M&A as a mode of entry into the german market. The acquisition of Mannesmann by Vodafone

List of Contents

List of Abbreviations

List of Figures

1 Introduction

2 Market entry modes
2.1 Definition
2.2 Overview of market entry modes
2.3 Factors affecting entry mode decision
2.3.1 Basics
2.3.2 External variables
2.3.3 Internal variables

3 The acquisition of Mannesmann by Vodafone
3.1 The Story
3.2 Analyzing the factors affecting the entry mode decision
3.1.1 External variables
3.1.2 Internal variables
3.2 Evaluation of the economic efficiency of the bid

4 Conclusion

Bibliography

List of Abbreviations

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List of Figures

Figure 1: Categories of Entry modes

1 Introduction

In the last two decades globalization has become one of the most important topics in the world of business. More and more companies try to escape their home markets and enter into international markets to expand their businesses. As a consequence the question of the choice of foreign market entry mode gets more important, because it is linked to the success of the activities of a company in a target market.

One of these companies seeking to escape the home market was Vodafone in 1999 when it started a hostile takeover in order to bid for its competitor Mannesmann. In the end this strategic move went down in history as the biggest M&A-transaction ever performed in terms of the transaction volume in the world of business.^[1] Later the question arose whether the deal was a good strategic move or an excessive and costly bid within the growth-strategy which Vodafone follows at all costs.

Therefore this term paper evaluates the acquisition as a mode of entry used by Vodafone regarding the variables that affected the entry mode decision. Especially the analysis of the variables shall lead to a clear conclusion why an acquisition was used in the example in order to enter the target market. Further another question of this term paper is whether Vodafone entered the market efficiently under the given circumstances.

For this purpose, the term of market entry mode is defined. Further an overview of the different market entry modes is given in order to highlight the differences between them. After that the variables affecting the entry mode decision are named and explained. Then the takeover process of the business case is described in a chronological order. In the next part the variables influencing the decision to use an acquisition as a mode of entry within the example are analyzed in order to evaluate the bid Vodafone submitted. Then the bid made by Vodafone will be evaluated on a basis of the available economic data. As a result the key factors are summarized.

2 Market entry modes

2.1 Definition

“A foreign market entry mode is an institutional arrangement that enables a company to transfer its products, technology, management, and other resources to a foreign country.”^[2] This method of business organization proposes performing cross-border value-creating activities.^[3] The idea of ‘foreign market’ goes beyond markets for intermediate or finished goods and services. Further it implies also factor markets of different types.

The choice of an appropriate entry mode for a special market is described as one of the most critical decisions in international business, because it affects all future decisions and operations in the chosen market.^[4] Additionally the impact of entry modes on the success of foreign operations in general is great.^[5]

2.2 Overview of market entry modes

In order to classify different market entry modes various factors which differ from strategy to strategy have to be considered. In the international business literature the prevailing opinion is that entry modes can be classified by degrees of resource commitment, risk exposure, control and profit return.^[6] Further studies have shown that the choice of entry mode depends on industry-specific and country-specific factors too. All these characteristics are sufficient in order to cluster the possible entry modes. The following graphic gives an overview of the different market entry modes.

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Figure 1: Categories of Entry modes

As shown in the figure the market entry modes can be classified into three major groups: the export modes, contractual modes and investment modes.

The export modes can be characterized by the physical transfer of goods from the firm to the foreign market with or without an agent in exchange for the value of the goods in monetary terms.^[7] This category comes along with low control of the activities in the foreign market, a low risk exposure and resource commitment, because of the fact that the activities in the target market are performed by an intermediary or the produced goods are directly shipped to the target market.^[8] Moreover the company often has to expect a relatively low economic return, because potential intermediaries take the risk and take a premium for that. Examples for this group of entry modes are the direct and indirect export.

The contractual modes consist of a binding contract between the firm and an agent to produce and distribute the goods in the foreign market in return for economic rents.^[9] This contract gives the company a higher control over the activities in the target market while taking, compared to the export modes, a higher risk. Examples for such a contractual agreement are licensing, joint ventures and franchising.

