The meeting of the Titans

Cyber News Service

In the days of acquisitions and mergers, another merger should hardly raise a storm. True, but the Tata-Birla merger is an event that has brought two stalwarts of the Indian industry together for the first time on a common business platform since 1940s. If that is not enough reason to stun the onlookers, the fact that this merger was made to happen by another stalwart of the telecom scene of the world, AT&T, as the industry buzz goes, is cause enough for envy and wild speculation. AT&T might just as well have pushed for the merger. For, it has business association with the Tatas as well as Birlas in the area of telecom. While AT&T is the cellular partner of Birla, its subsidiary Lucent is tied up with the Tatas in the telecom infrastructure segment.

Several aspects of the deal are yet to be worked out. For instance, the name of the new JV--the companies have said that it would reflect the three companies–the sort of brand promotion to be undertaken and whether the liabilities of the companies should be transferred to the JV. Only thing that is clear as of now is that the three players have an equal stake in the JV. It is assumed that the Tatas will buy out the 10 percent holdings held by AIG in Tata Communications.

The significance of the merger has to be seen from three perspectives: cellular as an emerging means of communication; opening up of long distance telephony; convergence of voice and data services in the form of soon-to-be-launched WAP-enabled services. Officials associated with the deal maintain that the merger has been affected to bring about economies of scale and pass on the benefits to the end-user as per the directives of the New Telecom Policy '99.

Increasingly, cellular is being looked at as the mode of communication in rural and remote locations. World over, the cellular industry is on the verge of a massive explosion. The ITU (International Telecom Union) report on world telecom refers to the cellular phone market as a "cash cow". The global mobile penetration of 53 million during 1996 outnumbered fixed line connection at 50 million and by 1998 the figure of mobile versus fixed line stood at 100 million against 58 million. The Scandinavian countries have more mobile penetration than fixed lines. And Europe as a whole is geared up to have a mobile penetration of 50 percent.

Coming to India, compared to fixed line penetration of 260 lakh in 50 years, 15.8 lakh cellular subscribers in four years is seen as a significant penetration. More importantly, cellular operators are looking at a scenario where the subscriber base will grow exponentially. The lowering of tax on handsets from 25 percent to 5 percent, lower rentals, new tariff structure along with the possibility of implementing CPP (calling party pays) are all factors which are expected to trigger the cellular boom in the country. The industry is looking at a growth of around 66 percent during this year and estimates that the total mobile subscriber base would stand at 2.7 million by 2001.

In the long distance telephony segment, Mittals of Bharti Enterprises, by virtue of their acquisition of Skycell and JT Mobile, commands the area from Himachal Pradesh to Chennai with Delhi, Madhya Pradesh and Andhra Pradesh thrown in between--the name of the game here being contiguity. The Reliance Group already has the license for the Eastern region for cellular services and it is laying down a fibre-optic cable along the East Coast. Not to be outdone, Escotel is executing a fibre-optic project at a cost of Rs 350 crore in the Northern part of the country. Singapore-based Hutchison Whampoa (now Orange) after buying stakes in the immensely lucrative Delhi city from Essar has now picked up stakes in Fascel, the mobile service provider in Gujarat.

So, mergers and acquisitions are only to be expected, given the national policy on long distance, which restricts the number of players in long distance to four including DoT. Yet, the Tata-Birla-AT&T is a kind-of-first in the Indian telecom scenario. For, the combined forces would have telecom footprints in Gujarat, Goa, Maharashtra (except Mumbai), and Andhra Pradesh, thus controlling around 25 percent of the total traffic. The combined subscriber base would stand at an estimated 1, 28,000 subscribers by the end of 1999. Not surprising that the names which emerge as the long distance players (literally) in the long distance game are the Bharti Group, the Tata-Birla and AT&T combine, Hutchision Whampoa, Reliance and BPL.

One look at the global scenario, and what emerges behind mega-mergers of telecos is the technological compulsions. The Vodafone-Mannesmann merger is a case in point--the combined business would now have 54 million customers across 24 countries. The cellular industry, which is on the verge of third generation (3G) services, will require huge investments, which can only be absorbed by networks of considerable size. Going by this trend–and there are no reasons to believe otherwise–the joint venture of the troika with a combined investment of Rs 3,200 stands a good chance of lasting the distance. Sunil Bharti Mittal, welcoming the competition, is not entirely convinced though. In his opinion, "The combined strength will in fact be a drawback in that it will hinder the response time to change, which a smaller organization can effect much more quickly."

Be that as it may, what is undisputed is that the technological edge of AT&T, a leading international player in long distance telephony, will prove invaluable to the new venture. The 3G cellular technology, which will enable high-speed data transfer by virtue of packets reducing costs dramatically, has immense potential in India. Globally, the volume of data traffic is already seen to overtake the voice traffic in telephone networks. The Tatas, in particular, stands to benefit post the departure of its foreign collaborator Bell Canada, which left it technologically weak.

Clearly, the cellular industry is now set to enter into a phase of consolidation. This deal will set the ball rolling for more mergers and acquisitions in the near future. BPL and Bharti are said to be working out a strategy just as the Ruias of Essar and the Modis of Spice Telecom are apparently chalking out their collaborative plans and a buy-out is expected in the next few weeks. The Escotel Group in the meanwhile is eyeing the Southern market. In this scenario, it would not be very surprising if the new JV went in for an acquisition. The industry also does not rule out the possibilities of cross-alliances amongst these mergers.