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Review of Mergers & Acquisition Cases in Sri Lanka

Ramzeena Morseth Lye

ramzeenalye@gmail.com

DOI: http://doi.org/10.4038/sljmuok.v8i0.97

ABSTRACT

Mergers & Acquisitions (M&A) are strategic growth tools used by organizations
aiming for market dominance and sustainable growth in shareholder wealth. While
M&A sound impressive they involve many complexities, conundrums and risks
(Angwin, 2001; Algama, 2020) requiring a great deal of thinking, effort and resources
to get right. Despite the commonality of M&A in developed as well as emerging
markets a good majority of them fail (Hitt, 2012) and there doesn’t seem to be a
thorough understanding of why they fail (Cartwright and Schoenberg, 2006).

This article is a brief review of several noteworthy M&A executed in Sri Lanka in
the recent history between Dialog Axiata & Wow.lk, Dialog Axiata & H-One,
Mobitel & E-Channeling, Hutch Lanka & Etisalat Sri Lanka, ACL Cables & Kelani
Cables, Gamma Pizzakraft & Keells Restaurants (Pizza Hut operation in Sri Lanka),
Softlogic Holdings & Odel/Cotton Collection, SS Equity Holdings & RIL Property
PLC (BreadTalk operation in Sri Lanka). The article attempts to understand the likely
business objectives behind these strategic moves and if the expected results have
materialized.

Empirical evidence suggests that a vast majority of M&A fail to deliver the expected
results. It is important that business managers evaluate the pros and cons of the M&A
route carefully, formulate well defined goals & strong integration plans should they
wish to proceed.

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The analysis was carried out based on already published data using company press
releases, information from their websites, other online press articles, existing
literature on mergers & acquisitions and authors experience/involvement in two of
the cases being discussed and insights from industry insiders.

Keywords: Challenges & Pit-Falls, M&A Cases in Sri Lanka, M&A Law in Sri
Lanka, Merges & Acquisitions, Definitions, Strategic Importance, Theories

Copyright: This is an open access article distributed under the Creative Commons Attribution
License 4.0, which permits unrestricted use, distribution, and reproduction in any medium,
provided the original work is properly cited.

1. INTRODUCTION

The purchase of or sale of a business or enterprise is a transaction driven by a complex

set of activities that present opportunities but bear considerable risk (Angwin, 2001;
Angwin, Mellahi et al., 2014). Although the term Mergers and Acquisitions (M&A)
are frequently used interchangeably, they come with different legal meanings. A
merger is defined as the combining of two or more companies into a single corporate
entity, with the newly created company often taking on a new name. An acquisition
is a combination in which one company, the acquirer, purchases and absorbs the
operations of another, the acquired (Gaughan, 2007; Thompson, 2016) . They are a
form of organizational growth which allows firms rapid development vis-à-vis
organic growth providing owners the opportunity of repositioning themselves in an
increasingly complex competitive landscape by joining forces with another firm, and
thus produce valuable opportunities to formulate competitive strategies (Teerikangas,
2007). However, some takeovers may be termed as mergers for PR reasons, economic
motives and even top management teams’ pride (Reis, 2015). They may induce
market entry or exit, may help improve cost efficiency and reduce competitive
pressures (Klodt, 2002) hence each case will be unique presenting different sets of
challenges, complexity and risks (Leepsa and Mishra, 2016).

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The different elements of M&A have drawn considerable attention over the past thirty
years yet evidence points to positive short-term returns for the seller with inconsistent
returns to the buyer (Cartwright and Schoenberg, 2006). When defined in extreme
terms such as the eventual liquidation then failure rates are under 20%, when defined
as an inability to reach set financial goals reported failure rates can be high up to 80%
(Reed S.F., 2007). Recent examples from corporate America evidences several “big”
M&A deals that failed. In 2015 Microsoft wrote off 96% of the value of the handset
business it had acquired from Nokia for USD 7.9Bn the previous year. Google
unloaded the handset business it bought from Motorola for USD 12.5Bn in 2012 for
2.9Bn, HP wrote down USD 8.8Bn of its 11.1Bn Autonomy acquisition; and in 2011
News Corporation sold MySpace for a mere USD 35Mn after acquiring it for 580Mn
just six years earlier (www.dealroom.net).

While companies may undertake the M&A route for multitude of reasons, studies
often show that most M&A initiatives are driven by the quest for synergy
achievements (Thompson, 2016). However, due to weaknesses in due diligence and
valuation, synergy goes unrealized in many cases (Fiorentino and Garzella, 2015).
Another major reason for M&A failure is not paying adequate attention to post
integration plans especially pertaining to people and culture.

