Telco Deep Dive 2019: Did fear kill Axiata, Telenor merger bid?

  • Daim Zainuddin, Mahathir Mohamad’s economic advisor said to nix deal
  • Concern over Celcom’s talent and vendor competitiveness in merged entity

Telenor's HQ in Oslo, Norway.

So, we’ve been told that the proposed mega-merger between Malaysia’s Asia champion, Axiata Group Bhd (Axiata) and Norway’s Telenor Group’s Asian operations have been called off due to “some complexities” of the merger that would have involved telco operations in nine countries across 12 operating entities.

This despite Jamaludin Ibrahim, Axiata’s president and group chief executive officer expressing his confidence of the merger going through as recently as on Aug 30 during the company’s Q2 results announcement. His confidence brushed aside an earlier report by The Edge Weekly reporting that the proposed merger was in trouble. Both Telenor and Axiata declined to comment for that report.

And in an analyst call on Sept 6, the same day the news of the merger breaking off was announced, Jamaludin expressed surprise as well, “surprising as it may be” he said.

Yet, despite his earlier optimism that the deal would go through, especially with all the advantages of scale the merged entity would bring to the table, Jamaludin did caution, in one of his earlier media interviews, that this merger, unlike others that center on commercial interests, has the added element of national interest and staff issues.

By staff issues, he meant related to Celcom, the home town mobile operator of Axiata’s. With one of the conditions of the merger being that Telenor gets to pick the CEO of the merged Celcom-Digi entity, the Malaysian operator that Telenor runs, there have been some media reports of job security concerns amongst Celcom staff. Axiata would have picked the chairman.

 

Prescient observation by Jamaludin

That caution about staff issues has turned out to be a prescient observation by Jamaludin.

For, while there would have been various regulatory hurdles to cross, the fact is that Telenor-Axiata never actually submitted any approvals to regulators in any of the nine countries affected by their proposed merger. Or, to be more accurate, I have not read of any reports of them making any submissions. And at least for Malaysia, an officer within the Ministry of Communications and Multimedia has told DNA that, “the deal didn’t even reach the stage for the government to review and approve.”

And while there has been speculation that it is job losses, and specifically job losses at Celcom more than at Digi, an executive familiar with the merger discussions tells DNA that the job losses would have been “very very minimal” and in fact, “new roles would have been created for talent within the merged entity in Malaysia as interesting new opportunities would have opened up.”

Indeed, in DNA’s interview with Gobind Singh Deo, Malaysia’s Minister for Communications and Multimedia in early Aug, Gobind said that both Jamaludin and Sigve Brekke, Telenor’s president and chief executive officer, had assured him that new and exciting roles would have opened up for staff of the merged entity in Malaysia that would have more than compensated for any redundant positions.

And yet, despite the new and exciting opportunities, some regional in nature, that would have opened up for the merged entity in Malaysia, DNA understands that the fear that eventually Celcom’s staff, more than Digi’s would have borne the brunt of any right-sizing caused Daim Zainuddin, a leading Malaysian businessman and influential trusted economic advisor of Malaysian Prime Minister Dr Mahathir Muhamad, to nix the deal. This factor, more than any regulatory concern, though those could have cropped up later, scuppered the proposed merger.

But beyond any impact on staff, apparently there was also concern that the predominantly bumiputera vendors of Celcom would have not been able to compete when the inevitable procurement consolidation happens. Apparently it was felt that Digi’s vendors would have had the advantage when the merged entity called for any tenders.

Yet this view does an injustice to the strong corporate governance Telenor has in place when it comes to procurement. Any vendor from both telcos who can provide the best value for the merged entity would be the winner of any tender with scant thought given to which company they were serving before.

If indeed, both these factors were the key reason for the abortion of the deal, what we are witnessing here is how the lack of confidence by Daim and his advisors in Celcom’s ability to compete at a higher level has essentially held Malaysia back from owning a significant stake in a merged telco that would have been one of the key global mobile operators with around 300 million subscribers and have generated US$13 billion (RM54.2 billion) in annual revenues.

There is irony here as Daim in the past has regularly urged Malaysians, especially the majority Bumiputera community, of which he is part of, that they need to level up their game to compete and win and not rely on government policies as their edge. But where this deal is concerned, the 81-year old Daim has not walked the talk.

DNA’s attempt to reach Daim for comment was unsuccessful.

But I feel Daim has also lost the plot here. For when it comes to jobs, Celcom, since at least 2015 has been quietly right sizing itself from a staff strength of around 4,000, according to a former senior executive to the current head count of around 2,700. Digi, by comparison, has a current staff strength of 1,700, according to an executive there.

Celcom’s current staff strength has been arrived at through a combination of natural attrition, VSS and hiving off around 400 staff to edotco, the fast growing telco tower operator of Axiata Group.

As a result, from a talent point of view, Celcom today is in the best shape of its life and can compete for and attract the best talent to join it. And yet, for Daim, the fear of Celcom unable to level up its game further, has been used as a reason to kill a deal that would have resulted in a Malaysian company, Axiata, vaulting itself into becoming one of the top companies in Asia, jointly with Telenor.

The reasons for killing the merger are all the more shallow bearing in mind what Jamaludin said during the Sept 6 analyst call. Acknowledging that competition is very intense in the Malaysian mobile space, Jamaludin said, “All focus will be on Celcom’s profitability where, hopefully, in a year or two Celcom will be in much better shape,” he said, adding that there is “a lot of room for improvement on cost side at Celcom.”

So I really don’t understand how Daim feels he is helping Celcom when Jamaludin, whom I consider a world class leader, is already zooming in on making Celcom even more competitive with some key areas that need further improvements.

 

Losing out on a world class innovation centre

Another key aspect of the proposed merger being called off is that Malaysia has lost out on the world class innovation centre that would have been located in Kuala Lumpur.

This aspect of the deal has not been brought up in the many media reports about the proposed merger and in hindsight should have been talked about more by Axiata in terms of the potential impact such a global innovation centre based in KL would have had on the country’s ability to further develop its talent, students and working executives, to be more creative and innovative to take advantage of an always connected 5G world that is on the horizon.

This, I feel, is a huge missed opportunity for Malaysia to level up and better compete in the Digital Economy. I can just picture such a facility, in an uber cool designed building in Cyberjaya, being a hive of activity with all universities in Malaysia also running innovation and disruption classes virtually, with faculty from Axiata and Telenor, based at the innovation hub.

But for now, those dreams are on hold. And that is the intriguing aspect of this merger being called off. Both Axiata and Telenor reaffirmed their confidence that the merger makes great sense, will generate economic value for both parties and have expressed the hope of revising the deal again later. Indeed, the very strong professional rapport and personal relationship that Jamaludin and Sigve have, will ensure that this proposed merger stays warm in the background while each organization carries on with their respective plans to be more competitive.

Now what could possibly change in the future that would make the merger palatable again? I leave that to your analysis and you can reach out to me as well at [email protected] with your take.

 
 
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