In early May, media reports began to appear that Bharti Airtel, one of India’s leading telecom service providers, was bidding for MTN of South Africa. Since MTN, which is listed on the Johannesburg Stock Exchange, is valued at $40 billion, this would have been the largest-ever takeover by an Indian firm of an international company. Even if the purchase had been for just 51% — some reports suggested that Bharti and partner SingTel (Singapore Telecom) were planning to bid for 100% — the deal value would have been significantly higher than the $13 billion the Tatas paid for Anglo-Dutch steelmaker Corus. “We are delighted that they have chosen to talk to us,” Bharti Airtel chief executive Sunil Mittal told journalists when the news of the possible deal broke. “It confirms Airtel’s standing among global telecoms.”
In the end, it was not to be. On May 24, the company issued a statement accusing MTN of setting aside an in-principal merger agreement in favor of a deal that would make Bharti a subsidiary of MTN. “This new structure,” Bharti’s statement read, “envisages Bharti Airtel becoming a subsidiary of MTN and [an] exchange of majority shares of Bharti Airtel, held by the Bharti family and SingTel … for a controlling stake in MTN. Bharti Airtel believes that this convoluted way of getting indirect control of the combined entity would have compromised the minority shareholders of Bharti Airtel and also would not capture the synergies of a combined entity… Accordingly, Bharti Airtel has decided to disengage from the ongoing talks and has conveyed the same to MTN.” As Mittal told business daily Business Standard: “This was not acceptable to us… We will continue to look for opportunities around the globe.”
The agreement, as restructured by MTN, would have compromised Bharti’s “vision of transforming itself from a homegrown Indian company to a true Indian multinational telecom giant, symbolizing the pride of India,” the company’s release said.
It is widely believed that the “pride of India” has been one of the factors behind the nation’s global takeover story in recent times. True, it has not yet reached the trophy acquisition stage, which made the Japanese buy properties such as Rockefeller Center or Pebble Beach Golf Resort in the U.S. The general opinion, however, is that though Indian firms might end up with a couple of lemons, it should not stop the whole fruit-picking adventure. Says Vinay Rai, industrialist and co-author of the recently published Think India: “This is India’s century. We should be going out to take over companies. It should no longer be the other way around.”
Indeed, there was some heartburn when Vodafone took over Hutchison Essar (from the Hutchison Whampoa group of Hong Kong) for some $11 billion. Many felt that an Indian company like Anil Ambani’s Reliance Communications (RCom) should have picked up the 67% stake that was on offer. (Vodafone already had a small stake in Bharti Airtel, so the latter was not in the running.) On a lighter note, there was a lot of openly expressed angst that Vodafone would retire the Hutch Indian mascot — a pug that had so much caught the public fancy that prices of pug pups doubled from $400 to $800. Eventually, Vodafone officials had to make a statement that the dog would stay.
Vodafone, of course, would have remained top dog even if the Bharti Airtel-MTN deal had gone through. The combination would have created the sixth largest mobile operator, with some 130 million subscribers (Bharti Airtel, 62 million; MTN, 68 million) in 25 countries, mainly in Africa and West Asia. Vodafone is way ahead with 250 million subscribers. The world’s top mobile operator in terms of subscribers is China Mobile (392 million), followed by Vodafone, Telefonica of Spain (170 million), China Unicom (168 million) and American Movil of Latin America (159 million).
In India, Bharti Airtel is ahead of its rivals; its 62 million subscribers give it a 23.80% market share (as of March 2008). RCom comes next (45.5 million; 17.45%), followed by Vodafone (44.1 million; 16.94%), and the government-owned Bharat Sanchar Nigam (40.5 million; 15.56%). There are, of course, several others. But none has a market share in the double digits.
The MTN bid is not the first attempt by Indian telecom firms to venture overseas. Bharti Airtel is already in Seychelles with 3G services; Telecom Seychelles is a subsidiary of Bharti Global. It will launch its operations in Sri Lanka in 2008; it has already acquired a license and other government approvals. RCom has acquired Ugandan company Anupam Global Soft, which has the necessary licenses. It will be putting in an additional $500 million to roll out services soon. In late May, Reliance Globalcom, the vehicle for foreign forays, acquired Vanco, a global managed network services provider in the UK, for $77 million. In 2007, the company had bought Yipes Holdings, an Ethernet service provider in the U.S., for $300 million.
Others also want a piece of the action. Mahanagar Telephone Nigam (MTNL), a public sector landline major which has belatedly moved into mobile, has started operations in Mauritius and Nepal. Its next stop is Kenya. The Tata group has various interests in South Africa in companies such as InfraCo and SNO Telecom.