1.1. Due Diligence

Due diligence is simply an investigation, audit or review performed to confirm facts

or details of a matter under consideration (www.invostopedia.com). Needless to say
it plays a pivotal role in M&A and should therefore be managed effectively to ensure
a higher probability of success (Fiorentino and Garzella, 2015; Bhagwanan and
Grobbelaar et al., 2018). According to Tanure, Cancado et al. (2009) the accuracy of
the due diligence will depend on the capital control, business segment and the cultural
profile of each company and the negotiation stage tends to be unique for each case.
For the due diligence to be productive and accurate, internal communication should
be encouraged (Salakka, 2018) and a culture of knowledge transfer must be
inculcated (J. Rosenbaum, 2009).

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1.2. Business Valuation

Business valuation is at the core of M&A. It could be summed as the meeting-up of

cash flows over time. In other words, the time it will take the buyer to recoup the cost
of the investment (Snow, 2011). According to Roll (1986) hubris (pride of the
managers) can play a big part in business valuation. The hubris hypothesis implies
that managers seek to acquire firms for their own personal motives and that the pure
economic gains to the acquiring company are not the sole or even the primary
motivation and in fact managers may pay a premium for a firm that the market has
already correctly valued. Quite obviously higher the premium, harder and longer the
payback will be.

1.3. Cultural Integration

Since M&A involve two companies with two distinct cultures with people in the core
of matters, it is reasonable to expect a culture conflict (Tanure, et al., 2009, Buono,
et al., 2016, Savović, 2017). Cultural differences and resistance of employees are
often mentioned as major barriers in achieving human or social integration (Dauber
and Vrontis, 2012) and can be a value destroyer. Hence to maintain stability of the
workforce cultural differences should be understood, planned and managed
proactively (Fernandes, 2021) and due consideration paid to the need for pragmatic
cross-cultural skills to bring about real change (Teerikangas, 2007).

Given that M&A are complex and full of challenges and risk, it is noteworthy to
explore and understand the Sri Lankan cases being deliberated in this article since
each will present its own unique challenges and outcomes. According to (Algama.
2020), mergers for companies incorporated in Sri Lanka is governed by part VIII of
the Companies Act No. 07 of 2007 (as amended CA, 2007). Under the TOM Code
(Takeovers and Mergers Code of 1995 as amended) a merger is defined as a
transaction whereby the assets of two companies come under the control of one
company. According to S. De Saram (2021) parties wishing to successfully proceed
with M&A will need to fulfill several prior legal requirements and approvals from

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regulating bodies. These would be the likes of Colombo Stock Exchange, Public
Utilities Commission of Sri Lanka, Telecommunications Regulatory Commission of
Sri Lanka, Monetary Board of Sri Lanka, the Insurance Regulatory Commission of
Sri Lanka and the Sri Lankan Board of Investment. The Consumer Affairs Authority
Act (CAA Act) regulates anti-competitive practices for companies in Sri Lanka and
may act against or put a stop to any M&A which led to anti-competition practices

2. STRATEGIC IMPORTANCE OF M&A

Companies consider M&A for a myriad of strategic reasons but empirical evidence
and literature suggest that organizations expect to realize several typical objectives.

2.1. Competitive Advantage and Strategic Alignment

The theory of Strategic Alignment believes that for an organization to attain peak
performance, its business strategy, resources and coordination must all be aligned in
one and the same direction (David J. Collis, 1998), moving in tandem, making it
difficult to separate and hard to copy (Galpin, 2018). Hence acquiring the right
competence, capabilities and resources become of paramount interest and a key M&A
objective.

2.2. Synergy Concept

Synergy is the concept that the value of two companies’ combined will be greater
than the sum of the separate individual parts and is often the driving force behind a
merger (Arthur A. Thompson, 2016). The expected synergy can be attributed to
factors such as increased revenues, combined talent and technology, and cost
reduction. It is critical that synergy is expressed in measurable ways, and the inability
to do so is a telltale sign of future difficulties (Bruner, 2004) likely to be ridden by
mistakes and excessively costly (Chatterjee, 2007). A recent study by Fiorentino and
Garzella, (2015) indicated three synergy pitfalls each having different likelihoods of
achievement requiring high-level risk management approach: (1) The Mirage; a
tendency to overestimate synergy potential, (2) The Gravity Hill; the underestimation

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of the difficulties in synergy realization and (3) Amnesia; a dangerous lack of

attention to the realization of synergy.

2.3. Market Dominance and Power

One of the obvious reasons for M&A is to achieve higher market share at greater
velocity to the organic growth route. Market dominance can potentially lead to market
power and usually will trigger the attention of Monopoly and Competition authorities.
The theory of Market power refers to a company's relative ability to manipulate the
price of an item by manipulating the level of supply, demand or both and thereby
control its profit margin without trading-off market share (Harrison, 2006), increase
obstacles to potential new entrants into the market (Jamison, 2020) and place
suppliers at the mercy of the organization (Wood and Wrigley, 2007).

