By Surya Suresh
Idea and Vodafone laid the finishing touches on their mega-merger this Thursday by announcing the leadership team of the merged entity. The news comes more than a year after the idea of the merger was first discussed between the two telecom giants. The finishing line is now in sight, with reports indicating that the merger will be completed by May.
Indias telecom industry
Since the economic reforms of the 1990s, India’s telecom sector has witnessed high growth rates and market liberalisation. According to RBI data, the telecommunications industry in India has witnessed an annual growth rate of more than 10 percent since 1990. As a result, India is currently home to one of the worlds most competitive and fast-growing telecom markets. The fierce competition within the sector has resulted in Indians benefitting from the worlds cheapest telephony services.
In the past year, the sector has been further disrupted owing to the entrance of Reliance Jio. While consumers are benefitting from the affordability of calling and data services, many telecom companies are being forced to take on high levels of debt in order to stay relevant in the cut-throat industry. Price wars have ravaged the industry with experts questioning the sustainability of the business models employed by telecom giants.
The telecom sector will continue to grow in the near future owing to the size of the Indian market. Internet penetration is close to 66 percent in urban India but is at a measly 20 percent in rural India. Hence, rural India appears to be the next battleground for Indias telecom giants and price wars will certainly not be a thing of the past.
The Idea-Vodafone merger
Idea and Vodafone are two of Indias telecom giants. The merger of these two companies will create Indias biggest telecom company with an estimated customer market share of 37 percent. The two companies have seen a decline in their popularity among users owing to the entrance of Reliance Jio and this move is an attempt to regain their former glories. Revenue and profitability have plunged for both the companies in the past year owing to the brutal price war in the telecom industry. The main objective of the merger is to build synergy, to leverage the combined customer base and to avoid duplication of assets.
The merged entity will need to retain subscribers, add new subscribers and also regain financial health. Vodafone and Idea are also lagging behind Airtel and Jio in the mobile data market, which is poised to grow in the future. Reports indicate that the merged entity will look to spend Rs. 60,000 crore over the next three years on building network infrastructure.
Leadership team
In such challenging times, the leadership team of the merged entity will play a crucial role in determining the success of the merger.
The merged entity will have Mr Kumar Mangalam Birla as its non-executive chairman while Balesh Sharma, the current Vodafone COO will be taking over as the CEO. Sharma is a Vodafone veteran, having joined the company in 2003. He has held several leadership positions in the company both nationally and internationally. Mr Sharma has previously been the CEO of Vodafone Malta and the Vodafone Czech Republic before making the move back to India. He will be responsible for the merged companys business strategy and execution. The mantle of CFO will be taken up Akshaya Moondra, who is currently the CFO at Idea.
Criticism of the merger
In an ideal world, a merger would result in the aggregation of useful assets and the disposal of wasteful ones. However, mergers are more complicated in the real world and are affected by legal agreements, logistics issues and culture clashes. While the Vodafone-Idea merger looks good on paper, experts are concerned about the feasibility and financial implications of the venture.
Some experts are concerned about the timing of the merger. The telecom industry is witnessing disruption and rapid change making it essential to have an agile management in place. A merger naturally results in slower and more ponderous decision making, at least for the first few months post the merger. This could negatively impact the merged entity in the current environment.
Others are also concerned about the longer than average time for synergies to accrue as estimates released by the companies indicate a period of 4 years for the same. Within this time frame, analysts believe that the merged entitys debt to equity ratio will soar, thus making the companies uncompetitive in the telecom industry.
Looking forward
The merger will certainly open up a gamut of opportunities to both companies. Profitability and market share will be two items on the top of their agenda. The merged entity will look to become the market leader in the Indian telecommunication market, beating the likes of Jio and Airtel. A renewed focus on internet connectivity is the need of the hour for the merged company to be successful in the long term.
The leadership team will have their work cut out to make the merger a success, particularly owing to the differences in ecosystems, billing systems, company culture and network vendors. Ironing out these differences and adeptly managing the new companys balance sheet will prove crucial to the success of this venture.