How sound is the logic of the maha-merger?

Neeraj Jha and Vandana Gombar

On the face of it, the merger could not have got off to a better start. It has the best of pedigree amongst Indian corporates: the Tata, Birla and BPL groups. It has the amongst cream of international telecommunications giants as part of the deal: USA’s AT&T and Europe’s France Telecom. It is also expected that when it goes through, it will create what will be to date the largest cellular company in India with close to one million subscribers, constituting 24 per cent of all the cellular users. Says BPL Communications, chairman, Rajeev Chandraskekhar: “ It is a formidable skill set. BPL brings to the table its consumer business expertise, AT&T it’s global name and presence, technology and capital and the Birla and Tata groups their stature, capital, ethics and values,” .

(From left) Nimesh Kampani, chairman, JMMSL; Ratan Tata, chairman, Tata Sons; Kumar Mangalam Birla, chairman, Aditya Birla Group; and Rajeev Chandrashekhar, chairman, BPL Communications

So, barely two weeks after the announcement of the proposed deal with the ink barely drying up, why are questions being raised on the logic of the mahamerger? Will the partners be able to cunsummate the proposed marriage or will there be potholes along the way during the honeymoon itself? Says Mr. Nimesh Kampani, chairman, JM Morgan Stanley Limited (JMMSL) “I rule out any drop-outs in the interim period till the agreement is finalised.” Despite the brave public face, there are various issues that need to be settled along the way. Indeed, it could be a good six to twelve months before the final deal could be worked out.

The tumultous courting
If there are questiions about the future, the past has not been rosy either. For the anthem did not happen just like that. Seven months of seating has gone into “bringing all the partners on a single wavelength” as JM officials put it. Managenment apart, there were serious differences between the two sides on the issues of valuation and the overlaping Maharashtra circle. “ The differences between the two sides were so serious that the deal had almost got killed in April,” reminisces Nimesh Kampani of JM Morgan Stanley, the deal maker in this case. It took umpteen sittings spread across seven months in Tata’s Bombay House and Birla’s Industry House to settle these issues. No wonder Mr Kampani calls it the most complex if not the most difficult deal of his life. “It was certainly the most complicated deal. Co-ordinating with the partners was not easy.” He recalls that it was with great effort that he could get Mr Ratan Tata, Mr Kumarmangalam Birla and Mr Rajeev Chandraskekhar to sit together the first time in February, he recounts. Vishal N.Kampani, director, JMMSL and a key member of the deal-making team agrees things weren’t easy: “It even involved educating the partners, especially the Tata and the Birla groups about what was right for them. Tht instead of buying new licences, building on existing entities was the better alternative and, finally, why BPL was the right partner.”

There were definitely misgivings. There were issues on how hands on what will be Mr Chandrashekhar involvement in the new company’s affairs. Mr.Chandrashekhar, on his part, was uncomfortable giving up Maharashtra where he was the market leader.

While the first two issues were settled by April 2001, the issue of valuation remained an irritant for the marriage maker till as late as mid-June. “The difference in the respective valuations by the partners was so huge that the deal was almost off in April,” sources said. “It took an independent valuer to step in and sort things out,” sources close to the BPL combine said. But even that didn’t happen smoothly. BPL and BTAL both had issued regarding the valuation by Arthur Anderson, the independent valuer appointed by JM Morgan Stanley in consultation with them. “It took another meeting at Mr Ratan Tata’s office to finally get the parties to agree to the numbers,” remembers Mr Nimesh Kampani. What then are the issues of the future?

Managing the partnership
To manage the aspiration levels of the various partners will be a challenge. “ With four major partners, the merger becomes an experiment worth waiting and watching. It’ll be interesting to see who remains and who goes,” says Mr Arvind Mahajan, executive director, PricewaterhouseCoopers. Agrees Mr Vikash Saraf, director, SSKI Corporate Finance Limited, “Keeping the partners together may not be easy unless each one of them remains focussed
on creating value for the merged entity and nothing else.”

The partners however see the picture differently. Says BPL’s Chandrashekhar: “There is complete agreement among the partners on the objectives of new entity. And that is to see that it not only becomes India’s premier telecom franchise but also remains one.” He agrees this is a challenge, but says the alliance partners will
do whatever it takes to make the venture a
success. “The key is value creation for all stakeholders,” he says.
Some rivals however think they have done the homework well. “It will work because all the constituents want it to work. They know that they will be competing with the best. The fact that all the promoters have agreed in the beginning to run it on a professional basis means that they mean business,” says Mr. K. V. Seshasayee, chairman, Fascel, the cellular operator in Gujarat. Board battles: The one obvious point of contention is likely to be the constitution and chairmanship of the board. In a merger of equals, which is what this is claimed to be, this is generally a ticklish issue.

There is a question of how this would fit in with a shareholding pattern in which BPL Communications (inclusive of France Telecom and American Insurance Group) is expected to hold 41-42 per cent, AT&T 23-24 per cent and 17 per cent each is expected to be held by the Tatas and Birlas.

Even if equal representation is conceded, there is the question of who would head the board. There could be some consensus on that. “It will be a revolving chairmanship,” said Mr. Sanjeev Aga, the chairman and chief executive officer of Birla AT & T Communications.
Will there be exits?

There are some who believe that the alliance already has a reluctant partner in the Birlas. the questions that could come up: One, Birlas strategy in telecom. Second, will they agree to further equity infusion into the new entity?

Says Mr. P.Krishnamurthy, vice chairman, JMMSL “ I do not see the Birlas exiting the alliance. However, even if they did, it will not make much of a difference to the new entity and its mission.” Adds Mr. Chandrashekhar, “Exiting is every shareholder’s prerogative. To me, Mr Birla is very much committed to make the venture a success. The success of the alliance anyway lies in overall value creation,” he says.

The brand management
Many analysts also see branding as one of the bigger challenges likely to be faced by the combine. “All the partners have built up their own brand equity. There will be challenges in finalizing a common brand strategy,” say industry observers.

The firms may rope in a consultant to help them in coming up with a brand which reflects the values of all the partners. “We know we have to do this as quickly as possible,” said an official of the combine.

What’s ahead?
The valuation of the merged entity is greater than the sum of the parts. There are economics of scale which will sharply bring
down operational costs. There are huge opportunities that can be explored together in the future like national long distance communications. And of course, the consumer would benefit in the form of lower charges and innovative product offerings.

The deal-makers and the partner companies, as expected, downplay any challenges to successful completion of the merger. “Most key issues have been settled in this merger of equals,” said Vishal Kampani, director at JM Morgan Stanley who has been closely associated with the deal. Agrees Vineet Nigam, telecom analyst at ICRA. “The benefits far outweigh any minor problems the merger may face, which will be overcome.” That is the premise that most mergers start with. Both in India and abroad, it has been seen that mergers and consolidations have had it’s ups anbd downs. But in many consolidations and mergers, managers and partners size as goal.

But successful mergers of the past have shown that it is not size but the development of a new business model that will help them compete, succeed and sustain themselves. Is the message ringing clear?