers are rare, public opinion was squarely behind management.
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.
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.
Answer: The short-term effects are relatively clear. In the short-term, Esser was able to negotiate a
huge 56% premium for the Mannesmann shareholders, through his “just say no” policy to Gent and his
public insistence that Mannesmann was worth $200 billion. Moreover, Esser was able to transfer $17.8
billion in Mannesmann debt to Vodafone and obtain Vodafone stock valued at more than $180 billion.
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?
Answer:
a. Does the strategy pursued by Vodafone and Mannesmann make sense? The strategy of
expanding their geographic reach does seem to make sense since the cellular phone
industry worldwide is in its growth stage. By expanding their reach these companies have
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.
Answer: Vodafone was forced to utilize stock due to the limited likelihood of being able to finance a
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.
Answer: Concessions made to the labor unions and to management were necessary to get the deal
done, without substantial labor disputes with the powerful German unions. However, the no cutting
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.
Answer: The substantially different cultures of the two firms make the introduction of so-called “best
practices” of throughout both firms very difficult in the near-term. However, such hurdles may be
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
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?
Answer: CNNOC’s aborted attempt to buy Unocal highlights the precarious nature of global trade
with nations sometimes viewed as hostile to a country’s self-interests. The case against the
merger seemed more politically expedient than real, designed to satisfy domestic political agendas.
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?
