Vodafone and Mannesmann: The bid that couldn't fail
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Vodafone and 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. Marcus Walker reports

    Headline: The bid that couldn't fail
Source: Euromoney
Date: March 2000
Author: Marcus Walker

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.

Mannesmann's sin, according to this account, was twofold: it had made a tender offer to acquire Vodafone's competitor in UK mobile phone services, Orange. And it had ignored Vodafone's request to stop and consider alternatives. "Mannesmann never came and talked to us about what we could offer to his shareholders, compared to what Orange could offer," says Dingemans of Goldman Sachs.

On October 20, Gent called Esser and asked him whether press speculation about a Mannesmann-Orange deal was correct; the two bosses agreed to meet to see what Vodafone could propose instead. But later that same day, Esser signed an agreement with Orange's controlling shareholder, Hutchison Whampoa, and called Gent back to tell him their meeting was now superfluous.

Mannesmann's spin on history is rather different. It sprang no surprise attack on Vodafone by marching into the UK market and buying Orange. Mannesmann had been open with Vodafone throughout 1999 that it was following a strategy of expanding its footprint in major European markets, and that meant buying in Britain. Mobile operator One2One caught Mannesmann's eye during 1999, but ended up in the hands of Deutsche Telekom. Orange was a stronger performer anyway, and Mannesmann's interest in it was of long standing. In autumn 1998, Esser hired Merrill Lynch to advise on acquiring Orange but Hutchison Whampoa didn't want to sell. The Germans courted Hutch persistently for a whole year.

Kinzius, Mannesmann's head of international telecoms strategy, says: "Orange was our ideal partner for two reasons. We had always focused on quality assets, and Orange was outstanding; and we realized that the Orange brand could provide for growth even outside the UK. We never gave up asking [Hutchison]. When suddenly in October 1999 we got the feeling that there was an openness to selling, we moved really quickly."

When Mannesmann began looking into the UK, it decided to get to know the locals. Among its meetings was an introductory lunch on January 15 1999 at London's fashionable Pont de la Tour restaurant. Present were Esser and Kinzius for Mannesmann and Gent and Julian Horn-Smith of Vodafone. The conversation was what companies call conceptual, but Kinzius says one point was concrete: "We made it clear that the UK was an important market for us." At this time, Vodafone was not a direct partner of Mannesmann in any telecoms venture, although both had relationships with France's Vivendi.

But that same day, Gent entered into a merger agreement with Californian mobile-phone company AirTouch, which owned stakes in Mannesmann's main telecoms businesses: D2 and Arcor in Germany, and Omnitel in Italy. Within hours, Vodafone had gone from complete stranger to a member of Mannesmann's innermost circle. And the uninvited guest had a large appetite.

For years, Esser had enjoyed happy relations with the people from AirTouch. He was also a close ally of European telecoms chiefs Jean-Marie Messier of Vivendi and Roberto Colaninno of Olivetti, kindred spirits who had reformed conglomerates and taken on Europe's telecoms incumbents.

Esser formed no such rapport with his newly acquainted English partner. In 1999, meetings with Gent were rare. What discussions there were suggested to Esser that Vodafone was narrowly interested in wireless telephony over wireline, and had little consciousness of the importance of the internet. In contrast, says one of Esser's advisers from Merrill Lynch, Gent's competitor Hans Snook of Orange "was much more sympatico on the net".

Despite the cool relationship, Mannesmann had fallen into Vodafone's sphere of influence. Gent's adviser on the AirTouch merger, Dingemans of Goldman Sachs, says: "Vodafone had in mind that the two groups [Vodafone AirTouch and Mannesmann] should be together. I don't think there was any definite timeframe."

Mannesmann, however, had no desire to lose its independence. For sure, Esser's stated managerial goal was increasing shareholder value; but most managers do not build up high-flying international companies in order to sell them. Esser aimed to maximize shareholder value by winning the contest to build the top European telecoms business, beating Vodafone, Deutsche Telekom and all his other rivals. He had a knack of perfectly aligning the interests of his shareholders with the jobs of his employees and the triumph of his company.