Now, RCom has signed a 45-day exclusivity agreement with MTN to discuss a possible merger or perhaps an alliance. A statement from RCom notes: “The negotiations are currently taking place and a further announcement will be made when appropriate.” The statement also quotes Anil Ambani, RCom’s chairman, as saying: “We are delighted to be engaged in exclusive negotiations with the MTN Group to achieve a partnership, which would provide investors, customers and the people of both companies a unique and global platform for exponential growth, creating substantial long-term shareholder value.”
Observers believe MTN will have to present an entirely different proposal in order to interest Ambani. If anything, he is even more conscious of India’s collective aspirations and his own. As business and investment advisor P.N. Vijay put it on CNBC-TV18: “Anil Ambani wouldn’t even be a subsidiary of his own brother. How do you think he will react to being asked to be a subsidiary of MTN?” (Anil and elder brother Mukesh parted ways a few years ago amid some acrimony.)
The market hasn’t reacted well to RCom’s move, and it didn’t like the Bharti Airtel alliance either. Bharti Airtel shares were beaten down 8% when the news broke. Now Bharti Airtel has recovered, but RCom stocks fell 5.6% in one day.
Why Go Global?
Amid this frantic activity, one question needs to be asked: Are Indian telecom firms trying to go global just because of national pride, or do they have valid economic reasons for overseas expansion? India is the world’s fastest-growing telecom market. In March this year, the number of subscribers increased by 10.16 million; the total now stands at 261 million. So why is it necessary to look overseas for growth?
Rajiv Chandrasekhar, former owner of BPL Mobile, says that both the domestic market and the international one can be tackled together. “Inorganic and organic growth are not mutually exclusive,” he says. They are two sides of the same coin. Adds Vijay Gurbaxani, director of the Center for Research on IT and Organizations at the Paul Merage School of Business, University of California, Irvine: “In a sense one really doesn’t have a choice. You don’t have the luxury of waiting because someone else will definitely move in and capture those markets. The real challenge is to ensure there is enough management attention and bandwidth to focus on multiple growing markets.”
Several reasons exist why Indian firms could try to ride both the domestic and international horses in tandem. First, consolidation in India is difficult and recent rules have made it even more so. According to new guidelines issued by the department of telecommunications on April 22, the number of operators in any circle (generally a state or a large metro like Mumbai or Delhi) after a merger must be at least four. (It used to be three.) More importantly, the market share of the new entity cannot be more than 40% (down from 67%). This rule is intended to prevent the emergence of monopolies. But Indian cell phone rates (2.5 cents a minute for both local and long distance) are among the lowest in the world. Telecom analysts say there was no need for further regulation.
Low rates translate to a very low Average Revenue Per User (ARPU), the metric used by telecom companies the world over to measure performance. For Indian companies, the ARPU is $10, against $100 for telecom companies in the U.S. and Europe. Even MTN, which operates largely in developing markets, has better statistics: Its average ARPU is around $17, ranging from a high of nearly $40 in Cyprus to below $10 in Yemen.
Indian telecom operators insist, however, that ARPU is not the best yardstick to compare their operations with those of foreign companies. Their low score on this parameter implies that they are in the red or barely making profits. The reality is just the opposite: Their returns are mouthwatering.
An analysis done by business daily Mint compares the cost structure of Indian and western mobile operators. As a percentage of sales, Selling, General and Administrative expenses account for 15% for Indian companies (against 20% for Western operators). Other key costs are interconnect charges (12% for Indian operators, against 15% to 20% for Western companies), license fees (10%, 5-9%), personnel (7-8%, 10-15%) and network (11-12%, 15-17%). This leaves Indian companies with a handsome 36% to 40% as operating profit against 12% to 30% for Western operators. As these numbers show, Indian mobile companies are saving on sales and marketing. They also focus on prepaid customers, which lower their customer support costs. They share infrastructure. Most importantly, perhaps, they outsource whatever they possibly can.
Consider Bharti Airtel, which has taken outsourcing all the way. The company has outsourced maintenance and expansion of its telecom network to Ericsson. Its entire IT operation has gone to IBM. And its customer service call centers have been handed over to several companies, including EmphasiS and IBM Daksh.
“Bharti Airtel has done an excellent job of defining customer acquisition and growth as its core competence, and outsourcing everything else, including its network and its IT,” says Ravi Bapna, professor and executive director, Center for IT and the Networked Economy, at the Hyderabad-based Indian School of Business (ISB). “This strategy befits the current Indian mobile market as another 200 million to 250 million consumers are up for grabs in the next five years.”
