28 Nov 2017 18:38 IST

Author Analysis

Right strategic direction will ensure synergies bear fruit

The combined entity should focus on differentiation, to consolidate its position in India

The landmark Vodafone-Idea merger deal will catapult the combined entity to the position of market leader in the Indian telecom industry, both in terms of revenues as well as market share.

The case lists out various potential synergies of this merger. So, instead of going over these again, let us look at how the merged entity can effectively leverage the synergies. Experience has shown that realising synergies is not always as easy as it appears. The Vodafone-Idea team has to work as an integrator and intervene at the business level in terms of strategic direction and control to ensure that the potential synergies bear fruit.

The post-merger integration (PMI) team should ensure that resources and activities are shared and redundancies are eliminated. For instance, network infrastructure should be rationalised, offices (front-end and back-end) shared, excess equipment redeployed to unpenetrated markets, employees may have to be redeployed or laid off, and so on.

Both Vodafone and Idea can learn from each the other’s skills and competencies developed over the years in serving their distinct markets. At the same time, the PMI team has to ensure that the costs of sharing or transference of skills do not outweigh the cost of undertaking such integration.

The HR aspect of the merger should be taken into account too. If the culture of Vodafone and Idea turn out to be significantly different, any sharing between the two could become problematic. Moreover, managers may become insecure due to impending layoffs or uncertainty, and there may be a hostile ‘us vs them’ feeling which is not good for transference and sharing.

Setting up of a congenial organisational climate, with clear communication and rewards tailored to encourage such sharing should be a priority. Some ‘give and take’ is not uncommon is such situations — both for operational as well as symbolic reasons. It has been announced that Kumar Mangalam Birla, Chairman of the Aditya Birla Group, would head the merged entity. Don’t be surprised if you see the Idea brand being assimilated into the Vodafone brand in the future.

In addition, the combined entity has to figure out ways of ensuring that it complies with the regulations that required the merged entity to have no more than 50 per cent of the revenue market share in each market and it may also have to surrender spectrum in some markets.

Both Vodafone and Idea have distinctive brands and appeal to different customer segments. One of the dilemmas before the combined entity is whether to assimilate one brand into another so as to have a unified brand, or to maintain two brands separately or to combine elements of the two brands (fusion). Each of these options has its pros and cons. Keeping both brands will have advantages, as this will allow both Vodafone and Idea to have operational consistency and offer sterling customer service to different segments.

However, there are complexities inherent in running two separate brands which can lead to inefficiencies and high operating costs (separate marketing campaigns will, for instance, add to costs). Similarly, fusing elements of both brands, despite some advantages, can lead to confusion regarding the brand among customers and also there is also the high initial cost of rebranding. While assimilating one brand into another leads to cost reduction and ensures minimal complexity in operation, there is a risk that loyal customers of the assimilated brand may feel disenchanted and the carrier may lose some of them, thus affecting revenue.

Much of the synergies identified for the combined entity are based on how it will eliminate redundancies and cut costs. So, it makes sense for the combined entity to opt for a single brand by assimilating Idea into Vodafone. Vodafone is not only the second positioned brand in India, but one of the top telecom brands globally. Will this lead to loyal customers of Idea leaving the network? Unlikely.

Vodafone is positioned as a more premier brand and it is easier for a marketer to bring a customer upmarket with a similar offering than to make them go down-market. Vodafone may well become an aspirational brand for the Idea consumers. However, Vodafone should implement it in a phased manner by first having the Vodafone and the Vodafone-Idea brand (for existing Idea customers), and then assimilate it fully with time.

Initial ads may show Vodafone’s iconic ZooZoos dancing to the tune of the popular Idea “Honey bunny” jingle, or even leverage the popular “What an Idea, Sirji” tag line. Vodafone, despite being a new entrant in the Indian telecom market in 2007, was able to assimilate a big brand such as Hutch in the past and it can do it again.

Going forward, the combined entity should focus on differentiation, to grow and consolidate its position in India. Being the undisputed market leader in India, Vodafone-Idea should focus on expanding the market, focusing on rural markets. Here the skills and competencies of Idea will be of much help when combined with the capabilities of Vodafone.

The combined entity will be in a much better position to combat rivals as it can leverage its better infrastructure and a huge customer base. In addition to reducing costs, the combined entity will also enjoy a lower debt-equity ratio, enabling it to borrow additional low-cost funds to fuel growth by introducing new services and promotional strategies.

In the past year, we have seen how Jio has had a disruptive impact on the industry with incumbents like Airtel, Vodafone and Idea, suffering a fall in new customers and even in their Average Revenue per User (ARPU). After the merger, Vodafone-Idea is likely to be in a better position to combat Jio, as it will hold the highest spectrum in the industry and offer data at competitive prices.

As the price wars settle, the combined entity can leverage its market position and enhanced spectrum to grow its market share. In urban areas it can get into exclusive opportunistic alliances with service providers to differentiate its data offerings with bundled services.

In rural/ semi-urban pockets, Idea’s offerings can be consolidated with not only calling service but also data services that this segment can be educated to value. The combined entity may even explore with some OEMs the opportunities of bundling basic 4G phones along with its services for rural markets, which Jio has thus far not been able to penetrate.