When merger is the last arrow in quiver

In a crowded press conference in Mumbai last Monday, Vodafone Plc chief executive Vittorio Colao told journalists a fascinating piece of truth: Reliance Jio is not the main reason for the merger of his Indian company with Idea Cellular, owned by Aditya Birla Group. The decision to merge has nothing to do with Jio, he said emphatically, adding that the market leader is someone else (Airtel). The $23 billion Vodafone-Idea merger will create India’s largest telecom firm, overtaking Airtel, and provide adequate gunpowder in their Armageddon against Jio and its disruptive games. True, nobody wants to be vanquished without attempting a final assault.

We are in the age of Mahagathbandhans or mega mergers. Big corporate houses are learning hard lessons from elections of Bihar and UP as they face life-threatening opposition in their spheres of operation. Mergers are the last arrows in the quiver for some companies while they aim to create economies of scale and a larger footprint, for others.

The State Bank of India (SBI) is all set for a mega merger, with its five associate banks and Bharatiya Mahila Bank. The idea is to create a global giant, breaking into the top-50 table. Surely, it has nothing to do with the bank’s survival. Post-merger, SBI will have 25% market share in deposits and advances, and will widen its gap with other banks in India. SBI chairman Arundhati Bhattacharya believes that the younger people working in associate banks would be happy to be part of a bigger bank. The older lot may find it difficult to relocate, which is why they are lining up a voluntary retirement scheme. Cutting flab is part of almost all mergers, even when the companies are reporting robust growth in a fast-paced economy.

Like political parties, companies are also a microcosm of a nation, representing a wide variety of ethnicity, culture, language and religion, all cast into a common goal. Like how India thrives in its diversity and the federal system, companies are supposed to encourage diverse ideas, cultures and perspectives, and their free flow.

Historical data shows that in a majority of mergers, the equilibrium tilts towards one of the entities, creating discontent among employees from the other. It may then lead to an insidious erosion of one’s identity.

The $36 billion merger between German giant Daimler (makers of Mercedes-Benz) and American Chrysler in the late 1990s is a classic merger. It took only a few years for the ‘merger of equals’ to turn to a catastrophe. In the absence of a Trump then, Germans overrode Americans into a cultural submission. The merged entity teetered for nearly a decade before Chrysler was sold out to a private equity firm for $7.4 billion.

Such cultural invasions are widespread in cross-border mergers, but not uncommon in local mergers.

If the projected drop in costs and boost in revenues remain on the paper, with the efficiencies from economies of scale proving elusive, contours of the merger may come back to haunt the deal makers. When companies stop leveraging and embracing diversity, it’s a sure recipe for disaster.

Organisations are built by people, and mergers can barely ignore them. The merger should seek to build a new monolithic entity, cherry-picking from the merging entities. Preventing free flow of ideas and cultures may prove disastrous.

The writer is editor, DNA Money. He tweets @AntoJoseph