report of international equity placement strategic alliances: case at indosat

7/29/2019 Report of International Equity Placement Strategic Alliances: Case at Indosat

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Syndicate 2 X46

MASTER OF BUSINESS ADMINISTRATIO

SCHOOL OF BUSINESS AND MANAGEME

INSTITUT TEKNOLOGI BANDUNG

2013

MM 5012

Business Strategy

GROUP SUMMARY ASSIGNMENT

INTERNATIONAL EQUITY PLACEMENT STRATEGIC

ALLIANCE – CASE STUDY AT INDOSAT

Syndicate 2 Executive 46 (Great Leader Syndicate)

29111311 Haidir Afesina29111328 HendraWinata

29111329 MitaListyatri

29111338 AndekPrabowo

29111344 AprianEkaRahadi

29111384 ChairunnisaMirhelina N

29111387 F X KresnaPaska

29111393 Agung Indri P.



yndicate II – MBA ITB X.46 INTERNATIONAL EQUITY PLACEMENT STRATEGIC ALLIANCE – CASE STUDY AT INDOSAT

1. CASE SYNOPSIS

PT. Indonesian Satellite, Tbk (Indosat), Indonesia’s state no. 2 telecommunications company

became the first Indonesia corporate ever to seek international listing. It was the pioneer of other

state owned enterprise. Indosat was established in 1967 as a foreign investment company, and

started promotion in 1969. In 1980, Indosat became state-owned enterprises (SOEs), which are

wholly owned by the government of Indonesia. Furthermore in 1994, its shares are traded on the

stock exchange Jakarta, Surabaya, and New York. Therefore Indosat indirectly entered a

divestiture. Indosat has two cellular subsidiaries companies such as PT Satelit Palapa Indonesia

(Satelindo) and PT Indosat Multi Media Mobile (IM3) with 30% market share. Furthermore

Indosat is Indonesia's dominant international phone carrier. The potential buyers are thought to be

most interested in its mobile operations, given Indonesia the now-booming mobile sector.

At the end of 2002, the government of Indonesia sell 41.94% stake in Indosat to STT (Singapore

Technologies Telemedia, Pte. Ltd). Thus, Indosat return to foreign investment. The remaining

shares of government are 15% and the rests of the shares 43.06% belong to public. On the other

hand, STT Telemedia has been forced to weather protest by union angry about a sale to company

controlled by the Singapore government. It has also faced parliamentary probing into what some

nationalists see as the sale of a vital asset. Indosat privatization carried out by the Indonesian

government in 2002 constituted with the aim to cover the budget deficit of revenue budget

expenditure. Goes along with it, the government also set policies that restrict credit for state-owned

enterprise to obtain funds for further development.

Chronology of the alliance began on September 19th, 2002 when 14 investors were prequalified

for the privatization of Indosat. After the due diligence, on November 7th, 2002, 8 preliminary bids

were received from preliminary investors. Four evaluations teams consisting of representatives

from the Ministry of State-owned enterprises, Indosat, PT Danareksa Securitas and Credit SuisseFirst Boston (Singapore) Ltd as government financial advisor were formed to evaluate and analyze

the preliminary bids (Exhibit 1).

2. ISSUES and PROBLEMS

The sale of Indosat`s stakes as Indonesia`s no 2 telecommunication industry has been debated

throughout the country. From the perception of the loss of sovereignty and national pride to

Singapore to the sale price that was undervalued had negatively influence the state of trust and

commitment, especially the transparency of the international alliance process.




3. ANALYSIS

The analyses cover the steps of IEPSA (International Equity Placement of Strategic Alliances) as

means of privatization. Compare to other type of strategic alliances, IEPSA has a higher risk as the

form partner have different nationality and culture.

