INDIAN INSTITUTE OF MANAGEMENT CALCUTTA

Course: Corporate Governance, Term 4, 2022 - 2023

Report on Mannesmann AG - Corporate Governance

Submitted by Group 5

SWATI SAINI MBA/0118/58

ANIKET SINGH MBA/0275/58

ADNAN CHOWDHARY MBA/0327/58

KANCHAN NAKHATE MBA/0333/58

DAKSHINA R J MBA/0368/58

SRINIVASAN G MBA/0453/58
 Contents
INTRODUCTION .................................................................................................................. 3
TIMELINE ............................................................................................................................. 3
TAKEOVER METHODOLOGIES.......................................................................................... 4
1) Friendly Takeover ................................................................................................. 4
2) Hostile Takeover ................................................................................................... 4
3) Reverse Takeover Bid .......................................................................................... 4
4) Backflip Takeover ................................................................................................. 5
5) Bailout Takeover ................................................................................................... 5
DEFENSE STRATEGIES ..................................................................................................... 6
1) Macaroni Defence ................................................................................................. 6
2) Poison Pill ............................................................................................................. 6
3) Scorched Earth Policy .......................................................................................... 6
4) Golden Parachute ................................................................................................. 6
5) Crown Jewel .......................................................................................................... 7
6) Lobster Trap .......................................................................................................... 7
CORPORATE GOVERNANCE - MANNESMANN ................................................................ 7
CORPORATE GOVERNANCE - VODAFONE...................................................................... 7
TAKEOVER PROCESS ........................................................................................................ 8
MANNESMANN LONG-TERM VISION ................................................................................ 9
Integrated package offering ............................................................................................... 9
Leading private telecom provider in the eurozone ............................................................. 9
Defensive strategy against takeover .................................................................................. 9
VODAFONE’S LONG-TERM VISION ................................................................................. 10
Exclusive wireless offerings ............................................................................................. 10
Leading mobile service provider in the US and Britain ..................................................... 10
Aggressive persistent attempts for mergers and acquisitions .......................................... 10
AFTERMATH OF TAKEOVER ........................................................................................... 10
INTRODUCTION
Corporate governance in Germany is frequently characterized as a bank-oriented, block
holder or stakeholder model, with no substantial role for corporate control markets. This case
study of Vodafone's aggressive takeover of Mannesmann AG in 2000 shows how systemic
developments in the 1990s weakened earlier institutional impediments to takeovers. Among
these shifts are German banks' strategy shift from "house bank" to investment banking, the
rising consensus and productivity focus of employee codetermination, and corporate law
reform.
Many German firms are currently subject to a corporate control market. The consequences
for the German model are analyzed in light of both agency theory assumptions about the
efficiency of takeover markets and institutional complementarities within Germany's particular
"variant" of capitalism. While the efficiency effects are debatable, increasing demands on
German firms to achieve the higher stock market valuations of their Anglo-American
competitors undermine the distributional concessions that underpin the German model.
Mannesmann AG is a significant German telecommunications company. Its D2 business
operates the country's largest mobile phone service; its Mannesmann Arcor ground-based
telephone network is second only to government-sponsored Deutsche Telekom.
Mannesmann has grown from a steel tube manufacturer to a diversified, globally focused
group of companies engaged in machinery and plant construction, industrial drive and control
systems, electrical and electronic engineering, automobile industries, and its traditional area
of steel tube production. However, telecommunications has emerged as the company's
exclusive priority. In February 2000, Vodafone Group plc purchased 99 percent of the
company.

TIMELINE
1890 - Mannesmann was founded to manufacture seamless steel tubes
1927 - Building of semi-finished steel product facilities began
1952 - Plants were established in Brazil, Canada, and Turkey
1968 - Mannesmann expands into hydraulics
1981 - Acquisition of the first electronics firm
1990 - Mannesmann leads the D2 cellular phone consortium
1995 - Traditional enterprises were divested in favor of telecommunications
1999 - Mannesmann invested US$42 billion on telecom purchases
1999 - On 14th November, Vodafone’s offered an all-stock bid worth $ 106.4 bn to acquire
Mannesmann, on 18th Mannesmann withdraw Vodafone’s offer
1999 - Vodafone presented again a sweetened all-stock offer of 20% higher than initial bid
worth $127.7 bn and 47.2% stake in combined entity, which Mannesman rejected again on
19th November
1999 - Vodafone directly approached Mannesman board on 24th December
2000 - Mannesmann was purchased by Vodafone Group plc
TAKEOVER METHODOLOGIES
Takeover process means that one company takes over the control and management of
another by purchasing the later. The purchase process usually happens when the acquirer
offers cash, stocks, assets, or a mixture of all for a set price. This process can take place in
multiple forms, as enlisted below:

