This article first appeared in Forum, The Edge Malaysia Weekly on April 19, 2021 - April 25, 2021

Takeovers of companies produce better results than mergers. In takeovers, there is a clear leader who sets the pace of the merger between the acquirer and the target company, drives the operations of the merged entity, and shapes a single culture.

Mergers of equals, especially between two strong companies, do not necessarily produce the desired results.

On that score, the proposed merger of equals between Celcom and Digi will be no easy task. Axiata Bhd and Telenor SA, the holding companies of Celcom and Digi respectively, will hold 33.1% each in the merged entity.

To avoid the unnecessary political rhetoric that Celcom Axiata Bhd will fall into the hands of foreign investors, the promoters have stressed that the merged entity will be majority Malaysian owned.

Moreover, the early line-up of the core team to drive the proposed merger works to the advantage of Celcom Axiata.

Axiata’s president and CEO Datuk Izzaddin Idris will be the chairman of Celcom Digi Bhd and the position of chief executive will be held by Idham Nawawi, who is the CEO of Celcom Axiata. From Digi, Albern Murthy will become the deputy CEO while Jorgen Rostrup, who is the head of Asia for Telenor SA, will assume the position of deputy chairman.

If a similar trend is followed throughout the organisation structure, with Celcom employees dominating the operations, the merger is not likely to produce the desired results.

Both entities have their strength and weakness. The ideal merger would be to take advantage of the strengths of both and minimise the weaknesses.

Digi, due to the technical and marketing strength of its major shareholder Telenor, is known for its innovation in marketing its products. Its marketing strength and product pricing have positioned it as a leader to serve the lower-income users. Digi has positioned itself well among college students and migrant workers, who are mainly prepaid customers.

As for Celcom, it has a steady pool of customers because of the strength of its network and reach. Compared to the other mobile operators, Celcom’s mobile network is more extensive and robust, and its consumers generally encounter fewer problems. Celcom’s network strength is also a reason why it is favoured by mobile virtual network operators (MVNOs).

A shortcoming of both mobile operators is that they are not able to command a bigger market share among the big hitters in the mobile telecommunications sector. This is where perennial leader Maxis has the lead when it comes to average revenue per user (ARPU).

The proposed merger is still at the honeymoon stage, hence both brands will be operating under their respective names before an integration eventually takes place. The real integration will only start after all regulatory approvals and shareholders’ nods have been obtained.

In relation to an integration of the two mobile telco providers, there is an abundance of consultants who can facilitate the merger. From human resource to billing systems, everything can be arranged by the consultants.

But the actual integration to make this merger work needs to be executed by employees of both companies. Normally, this is the period when the work cultures of Celcom Axiata and Digi would be put to the test. An advantage is that both entities already share infrastructure.

And the gap in the culture of both companies is not that big, unlike in the case of Malaysia Airlines and AirAsia.

The Malaysia Airlines-AirAsia proposed merger was doomed to fail right from the start because, apart from culture differences, both companies have been competing aggressively for market share in the domestic aviation sector. The years of competition have created an enormous amount of distrust between them.

In the case of Celcom-Digi, the distrust is less. Both companies compete in an environment that is dominated by the likes of Maxis in the area of mobile services, and Telekom Nasional Bhd in the broadband segment.

But the coming together of two large entities — one locally owned and the other foreign controlled — has not been tested of late in corporate Malaysia. Apart from business challenges, it could also face political headwinds from lobbyists acting for interested parties, because the merged entity is no lightweight.

It will overtake both Maxis and Telekom as the country’s leading telco, becoming the largest domestic wireless telco operator with just above 50% of the market and 34% of the total domestic telecommunications services, covering both fixed and mobile segments. According to Fitch, the merged entity will dethrone Telekom.

Because of its size and scale, there are complaints that the proposed merger should not be allowed because it results in less competition in the market and could cause an increase in prices. That reasoning is hollow because telco service providers are now not only confined to the likes of the big boys such as Maxis, Celcom, Digi and U Mobile.

There are several MVNOs and even over-the-top (OTT) players that are offering mobile and broadband services. Even satellite TV provider Astro is in the game of providing broadband.

Going forward, the competition is only going to get more intense and rates will come down further. The government’s 5G rollout plan, whereby a special purpose vehicle will build the infrastructure and lease it on a wholesale basis, will force the mobile operators to compete on services and data pricing.

The old way of mobile telco operators competing based on the strength of their respective networks will no longer be applicable.

Under the 5G rollout plan, telcos with economies of scale and aggressive marketing plans will have an advantage because it allows prices to come down. This is what consumers seek.

The ultimate shareholders of both Celcom and Digi have had a fair share of experience in mergers and integration of two systems and work cultures. Khazanah and Telenor both have a regional presence and have gone through several such exercises.

They also know the problems if they do not have scale and the ability to bring down the prices of products.

Most analysts and rating agencies have reasoned that the merger of Celcom Axiata and Digi will serve the merged entity well when the 5G systems are rolled out. There will be enormous benefits in cost synergies because going forward, the capital expenditure of the mobile operators will be reduced.

The experts are banking on the merged entity to be able to come up with products and services at competitive prices. For this to be achieved, the cultures of Celcom and Digi need to melt into one big pot.

If the process becomes too hot to handle, the merger will fail dismally.

M Shanmugam is contributing editor at The Edge

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