Idea-Vodafone merger: Why the $23 bn deal throws up a humongous integration challenge

Equal partnerships are a big challenge to manage. On top of it, Idea-Vodafone will also have to deal with the fierce market competition

Sulekha Nair March 22, 2017 11:36:59 IST
Idea-Vodafone merger: Why the $23 bn deal throws up a humongous integration challenge

The $23 billion Vodafone-Idea Cellular merger, which is touted to become India’s largest telecom firm, has cleared just one hurdle in the intense war simmering in the sector after the entry of Reliance Jio in September.

The move towards consolidation by Idea and Vodafone as announced on Monday with their merger has shaken the arena and more such mergers are expected.

However, Idea and Vodafone have a few stiles to leap over, even with the size the merged entity commands.

Management professors who have been keenly watching the deal said the road ahead was rough and strewn with boulders for the merged entity.

Brand identity

Vodafone and Idea Cellular have clear brand identities. British telecom major Vodafone is seen as ultra modern which is preferred by customers in the cities across the country. This image is also because the MNC has a confident urban image, says Siddharth Shekhar Singh, Associate Professor of Marketing, Indian School of Business (ISB). Idea, on the other hand, has an earthy and rustic image. What will the merged identity be – a balance of both or focus on the rural or city aspect?

IdeaVodafone merger Why the 23 bn deal throws up a humongous integration challenge

Kumar Mangalam Birla (L), chairman of Aditya Birla Group, shakes hands with Vittorio Colao, CEO of Vodafone Group, after a news conference in Mumbai, India. Reuters

The image chosen by the merged identity may not go down well with its customers, feels Singh, as it has to co-opt customers from opposing end of the spectrum. “A lot will depend on the brand resonance of the merged identities,” he said.

Question of tariffs

Vodafone and Idea’s tariff structure are different as they cater to different sectors. Idea at present offers unlimited voice calls and 0.5 GB data at Rs 348. This is for a period of 28 days, according to the Financial Express . Vodafone’s recharge pack valid until March 15 was at Rs 246 for 28 GB data with unlimited voice calls. However, data would be charged after free usage of 1GB data. The concern now is, what will the merged identity offer to its customers, and more importantly at what price points? Will it to appeal to both Idea and Vodafone’s customers?

Organisational challenges

Equal partnerships are a big challenge to manage, says Amit Bhadra, associate professor – services and brand management of Mumbai’s Narsee Monjee Institute of Management (NMIMS).

He reasons that though it is clear that the two telecom giants have gone for a merger for strategic reasons, the integration of management of both organisations will have to factor in cultural differences -- staff working with a foreign MNC versus a home-grown firm.

There could be a likelihood of one of the organisation taking the leading role which will result in a cultural force-fit for the less dominant player, he says. The salary scales of Vodafone and Idea may not be at par and the new firm will have to make it par which may hurt some positions.

Bhadra cites the instance of Lenovo which acquired IBM’s personal computer business in 2005 and its Intel-based server businesses in 2014. Lenovo was clear about its reasons for the acquisition as it stood to gain global exposure thanks to IBM.

In the case of Idea and Vodafone, though the reason for the merger is to capture a large market share, the companies will not risk the deal on for the sake of restructuring and HR processes. “The goal will be to keep everyone happy in both the organisations which is a tough goal,” says Prof Bhadra.

Unequal partnership

The merger has been called as an equal partnership with Vodafone initially holding 45.1 percent stake after transferring a stake of 4.9 percent to the promoters of Idea for Rs 3,874 crore in cash concurrent with the completion of the merger. Idea will hold 26 percent and the balance will be held by the public.

Idea has the right to acquire up to 9.5 percent additional stake at Rs 130 per share from Vodafone under an agreed mechanism with a view to equalising the shareholding over four years. Idea and Vodafone said the merged entity will be jointly controlled by Vodafone and the Aditya Birla group as per shareholders’ agreement.

The terms of the deal makes it seem like Vodafone wants to exit the market and has chosen a local player who can take the dominant position while it can ease off the market after a period, says Rajesh S Upadhyayulla, associate professor, strategic management, IIM - Kozhikode.

“It looks like that Vodafone is trying to get an Indian partner to focus on operations while they get the financial returns. Hence, the COO and CEO will be from the Indian partner while Vodafone has only its CFO in the merged venture.”

Manpower challenge

Though Kumar Mangalam Birla, chairman, Aditya Birla Group, has said that there will be no major job cuts at Idea Cellular after Vodafone India merger, Singh of ISB says that it will be interesting to see how the duplication of job roles and working in same geographies will be tackled. Despite what Birla has said, retrenchment can be expected, concurrs Bhadra of NMIMS.

Onus more on Birla and Idea

Whatever processes and structures and synergies are realised by the new merged firm, it will have to be prepared for the next move from Airtel and Reliance Jio. “Integration has to be done and also the market share has to be protected. This is going to be a challenge more so for Idea which also has to compete in the market,” says Upadhyayulu of IIM-Kozhikode.

The challenge will be to give the same call quality, augment customers and use the opportunity to get the merged firm’s identity in the market and get ahead of Reliance’s Jio and Airtel. There cannot be more than two or three players in the telecom market, said Bhadra. This merger will spell out who will be the biggest players in the sector.

Disclosure: Reliance Industries, which owns Reliance Jio, also owns Network18 that publishes Firstpost

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