1) Friendly Takeover
When the board of directors from both companies agree on the takeover, negotiate
and approve the bid. The board of the target company will approve the buyout terms,
and then the shareholders can choose to vote in favor or against the opportunity.
Eg:- The acquisition of Aetna by CVS Health Corp. in December 2017 serves as an
illustration of a cooperative takeover offer. According to Chief Executive Officer Larry
Merlo in a news statement, the resultant firm benefited from considerable synergies.
"By bringing the combined talents of our two top companies, we will alter the consumer
health experience and develop healthier communities through a new creative health
care model that is local, easier to use, less expensive, and puts consumers at the
center of their care," he said.

2) Hostile Takeover
When a corporation wants to buy another firm—the target company—but the target
company's board of directors does not want to be bought out or merged with another
company, or they find the bid price presented unsatisfactory, the situation is known as
a hostile takeover bid. If the bidder thinks the offer would harm the target company's
prospects and potential, the offer may be rejected. A tender offer or a proxy vote is the
acquirers' two most popular tactics in a hostile acquisition.
Tender Offer - Offering to purchase the existing shares at a premium market price.
Proxy Vote - Persuading shareholders of the target company to vote out existing
management.
Eg:- The hostile takeover attempt on Aphria by Green Growth Brands in December
2018 serves as an illustration. Aphia received an all-stock offer from Green Growth
Brands, valued at $2.35 billion. The board of directors and shareholders of Aphria,
however, rejected the offer because they believed it drastically undervalued the firm.

3) Reverse Takeover Bid

When a private corporation buys a publicly traded company, it is called a reverse
takeover offer. The primary goal of reverse takeovers is to get listing status without
conducting an IPO (IPO). In a reverse takeover offer, the private purchasing business
effectively acquires the publicly traded target company to become a public corporation.
If the acquirer decides that conducting a reverse takeover offer is preferable to
registering for an IPO, it may do so. Being listed is a time-consuming, expensive
procedure that involves a lot of documentation.
 Eg:- The 1996 reverse takeover of J. Michaels, a furniture manufacturer, by Muriel
Siebert's brokerage firm to create Siebert Financial Corp. is an illustration of a reverse
takeover effort. Today, Siebert Financial Corp., one of the biggest discount brokerage
businesses in the US, serves as a holding company for Muriel Siebert & Co.

4) Backflip Takeover
When the acquirer becomes a subsidiary of the target firm, a backflip takeover attempt
is made. Because the target firm survives and the acquiring business becomes a
subsidiary of the combined company, the acquisition is known as a "backflip." The
acquiring business may make a backflip takeover bid to benefit from the target's higher
brand awareness or any other significant competitive advantage.
Eg:- An instance of a backflip takeover attempt is SBC's 2005 acquisition of AT&T.
Due to AT&T's more recognizable brand, SBC paid $16 billion to acquire AT&T. The
combined business has been given the name AT&T.

5) Bailout Takeover
The government or a substantial corporation seizes control of a struggling business to
aid the latter in strengthening its finances. The acquiring entity takes over the
underperforming business, typically buying most of the stock. Programs for
exchanging shares may also be employed. The rescue takeover's objective is to assist
the firm in improving operations without selling off its assets. This is accomplished by
the acquiring corporation creating a rescue plan and hiring a manager to lead the
recovery while safeguarding the interests of the shareholders and investors.

Few main reasons for Vodafone’s hostile takeover of Mannesmann

1) Mannesmann acquired Orange, which was the then 3rd largest Britain mobile phone
company.
2) Mannesmann was seen as a direct competitor of Vodafone on British soil.
3) Wanted to assert dominance in other European markets like Italy & Germany
DEFENSE STRATEGIES
Defense strategies are taken by the target companies against hostile takeovers.