2.4. Entry to Foreign Markets

Economies of scale, synergy, market share and reputation, shareholder wealth

creation and empire building for managers have been identified as some key drivers
to enter foreign markets (Tripathi, Sanjoy Sircar et al., 2015). With more markets
opening and the convergence of digital technologies, cross-border M&A has gained
traction since 1990 (Shimizu, Hitt et al., 2004; Buckley and Casson, 2009; Johanson
and Vahlne, 2009). The dynamics of cross-border M&As are largely similar to those
of domestic M&A but involve unique challenges given different economic,
regulatory and cultural structures (Hofstede, 1980; House et al., 2002) (Shimizu, Hitt
et al., 2004).

3. DISCUSSION ON RECENT M&A CASES IN SRI LANKAN CONTEXT

The author posits that Sri Lanka being country of small population and geo mass,
highly competitive overcrowded industries with little room for differentiation may
view consolidation as imperative over the organic route. ROI in capacity building
will be slow as time taken to execute entry in to new markets/launch of new products,
substantial marketing investment and the grave lack of trained resources may not

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make the organic route very attractive. This also means that small companies serving
even small niche segments may be vulnerable for takeovers.

Sri Lanka has witnessed numerous cases of M&A over the years. Some of the notable
ones have taken place within the overcrowded telecommunications industry. The
acquisition of Suntel by Dialog Axiata in 2012 and acquisition of Celtel by Tigo
(2008), Tigo by Etisalat (2013) and subsequently Etisalat by Hutch Lanka in 2018
comes to mind. These M&A have been primarily driven by ambitious synergy and
market share objectives. The quick changing hands of Celtel to Tigo to Etisalat to
Hutch is evidence that M&A are difficult and probability of failure is high. Telco
industry also has been acquiring many start-ups and e-commerce businesses in the
recent past. These are primarily vertical attempts towards the consumer (as in the case
of SLT Mobitel & E-Channeling) or towards the supplier (as in the case of Dialog &
H-One).

This article will also look at the M&A between several other Sri Lankan blue chips
namely, ACL Cables & Kelani Cables, Gamma Pizzakraft & Keells restaurants (Pizza
Hut operations in Sri Lanka), Softlogic Holdings & Odel/Cotton Collection, SS
Holdings & RIL Property PLC (BreadTalk operation in Sri Lanka) discussed in detail
and summarized in Table 1.

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Table 1: Summary of M&A Cases in Sri Lanka

Buyer/Seller Industry Objectives Outcomes

ACL PLC is the clear Increase market
market leader in the dominance & Strong strategic and commercial fit. Successfully
ACL Cables PLC
Cable manufacturing Synergy realisation in implemented a dual brand approach with focus
1 aquired Kelani
industry with over 70% manufacturing, on management autonomy and a structured
Cables PLC in 1999
share between the 2 logistics and approach to integration
brands distribution

