A crown of thorns awaits the Vodafone-Idea merged entity
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If you can’t beat one, join the other. That seems to be the operative strategy behind a number of recent industry partnerships.
On Monday, Idea Cellular Ltd and Vodafone Group Plc. solemnized their three month-old engagement with details of the impending marriage. Elsewhere in Motown earlier this month, Tata Motors Ltd and Volswagen AG, neither of which was setting Indian parking lots on fire (the market share of the two together is less than 8%), announced a memorandum of understanding for a long-term partnership.
In strict number terms, the Idea-Vodafone merger catapults the combined entity to pole position in India’s $27 billion telecom market but an inorganic leadership in a turbulent market may be a crown of thorns. Bragging rights aside, the merger leaves both companies with massive issues of integration and no real guarantee of success beyond the savings from synergy.
Statements by Vodafone Group chief executive Vittorio Colao, shortly after the announcement, spotlight why it is difficult to be buoyant about the marriage. Both brands, he stressed, will continue to be present in the market. The fate of many a corporate marriage between two strong brands warns us of how that might pan out. Publicis Groupe SA and Omnicom Group Inc., Compaq Computer Corp. and HP Inc., Daimler AG and Chrysler Corp., Time Warner Inc. and AOL Inc.—the mega failures just reel off the tongue. A successful marriage between two equals is really the stuff of myths.
Nor are the two companies making it any easier for themselves. Consider the announcement: “Promoters of Idea have sole right to appoint the chairman.” So will Idea, not Vodafone, drive the new venture? But wait, the latter will appoint the chief financial officer. And the chief executive officer will be appointed by consensus. It is the kind of confusion that can haemorrhage an existing company, far less a joint venture which is still a work-in-progress.
Contrast that with the clarity and the scalpel-drawn terms of last year’s merger between HDFC Life Insurance Co. Ltd and Max Life Insurance Co. Ltd, which created India’s largest private insurer. Notwithstanding its ongoing issues with the insurance regulator, the deal left HDFC clearly in charge both operationally as well as in ownership terms.
And there’s the difference. When a corporate marriage is a response to an outside threat or its perception, the scope for a messy patchwork is much higher. While both Vodafone and Idea have been at pains to clarify that the merger wasn’t a reaction to Reliance Jio Infocomm Ltd’s entry in the market, surely, that had to be the catalyst. The mechanics of the arrangement almost cap its possible upside with neither partner showing the willingness to take on the dynamics of a mature market in which Jio is pouring billions of dollars of aggressive investments.
So here are a few predictions for the future.
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Vodafone’s India aspirations will show a marked decline over the coming years as its appetite for the Indian market becomes subservient to opportunities in other parts of the globe, notably in Europe where it is spearheading a move into fixed-line services. Already nearly 20% of its revenue is coming from fixed broadband and TV services. The UK-based company has invested £19 billion over the last three years in what it called its Project Spring program to enhance its coverage in the UK market. What’s more, Europe will continue to play a major role in its future plans.
Last May, following an year in which its revenues and earnings posted a rise for the first time since 2008, the company announced plans to take the lead in rolling out 5G mobile services across Europe.
These moves, along with its backward step in India, are clear indications that 10 years after it first entered the Indian market with its acquisition of Hutchison Telecommunications International Ltd’s stake in Hutchison Essar Ltd, Vodafone seems ready to get off the roller-coaster ride which has witnessed two write-downs, an aborted initial public offering and a pending $2.5 billion retrospective tax charge with little to show in terms of profits.
Idea, for its part, appears to have made its peace with the realities of a market it has struggled in and will settle for the bronze, leaving Bharti Airtel Ltd and Jio to battle it out for leadership. Twenty one years after it was set up as one of the first movers to take advantage of India’s telecom privatization opportunity, the group is choosing the path of discretion over bravado.
Lastly, Mukesh Ambani will finally permit himself a broader smile.
Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider will look at current issues and trends in the corporate sector every week.