1) Macaroni Defence
By issuing a significant quantity of bonds that must be redeemed at a high price in the
case of a takeover, the macaroni defense stops an unwelcome acquisition. In other
words, if the hostile bidder successfully acquires the firm, it will be required to return
investor loans for much more than they are worth.

2) Poison Pill
Also known as a shareholder rights plan, is when the target's shareholders receive the
chance to buy shares of the target or the merging acquirer at a significant discount. A
particular percentage of the target's stock acquired by an acquirer sets off the
execution of these rights. These rights, if used, might significantly reduce the acquirer's
ownership stake in the target, which would discourage an acquisition. One of the most
effective barriers against hostile takeovers is the poison pill.

3) Scorched Earth Policy

In a last-ditch effort to prevent a hostile takeover, a scorched earth campaign works to
make the target firm undesirable to potential buyers. Techniques include offloading
priceless assets, piling up debt, and guaranteeing management considerable rewards
if they are fired. Going out of business might be the price of freedom because many
scorched earth policies are challenging to reverse. Sometimes hostile bidders are
successful in obtaining injunctions to stop the target firm from implementing a policy of
scorched earth.

4) Golden Parachute
A golden parachute is a package of sizeable perks provided to senior executives if
their company is acquired by another business and they lose their jobs. Golden
 parachutes, often known as "poison pills," are contracts with senior executives that can
be used as a sort of anti-takeover tactic by a company to deter an unwelcome takeover
effort. Stock options, cash incentives, and sizable severance money are possible
perks.

5) Crown Jewel
The Crown Jewel Defense tactic is when the target business of a hostile takeover sells
its most prized assets to lessen its appeal to the hostile bidder. Since the target firm
would be deliberately destroying some of its value in the hopes that the acquirer quits
its hostile bid, the crown gem defense should only be used as a last option.

6) Lobster Trap
Small target companies employ the lobster trap defensive tactic to guard themselves
against hostile takeover attempts by larger enterprises. Businesses that use this anti-
takeover strategy include clauses in their charters prohibiting shareholders with a
holding of more than 10% from converting securities into voting shares. Thus,
significant shareholders are prevented from increasing their voting stock position and
aiding the acquisition of the target firm.

CORPORATE GOVERNANCE - MANNESMANN

German corporate governance model was applied in German AG, which is a publicly listed
and traded corporation. It had a supervisory body (Aufscichtstrat) which generally had 20
members, half of which were appointed by shareholders and the other half was elected by
the employees, and they acted as employee representatives.
The Mannesmann supervisory board was divided in their decision because of their ideas of
maximum stakeholder value creation; for example, Klaus Zwickle, who was the head of the
largest labor union in Germany, was focused on labor interests instead of maximizing
shareholder value while employee representative Jurgen Hedberg was looking for employee
value maximization
Esseler tries to convince the board to reject gents offer citing his plans for the firm, but when
eventually the Vivendi white knight strategy fails he could not prevent the hostile takeover

CORPORATE GOVERNANCE - VODAFONE

Vodafone’s Board was looking for shareholder value maximization of value creation through
the process this was evident from there previous deals such as acquiring San Francisco
based Air touch communication which made them largest mobile service provider in the
world.

The Vodafone board supported gent throughout the process, even when he offered
Mannesmen a second deal with a 20% Higher bid for the takeover, which shows their
confidence in Gent.
TAKEOVER PROCESS
In Nov 1999, Vodafone offered to exchange 43.7% of its shares for Mannessman’s shares with
no cash added. This was estimated to be worth up to 65 billion euros but was rejected by
Mannesmann. Then Vodafone initiated a hostile takeover and proposed a stock swap whereby
each Mannesmann share would be exchanged for 53.7 Vodafone shares. Vodafone will issue
27.8 billion new shares, and with 517.9 million shares outstanding, Mannessman would then
own 47.2% of the combined identity. The Vodafone offer was estimated to be up to 75 billion
euros. Mannesmann rejected the takeover bid. Board said that the offer did not contain a cash
offer and was unattractive to shareholders.

