Reference no: EM132260455

Reliance Industries

Dhirubhai Ambani, the founding entrepreneur of Reliance Industries, died suddenly at the age of 69 without a will or succession plan. He left two sons in executive positions within the business. Under Hindu tradition, the eldest son becomes the successor. But dissatisfied with this traditional legacy, Anil Ambani challenged his older brother Mukesh and began arguing about management and ownership issues. In the end, the brothers listened to their mother, Kokilaben Ambani, and a settlement of their differences was announced on June 18, 2005—seven months after the disagreements started.

THE SETTLEMENT

The Ambani family owned 34 percent of the shares of Reliance Group, a publicly traded but family-controlled corporation. The settlement included Mukesh and Anil each getting 30 percent of the family's ownership stake, Kokilaben retaining 30 percent, and each of her two daughters, Nina and Dipti, who did not work in the business, getting 5 percent of the stock. (See family tree in Figure K.) The brothers signed a 10-year no-compete agreement and resigned from each other's boards. Under terms of the agreement, Mukesh kept the flagship petrochemical business (which enjoyed extraordinary profits in both 2007 and 2008), while Anil assumed full control of an electrical power company, a telecommunications and broadband provider, and a finance company. The brothers swapped shares in each other's companies so that neither owned shares in the other's business, and Anil received an additional payment (estimated at between US$2 billion to $3 billion) to equalize the value of the divided assets.

THE SIBLINGS AND THEIR BUSINESSES AFTER THE 2005 SETTLEMENT

For the next seven years, both siblings achieved a multitude of successes and multiplied the value of the stock of their respective companies severalfold. But warning shots in the sibling relationship were also fired during this time. Mukesh terminated Reliance Communication's service of Reliance Industries and awarded that contract to a competitor. Mukesh also raised the price of the gas it sold to Anil's electric power company (albeit, in the midst of significantly higher global energy prices) and outbid his brother in a prime real estate deal in Mumbai. Anil's company, in turn, took the Maharashtra state government to court after it awarded a bridge-building contract to one of Mukesh's companies.

In late May 2008, Reliance Communications, controlled by Anil Ambani, entered exclusive talks with MTN Group of South Africa over a possible combination of the companies that would create a telecommunications juggernaut with more than 100 million mobile customers in Africa, the Middle East, and India. On Thursday, June 12, just as the talks were progressing and the due diligence work was being done, Reliance Industries, controlled by Mukesh Ambani, sent a letter to MTN stating that Reliance Industries had the right of first refusal on any deal involving the sale of Reliance Communication. Talks were focusing on Anil Ambani selling his 66 percent share in Reliance Communication to MTN in a share swap that would make him the largest shareholder of MTN but make Reliance Communication a subsidiary of MTN. At the time Reliance Communication was valued at approximately US $26 billion while MTN Group was valued at US$30.7 billion. A key motivator for the deal for Anil Ambani, according to a person close to him, was to become a larger business figure than his brother.

Reliance Communications' response to the Reliance Industries' letter was to call it a bad-faith effort to disrupt the talks and to claim that the alleged right of first refusal on the controlling stake in Reliance Communications was invalid because it had only been signed by Reliance Industries executives.

The disagreement escalated on Wednesday, June 18, 2008, exactly three years after the sibling settlement brokered by Kokilaben Ambani. Reliance Industries said that Reliance ADA Group, the Anil Ambani company that is parent of Reliance Communications, relied on the same contractual agreement to support its own positions in negotiating about 15 separate matters with Reliance Industries; therefore, the agreement must be deemed valid. Reliance Communications responded by stating that the company would consider all options, including launching criminal proceedings against Reliance Industries executives who had signed the agreement. Reliance Industries then countered by issuing a statement to the media claiming that "there is no criminality attached to the signing of the agreement… If any proceedings are adopted, we will not only defend them but will also consider our options for such a malicious action."

RELIANCE COMMUNICATIONS' GLOBAL GROWTH THREATENED

By early July, with Reliance Communications' shares down about 20 percent and the talks with MTN Group seemingly stalled, efforts were being made to restructure the transaction in a way that MTN would be taken over by Reliance Communications. This was an obvious attempt by Anil to address Mukesh Ambani's objections to the deal. Unfortunately, political issues in South Africa, raised by the possible takeover of one of its most important companies by a foreign entity, made this approach unlikely to succeed.

On Monday, July 7, the two sibling-led companies again traded accusations. Reliance Communications said Reliance Industries rebuffed its offer to meet to clarify any doubts that Reliance Industries (Mukesh Ambani's company) might have about the talks with MTN. Then Reliance Industries released a statement saying that Reliance Communications officials had failed to show up for a conciliation meeting scheduled earlier that day. Later, Reliance Communications countered by saying that "Reliance Industries' sole objective is to derail the talks with MTN and frustrate a possible combination."

MTN Group and Reliance Communications ended their merger talks on Friday, July 18, claiming that legal and regulatory issues prevented the parties from completing the transaction. To the world it seemed that two brothers, unable to overcome the sibling rivalry evident since their father's death six years earlier, had destroyed an opportunity for global expansion. The brothers have continuously wanted to best each other in the highest echelons of Indian business, according to a friend of the family.

A deal between MTN and Reliance Communications would have created a company with a stock market value of about US$50 billion and 110 million customers. But not to be deterred by this setback, Anil's media company, Reliance Big Entertainment, launched talks to invest more than $500 million in a joint venture with director Steven Spielberg. It has also earmarked about a billion dollars to make films with the movie production houses owned by Brad Pitt, Jim Carrey, and others.

Mukesh Ambani's Reliance Industries has not fared as well lately either. The company has not produced as much natural gas from the country's largest reservoir as it had projected, and its foray into a vast chain of supermarkets has not been particularly successful.

NONCOMPETE AGREEMENT TERMINATED

On December 13, 2010, Anil's Reliance Telecommunications, one of India's largest wireless carriers, launched 3G broadband service in four major cities. That very same month, Mukesh Ambani released a 36-page handwritten memo to Reliance Industries executives that detailed his plans to build a $10 billion 4G mobile network in India. It envisioned being the largest 4G network in the world outside of the United States and Japan. Reliance estimated that it would have as many as 37 million subscribers by 2016. Service was targeted to begin to roll out for 100 high-priority markets (including Delhi and Mumbai) and ultimately cover 700 cities.

What could have been a powerful reason to escalate the sibling war between Mukesh and Anil, was not. A few months earlier, on May 23, 2010, the Ambani brothers agreed to scrap the noncompete pact that was part of the June 2005 agreement brokered by Kokilaben, their mother. The very next day, Mukesh's Reliance Industries began the process of bidding for radio spectrum, and by the end of the very next month, he had acquired a 95 percent stake of Infotel, the company that had successfully acquired most of the radio spectrum for mobile telephony and broadband in India.

Of India's 1.2 billion people, approximately 9 percent enjoyed Internet access in 2012. Leapfrogging over the lack of infrastructure and traditional landlines, the new venture represented a major development, not unlike the introduction of mobile phones a decade earlier. Mobile phones overcame the absence of landlines and infrastructure and connected the lives of millions in India. "Our digital services business will revolutionize the lives of millions of Indians by giving them access and opportunities," stated Mukesh Ambani during Reliance Industries' annual meeting on June 7, 2012. Reliance is expected to invest $18 billion in its entire portfolio of businesses in the next five years; $10 billion of that will go to the new 4G broadband network.

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