Mergers and Acquisitions: Case Study of Vodafone Idea Merger

By: Vaidehi Sharma

Introduction to mergers and acquisition  

‘Mergers and acquisitions’ is a technical term used to define the consolidation of two or more companies. When two companies are combined to form one unit, it is known as a merger, while an acquisition refers to the buying of one company by another one, which means that no new company is formed, only one company has been absorbed into another. Mergers and Acquisitions are an important component of strategic management, which comes under the head of corporate finance. The subject concerns buying, selling, dividing, and combining various companies. It is a  type of restructuring to have rapid growth and increase profitability. 

Mergers and acquisitions are part of the strategic working of any business or working group. It involves the joining of two businesses with the object to increase market share and profits and to have an influential impact on the industry. Mergers and Acquisitions are complicated processes that require preparation, analysis, and deliberation. There are a lot of parties who might be affected by a merger or an acquisition but before a deal is finalized, all parties need to be taken into consideration, their concerns should be addressed, and all possible hurdles that can be avoided must be avoided. 

The term ‘Merger’ has not been defined under the Companies Act, 2013 or  Income Tax Act, 1961, but as a concept ‘merger’ is a combination of two or more entities into one; with the accumulation of their assets and liabilities, and coming together of the entities into one business. 

The other word for Merger is ‘Amalgamation’. Under The Income Tax Act, 1961  (ITA) ‘amalgamation’ is defined as the merger of one or more entities with another company, or the merger of two or more entities forming one company. It also mentions other conditions to be satisfied for an ‘Amalgamation’ to benefit from the beneficial tax treatment. 

For example -A company called and a company called B merge to form a new company called C . This is called a merger. 

The effect of the merger is that the assets and liabilities of both companies will now be shared and they will cease to exist as independent companies. 

Benefits of Mergers 

⮚ Profit and resource sharing – The resources of both companies are pooled together which increases the profit outcome.

⮚ Access to New Markets – Entering into new markets can be challenging for any company even for established companies. While setting up a subsidiary  or branch is always an option, a merger or acquisition can save companies a  significant amount of time, effort, and money compared to starting from  scratch  

⮚ More Economic Strength and Competitive Edge– mergers and acquisitions mean financial strength for both companies. It can help them to become more powerful in the market, attract more customers and create more resources. 

⮚ Powerful Human Resource-The biggest asset any company can hold is its employees. A skilled and effective stall generates a lot of profit for the company. Therefore in mergers and acquisitions, the human resources of both companies are pooled together. 

⮚ Better infrastructure and Fixed Capital-In mergers and acquisitions the resources of both companies are shared which means access to better infrastructure for the poor company. Big machines and other resources can also be used up for better production. 

Mergers and acquisitions in the telecom industry in India 

Introduction  

India is currently ranked as the world’s second-largest telecommunications market with more than 1.20 billion subscribers and has shown strong growth in the past one and a half decades. 

The Indian telecom industry is growing at a rapid pace. In 2020-2021 the telecom industry contributed 6% to India’s Gross Domestic Product (GDP). The telecom  sector is set to grow at a Compound Annual Growth Rate (CAGR) of 9.4% from  

2020 to 2025. However, with a CAGR of 15.9% throughout the forecast period, the smartphone industry in India will have the fastest growth. By 2025, India’s digital economy will be worth $ 1 trillion. 

The industry has increased primarily due to favorable regulatory conditions, low prices, increased accessibility, and the introduction of Mobile Number Portability  (MNP), expanding 3G and 4G coverage, and changing subscriber consumption patterns. The deregulation of Foreign Direct Investment (FDI) rules has made the telecom sector one of the fastest-growing sectors in the country and a huge means of employment opportunity generator in the country too.

The subsectors of the telecommunication sector include infrastructure, equipment,  Mobile Virtual Network Operators (MNVO), white space spectrum, 5G, telephone service providers, and broadband. 

It is predicted that 5G technology will boost the Indian economy by $ 450 Bn between 2023 and 2040. According to the Global System for Mobile  Communications (GSMA), there is an excellent opportunity for investment in this sector as India will have almost one billion installed smartphones by 2025 and 920  million unique mobile customers, including 88 million 5G connections. 

Importance of the telecom industry  

The importance of the telecommunication industry is highlighted by the fact that it enables global communication. The relevance of this industry has increased significantly after the pandemic. Services offered by this industry are more frequently used since it allows for a continued virtual connection. The smartphone market will continue to increase as more people are expected to purchase them in the coming years. Given that government reforms have eliminated ambiguity and risks and established a stable investment environment, India’s telecom sector is projected to receive investments totaling $ 25.2 Bn over the next two years. 