Esser is often described as ultra-rational, but he has also shown a competitive streak and a gambler's instinct. He knew that swooping on the UK market risked triggering a war. It was clear to him that a Vodafone-Mannesmann link-up was attractive to Vodafone, with its patchy European footprint, even if in his view Mannesmann had little to gain from it. On October 20 Esser bid for Orange, and bet that his group's dynamism would quickly lift it beyond Gent's reach.

Now or never

Mannesmann's plucking of Orange left Vodafone trapped. Mannesmann's share price was temporarily squeezed by its premium bid for Orange, but as time passed and the German group's valuation rose, Vodafone would forfeit its European ambitions. It would be stuck as a minority-participation investment trust in all major markets but the UK. Vodafone had to act now or for ever hold its fire.

Dan Dickinson, head of European M&A at Merrill Lynch and an adviser to Mannesmann, says: "Mannesmann buying Orange really put Vodafone in a corner because it exposed Vodafone as having only a series of minority stakes. Their window of opportunity was to act right away."

On October 22, Gent hired Goldman Sachs and Warburg Dillon Read to help him with his options. Goldman's leading advisers to Gent were Dingemans and Mead; the Warburg team leaders were Mark Lewisohn and Finegold. They all knew each other and Vodafone well. Dingemans and Finegold had worked for both banks. Unlike Mannesmann's advisers, they formed a cohesive group with a can-do attitude.

The first get-together, held at Warburg's offices on Finsbury Avenue, London, discussed how they could break Mannesmann's Orange deal. The answer was they couldn't. "It was a fait accompli," says Dingemans. "Instead we had to work out how to bid for Mannesmann and get Orange out again."

A hostile cross-border takeover of the second-biggest company in the Dax share index, carrying a risk of political and trade-union backlash, might have daunted many advisers. But Dingemans says: "When we first met, there was a determination that a way had to be found. From the outset, I don't think people doubted that it could be done. Once you took a look at Mannesmann's shareholders, you saw that it was quite unusual for a German company. Our feeling was that German capital markets had been opening up for some time, and that politicians would come to see that this was an issue for shareholders."

Lewisohn says the two banks' sales forces talked to investors to test the idea out. "It was obvious that investors were strongly receptive." His Warburg colleague Finegold says the challenge was time: "It took four months to plan Hoechst-Rhône Poulenc, and that was a friendly cross-border deal. This deal was hostile, and there was a ticking clock."

In the next three weeks, the bankers raced through their technical preparations, studying the German takeover code, how to dispose of Orange, how to get EU approval, and how to structure the offer. They presented their proposed course of action to Gent's board, and on Sunday November 14 Gent and Horn-Smith travelled to Düsseldorf, offering 42% of the combined group and e203 per Mannesmann share. Esser and Kinzius gave them short shrift. The following Friday in London, Gent launched a hostile stock offer worth e240.

Vodafone tried hard to hire a German bank, to help market its tender offer among local retail investors and give the bid a German supporter. Deutsche Bank would have faced a conflict of interest, but no other firm with an advisory business would say yes either. The accidental result, from which firms like Deutsche and Dresdner Kleinwort Benson can only lose, was a demonstration that you don't need German banks to do German M&A deals.

Esser's gamble in acquiring Orange had sparked off the very thing he had feared since January 1999: a takeover showdown with Vodafone. But the Mannesmann camp insists this does not make the entire contest a gross miscalculation on Esser's part. Kinzius says: "We had to develop our strategy. We were conscious that there were potential Vodafone issues, but what was the alternative: just sit there and no longer develop your strategy?" John Hahn, head of European telecoms coverage at Morgan Stanley, concurs: "Klaus realized he had to get scale. His alternative was just sitting there for fear of provoking Vodafone and watching someone else buy Orange, and in the end getting taken over because he lacked scale."