Gamma Pizzakraft Gamma was already Successfully implemented with the swift
Gamma is the leader in
Lanka aquired the
Buyer/Seller Industry a Pizza Hut
Objectives integration of employees to the new ownership
Outcomes
the Quick Service
Pizza Hut SL ACL PLC is the clear franchisee
Increase in India
market and culture. Former management team
2 Restaurants industry
franchise from market and used M&A & to continued with significant empowerment.
ACL Cables PLC with theleader inchain
largest the dominance Strong strategic and commercial fit. Successfully
Keells Restaurants Cable manufacturing enter a foreign
Synergy realisation in Company has a
implemented also moved
dual brandto the Maldives
approach market
with focus
1 aquired of restaurants in SL
in 2007 Kelani industry with over 70% market
manufacturing, under
on the same management.
management autonomy and a structured
Cables PLC in 1999
share between the 2 logistics and approach to integration
Dialog Axiata PLC It could be argued that this deal destroyed value
brands distribution
aquired the wow.lk instead of creating. Valuation of USD 3.4Mn for a
Fast route to the e-
operations
Gamma from
Pizzakraft Dialog is largest telco Gamma was fairly small operation
already Successfully implemented & anwith
unknownthe swiftbrand at
Gamma is the leader in commerce space
Digital Commerce
Lanka aquired the operator in Sri Lanka a Pizza a
Hut the time seem irrational. Hasty due diligence and
3 the Quick Service during time when e- integration of employees to the new ownership
LankaHut
Pizza in 2012
SL and with a dominant franchisee management hubris management
likely played ateam part in the
2 Restaurants commerce in wasIndia
at a and culture. Former
divested in
franchise 2019 to
from market shareindustry and usedstage
M&A to premium paid
continued withby the buyer.
significant Buisness model and
empowerment.
with the largest chain nascent
e-commerce giant
Keells Restaurants enter a foreign gaps in operational set-up
Company has also moved to the Maldives were also likely market
not in
daraz.lk of restaurants in SL favour the of Dialog
in 2007 market under same management.
A move that can be considered good strategic fit
Softlogic is one of Sri
Dialog Axiata PLC It could
that willbe argued
serve that this deal
to strengthen destroyed
Softlogics multi-value
Lankas prominent
aquired the wow.lk instead of creating. Valuation
brand, multi-channel approach ofinUSDthe3.4Mn
fashion for a
Softlogic Holdings conglomerates with Fast route
Cement to the and
position e-
operations from Dialog is largest telco fairly
retail small
market. operation
While the & an unknown
current economicbrand at
acquired Odel in investments in commerce
standing inspace
the
4 Digital Commerce operator in Sri Lanka the time seem
downturn is not irrational.
helping, onceHastythe dueCovid
diligence and
3 2014 and Cotton emegring markets. during
growinga fashion
time when e-
Lanka in 2012 and with a dominant management
pandemic situation hubrisislikely
underplayed
wraps a and
parttourism
in the
Collection in 2019 Company is the largest commerce
retail spacewas at a
divested in 2019 to market share premium paid by the buyer.
returns to some semblance of normalcy Buisness model and
Softlogic
Fashion Retailer in Sri nascent stage
e-commerce giant gaps in operational
will likely begin to fully set-up
reapwere
the also likelyofnot
benefits in
these
Lanka
daraz.lk favour
two deals. of Dialog
A move
This that canwas
acquisition be considered
seen by thegood strategic
industry as a fit
Softlogic is one of Sri
that will serve
reaction to marketto strengthen
leader Dialog Softlogics
launching multi-
Lankas prominent
Enter the e- brand,
similar multi-channel
service Doc990. approach
Even though in the thefashion
potetial
Softlogic Holdings conglomerates
SLT Mobitel is the with
2nd Cement position and
SLT Mobitel commerce space retail market.the
to monetize While
asset the current
exists it is economic
uncertain if this
acquired Odel in investments in
largest telco operator standing in the
4
5 acquired E- using a well downturn
deal was more is not tohelping,
appease once the Covid hubris
management
2014 and Cotton emegring
in Sri Lankamarkets.
with govt growing fashion
Channeling in 2016 established pandemic
than a realsituation is under wraps
market requirement. and tourism
However
Collection in 2019 Company
backing. is the largest retail space
ecommerce platform returns
compared to some semblance of
to Dialog/wow.lk dealnormalcy
the price Softlogic
paid
Fashion Retailer in Sri
will
for E-Channeling by Mobitel seem more of these
likely begin to fully reap the benefits
Lanka
two deals.
reasonable.
This acquisition
The operating was seen byhas
environment thenotindustry
been as a
reaction
favorableto market leader
immediately Dialog launching
post-acquisition with the
Hutchison Hutchison is a Enter the e- similar service in
Easter attacks Doc990.
2019 and Eventhethough
pandemic the potetial
in 2020
SLT Mobitel is the 2nd Icrease market share
SLT Mobitel
Telecommunications challenger Telco brand commerce space to monetize
& 2021 the asset
adversely exists network
impacting it is uncertain
and if this
largest telco operator through contigous
5
6 acquired E-
Lanka acquired in SL known as a strong using a well deal was more
distribution to appease
mergers. management
Post-merger hubris
integration of
in Sri Lanka with govt coverage and better
Channeling in 2016 value player especially established
Etisalat Sri Lanka than
culturesa real
and market
peoplerequirement.
were also not However
fully devoid of
backing. 4G services
operations in 2018 in data. ecommerce platform compared
conflicts and to may
Dialog/wow.lk
have impacted deal the price paid In
performance.
for
thisE-Channeling
context all M&A by Mobitel
objectivesseem more
have not been
reasonable.
realised
The operating
Microsoft environment
Solutions has not been
goes hand-in-hand with the
Strengthen the favorable
segemnt &immediately
this acquisition post-acquisition
looks to havewith strongthe
Dialog Axiata PLC
Hutchison Hutchison
Dialog is the is a
largest already well Easter
commercialattacks and in strategic
2019 andfit. the pandemic
Especially in in
the2020
aquired H-One Ltd Icrease market share
Telecommunications challenger
telco operatorTelco inbrand
Sri entrenched & 2021 adversely
current pandemicimpacting network where
driven economies and
7 leading provider of through contigous
6 Lanka acquired in SL known
Lanka with aas a strong dominant corporate distribution
dominant corporates large mergers. Post-merger
and small are fastintegration
focusing onof
MS Solutions in coverage and better
Etisalat Sri Lanka value
market player
shareespecially & enterprise cultures
digitizingand their people were also
operations not fully
the results ofdevoid
this M&A of
2021 4G services
operations in 2018 in data. segemnt conflicts
is likely to andbe may haveatimpacted
positive least in termsperformance.
of In
this context
revenue all M&A objectives have not been
synergies
realised
RIL initially invested Rs. 400Mn on the business
SS Equity Holdings SS Equity associated
Purchase of Microsoft
and disposed Solutions
of it for goes
Rs. hand-in-hand
245Mn. Givenwith that the
acquired the Bread with investor Shanker
Strengthen
undervalue the
asset to segemnt
Bread Talk & isthis acquisition
a strong looks to brand
international have strong
the
8 Dialog Axiata PLC
Talk Lanka Somasundaram holds
Dialog is the largest already well business commercial
enter a new valuation seem andrational.
strategicWithfit. Especially
some tweaks in the to
aquired H-One
operations from Ltd
RIL a diverse portfolio of
telco operator in Sri entrenched
space current
the product pandemic
offering driven economies where
and distribution model this
7 leading
Prperty provider
PLC in 2021of investments
Lanka with a dominant dominant corporate corporates would likelylarge give and small are
the buyer fast focusing
positive results. on
MS Solutions in
market share & enterprise digitizing their operations the results of this M&A
2021
segemnt is likely to be positive at least in terms of
revenue synergies
RIL initially invested Rs. 400Mn on the business
SS Equity Holdings SS Equity associated
Purchase of and disposed of it for Rs. 245Mn. Given that
acquired the Bread with investor Shanker
undervalue asset to Bread Talk is a strong international brand the
8 Talk Lanka Somasundaram holds
enter a new business valuation seem rational. With some tweaks to
operations from RIL a diverse portfolio of
space the product offering and distribution model this
Prperty PLC in 2021 investments
would likely give the buyer positive results.

