Vodafone's takeover of Mannesmann: The bid that couldn't fail

It's clear why Vodafone conquered Mannesmann. Vodafone won because it paid to win, using its powerful stock. Its shareholders supported its share price and thereby its bid because they believed its story: that big is best in the globalizing telecoms game. And they feared failure might burst the telecoms bubble. What's less understood is how Mannesmann lost. It gave away the early momentum through bungling, suffered splits in its defence advisory team, and came within an inch of winning the hand of a French rescuer, only to hesitate. Klaus Esser made Mannesmann a top company, but his risk-taking triggered this contest and shaped its outcome. We also reveal the battle that raged beneath the surface between Goldman Sachs and Morgan Stanley during the biggest hostile takeover of all time.

The dealmakers reshaping Europe

Chris Gent (left) and Klaus Esser

It was late on Wednesday February 2, and Canning Fok was getting in the way. The chief executive of Hong Kong conglomerate Hutchison Whampoa was making his presence felt on the 21st floor of Mannesmann's headquarters, a tall office block in Düsseldorf overlooking the Rhine, where the protagonists had gathered for the final, fraught scene of a three-month takeover battle.

Fok was convinced he could help broker a peace deal between hostile bidder Vodafone AirTouch and its prey, Mannesmann, in which Fok's group held an 8% stake. But the chairman of Mannesmann's executive board, Klaus Esser, had already seen the writing on the wall. He had decided the previous day to agree takeover terms with the English raiders from Vodafone - a humiliating defeat in the stock market was his likely alternative.

Some of Esser's advisers from investment bank Morgan Stanley Dean Witter saw that the slim, trim German needed privacy to drop his defences and strike a deal. They took the well-meaning Fok aside, sat him down and offered him coffee. Esser was finally alone with his adversary, Vodafone chief executive Chris Gent.

Esser and Gent took less than 90 minutes to overcome the differences that had kept them at war for the previous 100 days. Then they instructed Esser's closest adviser throughout the struggle, Dietrich Becker of Morgan Stanley, to list the points they had agreed. Most important, Mannesmann would agree to a takeover by Vodafone that gave Mannesmann's shareholders 49.5% of the combined company's stock.

The full agreement, covering governance, group structure and commercial strategy, would be turned into a formal contract by the two sides' bankers and lawyers, and presented for approval to Mannesmann's supervisory board the following afternoon - or so Esser understood. Gent left the Mannesmann tower block at 1:15am to fly home for a night's rest, his work done and Mannesmann's surrender accepted.

But submissions don't always end bloodshed, just as Genghis Khan's Mongol warriors couldn't refrain from butchering the men, women and children of conquered citadels during their romp through central Asia. The demoralized members of the Mannesmann camp, though spared the sword, were shocked by the bruising style of Vodafone's victorious bankers from Goldman Sachs and Warburg Dillon Read as they swaggered into Düsseldorf.

"They were ignoring the human toll," says a weary defence adviser from Morgan Stanley. "It got very ugly, very aggressive. They should treat people better."

After Gent's departure, the lawyers prepared the text of an agreement. At 5:30am on Thursday they faxed the draft to the UK homes of Vodafone advisers Warren Finegold of Warburg and Simon Dingemans of Goldman Sachs, who were due to fly to Germany later that morning.

This was the first time that several of the advisers of the two companies had dealt with each other face to face. Talks between the Mannesmann and Vodafone camps, outside the rare direct meetings between Esser and Gent, had been handled mainly by each side's principal adviser: Becker of Morgan Stanley, and Goldman's Scott Mead. Both investment bankers had been tough and uncompromising throughout their three-month dialogue but they had built up a relationship of respect.

On Thursday morning, mistrust was more evident. Finegold and Dingemans infuriated the Mannesmann advisers by saying there was no time to negotiate the formal contract: instead, the two companies should prepare a press release about the main points of the takeover. To the Morgan Stanley contingent, a mere press release fell well short of guaranteeing Mannesmann's interests. Above all, Esser had extracted a pledge from Gent not to break up the German company.

Noon passed, and Warburg and Goldman were still rejecting an ironclad agreement. The Morgan Stanley team knew that Mannesmann's supervisory board meeting, due at 2:30pm, would refuse to proceed with the agreed takeover unless there was a formal contract.

While his colleagues seethed at their rival advisers' foot-dragging, Becker sought out his familiar interlocutor, Mead. Becker reportedly warned him: "To have members of your team suffering from increased levels of hormonal activity will not make this day a success for your client."

From Finegold and Dingemans' point of view, however, it was Mannesmann's advisers who were being unreasonable by expecting them to commit Vodafone to a 20-page legal document with only a couple of hours' time for negotiation. They backed down only when the 20 pages were cut to two pages.

Mannesmann's supervisory board got the formal agreement it wanted, albeit in abridged form. It was in mid-discussion when company employees burst in with inflammatory news. A Goldman Sachs banker was demanding the heads of half of those in the room.

Goldman managing director Alex Dibelius had reportedly said to Becker: "Look, we're paying e185 billion for this company and we want control now. Every member of the supervisory board on the capital side should tender their resignations." An astounded Becker, referring to the pillars of Germany's corporate establishment gathered in the boardroom, replied: "Are you serious? Do you really want me to go in there and tell them that?" "That is exactly what we want," retorted Dibelius.

Reports of this conversation triggered uproar in the boardroom. Esser saw he had to take control to stop the poisonous mood from undermining the agreement. He told Gent, who had returned to the scene, to impose order on his marauding troops. "Goldman Sachs and Warburgs behaved out of control," recalls a still furious M&A adviser from Morgan Stanley. And the view from Vodafone's bankers? "Morgan Stanley were very emotional," says one, dryly.

Betting on Orange
Before this story became a stand-off between rival investment banks, it was a struggle for control of a telecoms company. From November 19 1999, Mannesmann found itself subject to an unsolicited tender offer to its shareholders. Vodafone's justification for launching this assault was that the two companies were logical partners, but that in the preceding month Mannesmann had abruptly hatched plans to thwart their natural union.
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