Vodafone Calling

How it plans to build a global titan

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, watching cricket down under, didn't fuss with flights back to London. He simply 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 now 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, Dresdner Kleinwort Benson Inc. telecom analyst.

A Vodafone-AirTouch team would create a titan with annual sales of $10 billion. At current valuations, its capitalization of $105 billion would rank it third 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. At the same time, he would acquire 8.5 million U.S. customers in California.

HEADY TIME. The result of the deal would be a wireless empire, one entirely focused on a mobile phone business projected to double, globally, to 550 million subscribers within two years, according to International Data Corp. This is a heady time for Gent. The 50-year-old marketing maven was dreaming of cellular as a global business way back when the unwieldy gadgets were more like police radios. Now the global business is taking shape--and he may wind up running it.

But Gent, who rose through the ranks of Vodafone on the strength of his marketing and managing, 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 of them offering the same host of services. That convergence is behind the rash of massive takeovers in the phone industry. For Vodafone and other cell-phone companies to justify their dizzying 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. No doubt a takeover would be pricey. But in the context of 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 cellular industry is preparing to launch the next generation of cell phones within two or three years--and the new system should open in Britain shortly after Japan, a year or two before reaching the U.S. This so-called third generation would enable users to send E-mail, download stereo compact discs, and even video-conference on mobile phones. With cell-phone rates falling by 10% to 20% annually in most markets, the move to third generation is vital: It promises crucial new markets for handheld devices. But for Vodafone and other cell-phone operators, the switch to the third generation requires multibillion-dollar investments on costly licenses and infrastructure--"a fair old sum," Gent calls it. He 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, then called Racal-Vodafone, landed Britain's first cellular license in 1983, and during New Year's celebrations on Jan. 1, 1985, it sent the first call from Trafalgar Square to company headquarters in Newbury, 80 km 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 Telecommunication PLC's mobile operator, Cellnet. Like other new tech stars, such as WorldCom Inc., Vodafone was able to battle the old giant with speed and focus. Its tiny workforce of 8,500 is spurred on by stock options.

Still, Vodafone seemed to be losing ground to aggressive newcomers when Gent, who had been developing Vodafone's international portfolio, took over as CEO in early 1997. He immediately canned the old ad agency and set about building a network of 250 company stores in towns and villages throughout Britain. The idea: to build brand recognition and neighborhood service that would keep customers, especially business users, loyal to Vodafone.

Gent's timing couldn't have been better. He had Vodafone ready just as Britain's market was taking off. In the last two years, the combination of lower prices and a booming economy have fuel- ed 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 Gent expects the growth to continue, as cellular relentlessly displaces fixed-line technology. In Vodafone's European markets, he says, "we expect half the population to be mobile by 2005."

Vodafone certainly enters the battle for AirTouch with a formidable war chest. The company's fabulous earnings and stock growth placed it second on BUSINESS WEEK's IT 100 last fall, ahead of such powers as Microsoft Corp. and SAP and trailing only Dell Computer Corp. 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.

CULTURE CLASH? The phenomenal growth is rooted in the ABCs of the phone business. The company bids high and early for cellular licenses, builds market share while holding down costs, and focuses on rich business customers. The formula runs like a cash-generating machine--which is what gave Gent the opportunity to follow Britain's Vodafone-sponsored cricket team to Australia. In fact, after making the bid for AirTouch, he stayed to watch a four-day match.

Already, Vodafone and AirTouch know each other well, although they hardly seem like a close match culturally. Vodafone, with its history as a military supplier, is known as a tightly run ship, while AirTouch, says an executive at its Spanish affiliate, "is California loose, with no dress code." The two are partners in a Swedish joint venture and were mulling over a merger last summer, say analysts, but could not reach agreement on a price.

Bell Atlantic, as it turns out, set the price for them. And for Chris Gent, the move to become leader of the wireless world was simply a matter of fishing a cell phone out of his pocket, and putting it to use.

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