Defensive fumbles

Mannesmann's first defensive steps were clumsy. On November 15, Kinzius attempted to play the man rather than the ball. In an affidavit presented to the High Court of Justice in London, he sought Goldman Sachs' disqualification from working for Vodafone by claiming that Goldman (a) had insider knowledge about Mannesmann after working for the Düsseldorf group on a string of recent equity and M&A deals, and (b) had promised Esser on specific dates in March 1999 that it would not advise Vodafone on a hostile takeover bid for Mannesmann.

Unfortunately for Kinzius, he got his specific facts wrong and had to retract his evidence. An angry Mr Justice Lightman, the judge trying the case, boomed: "I regard the placing of this evidence before the court as totally disgraceful and unacceptable conduct" and sent a humiliated Kinzius packing.

Mannesmann people genuinely believed Goldman reneged on its promises. A source close to the German chief executive says: "Esser is not a man given to overstatement - if he says he had assurances, I would believe him implicitly." Goldman got "a lucky let-off," says the source, because of Mannesmann's bungled execution of its case. Goldman flatly denied everything.

Mannesmann's more orthodox defence efforts began little better. Its first presentation to analysts in London was a chaotic affair: a room prepared for 30 analysts filled up with 150, and German executives bored them for four hours with rambling, laborious presentations.

Vodafone's bankers found that they had the first month's media airtime virtually to themselves: "That gave us a momentum which we never lost," says Finegold. Mannesmann missed the opportunity to land big punches with the publication of its defence document in mid January by saying nothing that hadn't already dribbled out piecemeal during December. And the besieged company did its credibility few favours by repeatedly shifting its growth estimates and self-valuation.

Curiously, Mannesmann had been preparing to defend itself against takeover since October 1997. Rumours of a hostile bid prompted Mannesmann to commission defence strategies from an undisclosed investment bank. After Vodafone pounced on AirTouch in January 1999, Mannesmann hired Morgan Stanley to make further defence preparations.

Unhelpfully, Esser declined to give the bankers any information about the company beyond what was in the public domain. When a real takeover bid arrived, the defence advisers began again from scratch, using the company's proprietary information and the unanticipated acquisition of Orange.

Once the contest was under way, Esser's main advisers were Colin Roy of Merrill Lynch plus a Morgan Stanley trio - Becker, who focused on Vodafone; John Hahn, who worked on an internet alliance with AOL; and Paulo Pereira, who handled Mannesmann's most potent escape plan: Vivendi. Among others involved were Merrill's Dickinson on defence strategy and Olivier Perraudin, who had originated the Orange deal, on telecoms advice. Relatively small teams from JP Morgan and Deutsche Bank played niche roles.

Advisers to Vodafone and insiders at Mannesmann detected a marked difference in attitude between Mannesmann's two main investment banks. One adviser to Gent says: "Merrill Lynch were much more pragmatic about getting a deal done and recognized much earlier the opportunity to get something for Mannesmann shareholders. Morgan Stanley seemed to take a lot longer to recognize the writing on the wall."

Sure enough, Merrill Lynch was less prone to thinking in terms of victory or defeat. But Morgan Stanley bankers were grittily determined to get their client off the hook and scorned any suggestion from Merrill that Mannesmann might want to settle. Morgan Stanley's zealous pursuit of independence for Mannesmann stemmed from two motives. One, Morgan Stanley could not stomach losing to Goldman Sachs, the firm's deadliest rival for the number one spot in European M&A.

Two, Morgan Stanley's Becker had assured Klaus Esser in October that he could safely buy Orange: Vodafone would have great difficulty in mounting a raid. This confirmed Esser's instinct that there was no price at which a takeover made sense for Mannesmann and Vodafone shareholders alike. But Becker had something else in mind: the scope for robust defence ploys. He did not realize how averse Esser would be to erecting barbed wire.

The French connection

Esser believed in his own company's superiority. Mannesmann boasted managerial control of most of its telecoms businesses. Mannesmann focused on Europe, the world's fastest-moving region for telecoms, and with both fixed-line and wireless telephony operations in its empire it aimed for revenue synergies from integrated services.