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3.1. Acquisition of Kelani Cables PLC by ACL Cables PLC (1999)

Cable manufacturing and marketing in Sri Lanka is largely dominated by local

companies and consists of 6 players. ACL Cables PLC is the largest manufacturer of
cables in Sri Lanka having pioneered the industry in 1962. ACL holds 45% share and
produce the widest range of cables in Sri Lanka. Kelani Cables was founded in 1969
and was incorporated as a quoted public liability company in 1973 and holds a 32%
market share (Dissanayake, 2017)

ACL acquired KCL in 1999 and it served two primary objectives; achieve absolute
market dominance using a dual brand approach catering to both B2C and B2B
segments with two distinct value propositions and derive cost benefits through
synergies around manufacturing, raw materials, logistics and credit controlling
mechanisms amongst others (Dissanayake, 2017).

The acquisition of Kelani Cables by ACL is recorded as one of the most successful
cases in Sri Lanka. Today after the acquisition of Kelani cables, ACL reports a
consolidated market share in excess of 70%. One of the key contributory factors to
achieving the set-out objectives is the successful implementation of the post-
acquisition strategy to enhance the performance of Kelani Cables PLC focusing on
integration of human resources, leadership and allowing management autonomy as
per a structured plan (Dissanayake, 2017).

3.2. Acquisition of Keells Restaurants Lanka (Pizza Hut Sri Lanka Operations)
by Gamma Pizzakraft Lanka (2007)

Pizza Hut is a brand owned by Yum! Brands operating a successful franchisee

business model across the globe. Pizza Hut was the first international restaurant chain
to be launched in Sri Lanka way back in 1993 by John Keells Holdings. After many
years serving the urban upper-middle class primarily in the Western Province, in 2007
as a part of its portfolio rationalization initiative John Keells Holdings sold off the

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Keells Restaurants business at an undisclosed amount to Gamma Pizzakraft, a New

Delhi based national franchisee for Pizza Hut (https://www.sundaytimes.lk).

Gamma Pizzakraft a prominent franchisee of Yum! Brands in India considered this

an opportune growth route away from the ultra-competitive restaurant industry in
India. Gamma Pizzakraft approached the business objectively but with a give attitude
prioritizing critical investments in assets, systems, management capabilities, brand
and people development demonstrating strong commitment. Effective change
management rallying the team together was evident.

The author having been a part of the management team in the unification and business
development process post-acquisition believes that this M&A brought positive
outcomes for seller, buyer and employees. While John Keells transferred equity
smoothly, both the business and its other stakeholders thrived under the new
ownership. Today having grown the business extensively with presence across most
major cities in Sri Lanka, Gamma Pizzakraft holds a much-respected place in the
corporate space and is also a sort after employer
(http://dailynews.lk/2021/02/18/business/241846/gamma-pizzakraft-lanka-shines-
great-place-work-awards). A similarity with the ACL and Kelani merger is witnessed
at Gamma despite this being cross-border M&A. Both deals were successful as post-
merger integration had been thought through and attention to people prioritized as a
key success factor.

3.3. Acquisition and Divestment wow.lk by Dialog Axiata Group (2012 to 2019)

Dialog Axiata entered the e-commerce space by purchasing 26% of Digital

Commerce Lanka (Pvt) Ltd (DCL) in 2012 at the price of USD 1.59Mn. DCL owned
wow.lk (formerly known as Anything.lk – founded in 2011), one of Sri Lanka’s
pioneer e-commerce operators. Anything.lk was one of the early disrupters of the Sri
Lankan retail space with a business model very novel at the time challenging the
traditional communications and distribution architypes
(http://archives.dailynews.lk/2012/12/11/bus01.asp).

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The 2012 joint venture merged several e-commerce sites owned by Dialog at the time,
including iBuy.lk and Tradenet.lk, into Wow.lk – ultimately making DCL Sri Lanka’s
largest daily deals site and online mall. Three years later in 2015 Dialog acquired
100% stake of DCL at an additional valuation of USD 1.8Mn (https://www.ft.lk/IT-
Telecom-Tech/dialog-fully-acquires-wow-lk).

