Vodafone Case Study

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the Vodafone Case

We start of with making the calculations for the premium that Vodafone is going to pay for Mannesmann. We know that Mannesmann will own 47.2% of the equity of the newly combined company. This is 47.2% from € 275 375 million, which is €129 997 million. Vodafone is offering 53.7 shares of the value of December 17, so € 4,957, for every share of Mannesmann. Mannesmann has 517,9 million shares, so Vodafone would pay 517,9 million * 53,7 * € 4,957 = € 137 860.3 million. This would be a premium of € 137 860.3 million - €129 997 million = €7 863 million. This premium we are going to compare with some possible different estimates for the synergy that will follow from the acquisition.

(1a) We know that Vodafone and Mannesmann have respectively 31105 million and 517.9 shares outstanding in the period of 21st of October and 17th of December. Based on the stock price from October 21, Vodafone at £ 2,70 / 0.645 = € 4,186 and Mannesmann at € 145,35 , the value of the firms would be € 4,186 * 31105 million = € 130205,53 million for Vodafone and € 145,35 * 517,9 million = € 75276,765 million for Mannesmann. Combined this would give a value of € 205483,74 million. If we perform the same calculations for the stock price of December 17 (Vodafone: £ 3,11 / 0,6274 = € 4,957 Mannesmann: € 234), we find a value of € 154186,404 for Vodafone and € 121188,6 for Mannesmann, combined for a value of € 275 375 million. Now we have the value of the combined firms before the market ever considered a take over, and a combined value after the bid was made public. The difference of those two values divided by the probability that the market gives for a successful acquisition will be the market’s estimate of the synergies resulting from the deal. In this case this will be (€ 275 375 million - € 205 483,74 million ) / 0,6 = 116 486.17 million. So if you compare the premium with the market’s estimate of the synergies, this would be a great deal for the shareholders. We take the quite some big assumptions of course and we believe that macro economic conditions and systematic risk do not change during those 2 months. (1b) Now take a look at the estimations of Goldmans Sachs about the expected synergies. Goldman Sachs estimate of WACC is 7,6%, and they believe that after 2006 the total operating profit will grow annually at 4%. Furthermore, the tax rate is 35%. We have implied their numbers from Exhibit 10 in following tabel:

| 2001| 2002| 2003| 2004| 2005| 2006| After|
Op. Pr.| 90| 246| 688| 984| 1221| 1489| |
Tax (1)| (31,5)| (86,1)| (240,8)| (344,4)| (427,35)| (521,13)| | ATOP| 58,5| 159,9| 447,2| 639,6| 793,65| 967,85| 26884,721(2)| Cap. Ex| 60| 147| 360| 420| 469| 506| |
Total| 118,5| 306,9| 807,2| 1059,6| 1262,65| 1473,85| 26884,721| PV(3)| 110,59| 265,08| 647,95| 790,95| 875,43| 949,69| 17323,35| (1) This is the 35% tax taken from Operating profit

(2) This is After tax operating profit for after 2006, taken the WACC and growth in consideration, so 967,85/(0,076-0,04) (3) This is the present value of the total estimate of the synergies after tax, discounted with the WACC, so (total)/(1+0,076)year

If sum up all the present values, we get the amount of £ 20962,11 million. At an exchange rate of 1,5789 EUR/GBP this gives a total present value of after tax synergies of is € 33 096.90 million. If we compare this again with the premium, we discover that this would be good deal for the shareholders, based on this numbers. However, we can see that the total operating profit given by Goldman Sachs consists by a big part out of Revenue Synergies. We have learned that revenue synergies are very hard to accomplish, so we have to be very careful taking this amount into our consideration. Furthermore, cost synergies might be fairly easy to accomplish in Anglo Saxon firms, it is certainly not the case for German companies. So we might have to take some closer looks at...
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