Corporate Finance, February, 2000, p. 22
They were practically at the altar, Telia and Telenor. The merger between the two state-owned telecoms companies of Sweden and Norway was about to be consummated when it collapsed in acrimony. But, as Glenn Drexhage reports, it had been a troubled courtship from the outset, and national politics got in the way of fulfilling an international destiny.
What a difference a year can make. On January 20 1999, two medium-sized state-owned Nordic firms - Telenor of Norway and Telia of Sweden-announced a merger that would create Europe's sixth-largest telco with a market value of nearly $50 billion. Onlookers praised the deal's strategic sense; with a planned IPO, the new entity - to be named Telaris - looked set to enter the next millennium well placed for success in the lightning-fast telecoms industry.
Just 12 months later, both companies are sorting through the detritus of a marriage that fell apart at the altar. Months of bickering, rumour and insults had poisoned the relationship; the crisis reached its breaking point in December following a bitter argument about the location of the merged company's prestigious mobile unit.
On December 16, just two weeks before the deal was set to close, a joint statement from the Norwegian and Swedish governments (each a 100% owner of the respective companies) indicated that the transaction - and along with it, the visions of a telco primed for the future - was dead. Estimates of the combined cost of the scuppered pact ranged up to Skr250 million (about $29.4 million).
This was hardly the first merger in the history of M&A to fall apart, but its spectacular last-minute disintegration conferred an unenviable status on the deal.
"I can't think of any transaction that has unwound this late," says Paul Lufkin, a director at ARC Associates, a boutique investment bank that specializes in the telecoms and technology industries.
The Telenor-Telia saga illustrates what a volatile mixture business and politics can make - the attempted merger was unique in that it tried to combine two wholly state-owned companies. Even so, it highlights crucial lessons not just for telecoms companies but for any corporate that wants to play - and win - the consolidation game.
Although this doomed courtship was the most tempestuous, it was not the first time that Telenor and Telia had tried to merge. The first attempt had occurred two years ago, following months of discussion that never reached fruition. At the time of the earlier failure, a Telenor press release stated that the Norwegian and Swedish owners "did not succeed in reaching an agreement on equal balance between the two parties in a new merged company" - an ominous development that foreshadowed the troubles to come.
Yet the seeds of inspiration had been sown, and the two partners seemed destined to meet again. The wait was not long - last January, the Swedish and Norwegian governments signed a letter of intent to merge the firms. The new company would be registered in Sweden, with the head office in Stockholm. Tormod Hermansen, Telenor's CEO, was to head the combined company. The Swedish government would own 60% of the new entity and the Norwegian government 40% - an arrangement that many felt was promising for the smaller Telenor.
A Telia press release stated that an IPO was "to take place as soon as possible", with the governments selling down each of their stakes to 33.4%. Perhaps most importantly, equal voting rights ensured a balance of ownership - a critical element of the deal's structure.
Another press release gushed that the merger was "a realization of an industrial vision", and impressive jargon such as "critical mass" and "synergy gains" peppered the text. But this was not just hype - the experts agreed on its merits too. ARC's Lufkin notes that the new company would have been well positioned to compete in the dynamic telecoms industry. "They traded what they were familiar and comfortable with against the international growth opportunities," he says. "At a strategic level, it was a very bold move."
Philip Carse, a telecoms analyst at Salomon Smith Barney, agrees that the deal transformed two smallish firms into a formidable regional player that would compete more effectively in Scandinavian and global markets.
Certainly, the combined entity would bolster the companies' capabilities. Individually, they had respectable but modest figures. Telenor employs more than 19,000 and its annual revenues are about Nkr25 billion ($3.1 billion); Telia employs more than 30,000 and its 1998 turnover was Skr51.2 billion ($6 billion). Together, however, the opportunities were evident. The new company was keen to excel in hi-tech areas such as mobile communications, satellite communications and the Internet, and annual revenues were predicted to be about Skr79 billion.
"Not all the transactions that bankers work on make as much strategic sense as this one did," says Richard Tolkien, a managing director at HSBC, which served as Telenor's adviser.