Throughout the takeover process, Vodafone offered 3 bids before Mannesman approached
Vivendi

14 November 1999 ( 1st bid )

Gent presented Vodafone’s offer to acquire Mannesmann at an all-stock bid worth $106.4 bn,
a 9% premium to Mannesmann’s most recent stock price and 25% premium to the stock price
before Vodafone’s bid speculation. Esser, CEO of Mannesmann, argued that Mannesmann
offered greater value to its shareholders as an independent company. And he also believed their
strategy to be incompatible
Mannesmann rejected Vodafone’s tender offer

19 November 1999 ( 2nd bid )

● On 19 November 1999, Vodafone announced its second offer to Mannesmann of

53.7 shares to 1, making the deal valued at $276.66 a share, or a 20% premium for
the day.
● In addition to the above offer, Vodafone made it clear and provided the details that
it would spin off the non-telecom assets of Mannesmann and that it would deprive
Orange of getting regulatory approval.
● Vodafone presented a sweetened all-stock offer worth $127.7 bn, giving
Mannesmann’s shareholders a stake of 47.2% in the combined entity.
● Mannesmann is still rejected, justifying that it will see an outstanding growth rate
of D2/Orange in the future.

Efforts to align Stakeholders - Esser advised the shareholders to reject Vodafone’s offer citing
that Mannesmann would be worth more than Vodafone within the next 12 months. Some
individual investors criticized and pressed Esser for rejecting Vodafone’s offer. Esser started a
publicity tour of his own – traveling to Britain, the US, and Germany to get support from
institutional investors both inside and outside of Germany (who together owned a total of 30%
of Mannesmann’s shares). By Dec 16, the management board appeared to be divided, as some
members expressed willingness to consider a deal if Vodafone would add a cash sweetener to
the current bid.
24 December 1999 ( Hostile Bid)
Vodafone / Gent officially initiated a $127.7 billion tender offer.

18 January 1999
VIVENDI in the picture - Mannesmann found Vivendi SA, a French leading media
conglomerate, as a ‘white knight’.Mannesmann tried to strengthen its defenses by discussing
with Vivendi about acquiring a majority stake in CEGETEL, France’s second-largest mobile
operator.
Vivendi finds itself in talks with both Mannesmann and Vodafone.
But on January 30, 1999, there was an announcement of a joint mobile/internet portal by
Vodafone and Vivendi. As a part of the deal, Vodafone offered Vivendi half of Mannesmann’s
15% share (7.5%)of the French fixed-line firm Cegetel.

MANNESMANN LONG-TERM VISION

Integrated package offering

Package included a bundle of wired line, mobile, and internet services. Manassmann focused
on giving a holistic solution to their customers

Leading private telecom provider in the eurozone

Major acquisitions were made in Europe, such as Omnitel, Orange, TeleRing, and
Inforstrada. These M&As were made to further focus on manessmann's product
differentiation strategy.

Defensive strategy against takeover

Employed a white knight strategy to protect against a hostile takeover, with the help of
Cegetel as their guardian.
VODAFONE’S LONG-TERM VISION

Exclusive wireless offerings

Vodafone's exponential growth is attributed to their price leadership which they achieved by
focusing purely on mobile services. This is at odds with the strategy employed by
manassmann

Leading mobile service provider in the US and Britain

Vodafone is the market leader in the US and is now Manassmann's biggest competitor in
Britain. It is trying to acquire Manessmann to become the most dominant player in Britain
and have a foothold in the EU

Aggressive persistent attempts for mergers and acquisitions

Vodafone has ended up paying high premiums many times over. Vodafone has a history of
making back-to-back bids with increasing premiums to pressurize a quick merger or
acquisition. They even lobby and convince the opposite board directly

AFTERMATH OF TAKEOVER
In the aftermath of this hostile takeover, Vodafone got Mannesmann, but they had to pay
45B dollars which meant a hefty increase of 90% from the initial bid, and with the german
trades union and Mannesman workers who were opposing this merger for the beginning of
the process, this was a signal of the corporate governance issues in the company.
After the merger, Vodafone had to spend $500 million on legal fees and publicity, and the
72% fall in share price worsened the situation further after the dot-com crash.