MM 5012 Business Strategy

GROUP SUMMARY ASSIGNMENT INTERNATIONAL EQUITY PLACEMENT STRATEGIC ALLIANCE CASE STUDY AT INDOSAT

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Syndicate 2 Executive 46 (Great Leader Syndicate) Haidir Afesina 29111328 HendraWinata 29111329 MitaListyatri 29111338 AndekPrabowo 29111344 AprianEkaRahadi 29111384 ChairunnisaMirhelina N 29111387 F X KresnaPaska 29111393 Agung Indri P.

MASTER OF BUSINESS ADMINISTRATION SCHOOL OF BUSINESS AND MANAGEMENT INSTITUT TEKNOLOGI BANDUNG 2013

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1. CASE SYNOPSIS PT. Indonesian Satellite, Tbk (Indosat), Indonesias 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 Suisse First 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.
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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.

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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 Indosats 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 IMFs requirement to do restructuring program, prior to continue lending financial aid to Indonesia. f) Company Management There were resistances from Indosats 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).
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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 subfactor, both partners had both similarities in the consensus-based decision-making and people-oriented leadership style.
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In terms of technology and financial, domestic partner benefitted from the technological expertise from foreign partner especially in the cellular and internet

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

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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. Its one of main factor that drives government release shares in Indosat. Transparency IEPSA 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.

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4. CONCLUSIONS and RECOMMENDATIONS 4.1 Conclusions 1. 2. 3. 4. Initial degree of success of the alliance (in planning and formation phases) was determined primarily by the state of transparency and stakeholder support. 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. In the alliance, the transparency variable that determined the initial degree of success was influenced by share price. 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 Indonesias 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
FDI International image (less government intervention) Increase its services and become customer focus oriented Potential knowledge management transfer from Singapore to Indonesia

Weaknesses
Stock price < Fair stock price Acquisition process might have a tendency to cause certain friction in corporate culture The eventual control of satellite by foreign party that would put the state security or confidential state information in jeopardy Indosats divestment loaded with public deception

Opportunities
Extra fund to expand BTS and infrastructure for technology advance Create jobs Opportunities to be world class company

Threats
Union labor strike Strategic policy PT.Indosat controlled by foreign Investment conditions in Indonesia are very influenced by the political stability Different culture create conflict

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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. 2. 3. 4. Privatization is vehicle for foreign direct investment (FDI) Privatization id fundamental transformational strategy both at the organizational level and the macroeconomic level The cultural understanding is important in order to build strong international alliances 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

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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)

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Exhibit 3. Indonesia vs Singapore Culture Comparison

Source: Hofstede (1984)

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

8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 2000
Source: PT Telkom (2002)

Telkomsel Satelindo Excelcomindo Metrosel Komselindo Telesera Mobisel IM3 Natrindo Total 2001 2002

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

Aspect
Cultural and Management Product & Services Market International Alliance Experience

Similarity
High power distance, low level of uncertainty avoidance, and masculinity Cellular services, multimedia, data communication and internet __ Indosat: DeTe Mobile (Germany) STT: StarHub, Equinix, Global Crossing, and Tele Choice. Decision-making: agreement based on consensus, preferring long-term employment, and possessing people-oriented leadership style (Hofstede, l984).

Difference
Time orientation:: Indonesia (loose time), Singapore (tight time) STT did not focus on the fixed line telecommunications. Singapore: Saturated Indonesia: Potential growing __

Management Practices

__

Exhibit 6 The fair Value of Indosats equity per share woth the associated terminal value

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Exhibit 7. Phase of IEPSA

Source: Wandebori et al (2011)

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