Despite past difficulties, a brave step had been taken and the two firms looked set to prosper together as a Nordic telecom powerhouse. Two months later, the agreements between the owners of Telenor and Telia had been finalized, and the group was set to pursue the goals of European and global expansion, increased profitability and the development of international business activities.
Questions of control
The deal was plagued with difficulties from the outset, however. Although the problems were many and opinions vary as to who was responsible for the debacle, the merger was beset by a fundamental problem: how to divide control fairly between two state-owned companies of different sizes. It was disagreement over this issue that led to the deal's failure. Observes ARC's Lufkin: "The mistake they made was to place control ahead of growth rather than growth ahead of control."
In part, the fatal flaw was to structure the deal as a merger of equals. Yet many involved in the transaction - including Telenor's outspoken CEO - insist that this was the only way to execute the transaction.
"This had to be a merger of equals," says Hermansen, adding that the entity had to be more than just a "Swedish company with some Norwegian capital."
However, as other deals have shown, mergers of equals often result in a struggle. The inspiration for such transactions may make sense on paper, but so often the realities - such as one company inevitably emerging as the stronger partner, or disagreements about power sharing - compromise the noble sentiments of equality.
Says Lufkin: "The crux of the issue was the size differential. There was an imbalance from the outset. Telia is a bigger company than Telenor, however you cut the pie. And the phrase 'merger of equals' is always window dressing to pander to national interests and give a flavour of balance."
Window dressing or not, the deal was set up to tone down the issues of control. Despite the 60/40 shareholding split, a differential selldown for the planned IPO was devised to result in equal shareholding positions.
Difficulties appeared early on. The signing of the shareholders' agreement at the end of March was postponed by two weeks. Ulf Backman, a spokesman for Telia, recalls that the media had speculated about problems between the owners, although he claims to be unaware of the details. However, reports indicated there had been differences regarding the proposed location of business divisions.
Another delay occurred six months later, when Dag Jostein Fjaervoll, the Norwegian transport and communications minister, failed to appear for the signing of the merger agreement on October 18. The Norwegians turned up the following day - a government spokeswoman attributes the delay to negotiations about "odds and ends", including board representation and the agreement's general clause. Fjaervoll was unable to speak to Corporate Finance, as the Norwegian government was preparing for a parliamentary hearing on the failed merger.
The spokeswoman insists that the October incident did not harm proceedings. Perhaps - but the incident highlighted the unease that came to characterize the deal. Telenor's Hermansen, who was slated to lead the merged company, is convinced that the Swedish side was not happy with the appointment of a Norwegian CEO; he adds that he was targeted in attacks from the Swedish media, government, trade unions and from within the new company itself. "It was deliberate work to undermine the basis for my functions as the chief executive," he says. Telia's Backman offered no comment on this.
Off the cuff
Bizarre incidents tainted the proceedings. In the previous month, for example, Bjorn Rosengren, the Swedish industry minister, committed an embarrassing gaffe on television when he referred to Norway as the last Soviet state. Rosengren thought that he was off-camera, but the remarks came through loud and clear (he later apologized, but would not comment for this article).
Then, on December 9 - a day after the fateful vote on the mobile phone headquarters - a scuffle between Hermansen and a journalist made the headlines. Reports indicated that Hermansen had attacked a reporter, apparently thinking he was a dangerous drug addict. However, the CEO insists he was attacked from behind by the reporter; to get rid of him, Hermansen says he "gave him a kick in the ass and told him to go home to his mother."
The incident may have seemed comical, but it also brought a sense of foreboding. "When Mr Hermansen beat up the reporter, we said 'Uh-oh, they've got problems,'" says one source. "I think everyone did, because for a CEO to do that is mindblowing." The deal formally collapsed a week later.
A dispute over control was the catalyst. The location of the mobile phone unit was a sensitive issue of national pride that had been debated for weeks, made all the more intense by the cutting-edge technological aspects. Sweden wanted the headquarters to be located in Kista, a technology park near Stockholm, and felt such a siting made clear commercial sense. The Norwegians felt that their hi-tech abilities were superior, and they wanted the unit near Oslo.
