DDI and IDO to Merge?

Kazuo Inamori honorary chairman of DDI

DDI, the number two domestic telecommunications carrier, and IDO, a cellular company affiliated with Toyota Motors, are reportedly in their final stage of negotiations regarding a potential merger, targeted for April 2000.

According to industry sources, the merger plan was proposed by Kazuo Inamori, honorary chairman of DDI, who selected IDO as a suitable bride for DDI's planned merger with Toyota in July of this year. When the merger plan leaked to the press in September, Inamori admitted that DDI and IDO had already agreed that the integration of both companies was necessary.

The main impetus behind the merger is to raise funds for both companies in preparation for the Japan-wide deployment of 3G--or IMT-2000--third-generation mobile communication services. Analysts have predicted that facility investment for 3G services will require some ¥1 trillion.

The immediate task for DDI, carrying debts of over ¥1 trillion this fiscal year, is to improve its financial situation, and the company therefore invited automotive giant Toyota to the table in a bid to obtain not only financial backing, but the power of Toyota's branding know-how as well. For its part, Toyota is hoping to become a top player in Japan's growing telecoms industry, and is planning to form a large NCC (New Common Carrier) group to compete with the now-dominant NTT group. Last year, Toyota became a major shareholder in KDD, which offers domestic as well as international fixed phone services (through the merger of KDD and Teleway, then a domestic long-distance carrier in which Toyota was the majority shareholder). Since the new NCC group is to provide complete telecom services for wired/wireless and domestic/international businesses, the merger plan is significant for Toyota, as well as for Japan's telecommunications industry as a whole.

For Toyota, however, the DDI-IDO merger plan is not without its shortcomings. If the new DDI-IDO company has to incorporate KDD, the new firm will be saddled with redundant employees, particularly for domestic operations, something that Toyota sees no advantage in. Based on this concern, Toyota's chairman, Hiroshi Okuda, denied that there was a merger plan as recently as September, saying that the two companies' relationship is just a technical tie-up.

The discord between DDI and IDO's parent Toyota is also due to the cultural differences between the two sides. DDI espouses a venture culture inspired by Inamori, while IDO hews closely to Toyota's conservative ways. It is, therefore, difficult for IDO or Toyota to easily accept a DDI merger. The same scenario was observed when DDI approached KDD prior to KDD's merger with Teleway. KDD, in the end, spurned DDI, mainly because of the difference in corporate cultures, and selected Teleway as a co-player.

Facing harsh competition, however, reorganization is a looming issue for all of Japan's telecom players. If the required industry realignments are put off due to pre-nuptial bickering, everyone will lose.