Dialog entered the market when it was at an embryonic stage contributing to less than
1% of all retail revenues. However, in 2019, four years after the full acquisition of
DCL, Dialog decided to exit the e-commerce space by entering in to a strategic
alliance with daraz.lk. (https://www.dailymirror.lk/recomended-
news/Alibaba%E2%80%99s-Daraz-and-Dialog-Axiata-Sign-a-Strategic-
Partnership-to-Grow-Digital-Commerce-in-Sri-Lanka).

Under this strategic partnership the management and business operations of wow.lk
was integrated with Daraz Sri Lanka, re-directing visitors to wow.lk to daraz.lk.
Daraz is part of global e-commerce giant Alibaba and presumably runs a business
model more suitable for e-commerce benefitting both shoppers and seller partners,
providing greater visibility for brands and a wider range of products to shop from
(https://archive.ceylontoday.lk/print-more/46392).

Entering the space seemed strategically aligned to Dialog’s Vision & Mission
statements of offering “empowerment & enrichment of Sri Lankan lives through
provision of technology enabled connectivity” (www.dialog.lk). The venture didn’t
live up to the expected synergistic goals likely caused by gaps in business model and
the operational set-up. Dialog being a large organization may not have been ideally
suited to manage a business that required quick on the move decision making and
expertise in dealing with large volumes of physical goods that can become obsolete
as well as logistics and after-sales challenges. Another question worth asking is if a
fairly unknown brand like wow.lk was worth the price Dialog paid (USD 3.4Mn).
Management Hubris could have played a big role in the original valuation of the
business. The move destroyed value instead of creating.

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3.4. Acquisition of Odel (2014) and Cotton Collection (2019) by Softlogic

Holdings

The story of Odel, the iconic local retail fashion brand is a famous one. As told many
times over, founder Otara Gunawardene started off selling factory surplus garments
and apparel to family and friends off the back of her car back in 1980’s
(https://newsin.asia/story-otara-gunawardene-founder-iconic-colombo-store-odel/).
It grew in stature and scale over the years becoming a chain of 20 stores across
Colombo including the flagship mall in Alexander Place (www.odel.lk). Odel was
floated as a PLC in 2010 becoming the first fashion retail business to be listed on the
Colombo Stock Exchange (https://www.businesstoday.lk/article.php?article=2720).

In 2014 Softlogic Holdings acquired a strategic stake of 44.5% of Odel PLC for LKR
2.7Bn (https://www.ft.lk/TOP-STORY/softlogic-shakes-up-retail-biz-with-odel-
buy/26-349800). The controlling shareholder of Odel at the time was Parkson Retail
Asia Ltd of Malaysia, which held 47.46% stake. In the following months in 2014
Parkson Retail divested their entire shareholding in Odel to Softlogic Holdings at the
price of Rs 22 per share amounting to a total of LKR 2.8Bn (https://www.ft.lk/Front-
Page/parkson-decides-to-exit-odel/44-360889).

As reported in numerous corporate communications at the time Softlogic defined this

acquisition as a perfect match and clear reflection of their strategy given the
company’s growing dominance in the branded lifestyle and retail business. Softlogic
retail business comprises apparel brands such as Nike, Levi’s, Giordano, Tommy
Hilfiger, Aldo, Mango and Charles & Keith to name a few and consumer electronics
giant Samsung (http://www.softlogic.lk). Subsequently, to complete the post-
acquisition synergies Odel PLC acquired Softlogic Brands (Private) Limited for LKR
600Mn in 2015 (https://www.dailymirror.lk/67259/odel-acquires-softlogic-brands-
for-rs-600mn).

Softlogic Holdings PLC’s subsidiary Odel PLC later in 2019 acquired the popular
local-grown fashion retail chain Cotton Collection Pvt Ltd for LKR 300Mn, a move

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that can be considered good strategic fit that will serve to strengthen its presence in
the fashion retail market (https://www.themorning.lk/softlogic-acquires-cotton-
collection-with-an-eye-on-retail-space-dominance/.) With a multi-brand, multi-
channel business approach company plans to add more lifestyle brands and more
retail space cementing themselves as the leader in premium retail shopping and
lifestyle experience (https://www.businesstoday.lk/article.php?article=11259).

The acquisition of two well accepted fashion brands, Odel and Cotton Collection by
Softlogic fits very well with the overall company strategic direction and will be a
sure-fire approach to cement market dominance as well as derive operational
synergies. While the current economic downturn is not helping, once the Covid
pandemic situation is under wraps and tourism returns to some semblance of
normalcy Softlogic will likely begin to fully reap the benefits of these two deals.