What ensued was the worst possible outcome. After a lengthy meeting on December 8 the board voted, but exactly along country lines: six votes for Sweden, six for Norway. What happened next brought about the deal's disintegration. Jan-Ake Kark, the Swedish board chairman, used his casting vote to break the tie and tilt the decision in Sweden's favour.
Interpretations of this move differ. Telia's Backman notes that a mix of Swedish and Norwegian votes - rather than a split along national lines - was necessary for the chairman to use his casting vote. Further, a qualified majority was required for decisions on the relocation of headquarters. But the Swedes argued that the debate dealt with the location, not relocation, of the mobile unit. Semantics aside, the Swedes thought they had acted constitutionally. "[This topic] isn't interesting any more," says Telia's Backman. "But, of course, Mr Kark is confident that he acted correctly."
Telenor's Hermansen is not. He thinks Kark acted against the wording and spirit of the shareholder agreement, and that the Swedes underestimated the resolve of the Norwegian contingent. "The important thing is that when a partner deliberately takes actions for his own benefit at the cost of the other partner, this makes the whole situation impossible from the point of view of future co-operation," says Hermansen. "They knew exactly what they were doing - they were counting [on the fact] that, in the end, this would have been accepted."
There was also speculation about a missing paragraph and different versions of the shareholder agreement, which was drafted in English and then translated into Swedish and Norwegian. Reportedly, a paragraph relating to decisions on the headquarters of business units appeared in the Norwegian text but not in the Swedish version. The possibility of differing versions of the agreement adds another level of intrigue to the proceedings. Telia's Backman confirms the story about the missing paragraph; others, including Telenor's Hermansen, deny it.
Under the spotlight
The deal had faltered over an item that many thought should have been negotiable. But the dispute over the location of the mobile phone unit was symptomatic of a bigger concern. Says Telia's Backman: "This was the thing that triggered a much larger crisis of trust between the two owners."
Telenor's Hermansen agrees. "This was not necessarily a very difficult issue," he says. "But from a symbolic, political point of view, it was more and more sensitive."
Given that telcos are the jewel in the state assets crown, nationalist sensitivities were bound to be delicate. If the merger had been between two private-sector companies, differences would have been tackled behind closed doors and the deal's success or failure would have been determined by market forces.
However, this Nordic saga was played out on a more unforgiving stage. "Here, you have two publicly owned companies merging in societies that have a great deal of openness, which meant that they were operating under the public spotlight all the time," says HSBC's Tolkien. "That made it extraordinarily difficult for the individuals involved on both sides."
ARC's Lufkin takes a sterner view: "Governments do not make good owners of growth companies."
Despite the transaction's inevitable complications, Tolkien is adamant about the benefits of the process. "This doesn't mean to say that you shouldn't continue to try and structure businesses according to the correct business principles," he says. "But is it easy? No, it isn't easy."
Some say that Telenor's Hermansen was effectively negotiating on both a corporate and a political level, with the blessing of the Norwegian government. He does not entirely deny this. "I had no authorization to negotiate directly with the minister, but in Norway over the years I have been trusted by the government to find solutions." He acknowledges that such a status might have irritated the Swedes.
However, political motives were not confined to one camp. In the spring, Dag Detter, a director at Sweden's Ministry of Industry, Employment and Communications, was appointed to the board of the merged company. Hermansen says this was not discussed with the Norwegian side, but Detter maintains the Norwegians were informed, and adds that each side was allowed to make four appointments.
Regardless, the move illustrated a difference in political traditions: Sweden considered the appointment as standard, but for the Norwegians it was questionable.
The complex relationship between two countries exacerbated the differences. Norway, a former colony of both Denmark and Sweden, is proud of its independence. Its relationship to Sweden is often compared to that between Canada and the US. Whereas Sweden has an established public market tradition - evidenced by companies such as Ericsson and Volvo - Norway's industrial sector is comparatively small, with most of the value retained by the state. As a result, Norway is often portrayed as a nation suspicious of foreign takeovers. Telenor's Hermansen adamantly rejects this description, insisting that his country's attitude to foreign ownership is "very open".