He doubts, however, if these techniques for driving profitability could work for Western corporations. “It is not easy to do for legacy global corporations, as it requires sophisticated vendor management skills and innovative revenue-sharing contracts with key partners,” he says. “It is certainly a factor in keeping costs low and, at the same time, accelerating growth…. Bharti Airtel’s context is unique and worth studying for global companies looking to making inroads into emerging markets.”
“Telecom presents one of the biggest opportunities for outsourcing,” says Ananda Mukerji, managing director and CEO of Indian BPO company Firstsource. On May 21, Firstsource signed a three-year outsourcing deal with Bharti Airtel. Under this agreement, “Firstsource will provide a suite of BPO services covering both voice and back-office operations in areas such as customer accounting, VAS (value-added services) provisioning, fraud and credit monitoring, customer service, collections, customer retention and the like to Airtel.
“At a fundamental level, any business that has high volumes of small accounts derives greater benefits from outsourcing,” says Mukerji. “Basically, traditional telecom firms now concentrate on owning networks and brand building and marketing. Virtual mobile operators go a step further: They don’t own the networks; they outsource customer management and concentrate only on brand building and marketing. Virgin Mobile in India is an example.”
Experience with outsourcing and, more importantly, a mindset that believes you must concentrate on your core competence are what Indian telecom firms will bring to the table in their international forays. The global giants are into outsourcing too, but they don’t have the zeal of the true coverts. “Outsourcing is rare in the telecom circles, but not as rare in general,” says Bapna.
“Bharti Airtel’s belief in outsourcing will make it a more nimble company with greater operational flexibility, and higher efficiencies and productivity and will free its top management resources to concentrate on growing its business globally,” says Mukerji. Priya Rohira, an analyst with Enam Securities, adds: “Bharti Airtel has skillfully replicated its network outsourcing strategy in India and demonstrated its scaleable business model.”
“Increasingly, companies are moving to a different business model, one that involves value networks,” says Gurbaxani of the University of California. “These are specialist companies that partner with one another and exploit the economies of specialization of each of the providers. Bharti Airtel has adopted this model probably more aggressively than anybody else. Bharti Airtel’s job is to be what we would call the network leader — to coordinate all of this into a value offering and interface with the end customer. This would certainly help cut down costs significantly. If one looks at both the telecom infrastructure and IT infrastructure, these are businesses with very high fixed costs. To the extent that Bharti Airtel is able to take these fixed costs and make them variable — and also link them to revenues (in the sense that that they pay per customer) — it results in substantial net cost savings.”
Not everybody is happy about outsourcing, however. Forget the regular suspects complaining about job losses. The Indian government, too, has some reservations. India initially had a fixed license fee regime. In the auction under the New Telecom Policy (NTP) in 1994, several contenders overbid, as happened with 3G licenses in Europe. The sector took off only when India moved to a revenue-sharing arrangement under NTP 1999.
The government’s contention is that by outsourcing — to independent companies or their own subsidiaries and affiliates — telecom companies may be understating their revenues. Thus, the government may not be getting its fair share.
No one’s pointing fingers right now, but a quiet investigation has been launched. It’s not Bharti Airtel alone. Among the joint ventures and subsidiaries floated are Reliance Infratel, spun off from Reliance Communications to handle the tower business; Reliance Communications Infrastructure, which handles billing and other subscriber services; and Indus Towers, a merger of the tower infrastructure operations of Vodafone, Idea Cellular and Bharti Airtel.
But outsourcing is here to stay. Bapna feels that the Bharti Airtel model has larger implications. “Mastering global sourcing is becoming a necessary condition for above-average success in today’s business environment,” he says. “Bharti Airtel offers lessons that extend beyond telecom.”
“This model of outsourcing certainly gives younger Indian companies a competitive edge when it comes to globalizing their business,” says Gurbaxani. “Three to five years ago, we were talking about C.K. Prahalad’s book, The Fortune at the Bottom of the Pyramid, and how multinationals could make money in less developed countries. But increasingly, we are looking at Indian companies which can teach U.S. companies more innovative ways to do business. There are a lot of things that we take for granted in the U.S. market regarding what a customer will or will not want. In countries where customers cannot afford to pay huge sums, one really needs to ask hard questions about what can be dispensed with and what really adds value to the customers.”
According to Bapna, “Indian companies such as Bharti Airtel have the benefit of operating from a clean slate and from necessity being the mother of innovation. Bharti Airtel realized very early that it was not in the best position to deploy a state-of-the-art mobile network on its own and hence partnered with the Scandinavian giants that had the capability. What is unique, and perhaps worthy of consideration by other companies looking to emulate Bharti Airtel’s success, is that it has revenue sharing or partnership type relations with IT and telecom vendors. The lesson from this is that ownership and control are ceding ground to access and influence.”