MERGERS AND ACQUISITIONS OF PUBLIC LIMITED

COMPANIES- A STUDY ON VODAFONE & IDEA

Submitted By:
Kudikala Raju

1
Need for the study

● It is known that the strategic goal of the Vodafone-Idea combination is to manage

Reliance Jio's increasing dominance in the telecom sector. Jio declared that its
services would be free for the first six months.

● Secondly, the effect of financial Performance post-Merger.

Scope of Study

The study is primarily deals with collaboration of two public companies of Vodafone
& Idea Merge, So the purpose of the study is to determine the firms' post-merger
financial performance.

Methodology
The study is based on secondary data only, and data obtained from the past records,
files and annual reports of the concerns and all so from reference test books , as well
as websites collected through the following sources, such as

 Internet

 Journals

 Wikipedia

2
Objectivesof Study
1. To analyze the Strategic reasons for the Merger.

2. To examine the Challenges and Synergies involved in the process of Merger.

3. To study the process of Merger adopted by Vodafone and IDEA.

4. To analyze the impact of Merger on Market price of share and its Revenue as
well as the profitability of the Post Merger.

Limitationsofstudy

1. Analysis is restricted to 5 years.

2. Limited data provided by company.
3. The study is purely based on the data provided by the companies.
4. The privacy of some information and data.

3
DATA ANALYSIS AND INTERPRETATION

1. Idea Positioning Before Merger

● Let us now learn about Idea Cellular Limited. The company is owned by

the Aditya birla group. Idea Cellular Limited was established in 1995 as a
Birla communications limited company. The company had a license to
provide GSM based services in the Gujarat and Maharashtra circle. Over
the years, the company started expanding its business by forming joint
ventures with the Tata group, the Birla group, and the US company AT&T..

● In August 2015 Idea declared that it will roll out its 4G service. This means

that it will now be competing in the non-opolistic market alongside Airtel

& Vodafone. The company also re-launched its "What an Idea" campaign,
which will take 4G to rural areas and empower people through 4G.

4
It seems like you're describing the significant impact that Reliance Jio had on the
Indian telecom industry with its disruptive pricing strategies. Before Jio's entry, the
market was relatively stable, with established players holding significant market
shares. However, Jio's aggressive pricing and innovative business model changed the
landscape dramatically.

Jio's decision to offer free services initially, followed by extremely cheap voice calls
and data plans, attracted a large number of subscribers. This move not only rapidly
expanded Jio's customer base but also put pressure on existing telecom players to
lower their prices and improve their offerings to remain competitive.

As a result, Jio quickly gained a substantial market share, disrupting the dominance of
existing players and reshaping the industry dynamics. This disruption likely forced

5
telecom companies to rethink their strategies and business models to adapt to the new
competitive environment created by Jio's entry.

If you have the post-Jio market share pie chart, feel free to share it, and I can help
analyze the changes in market dynamics it represents.

Vodafone Idea Merger in 2017:

The transaction was subject to a number of government approvals, including

from the Securities and Exchange Board of India (SEBI), the Telecom Regulatory
Authority of India (TRAI) and the Reserve Bank of India (RBI), among others. The
National Telecommunication Regulatory Authority (TRAI), for its part, has cleared
the Vodafone-Idea M&A in our case study on Vodafone. This is the largest M&A
agreement in the industry, which has ousted Bharti Airline from the top spot after
more than a decade and a half. The approval conditions were notified in March 2017,
more than one year after the agreement was signed, and included a Rs 7, 268 crore
advance payment.

Idea Contributon

The injection of Rs 3,250 crore by the Aditya Birla Group into Idea Cellular, along
with Idea independently raising Rs 3,000 crore, demonstrates the commitment of the
promoters to strengthen the company's financial position in preparation for the merger
with Vodafone India. This infusion of equity not only provided Idea with additional
capital but also increased the promoters' stake in the telecom operator to 47.2%, up
from the previous 42.4%.

6
By bolstering its financial resources, Idea was better positioned to navigate the
challenges and opportunities associated with the merger process, ensuring a smoother
transition and integration with Vodafone India. Additionally, this move likely instilled
confidence among investors and stakeholders about the company's ability to execute
the merger effectively and realize synergies.

