THE ZEE-SONY MERGER
Author: Fatima Thansiha, V Year of B.A.,LL.B(Hons.) From National University of Advanced Legal Studies.
Co-author: Lakshmi Raj C, IV Year of B.A.,LL.B(Hons.) From National University of Advanced Legal Studies.
THE ZEE-SONY MERGER: A PANACEA TO REMEDY CORPORATE MISGOVERNANCE OR AN ATTEMPT TO SHIELD BAD CORPORATE GOVERNANCE PRACTICES?
The year 2021 has been a momentous year for India, in so far as mergers and acquisitions are concerned. India recorded about 85 strategic deals that valued more than $75 million only in 2021. What sets this tally apart is the sizable expansion in the range of sectors witnessing large scale mergers and acquisitions. Against this background, the announcement of the recent merger between the Indian-based Zee Entertainment Enterprises Ltd. and the Japanese multinational giant, Sony Corporation has evoked much anticipation, surrounding the dynamics of the humongous merger deal. Would Zee, that has gone through a series of controversies during the past few years over the integrity of its operations, witness a remedying impact under the influence of a seasoned market player such as Sony or continue to persist in the infamous allegations of corporate misgovernance? The legal essay is an attempt to find a solution to the conundrum through a close examination of the merger to decipher its operational and strategic aspects in the broader context of the global trends on the nexus between mergers and acquisitions and corporate governance.
The last two decades have witnessed waves of media merger against deregulation and technological advancement. The Media and Entertainment Industry is vouching a shift to mobile access and content offerings in the wake of the virtual environment induced by digital revolution. The changing nature of the industry, with a deliberate shift towards digital media, strong corporate cash reserves and proliferation of private equity firms, has acted as a crucial factor for deal activity in the media sector.
India has one of the world's largest and most competitive streaming scenes, thanks to low-cost mobile internet and hybrid revenue models that combine advertising and subscription video on demand. Sportscasting, which was primarily the domain of broadcast television, has been avidly pursued by streaming providers. Zee and Sony operate streaming platforms in India though neither are the market leaders. The merger comes after years of corporate turmoil between the two companies, at a time when India's television landscape is being reshaped by improved broadband internet access and forays into streaming video services.
Massive changes in the realm of Indian entertainment, as well as internal corporate constraints inside each organization, can be seen as major factors that have prompted the ZEE-SONY merger.
While the greater synergies resulting from the multibillion-dollar deal is expected to improve operational efficiency and promote a renewed transformation at the service level, the future of the merger hinges on a host of factors, partly driven by Zee’s position in the domestic market.
Zee has witnessed a murky period over the last few years owing to the critical allegations of corporate misgovernance by one of its leading investors and the consequent shoddy legal battle, the outcome of which is yet to fully unfold. Though the merger has the potential to transform Zee into a global player, an assessment of the potential of the merger to uplift Zee from the controversies that have engulfed it recently is important to predict the future of the deal.
DECIPHERING THE MERGER
The Japanese Conglomerate, Sony, attempting to merge its global entertainment companies, has identified India as a region where it will either aspire to be among the top three competitors or depart entirely. Sony had been looking for partners to buy or sell its Indian company under the Sony Pictures Network India banner. After months of discussions, Sony had finally reached an agreement with Zee Entertainment Enterprises Limited, becoming the country's second-largest entertainment network after Disney's Star India.The Sony-Zee alliance, encompasses 75 news, entertainment, sports and movie channels in more than 10 languages, stands to become India's largest player, with a market share of 27% surpassing that of Disney's Star India, at 24%.As per the scheme of merger, the promoters of Sony will hold 51 %, Zee 4 % and the remaining 45 % will be held by the public.Zee's strength in linear television, along with its interests in print, the internet, film production, mobile content, and its 4,800 film collection, will be combined with SPNI's film and television production, as well as its entertainment and sports television networks, through this merger.
Sony first entered the Indian market in the late 1990s and has done nearly everything it can to claim the top spot. In terms of sports entertainment, Sony has a firm infrastructure and competes directly with Star. However, in terms of general entertainment, it has only managed to capture a small portion of the Hindi audience. Sony has failed to create a significant effect in the regional languages market, with only two moderately successful Sony Marathi and Sony Aath channels. Both, however, failed to make to the top five most-watched channels on a weekly basis.Sony's acquisition of Zee is welcoming as the latter has a significant regional presence.The new entity will be the finest of both realms. Sony has the resources and funds to invest in sports entertainment, while Zee has a regional presence. With two of the top three General Entertainment Channel GEC players joining forces, the competition is only going to become tougher and the combined entity will be a titan in the General Entertainment Channel(GEC) industry, elevating the competition bar. The merged entity’s strong market position synergy benefits will vouchsafe the company's significant potential to improve profitability.
