Vodafone-Mannesmann Case Questions

1. Vodafone proposes that each Mannesmann share would receive 53.7 Vodafone shares, so that in aggregate Mannesmann shareholders would own 47.2% of the equity of the newly combined firm, 1 and Vodafone shareholders 52.8%. Based on December 17, 1999 stock prices how much would Vodafone shareholders contribute to the newly combined firm? (hint: look at the current market caps of Vodafone’s and Mannesmann’s shares) Assume in what follows that the stock prices prevailing on October 21 reflect the stand-alone values of the firm, so that both firms would trade at October 21 prices if the bid failed and the merger did not go through. a. b. What is the minimum level of synergies for Vodafone shareholders to at least break even on the deal? Estimate the market’s assessment on December 17, 1999 about the likelihood that the deal will succeed. To do so, construct a merger arbitrage position where you buy one Mannesmann share (at the price prevailing on December 17, 1999) and sell short 53.7 Vodafone shares. Assume that the deal finalizes in 3 months time and a risk—free interest rate of 5.5%. Show that the implicit probability of deal success is approximately 60%. Using the 60% from part b.), estimate the expected synergies of the deal. Based on this estimate, should Vodafone shareholders support the deal? What fraction of the synergies is appropriated by Vodafone shareholders and what fraction by Mannesmann shareholders? What is the present value of the expected synergies as shown in Exhibit 10? (Assume that the synergies related to revenues and costs grow at 4% annually past 2006, that savings from capital expenditures do not extend beyond 2006, and that the merger will not affect the firm’s level of working capital.) Use the average exchange rate of EUR/GBP=1.5789, and the Goldman Sachs WACC. Based on these calculations, should Vodafone shareholders support the deal? UK equities returned 7.7% over the UK risk-free rate for the period...