Mergers and acquisitions in the telecom industry  

The recent trend of mergers and acquisitions can be widely seen in the telecom sector too. This recent trend in the world of the telecommunications market has been caused by the ongoing regulatory liberalization and privatization of the industry.  These changes have brought about fierce competition and ensuing decreases in profit in both the domestic and international telecommunications service markets. 

Mergers and acquisitions in the telecom sector are considered to be horizontal mergers because both companies deal in the same line of business. In the majority of developed and developing countries, mergers and acquisitions in the telecommunications sector have increased which also resulted in the creation of jobs. 

The legal Framework of Mergers and Acquisitions in the telecom sector  

• ⮚ National Telecom Policy formed in 2012 hasimplifiedde M&A in Telecom  Service Sect, ensuring adequate competition and allowing  100% FDI.
• ⮚ The merger in the case of licenses shall be done for the respective service category. Access to service license allows the provision of internet service and so the merger of ISP license with services license shall also be  
• permitted. 
• ⮚ In a service area, the market share of the merged entity should not be more than 50%. If it is more, it has to reduce it below 50% in an annum. 
• ⮚ The total spectrum held by the merged entity should not be more than 50%  in a service area. If it is excess, it has to be surrendered within an annum. 
• ⮚ The corporation which acquires will have to pay the difference between the market price determined in the auction & the administrative price if an acquired company has got spectrum after paying the administrative price. 
• ⮚ If due to a merger or transfer of license in any service area business,  corporation or entity becomes an important market power, then TRAI’s  Telecommunication Act of the year 2002 will come into place. 

Case study – Merger of Vodafone and Idea 

History of both the companies  

History of the merger  

In March 2017, it was announced that Idea Cellular and Vodafone India would merge. The merger got approval from the Department of Telecommunications in July 2018. On 30 August 2018, National Company Law Tribunal gave the final nod to the Vodafone-Idea merger. It was completed on 31 August 2018, and the new entity was named Vodafone Idea Limited. Under the terms of the deal, the  

Vodafone Group held a 45.2% stake in the combined entity, the Aditya Birla  Group held 26% and the remaining shares were to be held by the public. 

Reasons for Merger of Vodafone and Idea  

Dominance over the market by JIO- The main reason for the merger of Vodafone and the idea was the dominance of the Jio company. The companies saw a major downfall as Jio announced free internet services for the first 6 months. As a result price war began between companies. the companies began to see losses, and as a result, a merger between Vodafone and Idea happened. 

Key takeaways  

• ⮚ Under the plan submitted to Indian regulators, Vodafone will initially hold a  50 0% stake in the combined entity, while the Aditya Birla Group and public shareholders will hold 21.1% and 28.9%, respectively. Vodafone will then divest a 4.9% stake to the Aditya Birla Group, which would increase the latter’s stake from 21.1% to 26%, thus crossing the threshold for an open offer. 
• ⮚ Vodafone and Idea had individual spectrum holdings of 411 MHz and 316  MHz respectively. The amalgamation of the companies would give, it was expected, the merged company a hold of 728 Mhz increasing the chances of the merged company to rank number one or two in India. 
• ⮚ The merger ratio was 1:1. This ratio was based on the price of Idea at 72.5  per unit. Implied enterprise value for Idea and Vodafone was INR 72  thousand crores and INR 82 thousand and 8 hundred crores respectively.  The agreement had a break fee of Rs 3,300 crore payable upon certain conditions. 
• ⮚ Aditya Birla also has the right to acquire up to 9.5% additional shareholding from Vodafone Group throughout three years post-closure of the deal for an agreed price of INR 130 per share. But these rights by Aditya Group will be exercised based on the growth achieved and the market price of the combined entity.
• ⮚ Idea and Vodafone will have joint control over the appointment of CEO and  COO, the exclusive rights to appoint a CFO is with Vodafone. So Vodafone is not just a major shareholder but also has more financial rights. 
• ⮚ If at the end of 3 years, Aditya Birla Group fails to purchase any stakeout of the additional stake of 9.5%, then they will be given the last opportunity to purchase the stake at the prevailing market price for share equalization. 
• ⮚ Vodafone contributed net debt of Rs 55,200 crore to the merged entity,  whereas Idea contributed Rs. 52,700 crore. Vodafone contributed net debt of Rs. 2,500 crore more than Idea. 
• ⮚ In September 2020, Vodafone – Idea rebranded itself. The company used the initials to rebrand itself as ‘Vi’. The rebranding took place after almost two years of the merger, however, it shows the spirit of integration. 
• ⮚ In the financial year 2022, Vodafone Idea Limited earned revenue of 386.5  billion Indian rupees.