Furthermore, The merger also brought an end to a long conflict between Zee's major shareholder, Invesco, and the company's current management. Invesco has voiced displeasure with Zee's management and requested Punit Goenka's ouster from the position of managing director and CEO, as well as the expulsion of some other directors and their nominees. They were driven to seek a change in management due to perceived mismanagement as a passive investor. However Invesco's move was overturned by a court order by Zee Brass . The court fight continues.
While Zee has expressed a tacit support to the deal, it has also shown no hesitation in questioning some of the seemingly unfair terms in the proposed merger agreement. Notably, through an open letter in October 2021, it has alleged that the merger is not in the interests of the small shareholders of the company, but only serves to advance the parochial interests of the promoters. Specifically, it has questioned the provision that allots 2% equity stake to the promoters as “non-compete” fee, when the current CEO of the company is to continue in his position for another five years. It has also sought clarity regarding the manner in which the proposed increase in promoters’ stake from 4% to 20% is to take place.
ADDRESSING CORPORATE GOVERNANCE
The Zee-Sony Merger is one of the most closely watched developments in the M&A sector. The crucial features of the merger can be properly comprehended only once it passes the multiple regulatory and compliance tests that lie ahead. Added to this, the outcome of the legal tussle between Zee and Invesco that is currently underway, may also play a crucial role in determining the fate of the merger. While this may be so, much attention has also been raised on the manner in which the merger could potentially address corporate governance concerns within Zee, which has gained an unusual attention over the past few years.
Since Professor Henry Manne coined the phrase “the market for corporate control” in the year 1965, mergers and acquisitions have been increasingly associated with the notion of corporate governance. The sheer increase in the quantum of mergers and acquisitions in the recent past has been successful in provoking a renewed interest in the intersection of mergers and acquisitions and corporate governance. Usually, mergers between big competing firms are degraded as contradictory to fair market principles. However, this general perception has undergone considerable erosion over the years. Market analysts even view mergers and take-overs as viable means for companies to acquire stake in companies having poor corporate governance practices and create value for themselves by investing in enforcement of good corporate governance practices in the acquired company. The potential to create profit despite the prevalence of inefficient management often serves as a strong incentive for acquirer companies to acquire entities having poor management practices..The incentives in terms of business expansion and stronghold in the capital market of a developing nation like India is definitely an irresistible factor that might have influenced Sony’s merger decision. As in the case of cross-listing, cross-border mergers are seen as means to forge bonds at a transnational level for improving overall efficacy.
Empirical studies reveal that acquisitions that cause improvement in corporate governance also yield positive returns. Further, the disciplining effect of acquisitions is more in public companies compared to private companies due to the separation of ownership and control in public firms. Thus, the incentives for reinforcing corporate governance principles within Zee is compulsive for a big player like Sony, which more or less translates as an imperative duty thrust upon it, considering the huge stake that accrues in its favor through the merger.
Examination of the merger from a result-oriented perspective also signals certain green flags for the relationship. Globally, it has been evidenced that in cross-border mergers, the corporate governance standards of the merging entities incline towards getting elevated to the highest standard of corporate governance present among the entities to the merger. In most cases, this entity having the highest standard of corporate governance is the acquirer or even the resultant entity from the merger. In 2019, the Sony Group Corporation was included as one among the 128 “World’s Most Ethical Companies” by the Ethisphere Institute for its achievements in corporate governance, reputation and responsibility. Further, in 2020, Sony ranked first in the Wall Street Journal’s list of Top 100 most sustainably managed companies in the world. Hence, the possibility of development of better corporate governance practices in Zee resulting from the dominant influence of Sony is not illusory.
Given these factors, it is safe to assume that the proposed merger is potent to create a positive impact on the corporate governance front within Zee. As the factors at stake for both the entities to consummate the merger are significant, adoption of good corporate governance practices is imperative for the success of the merger and therefore, the possibility of disregarding this facet is low.
Triggers for transformation within the Media and Entertainment Sector include factors such as loss of revenue or the perception that the current operating model is not immune, which increases the pressure from unexpected external shocks. The Zee Sony merger marks the future path of India's media and entertainment industry. The future path is unification. The OTT Platform is an example. There are currently more than 35 players in the Entertainment segments in India. It is predicted that the media entertainment sector will witness more such mergers and acquisitions in the near future.It is through integration can businesses in this sector become more sustainable and relevant, both for partners and for consumers. Media and Entertainment Sectors business are prioritizing factors that will boost profit margins and, ultimately, cash flow as they seek to effect genuine change to adapt to changing market realities. Improving corporate governance and operational performance would be quite beneficial in the longer run and more or less, translates as a necessary precondition for the success of the merger.