3.1 Macro Economy

The Indonesian macroeconomics was still in the state of recovery after Asian economic ciris in

1997. There were some problems arises such as government budget deficit that has to be anticipate

and the Bali Bomb incident that had already deteriorated the condition. The privatization of

Indosat was part of industry restructuration program which was demanded by IMF. In 2002, prior

to the alliance, the GDP growth was 3.7%. The exchange rate for Indonesian Rupiah to American

US Dollar was IDR 9000 with high inflation rate (11.9%) and 13.8% interest rate. However, the

Jakarta Stock Exchange (JSE) bounced back in the level of 432 from level index of 392 in 2001.

Using the Sales and Purchase Agreement (SPA) from JSE as the base data for alliance valuation

which would be the selling price, the Indosat`s shares had already plummeted 50% from its highest

price in May 2001. Thus the government considers it necessary to privatize Indosat by sell some

shares to foreigners. It also believed that foreign company has enough capital in order to improve

and develop Indosat.

3.2 Industry Analysis

Network industries such as telecommunications are undergoing dramatic transformation.

Telecommunication is a large and dynamic business that continues to enjoy significant growth

worldwide in past few quarters. It is a mature industry that has been globally available for some

time. Competition is often already intense amongst the established player. The increasing

globalization can be seen from cross border investment and international alliances in develop and

developing countries. In addition the main drivers are advances in information and communication

technologies and privatization. Privatization removed the SEOs productive resources form

government ownership and political influence. Although privatization is now a global

phenomenon, there are significant differences in develop, emerging, and traditional economies. In

SOEs such as Indonesia, the goals and objectives may change frequently with consequent loss of

consistent in strategic direction. It usually comes from the top level of the organization, the

political party in power and the minister responsible for SOEs.




3.3 Planning Phase

3.3.1 Stakeholder Support

Following privatization, the organizational goal has to reflect its key stakeholder objectives.

Therefore the support of stakeholders in the alliance was influenced by a number of factors such as

political agenda, security, transparency, etc. Each variable possessed its own specific reason:

a) Labor Union

The Ministry of SOEs was not transparent during privatization process and seems hide

the transaction to Indonesia Communication Limited), different than previously offered

to ST Telemedia.

b) Politics

Privatization was pulling force from several political parties, supporting different

strategic partner

c) House of Representative

There was no official letter from HoR regarding the intended Indosat’s IEPSA.

However, Ministry of SOE insisted that prior consultation with HoR was held three

times in March and November 2002.

d) Society/People

Privatization process had violated constitution to reserve economic sources and that

turning government. Shares in Indosat were dangerous in terms of crime and

telecommunication market monopoly.

e) Government

It must oblige to IMF’s requirement to do restructuring program, prior to continue

lending financial aid to Indonesia.

f) Company Management

There were resistances from Indosat’s top management on IEPSA initiation.

3.3.2 Strategic Match

Strategic match factors are differentiated into 3 sub factors: capacity, complementary and strategic

importance (Exhibit 2) (Niederkofler-1991, Lorange and Roos-1992, Sierra-1995, Segil-1996,Medcof -1997,Douma-1997).




a. Capacity

By completing the privatization of Indosat (divestment of Indosat of 4l.94 % shares), the

government received US$ 9 million (23.46% higher than what was expected by APBN-National

Revenue Expenditure Budget) 2002 of Rp. 6.5 trillion targeted by Ministry of State-owned

Enterprise for the whole privatization scheme. The government, in the divestment 434,250,000

shares Seri B, received the fund US$ 627 million. Until 2001, 63% of SOEs recorded very low

rates of growth or even losses according to the Ministry of State-Owned Enterprises, only 13 SOEs

recorded high sustainable growth of revenue of over l8%, 19 recorded 'sustainable growth' (7-18%)

and l0 recorded 'low growth' (less than 7%). Through privatization (IEPSA), the government aimed

to improve the performance of the SOE.

b. Complementarity

Comparison between partners will be discussed first before describe the complementarity. From

cultural & management aspect, Indonesia and Singapore have similarities in terms of high power

distance, low level of uncertainty avoidance, and masculinity while difference was in time

orientation where Indonesian preferred to have loose time orientation while Singaporean was tight

time orientation (Exhibit 3) (Hofstede, 1984). On the other hand, Singaporean telecommunications

market had already saturated (68% cellular market penetration of the total number of population)

while in Indonesia has potential for growth in certain markets area (Exhibit 4)

Related to comparison between Indosat and STT, there are several complementarity between them

in some aspects below:

• In terms of past alliances track record, both partners was considered complementary.

