As in Mannesmann Deal, Globalization Forcing Germany Inc. Out of Business

When Mannesmann stockholders vote Thursday on whether to swap each of their shares for 59 shares of Vodafone AirTouch, the likely outcome would be not only the world’s biggest takeover deal, but also the clearest sign yet that Germany Inc. has been put out of business by globalization.

The telecommunications takeover proposed last fall was initially fought by Mannesmann management and the government here largely out of concern that German jobs would be lost to cost efficiencies and that a national business trophy would be carried off by British raiders.

Germany’s customized version of capitalism had often sought to shield companies from market forces, putting a priority on consensus among government, management and labor to stave off strikes as well as unemployment.

But Mannesmann Chief Executive Klaus Esser’s eventual submission to the shotgun marriage shows that even German politicians and corporate kingpins recognize that shareholder value takes precedence over national or personal interests.

Chris Gent, Vodafone’s CEO, has ambitiously set late March as the target date for completing the takeover, which would create the world’s largest mobile phone group with 42 million customers worldwide and combined annual revenue of about $25 billion.

The acquisition of Mannesmann would give Vodafone dominance in the mobile communications sectors in Germany, Italy and Britain, and also enhanced positions in France. A merged company also should be better positioned to challenge other European giants such as Deutsche Telekom, BT of Britain and France Telecom.

Esser initially had fought off the advances of the British-U.S. telecommunications rival, claiming the terms of the takeover outlined in November would sell short Mannesmann’s real value, as its stock price was forecast to rise within 18 months above the $127 billion that Vodafone was then offering.

The Mannesmann CEO also cited fears that Vodafone would sell off or shut down the Duesseldorf company’s engineering operations, compounding the job losses likely among Mannesmann’s 130,000 employees as Vodafone managers looked for savings by eliminating duplications in the core telecommunications business.

Mannesmann executives claimed at the time of the Vodafone offer that the two companies’ expansion strategies were too different to allow a successful merger. Mannesmann wanted to concentrate on the European market and retain its practices of integrating fixed-line services with mobile communications. Vodafone, on the other hand, wanted a better global position and to focus exclusively on wireless. In fact, that is what drove Vodafone’s merger with U.S. company AirTouch a year ago.

German Chancellor Gerhard Schroeder, whose leftist coalition of Social Democrats and Greens came to power 15 months ago on promises to make cutting 11% unemployment its first order of business, quickly rushed to Mannesmann’s defense after Vodafone said Nov. 19 that a hostile takeover was underway.

Mindful that the jobless rate had barely budged since he took office, Schroeder denounced the Vodafone bid as destructive of “the culture of a company” in this country. The governor of North Rhine-Westphalia, the state in which Mannesmann is situated, also opposed the takeover. The company’s employees took to the streets in protest.

But Vodafone’s soaring stock price during the ensuing three months of takeover talks undermined the stated logic behind Esser’s resistance. The value of the stock-swap deal--the terms were sweetened slightly during the negotiations--rose to nearly $199 billion by the time the Mannesmann board approved it Feb. 4. That offered Mannesmann shareholders a premium of 160% over the stock price of October, before the takeover moves started.

“I believe this is the first time a clear signal has been sent to the government that it shouldn’t mix so intrusively in private industry,” telecommunications analyst Mathias Plica said from his offices in Munich. “This is a sign that market forces don’t need any government oversight.”

Plica sees “zero” benefit for either company’s customers as a consequence of the merger, at least in the short term. Vodafone’s much-ballyhooed promise of providing “seamless service” by offering the roaming option at a fixed price is something it was going to do anyway, argued Plica, as is its focus on developing the next generation of wireless technology to offer hand-held access to the Internet.

The immediate beneficiaries are the stockholders and the companies’ expansion gurus, as they will have more clout representing a joint entity in the capital markets, he said.

“Vodafone and Mannesmann together will have 10% of the world market, and with this considerable weight it can grow quickly,” the analyst said.

Those pluses would come at the expense of labor and the government, which would have to bear the unemployment costs for those made redundant at Mannesmann as well as at several other big employers recently hit with the need to trim work forces. As many as 10,000 jobs are thought to be at risk at the two companies.

Simultaneously with the Mannesmann drama, for example, Germany’s second-biggest construction conglomerate, Philipp Holzmann, sought bankruptcy protection and negotiated a government bailout to save at least half of the 70,000 jobs dependent on the 150-year-old company.

As with all German companies, Mannesmann’s board of directors is split evenly between management and labor union representatives--a supervisory alliance unthinkable in most market economies but one that Germans have long defended as helping to prevent unrest in the work force.

Vodafone executives have put Mannesmann on notice that they want the labor representatives out, German media reported. That call so infuriated Mannesmann directors that several vowed to see the deal torpedoed.

But the board’s inability to derail the takeover demonstrated how much the German way of doing business has been changed by the trend toward multinational mega-mergers. As Esser’s acquiescence proves, the need to create value for shareholders has become as much an imperative in Germany as anywhere else, analysts noted.

Among the Mannesmann board members most influential in urging Esser to agree to the takeover and cut the best deal were two of Germany’s biggest corporate figures, DaimlerChrysler Chairman Juergen Schrempp and insurer Allianz Chief Executive Henning Schulte-Noelle.

However, the merger trend sweeping much of Europe was late coming to Germany, because its economy is dominated by small and medium-sized enterprises that seldom attract the big players on global markets, said Juergen Bitzer, senior researcher in international economics at the German Institute for Economic Research.

He described Mannesmann’s resistance to being taken over as exceptional, though, noting that other German giants such as Daimler-Benz merged willingly with foreign partners when the deals made sense for shareholders.

One incentive Mannesmann had for resisting Vodafone remains an issue in German corporate boardrooms: the grossly disproportionate practice of executive compensation that gives most top executives little or no stock in their own companies. Esser had no stock options to exercise and reportedly few if any shares in Mannesmann that would allow him to personally benefit along with the stockholders.

But that too is changing in Germany, if only slowly, say executives who have recently been lured back to their homeland from lucrative positions abroad.

“What attracted me here was my significant equity stake in the company,” said Bernd Seizinger, CEO of Genome Pharmaceuticals Co. of suburban Munich, who returned last year after almost two decades in the United States. “When it comes to compensation, there is still a gap, but it is getting smaller.”

German newspapers initially reported on Vodafone’s pursuit of Mannesmann in defensive terms, with the mass-circulation daily Bild describing the hostile takeover as a choice between greed and independence.

However, by the time Esser backtracked early this month after major stockholders informed him of their plans to accept Vodafone’s offer, news of the deal was given little attention by the tabloids and heralded by the more serious media as a breakthrough for German business.