Column

For the sake of Bharti Airtel’s shareholders, one hopes that the current talks to acquire South Africa’s second largest telecom company, MTN, will fail. If they don’t, a bigger failure looms.

The history of megamergers and acquisitions (AOL-Time Warner, Citibank-Travellers) proves that most mergers end up destroying shareholder value. If the Bharti-MTN deal goes through, it will be Sunil Mittal’s biggest mistake. It is unlikely to work.

A merger of equals, even if couched as an acquisition, is the ultimate recipe for disaster, for it creates an indecisive command and control structure. Who will finally call the shots? Under the proposed deal, Bharti will buy 49 per cent of MTN through a cash-cum-shares offer totalling about $13.1 billion; MTN will buy 36 per cent of Bharti, with a similar cash-cum-shares offer of around $10.5 billion.

At current share and exchange rates, this means Bharti would pay around $7.4 billion in cash, and MTN around $2.9 billion — leaving around $4.5 billion to be financed through loans.

With 49 per cent, and with a South African government fretting about retaining MTN’s local character, you can be sure Bharti will not have a completely free hand to run MTN as it sees fit. That, however, is the lesser problem. The bigger one is people. No merger anywhere can succeed if the employees of two merging entities do not see themselves as one.

The cultures of Bharti and MTN are considerably different, and it is a fair bet that the two companies will spend at least a couple of years trying to find an alignment of values, either though combo branding (Airtel-MTN) or a completely new one.

Mergers fail largely because expected synergies take a longer time to deliver, or the price is too high, or there is no one completely in charge. In the Bharti-MTN case, all three apply. First, 49 per cent will not give Bharti unhindered control. Second, paying $4-5 billion in cash means it will take several years to amortise the cost. Third, synergies will not come till the people, culture and branding issues are addressed, and that will take some doing.

The underlying logic of such mergers is always the complementarity of strengths and resultant size. Bharti and MTN will have $20 billion in revenues and over 200 million customers, making them the third biggest telecom company in the world. They will span two continents and be able to cut costs by integrating technology and reducing overheads.
But between theory and reality there is a wide gap. Underlying it is the your-beauty-and-my-brains fallacy. Isadora Duncan, the famous American dancer, was once alleged to have toyed with the idea of having a child through playwright George Bernard Shaw. “Think of it,” said Duncan. “With your brains and my body, what a wonder it would be.”

To which Shaw’s response was laconic: “But what if it (the child) had my body and your brains?” Shaw was not a particularly good looker. The story may be apocryphal, but corporate giants should ponder over Shaw’s riposte. Most mergers are justified on Isadora Duncan’s logic, and the math is shown to indicate that two plus two equals five.

In actual fact, most mergers end up subtracting shareholder value. Two plus two usually ends up with three. Among the earliest studies to disprove the benefits of mergers was one by management pundit Mark Sirower in 1990s. In his book The Synergy Trap, Sirower suggests that almost two-thirds of mega-mergers flop. The cost savings imagined at the time of the CEO handshake do not materialise and the synergies turn out to be a mirage.

Jim Collins, in his book How the Mighty Fall, shows how hubris and unprincipled growth have been major contributing factors to failure. Growth through mega-mergers often tends to be “an undisciplined pursuit of more” because they are driven by the size illusion. The right way for Bharti to decide on the MTN deal is to figure out whether its $13 billion is best spent on buying a company with lots of trouble attached, or whether it would be better off growing its business in India and other greenfield markets.

If it does not make this comparison, one can safely say it is driven by hubris and the size attraction. A sobering thought: just as it takes individuals a lifetime to make a marriage work, mergers take many years to build. And unlike human beings who, at least have time on their side, companies work in the brutally competitive world of dog-eat-dog. The last thing Bharti and MTN need is an excessive inward focus on making a merger work when competitors are trying to snatch their business. They are better off alone.

The writer is the Executive Editor of DNA.