A merger is a success when the component parts add up to more than they are worth individually. Hence, it is important to identify synergies and maximise the merger value in the least amount of time possible.
In the Vodafone-Idea merger, about two-thirds of the total estimated savings (operational expenditure and capital expenditure) — which comes up to ₹14,000 crore annually by the fourth year of operations — is cost synergy.
The increase in data usage is making it difficult for Vodafone and Idea, individually, to stay afloat as the extent of 3G and 4G spectrum they hold is less than that held by Bharti Airtel and Reliance Jio. The merger is beneficial in this aspect of asset sharing and will also result in a sharp fall in operating leverage.
Identifying and attaining synergies
Opex:
1. Network: Rationalisation of co-located sites following network consolidation; energy savings and operational efficiencies with elimination of older GSM sites; savings related to connectivity costs.
2. Customer acquisition and servicing: Service centres, back office and distribution efficiencies.
3. IT: Infrastructure sharing, resulting in lower costs.
4. Others: Reduction in general and other administrative expenses.
Capex:
1. Network: Higher spectrum availability and high-capacity radio access network deployment, resulting in lower capex; re-deployment of overlapping broadband equipment; avoiding duplicate 4G network expansion and upgrades; lower fibre and electronic roll-out needed for building large broadband capacity.
2. Increased scale to drive cost efficiencies for IT platforms; common IT systems for the combined entity.
Human resources
Human resources is an important aspect of the transition because people are the ones who will carry out the operations. Many mergers and acquisitions are great on paper but fail because they don’t do a good job of integrating the human resources.
Employees typically view mergers with hostility as they feel undervalued. The management of both companies should keep in mind the differences in work culture and sensitively handle the transition.
Training sessions, cross-culture interactions and establishing the ground rules post the merger should be given importance. Something seemingly as small as an e-mail id should also be taken care of — IT processes should be integrated on Day 1 itself.
There should be clarity and involvement of all necessary stakeholders in decision-making and a proper chain of command. The merged entity might also have to go ahead with some lay-offs as many roles would be duplicated; this has to be dealt with utmost caution as it might undermine the confidence of existing employees.
Branding
The plans, tariffs and customer base for Vodafone and Idea are very different. Diluting both brands into one could be a mistake for the merged entity. The idea of a merger is to capitalise on synergies in both opex and capex, which practically do not need to be under a single brand.
Idea and Vodafone should ideally retain their brands separately, so that they don’t lose out on the brand image and value of each in the customers’ minds. With this, they will be able to provide better offers to compete with other brands like Airtel and Jio. The merged entity will also be able to command a premium from certain customer segments as they will now have better service quality.
Future strategy
Jio is able to give data at low prices because of its spectrum holdings, and free voice calls because it has practically no operating costs associated with voice calls as it uses VoLTE technology. The low data charges offered by Jio can easily be countered now as Vodafone-Idea combined will have larger spectrum holdings and opex and, hence, can be profitable even at lower prices.
This money can be used to fuel the price war with Jio on voice calls. They have to properly identify the segment of customers where Jio has the major share and come up with counter offers. Yet, this price war can only be for a short period. With fewer companies in the sector, there is a higher chance of increase in prices with more consensus among players.
(The fourth runner-up is PGP 2016-18 student at IIM Bangalore)