Kumar Manglam Birla is the Chairman of the $44 B Aditya Birla group. Some of the companies in the group are Grasim, Ultra Tech, Hindalco etc. The group merged the telecom business with Vodafone to form Vodafone Idea. Following is my imaginary conversation with Mr. Birla. This blog is for entertainment purpose only.

Birla: You know, we merged Idea and Vodafone to form India’s largest telecom company and world’s 2nd largest. What do you think of that?

Me: Sir- let me narrate a small story to you.  This has been copied from Wikipedia.

“The Emperor’s New Clothes” is a short tale written by Danish author Hans Christian Andersen, about two weavers who promise an emperor a new suit of clothes that they say is invisible to those who are unfit for their positions, stupid, or incompetent – while in reality, they make no clothes at all, making everyone believe the clothes are invisible to them. When the emperor parades before his subjects in his new “clothes”, no one dares to say that they do not see any suit of clothes on him for fear that they will be seen as stupid. Finally a child cries out, “But he isn’t wearing anything at all!”

Birla: What has this got to do with my question about Vodafone Idea?

Me: Sir- you are the emperor, Vodafone Idea is the new dress and I am the child. In fact, your new dress has already made you two-thirds naked. By that I mean, Idea has lost two-thirds of its market-cap in the last one year! I think it’s your worst idea, and this idea has truly changed the lives of your long term investors for the worse!

Birla: What are you saying? Do you know who I am?

Me: Yes sir, I do.

Think of me as a fool. I don’t know much about 3G, 4G or 5G. I don’t even know how calls are made and placed, what spectrum means etc. I don’t know much about running a business either, let alone a conglomerate. But I do know some first principles like – law of gravity, probability theory and some common sense. So I am going to say a few things based on those.

Birla: Hurry up!

Me: Okay sir here they are.

First you may think of Idea and Vodafone as a brands. That is BS. Telecom services have become a commodity.

A brand is supposed to allow you to differentiate your products from your competitors and help you give pricing power. If I showed you a mobile phone, you can tell which phone it is. But if I showed you a mobile number, can you tell the service provider?  Can you tell the brand of sugar in your coffee? Do care for the brand or the sweetness? And if you don’t care for the brand, would you pay extra for it? Your brands are like sugar to the customer; you think your brand matters but they were only interested in the sweetness.

So, I think you should let go of your branding team that made the following slide. Will help save you money.

The only reason your customers are still with you are because the service quality of the competition is not as good in certain pockets and/or the inconvenience associated with number porting.

Second- in a commodity like market, you don’t have pricing power. That is, you are going to find it very hard to raise prices if your competitors aren’t going to follow suit. And to  quote Warren Buffett, in a commodity business, you can’t be a lot smarter than your dumbest competitor. And to compound matters, you have a deep pocketed rival who isn’t making anything easy for you.

Third- Let me show a few numbers, that I picked from your last quarter earnings presentation:

Total borrowings: Rs 1,23,660 Crs as of Q3 FY 19

Q3 FY 19 EBITDA: Rs 1137 Crs

Q3 FY 19 Interest expense:  Rs 2606

How are you going to pay your interest of Rs 2606 Cr per quarter when your earnings is just Rs 1137 Cr ? And lets say, you do pay your interest expenses, what other critical expense are you going to leave out? Employee salary? Maintenance capex? Either way sir, I think it’s unsustainable.

At this point, I must say, I am worried for Vodafone Idea.

Birla: We are getting a fresh round of funding of Rs 25,000 Crs from the Vodafone UK guys. And then meanwhile, we are going to get operational synergies from the merger which will help us cut costs and improve our EBITDA.

Me: Sir- if I were you, I’d fire anybody who used the word “synergy”. It seems that without using the word synergy we can’t justify any merger or acquisition, like below.

 

Talking of synergies, here are some of the synergistic mergers and acquisitions from the previous decade. We all know how the stories turned out to be.

Source: Financial Express

 

(Dear Reader- A fun exercise to do would be – go to google and search for companies that got acquired and “synergy”. You will see it appearing in almost all of them.)

Air India- India airlines were merged by the government to derive synergies by combining two weak entities to become one strong entity, but ended up creating one big mess. Kingfisher acquired Air Deccan and tried to offer full service and low cost. When you try to be everything to everybody, you end up being a nobody. Tata Steel overpaid for synergistic reasons and since acquisition has cut Corus’ production by nearly 50%. If things go further south, it may hand over Corus to JV partner and exit Europe.

Synergy is corporate BS.

Constellation Software is a Canadian company. It’s the Berkshire Hathaway of software. It has acquired more than 250 companies and I had a hard time finding “synergy” as an excuse to buy them. If you had bought Constellation Software at the time of the IPO in 2006, you would have had 60X your money by now. And yet, how many M&A teams have studied Constellation?

Coming back to Vodafone Idea – sir, you are on a tread mill. After 4G, there will be 5G and god knows what after that. You would need to keep running (investing) just to stay in the same place (market share). And because your offering has become a commodity, will you be able to raise price enough to recover all your costs and make enough profits?

Birla: I see. I see. This is not good news.

Birla: Why don’t my guys tell me all this?

Me: It’s complicated. But I’ll try.

First: They are paid by you. Therefore, they would tell you only what you want to listen.  If you wanted to exit Telecom, they can make a fine presentation on why it makes sense. If you wanted to merge, guess what- they’d make you another fine presentation on why it makes sense to continue. You see sir, if you don’t train your men and women to tell you the blunt truth every time, they will end up telling you only what you like to hear.

Second: The guys you hired are also living in a bubble like you. They don’t want to or they can’t acknowledge reality because it would be too painful. Therefore, they get into this denial or cognitive dissonance which allows them to function.

Third:  Overconfidence and arrogance. Most of your hired guns have an enviable track records in climbing the corporate ladder. But they mistake ladder climbing abilities with gravity defying abilities. And as they say, pride goes before a fall.

Fourth: We have blindly taken some ideas from sports and think of them as truisms. Like “Winners don’t quit and quitters don’t win”. That works only in sports but is mostly BS in life. Take Vodafone Idea for instance. You have 190,000 Crs of capital that is currently earning a negative rate of return and in my humble opinion is likely to do so for some more time. And yet, you want to take more money, 25,000 Crs to be precise, and invest it into Vodafone Idea and hope that the results would be different this time?

That’s insanity! I think you should quit telecom and instead put that money and time to work on something more promising. Chandra of Tata Sons, smartly quit Telecom rather than compete.

Not quitting or not quitting soon enough is an affliction that many business tycoons share- like Mr. Naresh Goyal and Mr. Vijay Mallya. I could only think of Airline examples right now. But I hope you get my point, Mr. Birla.

 

 

These are some of the reasons why no one tells you what I just did. But then of course, I am only a fool. I don’t know much about anything.

Birla: Wow! For a fool, you do know something.

Me: Thank you. But, I wish to remain a fool, so that I can call an emperor naked when I see one. I think we all need someone to tell us the reality to our faces even if we don’t like it.  I hope you find some such mentor.

Best wishes to you sir.