[For me, who spent two years in Germany in the 1960s as a student, Mannesmann was a great engineering company. So I was surprised by its takeover by Vodafone, a British telecommunications company. But that is how emerging technologies reshape capitalist societies - except India. This column was published in Business Standard of 17 March 2000.]
Vodafone takes over Mannesmann
The takeover of Mannesmann by Vodafone has made news on
account of its size: it is the biggest takeover in history, valued at $183
billion. It is bigger than the takeover of Time Warner by America Online 10 January,
valued at $165 billion, of Sprint by MCI Worldcom on 5 October last year ($115
billion), or of Mobil by Exxon in December 1998 ($80 billion).
However, the figures miss the emotional impact of the
takeover. It is like Reliance being taken over by Netscape, to be dismembered
and sold off in bits and pieces. If Netscape were to make an offer for
Reliance, there would be outrage in Reliance headquarters: how dare this
upstart of internet try to take over a company built up with the sweat of the
Ambanis and their toiling workers? The outrage would find a ready echo in our
ruling circles. Gurumurthy would ask the government how it could allow India’s
foremost jewel to go into American hands. Murli Manohar Joshi would intone upon
the riches of India being plundered by rapacious foreigners. Demonstrations
would be organized at short notice; the government would, by popular demand,
ban the takeover.
Although the German government studiously avoided
interfering in the takeover, the emotional impact in Germany is similar.
Duesseldorf is the second most important city of the Ruhr valley, Germany’s
industrial heart; only Frankfurt is bigger. And Mannesmann was the heart of
Duesseldorf for over a century. It was founded by two brothers in the 1880s who
invented seamless pipes. Until then, pipes were made by rolling up a sheet and
soldering its two edges (many pipes are still made this way, but seamless pipes
are stronger and are preferred where fluids are dangerous or carried under
pressure).
In the 1960s when India was industrializing with the help
of imported technology, Mannesmann was a favourite source of tubing and
engineering technology. Till as late as 1980, over a half of Mannesmann’s
turnover came from steel tubes, and another 40 per cent from engineering and
hydraulics. Faced with a slump in its traditional markets, Mannesmann rapidly
reengineered itself. It first went into automobile ancillaries. Then, in 1989,
it obtained a German licence for cellular telephones. Today it is the biggest
mobile telephone service provider in Germany, with a quarter of its 23 million
cellphone owners.
Vodafone is Britain’s biggest mobile telephone company;
it connects a third of Britain’s 24 million cellular phone owners. Its battle
with Mannesmann started in January 1999 when Vodafone acquired Airtouch, which
connects 9 out of America’s 65 million cellphone owners. Airtouch was a
minority partner in Mannesmann’s telephonic ventures; by acquiring it, Vodafone
acquired a share in Mannesmann. Mannesmann countered by buying Orange,
Britain’s third biggest mobile phone company, for $33 billion in October. That
is when Christopher Gent, the CEO of Vodafone, decided that it was one or the
other: Mannesmann was too great a threat to be left untouched. It made an offer
to Mannesmann shareholders.
Mannesmann is a well run company, popular amongst
knowledgeable investors; probably 60 per cent of its shares are held by
foreigners, mostly institutions. Klaus Esser, CEO of Mannesmann, appealed to
the shareholders to reject Gent’s offer, saying it was too low.
The linchpin in this struggle was the French
telecommunications company, Vivendi, a long-term ally of Mannesmann. It held a
crucial proportion of Mannesmann’s share capital. To secure himself against
Vodafone, Esser proposed a merger of Mannesmann and Vivendi to Jean-Marie
Messier, its CEO. Messier encouraged him, but in the meanwhile, channels of
communication opened between him and Gent. Finally in January, Gent offered to
sell to Vivendi a part of Mannesmann’s holding in Cegetel, France’s second
largest cellphone company. With this share, Messier could take control of
Cegetel and form a joint venture with Vodafone to offer internet services
across Europe. That won over Messier, and on 30 January he held a joint press
conference with Gent to announce the deal.
Esser was taken entirely by surprise and felt betrayed.
But he was out of options. To raise the pressure, Gent took the lead adviser to
Hutchison Whampoa, the Hong Kong company, when he went to see Esser. Hutchison
Whampoa owns 10 per cent of Mannesmann. After that, Esser had no choice but to
recommend to his shareholders that they accept Vodafone’s offer.
Such a thing cannot happen in India; Department of
Telecommunications has seen to it that it is not itself privatized, and that it
would not have to face a major private competitor. To this end it has
intrigued, taken recourse to courts, and run smear campaigns against TRAI; it
has lobbied politicians and ensured a short life for inconvenient ministers. So
the Indian telephone industry is safe from foreign threats: and the Indian
consumer is safe from cheap and efficient services. Let him suffer in national
interest.
Nor can it happen to Reliance – or Bajaj, or ACC. For the
government has ensured that foreign holdings in the share capital of an Indian
company cannot exceed 30 per cent; and within that 30 per cent, a single
shareholder cannot hold more than 5 per cent.
But once the foreign share reaches 30 per cent, there can
be no further purchase of shares by foreigners. This restriction only reduces
the price of the shares of Indian companies, and increases the cost of capital
to them. Dynamic entrepreneurs like Deepak Parekh of HDFC are all too aware of
this, but they are too few; the dinosaurs have greater influence on the
government.
And, of course, foreign companies can come and set up
subsidiaries in India. So Indian industrialists cannot avoid their competition.
They can, of course, sell their companies to foreigners. What the foreigners
cannot do, however, is to make an open offer to the Indian companies’
shareholders, make a hostile takeover, throw out Indian promoters and
reengineer the company. In other words, our government is a servant of
industrialists, not of shareholders or consumers.