In addition to the financial infusion, Idea contributed its assets as part of the merger
process, including standalone towers with 15,400 tenancies and a stake of 11.5% in
Indus Towers Ltd. These contributions further strengthened the combined entity's
infrastructure and market position, enhancing its competitive edge in the telecom
sector.

Overall, the strategic initiatives undertaken by Idea, including the equity infusion
and contribution of assets, underscored its proactive approach to maximizing
value and positioning itself for success in the merged entity with Vodafone India.

Strategic Reasons for the Merger :

The Vodafone-Idea merger was driven by several strategic reasons:

1. Market Leadership: Through the merger, Vodafone and Idea aimed to

establish the foremost telecom operator in India, leading in both subscriber base
and revenue, thereby outpacing competitors such as Bharti Airtel and Reliance
Jio. This strategic move toward market leadership would furnish the combined
entity with enhanced market sway and negotiating leverage.

2. Network Consolidation: Combining the network infrastructure of Vodafone

7
and Idea allowed for better utilization of resources and improved network
coverage and quality. This consolidation was essential to compete effectively in a
highly competitive telecom market.

3. Cost Synergies: The merger enabled cost savings through economies of scale
by consolidating operations, network infrastructure, and administrative
functions. This included reductions in overhead costs, network maintenance
expenses, and marketing expenditures.

4. Spectrum Optimization: The merged entity could optimize spectrum

holdings, leveraging the combined spectrum assets of Vodafone and Idea to
enhance network capacity and efficiency. This optimization was crucial for
providing better service to customers and meeting growing data demands.

5. Diversified Service Portfolio: The merger allowed for a more diversified

portfolio of services, including mobile, broadband, and digital offerings. This
diversification enabled the merged entity to cater to a broader range of customer
requirements and preferences, developing its competitive position in the
Industry.

6. Enhanced Financial Strength: By merging, Vodafone and Idea aimed to

strengthen their financial position and improve profitability. This was
particularly important given the intense competition and price pressures in the
telecom market in India.

7. Long-Term Growth Potential: The merger was strategically perceived as a

means to fortify the combined entity's prospects for sustained growth in the
8
Indian telecom sector over the long term. By harnessing synergies and asserting
market leadership, the merged entity sought to seize forthcoming growth
avenues and leverage emerging technologies.

In essence, the Vodafone-Idea merger was propelled by the strategic imperative

to forge a more robust and competitive telecom operator primed to thrive
amidst the dynamic and swiftly evolving Indian market landscape
2. After Merger of Idea and Vodafone in 2020:

After merger of both the companies the share market increases and the
merger get benefited.

9
3. The graph below shows the rate of subscribers, fiber cable and
broadband spectrum after merger of Idea-Vodafone:

Interpretation:

The introduction of Reliance Jio Infocom Ltd in September 2016, with its offering
of free services for nearly seven months followed by competitive tariffs, had a
significant impact on the margins and revenue of its competitors. Against this
backdrop, the merger between Idea and Vodafone took shape, with Vodafone's
contribution encompassing Vodafone India along with standalone towers
totaling 15,400 tenancies, excluding its 11.5% stake in Indus Towers as per the
agreement terms.

After the combination closes, Vodafone is expected to have roughly Rs 2,480

crore more in net debt than Idea. Following the merger, the combined company
will operate as a joint venture between Vodafone and Idea, with both companies
sharing equity oversight.

10
In accordance with the terms of the agreement, Idea promoters are entitled to
purchase an extra 9.5% of Vodafone in order to gradually equalise their
shareholdings. Vodafone's stake will drop from 45.1% to 35.6% as a result of this
deal, while Idea's stake would increase from 26% to 35.6%.

4.The graph below shows the rate of 3G/4G spectrum Shares after merger
of Idea Vodafone :

Interpretation

The entry of Reliance Jio Infocom Ltd. into the telecom sector in September 2016,
backed by an investment of approximately Rs 1.5 trillion, ushered in a period of
upheaval for the Indian mobile industry. Reliance Jio's introduction of free voice
calls and data services placed considerable pressure on established players such
11
as Vodafone, Idea, BSNL, and market leader Airtel, impacting their growth
prospects significantly. Despite efforts by these operators to counter with
various plans offering unlimited calling and bundled data, their revenues
continue to decline. To address this challenge and bolster their market share and
subscriber base in the long term, major players like Idea-Vodafone and Airtel
Telenor are pursuing mergers and acquisitions. It is anticipated that such
strategic actions will fundamentally alter the landscape of the telecom industry.