• In terms of product and innovation, both partners can be considered as complementary

because Indosat's wide range of product, good quality and innovation interacted with

excellent product and innovation of STT's.

• Customer base, both partners performed an excellent complementary alliance. The

Indosat customer base was growing while that of STT was mature.

• In terms of complementarity of management practices variables in the capacity sub-

factor, both partners had both similarities in the consensus-based decision-making and

people-oriented leadership style.

• In terms of technology and financial, domestic partner benefitted from the technological

expertise from foreign partner especially in the cellular and internet




telecommunications services. While, foreign partner had the technology adaptation

perspective on the vast developing market. Moreover, Indosat was able to obtain low

cost financing through highly rated STT's obligation, and in return through market

penetration opportunity the alliance would provide dividend for foreign partner.

c. Strategic Importance

Indosat was an important strategic partner for STT to invest in and enter Indonesian

telecommunications market. On the other hand, STT was a good partner with financing capability,

and technological expertise, which would help increase the Indosat's market share. As alternative,

for Indosat, there were Telecom Malaysia, Telstra in the region to make potential alliance, in other

hand, STT has option to make alliance with Telkomsel or Excelcomindo in Indonesia.

3.4 Formation Phase

In the formation phase, there are two aspects that need to be strengthened: internal support and

strategic planning. In between there is cultural understanding variable in the initial phases: trust

and commitment.

3.4.1 Internal Support

There are two views of the sides, namely the management and workers, which is divided into two:

supports the privatization and against the privatization. The reason is sovereignty and national

pride. Therefore the importance to gain the support of union trade is through socialization and

dialogue.

3.4.2 Strategic Planning

Both sides (Indosat & STT) are committed to build long-term investments and to avoid the

employees lay off. The strategic Plan is to increase the number of BTS to 1000 units, improve the

profitability, increase quality, increase the number of customers and increase market share.

3.4.3 Cultural Understanding

Culture understanding, a tangible feature that is needed as different nationalities would have

different perspectives in any decision-making. Trust and commitment are intangible features that

are needed to solve any problems and differences in order to achieve the future goal. Therefore a

successful alliance needs higher levels of trust, a strong commitment to the alliances

a. Trust

The environment of trust in the alliance was split into those who opposed and the ones

who supported. This alliance should be able to trust each other. STT through its CEO




committed to invest for the long-term, while Indosat to convince the opposition parties

that the relationship will bring benefit to both of the parties and to ensure there is no

employee lay off.

b. Commitment

STT CEO Statement “Basically we are committed to all of the demands”. On the

organization’s point of view the employees committed to achieve the objective of the

alliance by aligning the management and employee objectives through the set up of

Employee Stock Option Program (ESOP)

3.5 Operation Phase

The need for human resource development management and training programs to all layers within

organization is highly important in order to managed newly privatized company. Thus the

importance of leadership and participation in the privatization restructuring processes is

substantial. The industry has transformed from just technology industry to service industry that is

customer oriented.

a) Build Human Resource

Two years after the alliance initiation, it had organized 252 in-house training sessions,

314 external training programs, investing a total of IDR 15.8 billion. The alliance

provided 7 training days per employee or about 3% of total working days for people

development.

b) New Corporate Values

Covered with integrity, cooperation, excellence, partnership, and focus to customers

c) Integrated one-stop Excellent Service Performance to the Customers

2005 decentralized and empowered the organization to stay close and be responsive to

the customers. The alliance developed this new operating model by transforming and

expanding the roles of the regions to become more independent and responsive to

market development.