In contrast, Vodafone's geographically diffuse portfolio disguised a lack of majority-controlled operations in any G7 economy but the UK. And the fact that it was limited to wireless telephony meant it couldn't supply bundled services. But Esser saw that international equity investors had various motives for accepting Vodafone's bid, from belief in the combined company's global presence to short-term profit from the offer premium, to fear of falling share prices if the bid failed.

Whatever arguments Mannesmann used to show how good its growth prospects were, Vodafone embraced - adding that the two companies together would be better still.

Morgan Stanley knew that Mannesmann had to present the market with growth opportunities investors would lose if they went with Vodafone. The most powerful option was a deal with Vivendi, the French telecoms, media and environmental services conglomerate.

Mannesmann's failure to reach a deal with Vivendi was the pivotal moment in the contest. Afterwards, the relentless rise of Vodafone's stock ensured victory for the British group.

Adding Vivendi's telecoms interests to Mannesmann's would have created the first genuinely pan-European player in the industry, controlling major and dynamic businesses in Europe's four biggest economies: Germany, France, the UK and Italy.

Kinzius says: "A potential transaction with Vivendi was very attractive for us as it fitted exactly our strategy of European, integrated, controlled stakes."

When talks began in the week before Christmas, Mannesmann had eyes for Vivendi's 44% stake in landline telephone operator Cegetel, to add to its own 15% participation. Cegetel in turn controlled mobile operator SFR. Unfortunately, Vivendi's other partners in Cegetel - SBC and British Telecommunications - had rights of refusal which meant that Mannesmann had to buy Vivendi to get at its telecoms stakes.

Mannesmann's two main investment banks were divided. Morgan Stanley believed wholeheartedly in the Vivendi project: if the French group would sell itself to Mannesmann, the German company would escape Vodafone's clutches, or at a minimum shoot up in value until it became the majority partner in any merger talks. Pereira, the Portuguese banker who heads European telecoms M&A at Morgan Stanley, says: "The concept was to create a highly rated stock that would run away from Vodafone by providing superior value."

Merrill Lynch was more sceptical: Vivendi was a conglomerate with much larger non-telecoms businesses than Mannesmann had, and it was playing hardball in the negotiations. Was a merger commercially justifiable, or just a blatant defence tactic? At best, for the Merrill Lynch team, talks with Vivendi could be used to extract better terms from Vodafone if Mannesmann faced defeat.

Kinzius was aware of the dilemma. "We had to be able to tell the right story to the market. The last thing we wanted to do was to make an offer that people thought was desperate and defensive."

The more hawkish bankers from Morgan Stanley were determined to bag their acquisition and see off Vodafone. "The Merrill people were always a bit more weak-kneed than we were," says one member of the Morgan Stanley team. "They didn't see the power of the Vivendi deal. They looked at Vivendi and saw a big sewage business." Morgan Stanley, in contrast, saw a group that could be pared down to its telecoms and media parts. But in practice, getting this deal proved tough.

Vying for Vivendi

Back in the autumn, before Vodafone launched its bid for Mannesmann, Vivendi's chairman, Jean-Marie Messier, had set a date of January 29 2000 to present his board with a choice of strategic options. The Anglo-German takeover contestants were, by pure coincidence, two of Messier's dialogue partners about possible alliances. In December, these parallel talks took on a new urgency: Vivendi's choice of either Mannesmann or Vodafone could decide their takeover battle.

Vivendi faced a double risk if it sided with Mannesmann. First, Vodafone might win anyway. Then Vivendi would lose its deal, plus the chance to extract a deal with Vodafone from a strong bargaining position.

Second, Vivendi feared that Mannesmann might use it as a stalking-horse to wring improved terms from Vodafone. Even if Mannesmann was sincere in seeking a Vivendi deal, it would be obliged to listen to a raised offer from Vodafone. "We were unable to ease Vivendi's fears on this point," admits Becker. Because of these risks, Vivendi would only accept a transaction that met its terms.

In the first week of 2000, Vivendi and its adviser Lazard worked intensively with Mannesmann and Morgan Stanley to hammer out a complex merger. The plan, which was never disclosed, was to create a French company in law, with management equality and two headquarters: all telecoms operations would be run out of Düsseldorf, and all media and internet operations would be managed from Paris. The remaining businesses of both Mannesmann and Vivendi, from steel pipes to sewerage, would be spun off quickly.