5 . FINANCIAL PERFORMANCE POST-MERGER:

Q2FY19(July18Sept18) Change(Rs) Change%

Q3FY19

(Sept18-
Dec18)

Year 17-18 Year 16-17

Sales turnover 11751.60 7663.50 4101.30 53.52%

Operating 10614.7 7202.2 3412.5 47.57%

expenses

EBITDA 1136.90 461.40 675.50 146.40%

PAT -5004.60 -5.016.10 -28.30 -0.56%

12
 8735.40 8735.10 0.30 00.00%
Equity share
capital

EPS -5.73 -5.69 -0.04% -0.62%

EBITDA margin 9.67% 6.02% 3.64%

Profit after tax -42.88% -65.45% 22.58%

margin

During the post-merger period, the analysis of the case study's financial
performance revealed notable changes. The organization's revenue grew 53.52%
in the third quarter, showing a strong growth trajectory. EBITDA also saw a
significant expansion from 461 crores in Q2FY19 to 1136.90 crores in Q3FY19,
accompanied by EBITDA margin increase from 6.02% to 9.67% during the same
period.

However, despite these positive trends, there was a slight decline in profit after
tax by -0.56%. This can be attributed to factors such as high finance costs,
integration expenses, and charges associated with the exit of mobile towers.
Furthermore, the primary reason for the decline in profitability is attributed to
intense market competition, driven by the aggressive pricing strategies of
Reliance Jio Infocom Lt
CRITICAL ANALYSIS OF THE MERGER

1. Vodafone maintains a 45.1 percent stake in the consolidation, while Idea has
13
 the potential to increase its ownership by an additional 9.6 percent over the
subsequent four years, albeit at a cost of Rs. 130 crore per share. However, in
the event that Idea fails to attain parity with Vodafone's shareholding level, it
retains the option to acquire the requisite shares at prevailing market prices.

2. The promoters of both Vodafone and Idea are entitled to nominate three

members each to the board. Additionally, out of the total of 12 board members,
six are independent, ensuring a balanced representation and governance
structure within the company

Challenges and Synergies involved in the process of Merger:

● Challenges:

1. Regulatory Approval: Because of the possible effects on consumer interests

and market competition, obtaining regulatory approval from multiple authorities
—the Competition Commission of India (CCI) and the Department of
Telecommunications (DoT)—posed a substantial hurdle.

14
2. Integration Complexity: Merging two large telecommunication companies
with different operating systems, network infrastructures, and corporate
cultures was a complex and time-consuming process. Ensuring seamless
integration while minimizing disruption to operations was a key challenge.

3. Cultural Differences: Vodafone and Idea had different organizational

cultures, management styles, and employee practices. Aligning these cultural
differences and fostering a unified company culture was a challenge during the
merger process.

4. Debt Management: Both companies had significant debt burdens prior to the
merger. Managing and restructuring the combined debt load while maintaining
financial stability and investor confidence was a challenge.

4. Market Competition: The Indian telecom market is highly competitive, with

several players vying for market share. Sustaining competitiveness and
retaining customers in this dynamic market posed challenges for the merged
entity.

● Synergies:

1. Expanded Market Presence: The merger created India's largest telecom

operator in terms of subscribers, allowing the combined entity to leverage a
larger market presence and reach a wider customer base.

2. Cost Savings: Consolidating operations, network infrastructure, and

15
resources led to significant cost savings through economies of scale. This
included savings in areas such as network maintenance, marketing, and
administrative expenses.

3. Enhanced Network Coverage: Combining the network assets of Vodafone

and Idea allowed for improved network coverage and quality, benefiting
customers with better service reliability and coverage.

4. Diversified Service Portfolio: The merger enabled the combined entity to

offer a more diversified portfolio of services, including mobile, broadband, and
digital services, catering to a wider range of customer needs.

5. Increased Competitiveness: By pooling resources and capabilities, the

merged entity enhanced its competitiveness in the Indian telecom market, better
positioning itself to compete against rivals and adapt to evolving market trends.