3.5. Acquisition of E-Channeling (Pvt) Ltd by SLT Mobitel (2016)

As confirmed by corporate announcements, SLT Mobitel (then known as Mobitel

(Pvt Ltd), Sri Lankas second largest mobile telecommunication service provider,
acquired at a price LKR 732Mn 87.6% stake of E-Channeling PLC owned by Senior
Marketing System Asia PTE in Oct 2016 (https://www.dailymirror.lk/business-
news/Mobitel-acquires-of-E-Channelling-as-voluntary-offer-closes/273-117034).
The company considered it a strategic investment to enhance Mobitel’s position in
the mobile market bringing the all-important health and medical service E-
Channeling to its users and position Mobitel as a differentiated player with a wide
and useful range of value-added service offerings (https://www.mobitel.lk/press-
releases/mobitel-empowers-echannelling-take-digital-healthcare-new-heights).

According to company insider insights, the E-Channeling platform for all intentions
and purpose is an e-commerce platform that can be used to develop many future
revenue streams by adding other services to the platform. Hence the monetization
options of the acquired platform can be quite substantial. Working together with other
Sri Lankan telco players Mobitel has also the potential to take this platform to all Sri

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Lankan mobile users through a range of new products and services not limiting to
health and medical services.

E-Channeling PLC is the pioneer software developer and ICT service provider to the
Healthcare industry. It is the first company in Sri Lanka to offer a complete
ecommerce-based service and the first public quoted technology company. E-
Channeling has consistently been part of the 100 top brands in Sri Lanka
(https://www.echannelling.com/Echannelling/company).

Given the brand strength and the user profile of E-Channeling, the valuation of LKR
732Mn seem more rational than what Dialog paid for wow.lk (USD 3.4Mn) many
years back. Mobitel can be expected to milk the brand further as more users embrace
e-commerce for health care, but how they will go about monetizing the generic
platform for other services remain to be seen. On the other hand, if Mobitel acquired
E-Channeling as a reaction to (instead of an actual market need) the launch of Doc990
by rival Dialog (a similar healthcare platform) is worth pondering over.

3.6. Acquisition of Etisalat Sri Lanka by Hutchison Telecommunications Lanka

(2018)

Hutchison Telecommunications Lanka (Hutch Lanka), a subsidiary of Hong Kong

based CK Hutchison Group (CKHG), acquired and consolidated rival mobile network
operator Etisalat Lanka from Emirates Telecommunications Group Company
(Etisalat Group) in Dec 2018. The official announcement noted that upon completion
of the sale CKHG will hold majority and controlling stake of 85% whilst Etisalat
Group will hold 15% ownership of Hutch Lanka
(https://www.telecomasia.net/content/hutch-lanka-completes-merger-etisalat-
lanka/).

Being a horizontal merger, the primary objectives for Hutch Lanka was to strengthen
its market position continuing the operation under the brand name Hutch and also
reap operational synergies. The consolidation provided Hutch access almost

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overnight to a suite of critical assets including spectrum, large pool of subscribers and
trained and experienced human resources
(https://www.lankabusinessonline.com/interview-our-aim-is-to-provide-a-better-4g-
experience-hutch-ceo/). Combined, the new network was expected to provide
markedly better contiguous coverage to subscribers of both Hutch and Etisalat than
they previously enjoyed
(https://www.dailynews.lk/2018/12/13/business/171185/hutch-invest-us-200-mn-
local-expansion). Contiguous coverage being a key industry driver the M&A was
projected to accelerate customer acquisition as well as drastically reduce subscriber
churn-out, two key challenges faced by Hutch at the time.

Operating under hyper competition and strict regulatory conditions, an organic path
to scale up operations and acquire new subscribers of similar number would have
taken Hutch several years. The M&A benefited all operators not only Hutch by
reducing the hyper competition in the industry
(https://www.fitchratings.com/research/corporate-finance/sri-lankan-telco-merger-
to-relieve-competitive-pressure-30-04-2018).

Both companies possessed heavy asset bases and the due diligence process therefore
was long drawn and the business dynamics and market conditions changed
considerably during this time. The operating environment has not been favorable
immediately post-acquisition with the Easter attacks in April 2019 followed by the
pandemic in 2020 & 2021 adversely impacting network and distribution mergers.
Post-merger integration of cultures and people were also not fully devoid of conflicts
and may have impacted performance. In this context all M&A objectives have not
been realized.

3.6. Acquisition of H One Ltd, Leading Microsoft Solutions Provider by Dialog

Axiata (2021)

Dialog Axiata acquired 100% shares of H One (Pvt) Ltd in Jan 2021 through Dialog
Broadband Network (Private) Limited (DBN), a fully owned subsidiary of Dialog.

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The transaction was expected to be at a price between LKR 300Mn to LKR 350Mn
but the final company announcement made no mention of the purchase price
(https://www.dialog.lk/dialog-axiata-to-acquire-h-one-srilanka-leading-microsoft-
solutions-provider).

The acquisition of H One was considered a move to enhance Dialog’s already

extensive suite of enterprise solutions and expected to facilitate acceleration of the
digital transformation of Sri Lanka’s enterprise sector. H One founded in 2008 as a
subsidiary of Hidramani Group, is the largest reseller of Microsoft enterprise
solutions in Sri Lanka with an annual turnover of approximately LKR 1.6Bn already
delivering innovative solutions to many top corporates in the country.