And the name for this potential powerhouse of the new European economy? "Orange" - adopting the popular brand of Esser's recent UK acquisition, but pronounced in the French way.

This Orange writ large would issue a brand new stock to shareholders of both Mannesmann and Vivendi. The terms demanded by Vivendi would have given its shareholders 36% of the new entity. Mannesmann went as far as offering 34%. Other differences concerned the timetable for Vivendi to dispose of its large water and sewerage business, and some points in the governance agreement. The gap was surely narrow enough for a compromise to be reached. Yet in mid-January, it had become an impasse.

Pereira says: "By the weekend of January 22 to 23, it was apparent that we were not going to get a deal done." Mannesmann was not willing to accept the terms on which Vivendi was willing to do a deal. Mannesmann's Kinzius says: "We made the best offer we felt we could." Mannesmann's story is that its reasonable offer met with a Gallic shrug, and that to concede more would have given away more value than it could justify to its shareholders.

But this explanation is mysterious, given that the outstanding disagreements were small. How much extra would Mannesmann have had to move to convince Jean-Marie Messier to side with them and not Vodafone? A source trusted by Messier answers: "Not much. We were very close."

The missing element, he says, was Esser. "What was needed was the perception that Klaus Esser was really behind this deal. But [the Mannesmann negotiators] were in two minds, because they felt they had given away too much under pressure from Vodafone."

Besieged chief executives on roadshows often encounter polite and friendly responses from investors. At times, they start to believe their own story: that the market wants them to stay independent. The reality of takeover bids is that independence is the least common outcome. Statistically, predators tend to win unless a white knight appears. But a part of Esser believed he could convince the market to reject Vodafone's mega-premium bid and let Mannesmann continue as before. Vivendi, with its high asking price, was dispensible for him.

Vivendi found that the Mannesmann boss was difficult to engage in the critical negotiations. Esser was travelling the world, exhaustively meeting his shareholders one-on-one, trying to coax them into rejecting Vodafone's bid. In between his global roadshows, he would dip into the talks with Vivendi: his physical burn-out was obvious, and at important stages he was unavailable. Vivendi found, to its frustration, that no-one besides Esser had the authority to make even minor decisions for Mannesmann, not even Kinzius whose job was to coordinate the defence advisers. Esser's style was to be alone at the top of his company.

Without Vivendi, Mannesmann succumbed. Would it have survived if Esser had clinched a deal with Messier? It is impossible to say definitively whether Mannesmann shareholders would have chosen Vodafone's premium or an Orange future. But Vodafone adviser Dingemans comments: "Of all the propositions [Mannesmann] bandied about, a deal with Vivendi was the most worrying."

Milking Vodafone

In contrast to Mannesmann's centralism, Messier found interlocutors from the more informally run Vodafone who had authority to negotiate, even when Gent was away lobbying investors. In December, Vodafone dispatched a team led by Arun Sarin, former AirTouch boss and head of the group's US interests, to find out what form a deal with Vivendi could conceivably take. And in January, Horn-Smith was frequently in Paris to flesh out the alliance that Messier would eventually recommend to his board.

The pact was announced on January 30, and to a neutral eye involved Vodafone presenting Vivendi with three large gifts. The UK company promised Vivendi half of Mannesmann's 15% stake in fixed-line venture Cegetel; this turned Vivendi's existing 44% into majority control while weakening the future Vodafone/Mannesmann combine's presence in France.

Vodafone also agreed to form a 50:50 joint venture with Vivendi called Multi Access Portal (MAP), to provide an internet service accessible from computers, televisions and mobile phones - even though Vodafone brought more than three-quarters of the potential customers to the table. And Vodafone promised not to build any stake in Vivendi for three years without Vivendi's approval, a concession Esser must have envied.