But not everyone - including Christian Hambro, a director-general at the Norwegian Research Council - shares this view. "I think it's fair to say that Sweden has a more mature attitude to globalization than the one you have in Norway," he says. "In Norway, both politically and in business, we still have a long way to go to accept the implications of globalization."
Key lessons
Geopolitics aside, the deal that never was also suggests key lessons for merging companies. ARC's Lufkin sums up the most obvious and important one: "Make sure you've got everything sorted out before announcing the deal."
He adds that there should have been a single set of discussions from the outset between the companies and the governments. In the case of Telenor-Telia, a government adviser was hired after the transaction had been made public, and questions of control hung over the whole process. Considering the companies' touchy relations and the pact's political dimension, concerted efforts to sort out potential deal-breaking issues as early as possible might have saved the marriage.
Deal participants also need to be aware of the dangers presented by a merger-of-equals strategy, especially for companies in industries - such as telecoms - that present huge growth opportunities but are also subject to sudden change. The key is to ensure that issues of control do not become so distorted that the growth prospects that inspired the merger plans are forgotten. Asks one observer: "Do you think that America Online and Time Warner [which recently announced a record-breaking $327 billion merger] thought very much about whether the value split was 60-40 or 61-39? No - they didn't care. They just did it because they knew there was going to be huge value creation."
Fundamentally, the issue comes down to trust and shared vision - elements that cannot be determined by shareholding arrangements and balance-sheet calculations. Says Telia's Backman: "When you're planning a merger, it is crucially important that the owners of the two merging parts have the same agenda and talk through the major problems."
In the end, the deal fell victim to a situation that plagues so many failed marriages: a lack of communication. Backman acknowledges this flaw: "It's quite clear that the main reason [for the merger collapsing] is that the owners had a different perception of the meaning of the shareholders' agreement."
Given that the relationship was troubled from the beginning, it is tempting to ask why the companies bothered in the first place. For Hermansen, the opportunities had to be pursued. "In the two organizations, we worked very well together. And the possible benefits were so large that we couldn't take responsibility for not trying to achieve them."
Tolkien at HSBC has a similar attitude. "I think it would be a mistake to say that the whole thing was an ill-conceived failure," he says. "It's a very big prize that people were striving for. Just because you don't always succeed doesn't necessarily mean that you shouldn't try."
Damaged goods
So, after two failed attempts, Telenor and Telia are on their own again, and many feel that both have been damaged. After such a long ordeal, neither company presents itself in the short term as a suitable candidate for other partnerships. Says Salomon's Carse: "I think other telcos would naturally be cautious in doing anything with either of these players, simply because of the history of that deal."
Even Telenor's bullish Hermansen acknowledges the fallout. "There have been recent questions about our ability to fulfil transactions like this merger, and we will do our utmost to repair this questioning."
But the company has not been sulking; it recently reached an agreement with British Telecom regarding Esat Telecom, the Irish company. Many onlookers predict IPOs within a year from both Nordic companies. "Both governments have had the smell of money," says Carse.
The need to go public is all the more urgent, as both Telenor and Telia require stronger acquisition currencies if they are to make other strategic moves. Telenor may go public at the earliest by November 2000; Telia will not indicate whether an IPO is in the works.
The advising banks - which included HSBC (Telenor), JP Morgan (Telia), Merrill Lynch (Norwegian government) and Goldman Sachs (Swedish government) are the only ones to emerge relatively unscathed by the affair. Most observers feel that the deal's complications and ultimate failure were beyond the scope of the advisers. "On the whole, the banks were struggling to get something done," says ARC's Lufkin. "In the end, the investment banks don't force deals to happen."
Meanwhile, the two protagonists remain in charge of their respective companies. Hermansen has been reinstalled as Telenor's CEO, and Kark has returned as Telia's new president and CEO. Both face considerable challenges as they guide their companies in an ever-competitive telecoms industry.
For now, the future looks daunting. Given the urgency of the situation, might the two estranged partners walk down the merger aisle for a third time? The question elicits a gust of laughter from the Norwegian government spokeswoman. "Well, you know how it is with old lovers," she says. "Nothing is impossible."