d) Indosat Vision

To become a leading cellular/wireless focused, fully integrated telecommunications

network and services provider in Indonesia

e) Indosat Mission




To provide and develop innovative and quality products, services and solutions, which

offered the best value to the customers

f) Control Mechanism

Audit Committee and Remuneration Committee to assist Board of Commissioners in

the execution of their duties. Each Committee had a written charter outlining its duties

and responsibilities that approved by the Board of Commissioners

3.6 Termination Phase

June 2008 KPPU which upheld the Central Jakarta District Court decided that Temasek Holding

which consists of the companies: STT and Singtel had violated Article 27 letter (a) of Act No. 5

Year 1999 concerning Prohibition of Monopolistic Practices and Unfair Business Competition.

a. Pay a fine IDR 15 billion to state treasury

b. Stop ownership of shares in Indosat or Telkomsel by releasing of the shares at these

companies

Temasek sell its stake at Indosat to Qatar Telecom (Qtel) worth USD 1.8 Billion. STT also

considered that within this situation, its better to leave the alliance when they had acquired gain in

the share as much as 300%

3.7 Specific Characteristic

Firms form strategic alliances to reduce competition, enhance their competitive capabilities, gain

access to resources, take advantage of opportunities, build strategic flexibility, and innovate. To

achieve these objectives, they must select the right partners and develop trust.

Share Price

The Indosat’s share price during the process of forming the alliance was about 50% below the

shares bought by STT, which was IDR 12,950. Based on DCF valuation, the price was much lower

than the valuation of DCF finding. The fair value per share was IDR 43,231 with estimated

terminal growth of 3.5%. During December 2002, the time of alliance started, the average price in

the exchange was IDR 8,900 Government claim basis to its premium of 50% of the selling share

price to STT was the last stock exchange price but its valuation ignored the downturn of indosat’s

shares within the last six months which had plunged from its highest level per price in 2002.




Based on calculation above, can be see that was happened Negative Spread for Indonesia

Government in terms Selling Purchase Agreement of Indosat share. The fair valuation of indosat

based on the existing condition and its potential growth. Based on the Discounted Cash Flow

Valuation (DCF) the fair value per share was IDR. 43,231 with estimated terminal growth of 3.5%.

Donor Pressure

The IMF bailed Indonesia out in the Asia financial crisis. There was a Letter of Intent (LOI)

between IMF and Government of Indonesia which was arranged on October 19, 1998 and May 17,

2000. In the LOI, there was a clausal of SOEs’ privatization, and one of the candidates of IEPSA

in 2002 was Indosat. It’s one of main factor that drives government release shares in Indosat.

TransparencyIEPSA transparency upon the stakeholder there were problems. There were the same advisors for

the two actions, as it might reduce the possibility of competition among the financial advisors.

Danareksa and Credit Suisse First Boston (CSFB) did not have license to operate in Indonesia.

CSFB just established 1.5 years earlier. The tender of short listed bidders: Telkom Malaysia and

STT, the government did not announce the offering price of Telkom Malaysia. The sign of sales

and purchase agreement, it was not STT which sign, but instead through its special purpose

vehicle, ICL (Indonesia Communications Limited) which was located in Mauritius.




4. CONCLUSIONS and RECOMMENDATIONS

4.1 Conclusions

1. Initial degree of success of the alliance (in planning and formation phases) was determined

primarily by the state of transparency and stakeholder support.

2. Although the initial degree of IEPSA was not successful, there were intervening actions set up

by both partners to improve the successfulness in the operation phase.

3. In the alliance, the transparency variable that determined the initial degree of success was

influenced by share price.

4. That was happened negative spread for Indonesia Government in terms of Selling Purchase

Agreement of Indosat share to STT.