The UK group's advisers argue that this package, in particular MAP, has inherent commercial attractiveness. Perhaps so, but the terms imply that Vivendi had the upper hand in talks, and that Vodafone was eager to achieve an Anglo-French entente it viewed as integral to winning Mannesmann. The irony is that by the last days of January this deal was unnecessary for blocking the creation of mega-Orange.

Effectively, Vivendi must have convinced Vodafone that its discussions with Mannesmann were still live after 23 January, when Pereira testifies (and the Vivendi camp agrees) that an impasse was clear.

Did Messier milk Vodafone for all it was worth? One adviser to the British company argues that with 44%, Messier had effective control of Cegetel anyway, and says pointedly that the 50:50 internet venture consists merely of a letter of intent.

Messier is unlikely to tolerate backsliding by Vodafone on MAP: a pan-European internet portal is the closest thing the French group possesses to a bright future. Messier knows all too well that he has missed the boat on telephony. In the five years since he took charge, Vivendi - formerly the debt-riddled Générale des Eaux - was not transformable quickly enough to join the consolidation race in European telecoms. Vivendi's conglomerate stock was never valuable enough to buy prime telecoms assets like Orange, and Messier was forced to sell off stakes in his domestic telecoms businesses, Cegetel and SFR, for lack of financial power.

But a new generation of M&A plays, linking telecoms with media and internet services, is just beginning, and with assets like the media company Canal Plus and the planned MAP, Messier believes he has better prospects as a content provider than as an owner of pipes. Indeed, the pipes - Cegetel and SFR - may lose their attraction for Vivendi before long. If and when the French company admits it can't win at the European telecoms game, there may be an almighty fight over its telecoms assets between Vodafone and Cegetel's other main investor, BT.

Writing on the wall

Even if Vodafone didn't need its generous agreement with Vivendi to prevent the doomed Vivendi-Mannesmann merger, the announcement of the alliance on January 30 gave Vodafone a psychological boost. The market believed that Vodafone held all the trumps.

It was the market's reaction on January 31 and February 1 that persuaded Esser he had to change course or lose. Previously, he had steadfastly believed that Mannesmann shareholders were best served by sticking with him: he would give them operational and stock growth in the coming year that would eclipse the instant profit Vodafone was dangling in front of their noses.

That was the thinking behind his seemingly haughty demand that a Vodafone takeover should give Mannesmann shareholders most of the combined group. Given one more year, Esser convinced himself, Mannesmann would outperform Vodafone until any merger would have to be on a 60:40 basis in the German company's favour. Bringing that sense of superiority into the present, and discounting it slightly for uncertainty, left a figure of 58.5%.

Now, however, Esser sensed defeat. Mannesmann's German and US shareholders, formerly more supportive than UK institutions, which tended to own more Vodafone shares, were telling the company that although it was good, it would be better still with Vodafone.

Many German institutions were selling into the market where the risk arbitrageurs at investment banks and hedge funds had picked up an estimated 10% of Mannesmann's stock.

And Esser had run out of room to dismiss Vodafone's premium. The offer's value had virtually reached the e350 share price Mannesmann had named on December 8 as its fair value. Was that a tactical blunder for a company whose defence was based on its immeasurable growth prospects? A defence adviser says: "It is hard to put a fair value on such businesses at any one time. The problem is that in the face of a bid you have to do just that. At the time, e350 was reasonable number. But the problem was that the market was behaving in an unreasonable way: it defied gravity."

Already on January 30, Esser had dropped his merger terms to 52% of the combined group. The next day, when the Vodafone-Vivendi pact was revealed, Gent suggested Vodafone could offer just under 50%.

Esser took soundings from his shareholders and board members. The takeover contest had focused the entire financial world's attention on the growth potential of wireless telephony, especially for carrying the internet. The telecoms sector had been dramatically re-rated upwards. Voices in the marketplace said: don't spoil it. If the bid failed, both companies' stock would fall, at least for a while. While Esser's defence strategy promised long-term stock growth, institutional investors also had the first months of 2000 to worry about.

On February 2, with the hostile bid worth nearly e350 per Mannesmann share, Esser picked up the phone and asked Gent to come to Düsseldorf that night. Over the Rhine, the white flag was flying.

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