Vodafone-Idea merger deal faces regulatory and cultural roadblocks
Vodafone India Ltd and Idea Cellular Ltd may have announced an ambitious merger plan but how they handle a host of issues — regulatory and cultural in nature — will determine the success of the deal.
Experts said some of the risks associated with the merger and acquisition process and subsequent integration include clash of cultures, confusion about brand identity, distractions faced by top management and employees, and impact on morale of employees amid apprehensions of job safety.
“Mergers are complicated in the best of times. Synergies are only delivered if staff are let go, network overlaps eliminated or redeployed elsewhere, brands integrated and marketing budgets reduced. All of these are disruptive, and in almost all cases result in share loss,” Chris Lane, an analyst with Hong Kong-base Bernstein Research, wrote to investors on March 21.
Lane emphasised that there will be incremental loss of revenue market share and subscriber base of the combined entity as it attempts to address these issues across 22 circles in India, and that, too, in the middle of a fierce price war. “We expect they will lose 5% revenue market share in FY18 (as Jio starts charging) and a further 2% during the network integration period. This implies their combined subscriber share will fall from the current 40% reported to 34.6% by March 2018,” Lane wrote in his report.
JP Morgan Asia Pacific Equity Research said that notable among the risks is that of a unified brand. “If one of the brands (such as Vodafone) is extinguished and the merger envisages a single brand (say, Idea), it will be interesting to see how the Idea brand and execution resonates in the key circles where Vodafone is more dominant/ focused and Idea less so.”
“In the near-to-medium term (say, over the next 6-18 months), the cited risks to the merger may cause some share loss. In our view, Bharti (Airtel) can make the most of the revenue leakage from the potential merger.”
Both Idea and Vodafone have said that they plan to retain both the brands in the Indian market, which Credit Suisse found “intriguing”. “This may prevent the full extent of synergies to be realised when two competing brands from the same company are out in the market”
“Unlike a soap or a shampoo category, a customer is not making a brand decision every month when it comes to a telecom operator. However, in order to attract new consumers they (Vodafone and Idea) will have to think about a unified branding strategy,” said Ambi MG Parameswaran, a brand strategist and founder of Brand-Building.com.
The current market leader, Bharti Airtel Ltd, has a revenue market share of 33%. The $23 billion Vodafone-Idea merger will create India’s largest telecom firm, overtaking Airtel. It will have 400 million customers.
Naval Seth, an analyst at Emkay Global Research, said that since the merger is the largest in the industry, the regulatory approvals could take longer.
The agreement between Idea and Vodafone contemplates completion of the proposed deal within 24 months. “CCI (Competition Commission of India) alone may take anywhere between 45 days to eight months to approve such a merger,” said an executive from a rival company.