European wireless merger sets record; Vodafone negotiates $170 billion takeover of German company; Hostile bid pushed through


DUSSELDORF, Germany -- Ending a brutal struggle to dominate Europe's insatiable market for wireless communications, a company that was until recently a relative unknown name outside Britain rammed through yesterday the biggest takeover deal in history.

Three months after launching its hostile bid, Vodafone Airtouch PLC of Britain achieved a stunning victory yesterday morning when Mannesmann AG of Germany surrendered and agreed to be acquired for about $170 billion in stock.

It is the biggest proposed corporate takeover on any continent, eclipsing the previous record set less than three weeks ago -- America Online Inc.'s $165 billion deal to buy Time Warner Inc.

If consummated, the takeover would create the world's biggest wireless communications company. The combined company would control wireless networks in Europe's three biggest markets -- Britain, Germany and Italy -- along with a 45 percent stake in the biggest U.S. network, and holdings in more than 30 other countries from Sweden and Poland to India and Japan.

But the deal is even more important as a watershed in European corporate behavior.

Never before has a European company carried off a hostile takeover on such an audacious scale: cross-border, cross-cultural and financed with shares in a company that most Germans had never heard of until a few months ago.

The unprecedented hostile bid outraged many German leaders, including Chancellor Gerhard Schroeder, who attacked it as a violation of Germany's tradition of consensus that could lead to the dismantling of a revered German company.

But in a major departure from traditional European practice, Mannesmann avoided any attempt to seek political protection and waged its battle by appealing directly to shareholders.

When it became obvious this week that shareholders were ready to sell, Mannesmann's embattled chief executive, Klaus Esser, reluctantly sued for peace.

Under an agreement reached after hours of bargaining at Mannesmann headquarters here Wednesday night, Esser agreed to endorse a peaceful takeover in which Vodafone will issue millions of new shares to buy out Mannesmann shareholders.

The deal comes four days before the expiration of Vodafone's hostile bid to Mannesmann shareholders. And although it is nominally a "friendly" merger, Esser capitulated only when it became obvious that a majority of his shareholders were about to sell out.

A bonanza for shareholders

Mannesmann shareholders will end up with about 49.5 percent of the combined company's stock, and Esser will resign from the company in favor of Vodafone's chief executive, Chris Gent, who conducted some maneuvering that helped undermine Esser.

If Vodafone shares hold their value, the agreement will become a bonanza for Mannesmann shareholders. At current stock prices, the Vodafone offer is worth more than 330 euros per share -- more than double the price that Mannesmann shares were trading at before the takeover battle began in the fall. (The euro traded just below 99 U.S. cents yesterday in the United States, up from its late New York rate Wednesday of 97.57 cents and the record low of 96.68 cents reached Tuesday.)

Bitter defeat for Esser

The deal is a bitter defeat for Esser, who fought passionately to preserve his company's independence. It is also a shock for Mannesmann, an old-line industrial conglomerate that had brilliantly transformed itself into the biggest provider of wireless communications in Europe.

Gent outmaneuvered Esser on the chessboard of Europe's wireless industry, which is based on a handful of immensely valuable national wireless licenses in each country.

Mannesmann owns national networks in Germany, Italy and Britain. Vodafone owns Britain's second-largest network and scores of other stakes around Europe and on other continents.

Gent's biggest victory came Sunday, when Vodafone managed to steal one of Mannesmann's longtime allies -- Vivendi SA of France.

That move derailed Esser's desperate attempt to hammer out a merger with Vivendi, which would have given him control of a major French network and greatly strengthened his position with shareholders.

But Gent cut a deal with Vivendi's chairman, Jean-Marie Messier, by forming a joint venture in Internet services. That deal convinced wavering shareholders that Esser had lost the upper hand, even with his allies, and they immediately began betting on a takeover.

History-making deal

Though Europe has witnessed a surge of big hostile takeovers in the last two years, the takeover of Mannesmann makes history on several fronts besides its size.

The only successful hostile takeovers have occurred between competitors within a single European nation.

The battle for Mannesmann marks one of the first real battles for the entire European market, one in which both of the combatants recognized that the economic integration of Europe and the adoption of a single currency in 11 countries made it crucial to overcome national boundaries.

The battle also marks one of the first cases in which national political leaders did not try to interfere to protect an important domestic company.

When three of France's biggest banks plunged into a heated takeover battle last year, it was largely sanctioned and guided by the Ministry of Finance, which wanted to consolidate the nation's banking industry and keep out foreign bidders.

Government stayed out

The same was true when Totalfina SA, the French-Belgian oil company, launched a successful hostile takeover of Elf Aquitaine SA. Likewise, Italian political leaders actively opposed the proposed telephone merger between Deutsche Telekom of Germany and Telecom Italia in favor of a hostile bid by Italy's Olivetti SPA.

In Germany, the reaction was entirely different. Despite angry rhetoric from Schroeder about the dangers of hostile takeovers, the German government stayed out of the fight.

That reflected a widespread view among German executives that it was far more dangerous to interfere with a legitimate if hostile bid and jeopardize the ability of German companies like DaimlerChrysler to buy up foreign companies.

As a result, Esser and Gent waged their battle almost entirely through direct appeals to shareholders.

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