Although many business analysts and market commentators will tell you that the merger between Vodafone and Hutchison in Australia will create a strong third force in the mobile telecommunications market, quite the opposite is probably true. The company that will evolve from this merger will struggle to hold onto existing customers and rather than closing the gap with Optus and Telstra, the gap may actually become even wider.
Vodafone Australia and Hutchison Australia are not highly successful companies. Vodafone has struggled in Australia for many years even with the support of the Vodafone Group, a company with a worldwide subscriber base of around 289 million and a market capitalisation of £74 billion. (as of the 31st December 2008) Why a global mobile operator the size of Vodafone has struggled to compete in the Australian market is a mystery to me, it is a bit like making a mess of having a McDonald’s franchise: nothing wrong with the product but a lot of problems with executing a winning strategy.
Hutchison Australia (the owner of the “Three” or “3” mobile brand) has had the backing of the global telecommunications and data service provider Hutchison Telecommunications which in turn is part of the global giant Hutchison Whampoa Limited (HWL). Hutchison Whampoa Limited has operations in 56 countries and over 220,000 employees worldwide so as you can imagine, they have deep pockets.
In Australia they have thrown hundreds of millions of dollars into establishing a 3G mobile presence over some years however their 3G business has not lived up to expectations. By any sane performance measure, Hutchison’s 3G business in Australia has been a failure. (although I do enjoy the way their PR and marketing teams try to make it look otherwise)
Of course both companies would strenuously deny that their operations in Australia have been failures. Like all good mobile telco’s they would excitedly refer to the growth in the subscriber numbers that they have had in the last few years, but if you asked them how much it has cost to gain each new 3G subscriber they will not have any clear figures.
Despite all the mobile industry marketing hype actually getting a viable 3G business up and running has been difficult for operators and companies like Vodafone Australia and Hutchison/Three Australia have been really struggling. The fact that these companies are now going to merge is an admission that they have both failed in execution of their 3G strategies in Australia.
After the merger the new entity, VHA Pty. Ltd. will be the combination of two poorly performing companies with a history of being unable to seriously threaten either Telstra or Optus. This is hardly likely to result in the new company being any more competitive and the chances are it will be lucky not to lose customers and become even less competitive than the two companies it replaced.
VHA Pty. Ltd. will start off with a serious moral problem as staff from both Vodafone and Hutchison know there are going to be job losses. In regards to the merger with Vodafone, Hutchison Australian chief executive Nigel Dews recently stated “There’s synergies across all areas, but the vast majority of those would be in overhead areas as distinct from the front line.” If we translate this into plain English it means job cuts; because when you merge two basically identical companies you end up with twice the number of departments you need.
So there will be plenty of people scrambling to hold on the same role in the new merged company thus creating a lovely atmosphere of political manoeuvring, back stabbing and “us” versus “them” etc. Many talented people will simply take a redundancy payment and leave.
Then there will be the massive task of integrating systems and processes. I suspect a small fortune will be spent on getting consultants involved and in two years time the CEO will still be reporting this work is ongoing. There will be plenty of fighting within the company over which way was best, the Vodafone or Hutchison way, and this will result in the merger of systems taking much longer than expected.
Of course the original merger plans will be overly optimistic and the timeline will never be met.This is how things work in the telecoms world, the complexity of many projects are not understood by many in top management and thus network rollout plans, service launch plans etc. often run behind schedule and/or over budget.
In two years time I expect Optus and Telstra will still be entrenched as the dominant mobile telecommunications companies in Australia with the new “Vodafone” a long way back in a distant third. It will take years and a lot more money for the new company to be in a position to seriously challenge Optus and Telstra, and even if things go smoothly with the merger there is no guarantee that VHA Pty. Ltd. will be any more successful than the two companies it replaced.