Dialog being Sri Lankas’ largest telecommunications services provider with an

overarchingly dominant market share of the corporate & enterprise segment this
acquisition looks to have strong commercial and strategic fit. Especially in the current
pandemic driven economies where corporates large and small are fast focusing on
digitizing their operations the results of this M&A will likely produce positive
outcomes for Dialog.

3.7. Acquisition of BreadTalk franchise from RIL Property PLC by SS Equity

Holdings Ltd (2021)

BreadTalk, a bakery brand founded in Singapore in 2000 has a network of owned

bakery outlets in Singapore, PRC, Malaysia, Hong Kong and Thailand as well as
franchised bakery outlets across Asia, Europe and the Middle East. BreadTalk was
launched in Sri Lanka in 2012 by Foodbuzz (Pvt) Ltd, a subsidiary of RIL Property
PLC with an initial investment of approximately LKR 400Mn. 9 years since launch
and 10 stores later RIL Property announced the exit from the BreadTalk business in
a market disclosure in March 2021. Adverse market conditions resulting from the
Easter attacks as well as the ongoing pandemic were quoted as the reasons behind
this decision. BreadTalk revenue in 2021 declined by 60% over 2020 due to the
COVID-19 pandemic-induced lockdowns, racking up substantial before tax losses

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(https://www.dailymirror.lk/business-news/BreadTalk-closure-put-off-due-to-
potential-investor-interest/273-208434).

Three months after the suspension of operations, SS Equity Holdings, backed by

investor Shankar Somasundaram, purchased the entire equity of BreadTalk franchise
for LKR 245Mn in June 2021 (https://www.ft.lk/front-page/Shankar-Somasundaram-
buys-BreadTalk-Lankan-franchise-for-Rs-245-m/44-719641). As reported by RIL,
the divestment is in line with the company’s strategic investment activities that helps
streamline its resources and business structure.

RIL held net assets of 260Mn at the time of the transaction and disposed of it for Rs.
245Mn. Given that Bread Talk is a strong international brand with strong revenue
performance prior to Covid-19 crisis the valuation seems rational. With some tweaks
to the product offering and distribution model this would likely give the buyer
positive results.

4. CONCLUSION

Weighing in on the cases discussed in the article it can be expanded that each case
had its unique set of challenges and outcomes. While some succeeded, some failed in
meeting expectations reflected in the way the M&A have been negotiated, planned
and executed.

• Organizations that had robust post-merger integration plans with attention to

human resources performed better as witnessed in the cases of ACL/Kelani and
Gamma/Keells. Both M&A were successful because they had a good post-merger
integration plan that seemed to have been executed swiftly and efficiently making
synergy realization a reality and achieving other M&A objectives easier due to
the buy-in of employees.

• Organizations that executed the deal with a “give” attitude gained more than
those that entered it with a “take” attitude (Martin, 2016). Martin goes on to
observe that an acquirer can improve its target’s competitiveness in four ways:

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(1) by being a smarter provider of growth capital, (2) by providing better

managerial oversight, (3) by transferring valuable skills and (4) by sharing
valuable capabilities. This seem to be another key success factor for both
ACL/Kelani and Gamma/Keells.

• Due diligence and valuation are lengthy, complex processes but critical to get
right. Research suggests that ignorance of potential problems in an acquisition is
one of the more common causes of failure in M&A. But learning about the target,
the task of due diligence, is very challenging (Bruner 2004). The long drawn due
diligence process of Hutch/Etisalat case impacted synergy calculation, synergy
realization and investment recovery time. It is likely that Dialog/wow.lk deal
failed due to inflated valuation even though it did seem to have strategic fit.
Ignorance of potential problems during due diligence and hubris likely paid a role
in the valuation.

• Strategic fit is a key success factor for M&A, like in the cases of
Softlogic/Odel/Cotton Collection, Dialog/H-One. But as was witnessed in the
same cases strategic fit alone is not adequate to make it work. Even though
Chatterjee (2007) says same industry M&A are less risky the Telco experience
seem to tell a different story.

• Synergy (especially revenue) realization may not materialize as expected due to

inaccurate forecasts, ill-timing, unforeseen external environmental challenges as
in the case of both Hutch/Etisalat and Softlogic/Odel/Cotton Collection.
Chatterjee (2007) and Studer and Thomas (2016) reiterates that cost reducing
synergies are more readily quantifiable while revenue enhancing synergies are
dependent on external factors and hence company would have less control over
realization.

The economic impact of the 2019 Easter attack followed by the crippling effects of
the global Covid-19 pandemic has delivered a double whammy across most industries
in Sri Lanka making M&A execution even more difficult. Within such a context we

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can expect results from the more recent M&A to be delayed beyond the fact that
M&A objectives by design tend to be long term.

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