The investment modes can be described as the investment in new facilities in the foreign market or purchase of stock in an existing company in order to exercise control over that company.^[10] The major examples are the Greenfield mode and the merger and acquisition transactions. Using these methods is associated with the highest resource commitment, risk and control in the target market.^[11]

2.3 Factors affecting entry mode decision

2.3.1 Basics

The previous section outlined the characteristics and differences between the entry modes. Besides that it is important to understand the determinants that influence the choice of entry mode. In the existing literature these variables can be divided into two groups: the external variables and internal company specific factors.^[12]

2.3.2 External variables

Two important factors influencing the choice of entry mode are the size and growth rate of the foreign market a company wants to enter. On the one hand big foreign markets tend to favour modes with a higher degree of internalization of the activities performed in the market. This internalization is associated with high break-even sales volumes which can be met by the high level of potential demand caused by the size and growth of the target market. On the other hand small markets tend to favour modes with lower degree of internalization, because of the fact that only a low potential demand is expected.^[13]

Another external factor associated with the choice of entry mode is the country risk. Companies will always prefer export modes and contractual modes to other entry modes where the uncertainty and the country risk is high, because through this modes companies are able to pass the risk to contractual partners.^[14] The country risk in general depends on different circumstances like political stability. People living in a country under such circumstances often focus on the problems in everyday life and are not interested in the product on the market.

Besides those factors there is the variable of intensity of competition. In the existing literature the authors suggest that intense competitive conditions in the target market discourage investment entry modes because the merchandising risk is higher in those markets.^[15] Further the competitive conditions in the home market can affect the choice of entry mode, too, because a dominant position in the home market secures the financial power of a company which is necessary in order to implement investment modes in a company´s strategy.^[16]

Further the number of relevant and available export intermediaries can influence the mode of entry because the higher the number of possible intermediaries in the target market the higher the chance to find a contractual partner for an export or contractual mode of entry. On the opposite means that if there are a low number of potential candidates an investment mode is more likely to choose.

Another factor is the geographic and sociocultural distance between the home and target market. The greater the distance, the more likely is the use of export or contractual entry methods because the experience of local experts and intermediaries can be the key to a successful market entry.^[17] Distance means differences in terms of language, consumer behaviour, tastes, culture and distribution structures.^[18]

2.3.3 Internal variables

Besides the external variables there are internal ones which influence the choice of entry mode. The first factor is the firm size. A bigger company is more likely to have the financial power in order to internalize activities while entering a target market.

Further the international experience influences the choice of entry mode too. Companies with a lot of experience are able to perform entry methods without local partners which means that investment entry modes only should be realised if a certain international experience exists.

Another internal variable that has to be mentioned is the product itself. The characteristics of the company’s product in terms of complexity, special needed resources and differentiation advantage etc. have a certain influence on the entry mode decision. So the channel selection is affected by the complexity of the product because some products may require special service before and after sale regarding their technical nature. Contractual partners that can handle such kind of work are not always available.^[19] This has to be considered when choosing the entry mode and forces a company with such products to use an entry mode with a higher degree of internalization. Further in business literature a needed proximity of the producer and the consumer is described by the terms “hard and soft services”.^[20] Hard services are those where production and consumption can be decoupled and soft services where it is impossible. The dependence is based on the fact that the products are produced and consumed simultaneously.

Besides that the desired mode characteristics can have an influence on the entry mode decision. The different entry modes differ in terms of degrees of resource commitment, risk exposure, control and profit return from each other.^[21] Because of that the desire for certain characteristics can affect the decision towards a special entry mode ignoring the other variables.

3 The acquisition of Mannesmann by Vodafone

3.1 The Story

The story started in 1999 when Mannesmann initiated a bid for a British competitor of Vodafone called Orange. In this situation Vodafone was faced with the fact that Mannesmann was about to enter into more and more markets while being in several major joint ventures a co-partner of Vodafone. All in all Mannesmann gained strength and appeared to be as much of a competitor as an ally. The conclusion of the capital markets was that Vodafone had to make a takeover bid for the whole of Mannesmann.^[22] Therefore a long phase of negotiations occurred. Then in 2000 the biggest M&A-deal in history in terms of the transaction volume took place. The British wireless company Vodafone brought Mannesmann for 176 billion Euros.^[23]

3.2 Analyzing the factors affecting the entry mode decision

3.1.1 External variables

Vodafone was influenced in its entry mode decision by different factors. One of the external factors was the size and growth of the target market. At that time Germany was one of the biggest markets in terms of mobile subscribers in Europe.^[24] Besides that the potential growth prospects in the next years, only limited by the population of Germany, were rated high. Therefore a market entry with a high degree of internalization was logical.^[25]

The country risk didn’t matter that much for the entry mode decision, because of the fact that Germany is a country with a lot of political and financial stability. That means that this factor is no barrier towards an investment mode in order to enter the German market.

