Terminated Sony-Zee Deal Is A Classic Example Of How Not To Do A Merger

Some of the biggest M&A failures of all time worldwide are that of Time-Warner and American Online (2001: US$ 65 billion), Google and Motorola (2012: US$ 12.5 billion), Microsoft and Nokia (2013: US$ 7 billion), and Daimler-Benz and Chrysler (1998: US$ 36 billion).

Popular Indian examples include HDFC and Max Life, UTI and Global Trust Bank, IDFC and Shriram Finance, RCom and Aircel, and Flipkart and Snapdeal.

The key reasons for the failures of these deals include poor cultural fit, lack of commitment from the top management, value destruction, unclear objectives and decision-making structures and poor communications. Quite often, while these are called M&As, they are actually acquisitions leading to a one-sided deal.

When Sony Pictures Networks India and Zee Entertainment Enterprises Ltd agreed to a merger in September 2021, not many were surprised. The proposed merger was expected to create the largest media conglomerate in the country.

With a combined market share of over 28 per cent, it would have brought together 75 channels, two video streaming services (Zee5 and Sony LIV) and two film studios (Zee Studios and Sony Pictures Films India). Sony would indirectly hold a majority of 50.86 per cent, while the founders of ZEEL would hold 3.99 per cent. The rest of ZEEL shareholders would hold a 45.15 per cent stake.

Interestingly, this could have been a near-equal partnership with a slight majority to Sony. “On paper, this was a good merger. Globally, Sony is high on reputation, image and ethics. Zee has good market inroads and reach into heartland India, has high debts and has a blemished image. This merger would have benefited Zee more,” said Irfan Rizvi, Professor of Strategy at the International Management Institute (IMI).

Sony Calls Off Merger

December 21, 2023, was the cut-off date for concluding the Zee-Sony US$ 10-billion merger. However, just four days before the date, Zee sought an extension and the two parties agreed to enter into ‘good faith negotiations’.

Yet, in the last one month, despite efforts to reach an agreement, things had been difficult and the potential marriage derailed. On January 22, Sony Group Corp officially notified Zee Entertainment Enterprises Ltd that it plans to call off the merger between its India unit and the media network.

Sony said the merger did not close by the end date as the “closing conditions” were not met by then. Following Sony’s decision, Zee has said it will take legal action against the Japanese behemoth.

The important point to note at the outset is that the deal unravelled even before it started. Perhaps, the two-year timeline to create a combined entity was too much. It should have been consummated much earlier despite the complexities. What, then, are the learnings from this failed merger? Three important ones.

Managing External Landscape And Players Are Important

Barely four months after the agreement for the merger was announced, private sector lender IndusInd Bank filed a plea before the National Company Law Tribunal in February 2022 to initiate insolvency proceedings against ZEEL, claiming a default of Rs 83.08 crore. In December 2022, IDBI Bank moved NCLT to recover from ZEEL about Rs 150 crore.

Perhaps, not surprisingly, both these pleas were against the financially troubled ZEE. Based on these two developments, the NCLT directed the National Stock Exchange and the Bombay Stock Exchange to reconsider their initial approvals for the merger. While these potential claims may or may not have been pre-known, it would have been better if there had been efforts to resolve them earlier.

Choice Of The CEO Is Crucial

Ninety days after the announcement of the agreement for the merger was made and the due diligence done, it was announced on December 21, 2021, that Punit Goenka of the ZEE Group would be the CEO and Managing Director of the combined entity.

Was this a fundamental mistake? The normal practice in a merger is that the majority partner would get the CEOship. But in this instance, even though Sony has a slight majority, it gave up the top leadership of the combined company to Goenka.

But the more important development is that Sebi banned Subhash Chandra and Goenka from holding any managerial or directorial positions in ZEEL based on allegations of siphoning off funds. While this order was contested and won at the Securities Appellate Tribunal (SAT) by ZEE, by the end of 2023,

Sony developed cold feet at the continuing negative spotlight on Goenka. Sony then sought that NP Singh, MD & CEO of Sony India, lead the merged entity. In hindsight, given Goenka’s track record, such a situation could perhaps have been foreseen.

Poor Communication Is Disastrous

One of the fundamental yet often committed mistakes is to wash the dirty linen in public when things turn sour. This is an off-shoot of poor communication and lack of trust. In this case, irrespective of which way the wind blew, much market value and brand reputation were eroded in the last two years. Both the companies spoke in public whether about the CEO's choice or pull-back from ‘good-faith negotiations.

“The success of a major resetting event like a corporate merger depends on the support it must receive from diverse stakeholders, both external and internal, to the process and the outcome,” said Dilip Yadav, founding partner of leading communication agency First Partners.

“This is not easy as there would be voices of dissent in an already dynamic situation. This is where clear and unwavering communication from the top plays a critical role. The contrary can have a devastating effect leading to fall-throughs and ensuing damages,” Yadav said. “The evolving developments in the case of the Zee-Sony merger aptly underscores this reality.”

Summed up Professor Rizvi, “Typically, there are penalty clauses on both partners if the terms of the agreement are flouted. To that extent, having come so far, if there is a renegotiation of the terms, today, it will benefit Sony more than India Zee which is desperate.”

But it is not an open and shut case. Clearly, picture abhi baki hai (there’s more to unfold)!