The deal therefore represents a major win for the Indonesian government, which needs funds to

plug a budget deficit and rid itself of a crippling debt burden. However, the price sensitivity is

understandable as the share price should be above than what has been agreed. In addition the

difficulty is not between the Singapore government and the Indonesian government, the difficulty

is within Indonesia’s political process, with objections being played out as part of “political

theatre” on the Indonesian side. The need of trust and commitment in order to build strong

alliances between different cultures is highly important.

Table 1. SWOT Analysis

Strenghts Weaknesses

• FDI

• International image (less governmentintervention)

• Increase its services and becomecustomer focus oriented

• Potential knowledge managementtransfer from Singapore to Indonesia

• Stock price < Fair stock price

• Acquisition process might have atendency to cause certain friction incorporate culture

• The eventual control of satellite byforeign party that would put the statesecurity or confidential state informationin jeopardy

• Indosat’s divestment loaded with publicdeception

Opportunities Threats

• Extra fund to expand BTS andinfrastructure for technology advance

• Create jobs

• Opportunities to be world classcompany

• Union labor strike

• Strategic policy PT.Indosat controlled by foreign

• Investment conditions in Indonesia arevery influenced by the politicalstability

• Different culture create conflict




4.2 Recommendations

The main successful factor of company alliance is transparency, especially in shares selling price.

In addition the corporate valuation must also calculate from existing condition about corporate

value fairly.

5. LESSONS LEARNED

The lessons learned that could be taken from the case are;

1. Privatization is vehicle for foreign direct investment (FDI)

2. Privatization id fundamental transformational strategy both at the organizational level and the

macroeconomic level

3. The cultural understanding is important in order to build strong international alliances

4. Bargaining power of government is needed to avoid negative spread in equity placement

strategic alliance.

REFERENCES

Ireland, R.D, Hoskisson, R.E, and Hitt, M.A (2011), The Management of Strategy; Concept &

Cases, 9th Edition, South-Western Cengage Learning

Wandebori, Harimukti (2008), International Equity Placement Strategic Alliance, Case at Indosat

Wandebori, Hari, Joost de Bruijn2, Eric and Jan Steenhuis, Harm (2011 ), Required Steps of

Managing International Equity Placement Strategic Alliance, The Asian Journal of

Technology Management Vol. 4 No. 2, SBM-ITB




Appendix

Exhibit 1. Scheme of the process of forming the alliance

Source: Wandebori (2008)

Exhibit 2. Strategic match of international strategic alliance

Source: Niederkofler-1991, Lorange and Roos-1992, Sierra-1995, Segil-1996, Medcof -1997,Douma-1997,cited on

Wandebori et al (2011)




Exhibit 3. Indonesia vs Singapore Culture Comparison

Source: Hofstede (1984)

Exhibit 4. Number of Subscriber of Indonesian Operator (*until June 2002)

Source: PT Telkom (2002)

‐

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

2000 2001 2002

Telkomsel

Satelindo

Excelcomindo

Metrosel

Komselindo

Telesera

Mobisel

IM3

Natrindo

Total




Exhibit 5 Comparison Between Indosat (Indonesia) vs STT (Singapore)

Exhibit 6 The fair Value of Indosat’s equity per share woth the associated terminal value

Aspect Similarity Difference

Cultural and

Management

High power distance, low level of uncertainty avoidance, andmasculinity

Time orientation:: Indonesia(loose time), Singapore (tighttime)

Product & Services Cellular services, multimedia, datacommunication and internet

STT did not focus on the fixed

line telecommunications.

Market __ Singapore: Saturated

Indonesia: Potential growing

International

Alliance Experience

Indosat: DeTe Mobile (Germany)

STT: StarHub, Equinix, GlobalCrossing, and Tele Choice.

__

Management

Practices

Decision-making: agreement based on consensus, preferringlong-term employment, and

possessing people-orientedleadership style (Hofstede, l984).

__




Exhibit 7. Phase of IEPSA

Source: Wandebori et al (2011)

report of international equity placement strategic alliances: case at indosat

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