Another external variable that can influence the choice of entry mode is the intensity of competition. The number of market members was only four when Vodafone wanted to enter the German market.^[26] This low number of rivals resulted in a rather low intensity of competition what favours an investment mode of entry.

Further there is the number of potential partners in the target market which influences the entry mode decision. The German telecommunication market was controlled by four market participants.^[27] This low number suggested an investment mode in order to enter the target market because of missing contractual partners.

Another factor is the geographic and sociocultural distance that can influence the entry mode decision. Between Great Britain and Germany is a rather low distance which means that the internalization of the activities in Germany are not confronted by barriers based on this variable.

3.1.2 Internal variables

Another factor that affected the takeover was the firm size of Vodafone. Compared to the size of the target Vodafone had a lower market capitalization which means that Vodafone was the smaller company. Normally bigger companies try to takeover smaller ones because of their financial power. The smaller companies are forces to use other modes of entry with a lower degree of internalization regarding the missing financial power.

Besides that there is the international experience which can affect the entry mode decision. Vodafone had a lot of experience with regard to other transactions in the recent past.^[28] So the great experience helped Vodafone to choose a M&A-transaction as a mode of entry because of its huge internationalization experience.

The desired mode characteristics can be a variable that influences the entry mode decision too. In this case Vodafone followed a consequent growth strategy for years while being venturesome. This shows that the company in general prefers entry modes with a higher of internalization even if they include a higher risk.

The last factor which affected the choice of entry mode is the specific product of Vodafone. Vodafone is a network provider and offers telecommunication services. Regarding the differentiation between hard and soft services, the services Vodafone offers are soft services. That means if Vodafone provides its products they are consumed simultaneously. This inseparable character of the services excludes export modes from the possible market entry modes.

[...]

^[1] Cf. Müller-Stewens, G. (2010), p. 82.

^[2] Root, F. R. (1988), p. 4.

^[3] Cf. Jones, M. V. (2009), p.7.

^[4] Cf. Terpstra, V., Sarathy, R. (1991), p. 361; Kumar, V., Subramaniam, V. (1997), pp. 53-54.

^[5] Cf. Wind, Y., Perlemutter, H. (1977)

^[6] Cf. Pan, Y., Tse, D. K. (2000), p. 535.

^[7] Cf. Kumar, V., Subramaniam, V. (1997), p. 54.

^[8] Cf. Anderson, H.; Gatignon, H. (1986), p. 3.

^[9] Cf. Kumar, V., Subramaniam, V. (1997), p. 54.

^[10] Cf. Kumar, V., Subramaniam, V. (1997), p. 54.

^[11] Cf. Ireland, R. D., Hoskisson, R. E., Hitt, M. A. (2008), pp. 157-159.

^[12] Cf. Root, F. R. (1994), p. 29.

^[13] Cf. John, R., Gillies, G. I. (1996), p. 266.

^[14] Cf. John, R., Gillies, G. I. (1996), p. 267.

^[15] Cf. Kim, C. W., Hwang, P. (1992), p. 36.

^[16] Cf. Root (1994), p. 33.

^[17] Cf. John, R., Gillies, G. I. (1996), p. 267.

^[18] Cf. Hollensen, S. (2007), p. 300.

^[19] Cf. Hollensen, S. (2007), p. 299.

^[20] Cf. Blomstermo, A., Sharma, D. D., Sallis, J. (2006)

^[21] Cf. 2.2

^[22] Cf. Curwen, P (2000), p. 29.

^[23] Cf. Müller-Stewens, G. (2010), p. 82.

^[24] Cf. Curwen, P (2000), pp. 30-31.

^[25] Cf. 2.3.2

^[26] Cf. Curwen, P (2000), p. 30.

^[27] Cf. Curwen, P (2000), pp. 30.

^[28] Cf. Anwar, S. T. (2003), p. 270.