The Indian business landscape has not seen too many cases of competitors merging, barring a few exceptions like the Vodafone-Idea merger in 2018. Now, there’s been a slew of them – the Zee-Sony transaction, followed by Inox-PVR and then HDFC-HDFC Bank.
These transactions happen primarily due to the economies of scale, cost rationalisation and other synergies. However, there are significant challenges too – cultural integration, promoters with different mindsets and, of course, the process itself.
In the Zee-Sony situation, Zee, a listed entity, is merging into an unlisted entity, Sony Pictures Networks (Sony). It is a complex transaction and the net result is intended to translate into 51% shareholding by the Sony Group, 4% holding by the Essel Group, and the balance being public shareholding. The merger includes shareholder and management agreements between Sony and Essel, the continuation of Zee’s managing director as MD of the merged entity, and non-compete payments of significant amounts to Essel, etc.
In terms of business synergies, the combined entity will create India’s second-largest entertainment channel by revenue, and will have 75 television channels, two video-streaming services, two film studios and film content. The fact that two entities with totally different cultures, one a promoter-driven entity and the other a multinational company (MNC), have agreed to get together is a telling commentary on the business challenges. But it also underlined the opportunities that can be exploited if the two combined into one entity.
Inox and PVR have straddled the Indian multiplex landscape. The pre-merger promoter shareholding in PVR is 17%, and that of Inox is 44%. The share-exchange ratio is such that, post-merger, the shareholding pattern will be 27% held by both promoters (17% by Inox and 11% by PVR) and 73% by the public. Interestingly, Ajay Bijli of PVR will serve as MD of the merged entity, while Inox’s promoters will have a more passive role.
In terms of business synergies, the merged company will operate 1,546 screens across 341 properties, implying a market share of 16-17% in total screens in India, and a 44-50% share within multiplex screens. Other competitive advantages include PVR’s ability to service its debt of ₹850 crore, the real estate pipeline of both companies, and also the ability to negotiate better terms with vendors.
The coming together of these companies could also help them address the threat from over-the-top (OTT) platforms and strengthen their pricing power.
The HDFC-HDFC Bank merger will make the combined entity larger than Citigroup, Standard Chartered and HSBC, and may have a market cap of more than $185 billion. Unlike the Zee-Sony and Inox-PVR deal, there is some synergy of culture in the HDFC-HDFC Bank merger. Nevertheless, a merger of this magnitude is complex and involves a large number of regulators, including the Insurance Regulatory and Development Authority (Irda), Pension Fund Regulatory and Development Authority (PFRDA) and Reserve Bank of India (RBI).
The deal would widen HDFC Bank’s suite of products. Its cross-selling and regulatory capital buffer would also increase. Additionally, the merged entity will have access to the time-tested mortgage origination and loan servicing capabilities of HDFC. The combined loan book of both entities is expected to amount to about ₹17.9 lakh crore, the second-largest after the State Bank of India (SBI).
HDFC’s 3,500-strong workforce is much smaller than HDFC Bank’s. So, integration should be easier. The overall cost of funds is likely to go down and, therefore, will probably enhance the merged entity’s competitive edge, which other players in the competition will find hard to match.
Incidentally, the new scale-based regulations for non-banking financial companies (NBFCs) and the bank-like treatment for large NBFCs have also enhanced regulatory requirements. Hence, mergers of such nature are more likely going forward.
Such coming together is bound to have regulatory and tax complexities. But the more challenging aspects are commercial issues. Clearly, 1+1 is expected to make more than 2. But it does not always result in a happy marriage. There have been several examples globally of such deals failing to actually realise the synergies – the Daimler-Benz and Chrysler merger, which failed due to cultural clashes, and the 2005 Kmart and Sears merger, which could not sustain the ecommerce boom that followed.
There are other segments beyond those from media and financial services that are likely to see consolidation – pharma and logistics, for instance. Each would have its own reasons to merge. But, clearly, a trend has emerged.
