“Executives can be like Elizabeth Taylor, who has said that, with each of eight marriages, she was convinced that somehow, someway, this marriage would work,” Paul B Carrol and Chunka Mui’s write in their book, Billion Dollar Lessons - What You Can Learn from the Most Inexcusable Business Failure of the Last 25 years.
Mega mergers have often been known to fail, but those running companies keep trying nonetheless, hoping theirs would work.
In this context, the failure of its talks with MTN may well turn out to be a blessing in disguise for Bharti Airtel. The stock market seems to think so, going by the scrip’s 4% surge to Rs 435.35 on Thursday, when the broader market ended flat.
Between May 25, 2009, when it was first announced that the two companies were in talks, and September 30, when the talks fell through, the Bharti stock had gained just 3% as compared with a 23% rise in the Sensex, signalling the market did not like the deal.
Investors were concerned about the strain on Bharti’s financial health from the deal.
For, one, Bharti would have paid $7.4 billion to MTN, and MTN would have paid $2.9 billion to Bharti. This would have left around $4.5 billion, a substantial portion of which would have had to be financed through debt.
Also, the deal structure was very complicated, and the market does not like things it cannot understand. The deal would have diluted Bharti’s India-focussed play and exposed it to country and currency risk. Besides, sub-Saharan Africa, with its ruling dictators and despots, isn’t the best place to do business.With the talks falling through, Bharti can make good use of the cash on its books for the 3G auctions as and when they happen. Its capacity to raise debt for the 3G play also remains intact.
The company could also expand operations in Sri Lanka.What’s more, it could consider smaller deals. Some analysts have gone to town saying the merger would have worked for the company over the long term. They might have assumed that the merger would be a smooth one, which is rarely the case.
As Carrol and Mui point out in their book “A McKinsey study of 124 mergers found that only 30% generated synergies on the revenue side that were even close to what the acquirer had predicted. Results were better on the cost side. Some 60% of the cases met the forecasts on cost synergies. Still, that means two out of five didn’t deliver the cost synergies, and forecasts were sometimes way off —- in a quarter of the cases, cost synergies were overestimated by at least 25%.”
In a mega merger such as the Bharti-MTN deal would have been, the ponderables only multiply. After all, Bharti Airtel is India’s biggest telecom company, just as MTN is South Africa’s.
Also growth through big mergers tends to get addictive, as management guru Jim Collins says in his new book, How the Mighty Fall: And Why Some Companies Never Give In. Growth through big mergers often leads to “an undisciplined pursuit of more,” writes Collins.At the time of the merger, the executives at the helm usually emphasise the synergies they see.
“They (the mergers) fill the need for CEOs to make some bold move that will redefine an industry and establish their legacy,” says Collins. This often leads to a company overpaying for an acquisition. And then, once the merger goes through, those very synergies are seen to be missing. Blame it on the cultural disparity between organisations, as would have been the case in a Bharti-MTN merger.
No doubt it would have made the combined entity the world’s third-largest telecom player with $20 billion in revenues and over 200 million customers. But the risks would have multiplied, too.
Meanwhile, competition in the local telecom market has been getting intense, as the success of Tata Docomo shows. Bharti would thus have to keep expanding its rural presence and think of newer ways for its customers to pay more so that growth doesn’t plateau.
At the current market price, Bharti’s stock trades at 16 times its estimated earnings for 2010. Some analysts believe it would be fairly valued at Rs 450 per share.
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