Overall, while the merger presented challenges, the synergies derived from
combining the strengths of Vodafone and Idea allowed the merged entity to
create a more competitive and resilient telecom operator in India.

Steps involved in the Process of Merger of Vodafone and Idea:

1. Announcement and Intent: Vodafone and Idea announced their intention

to merge in March 2017. This signaled the beginning of the merger process.

2. Regulatory Approvals: The Department of Telecommunications (DoT) and

the Competition Commission of India (CCI) were two of the regulatory agencies
16
that had to approve the merger. This step required close examination to make
sure that antitrust laws and regulatory requirements were being followed.

3. Shareholder Approval: Both companies sought approval from their

respective shareholders for the merger. This involved conducting shareholder
meetings and obtaining the necessary votes to proceed with the merger.

4. Operational Integration: Once regulatory and shareholder approvals were

obtained, the companies began the process of integrating their operations. This
included combining network infrastructure, IT systems, and business processes
to create a unified entity.

5. Brand Consolidation: After the merger, the companies decided to operate

under a single brand name. In this case, the merged entity operated under the
brand name "Vodafone Idea Limited."

6. Synergy Realization: Post-merger, the focus shifted towards realizing

synergies by optimizing costs, leveraging combined resources, and maximizing
operational efficiencies.

7. Customer Transition: Customers of both Vodafone and Idea were gradually

transitioned to the unified network and service offerings. This involved
communication campaigns to inform customers about the changes and ensure a
smooth transition process.

8. Post-Merger Integration: The companies continued to work on integrating

their operations and optimizing their business strategies to achieve long-term
17
growth and profitability.

Overall, the merger process involved careful planning, regulatory compliance,

and operational integration to create a unified and competitive entity in the
telecom industry.

4.1 Findings

1. Firstly, initiatives focused on renewing price discipline are crucial because

the disruptive entry of New competitor, which has caused significant

18
 imbalance in the telecom market. Implementing measures to stabilize prices
can help restore equilibrium and ensure fair competition among industry
players.
2. Secondly, the weak financial health of the telecom sector is evident,
necessitating mergers for revitalization. Mergers like that of Vodafone and
Idea inject vitality and stability into the sector, particularly considering
India's rapid subscriber base growth.
3. As the merger, of Vodafone and Idea can address their debts, injecting a
substantial amount of credit into the system. This financial infusion is
essential for sustaining operations and fueling further growth in the
competitive telecom landscape.
4. The merger has prevented both the companies from resorting to selling off
their businesses, which was initially considered. This decision allows
safeguards the improvement of services provided by various companies in
the industry, ensuring continuity and reliability for consumers.
5. The Vodafone-Idea merger promises to accelerate the pace of the telecom sector's
development. Significant savings, synergies, and access to spectrum will drive
growth, with potential savings of over 60% in operational costs. These savings
can be redirected towards investments to enhance service quality and
performance, ultimately benefiting consumers and stakeholders alike

4.2 Conclusions:

I. The merger of Idea and Vodafone positions them as a formidable companies in

the telecom industry. The cooperative management approach promises significant

19
 synergies, estimated at up to INR 670 billion, with a further INR 140 billion
expected in operating cost savings by. Additionally, the sale of tower assets will
contribute to a mixed business and provide credit opportunities.
II. Consolidation offers cost-saving advantages and financial opportunities that can
positively impact financial performance. The successful monetization of
remaining spectrum remains a key consideration for the merged entity.
III. The Aditya Birla Group's (parent group of Idea) promoters have demonstrated
strategic acumen in navigating the price war and orchestrating a phased
integration with Vodafone. While immediate benefits for public shareholders may
not be apparent, long-term gains are anticipated.
IV. Overall, this merger is poised to deliver substantial benefits for both companies
involved, solidifying their position and competitiveness in the dynamic telecom
landscape.
V. To sum up, customers have benefited directly from the Idea and Vodafone
combination, which has improved network coverage in both urban and rural areas.
Following the merger, customers can also expect access to a greater choice of
services and cutting-edge technology including digital wallets, VoLTE, and the
Internet of Things.
VI. The merger is also expected to generate cost controls and create opportunities for
asset standardization, which will positively impact financial performance.
However, the key challenge lies in effectively monetizing surplus spectrum and
directing the proceeds towards the development of newer technologies and the
enhancement of services.

20