How Vodafone Aims To Rule The Wireless World

The AirTouch bid is just one step in its plan for dominance

As a public-relations stunt, it would have been a tad heavy-handed. But there was Vodafone Group PLC Chief Executive Chris C. Gent, orchestrating the biggest merger in the history of the mobile phone industry--via cell phone from Australia. It started over New Year's weekend, when word got out that Bell Atlantic Corp. was offering $45 billion for AirTouch Communications Inc., the largest independent U.S. mobile company. Gent didn't fuss with flights back to London. He pressed the call button and started talking. By Jan. 3, he had put together his own $55 billion stock and cash offer for AirTouch.

If it goes through, as analysts expect, Vodafone, Europe's leading mobile phone company, could become the first global giant of the wireless age. "Sizewise, nobody else would come anywhere near," says Jonathan Lewis, a Dresdner Kleinwort Benson Inc. telecom analyst. The combined company would have sales of $10 billion and a market capitalization of $105 billion, making it No. 3 in Britain. More important, by consuming AirTouch, which is strong in Europe's booming south, Gent would enjoy supremacy in Europe's cellular-phone market, the world's biggest. He would also acquire 8.5 million U.S. customers in California.

But Gent faces a host of technical challenges. In the next three years, communications devices, from computers and televisions to mobile phones, are expected to converge, all offering the same host of services. For Vodafone and other cell-phone companies to justify their stock valuations, Gent and his competitors must expand from voice into the potentially rich data side of the market. Cell phones, in short, must push their way onto the Internet.

At the same time, with or without AirTouch, Gent will have his work cut out keeping his company independent. A takeover would be pricey. But in today's merger mania, size is no longer a surefire defense. "I see Vodafone as a target for somebody who wants to get into the wireless world," says Linda Barrabee, a researcher at Pyramid Research in Cambridge, Mass.

Vodafone's European roots give Gent a technical edge over American competitors such as AT&T and Sprint Corp. That's because the next generation of cell phones will probably hit Britain by 2001--a year or two before reaching the U.S. Users will be able to send E-mail, download compact discs, and even video-conference. But for Vodafone and other cell-phone operators, the switch to the so-called third generation requires multibillion-dollar investments on licenses and infrastructure. Gent is determined to spend it, even with only the sketchiest notion of return.

A similar dive into an untested cellular market gave Vodafone its start 16 years ago. The military electronics company landed Britain's first cellular license in 1983 and on Jan. 1, 1985, sent the first call from Trafalgar Square to company headquarters in Newbury, 50 miles east. A day later, Gent, a computer industry executive, joined the company.

Vodafone's initial public offering in 1988 raised funds to stave off a challenge from British Telecommunications PLC's mobile operator, Cellnet. Vodafone was able to battle the old giant with speed and focus. Still, Vodafone seemed to be losing ground to aggressive newcomers when Gent took over as CEO in early 1997. He canned the old ad agency and set about building brand recognition that would keep customers, especially business users, loyal to Vodafone.

CELL-PHONE MANIA. Gent's timing could not have been better. In the last two years, the combination of lower prices and a booming economy have fueled cell-phone mania in Britain--a phenomenon that Gent and others expect to hit the U.S. soon. Last year alone, British subscriptions grew by 53%, to 13 million, or 22.4% of the population.

Vodafone is seeing explosive growth in its 13 other markets as well. Double-digit growth is the rule in its joint ventures from the Netherlands and Greece to New Zealand. And its fabulous earnings and stock growth placed it second on BUSINESS WEEK's IT 100 last fall. Last year, the company earned an estimated $1.45 billion on sales that grew 40%, to $5.5 billion. Vodafone shares are up 143% in the last 12 months.

Vodafone and AirTouch know each other well. They are partners in a Swedish joint venture and were considering a merger last summer, say analysts, but could not settle on a price. Bell Atlantic, as it turns out, set the price for them. And for Chris Gent, the first step toward leading the wireless world was simply a matter of picking up a cell phone and putting it to use.

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