Strategic Alliances in Emerging Markets - December 2009

8/9/2019 Strategic Alliances in Emerging Markets - December 2009

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December 2009

The Delta Perspective

Growth through strategic

alliances has become more

relevant in the current

environment; successul

alliance has the potential

to achieve 1-4% revenue

increase, 4-6% OPEX

reduction and 5-9% CAPEX

optimization

Strategic Alliances in Emerging

Markets Auors Fd Mmbrra PartnerZdnk Ncas ManagerSon Gos Senior Researcher

Introduction

The irst wave o rapid expansion o

telecom operators in Western Europe

happened during the 1990s ollowing

industry liberalization. An industry

dominated by national monopolies

was suddenly open to other players

with access to technology and

unding. Debt was available to

support expansion programs uelling

greenield appetite ollowed by

regional consolidation. Ater the initial

expansion phase, operators started

to look at emerging markets (e.g.

Orange, Telenica or Vodaone are

clear examples o this). Again the

process ollowed was quite similar,

strong leverage on debt to und

acquisitions, Greenields or buying

regional players. Some players in

emerging markets, took a very similar

route, irst consolidating in operators

in the most immediate areas o

inluence ollowed by an aggressive

international expansion (Etisalat, Zain

or Qtel are good examples o players

that took this route).

Key hiGhliGhtS

Growth through strategic alliances

has become more relevant in

the current environment sinceprices are more attractive than

those 18 months ago, and debtis less available to und M&A and

Greeneld rollouts.

Value generated by strategicalliances can be substantial. Delta

Partners estimates that in successulstrategic alliances there is potential

to achieve 1-4% revenue increase,4-6% OPEX reduction and 5-9%

CAPEX optimization.

Strategic alliances, i properlyimplemented, can be an eectivetool to gain access to new markets

with limited cash commitment,

whilst generating a positive impacton revenues and relevant cost

optimization opportunities.

The sustainability and eventualsuccess o an alliance dependslargely on the commitment and

incentives o the parties involved.Clear indications include type o

resources assigned, empowerment

received by top management,governance model to guide the

alliances development, and nancialcommitment.


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Strategic alliances are not an entirely

new phenomenon. Their evolution

has ranged rom straightorward

collaborations aimed at adopting

best practices to create competitive

Today, in the scenario o shortage

o debt, growth through strategic

alliance oers a real alternative to

other orms o non-organic growth.

The purpose o this paper is toanalyze the opportunities or strategic

alliances under various market

scenarios, establish the beneits

presented by them, understand the

importance o selecting the right

partner, discuss applicable governance

models and outline key success actors

or a value creating collaboration.

Defnition o StrategicAlliances

A strategic alliance is the combined eort o twoor more entities, through establishment o a ormal

relationship to pursue a common goal. The objective

o both parties is to meet critical business needs

while maintaining their independent identities and

the alliance product. The rationale o such mutual

eorts is based on the belie that the sum is greater

than its parts.

advantage, all the way through to

strengthening an operators position

by leveraging economies o scale. At

the turn o the century, as additional

markets became accessible ollowing

EXHIBIT 1: FORMS OF COLLABORATION CONTRACTS AND CAPITAL

Source: Delta Partners Analysis


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EXHIBIT 2: ALLIANCE CLASSIFICATION INVOLVEMENT VERSUS OWNERSHIP


the liberalization process, operators

began to increasingly seek cross-

border alliance opportunities.

As outlined in Exhibit 1, collaborations

amongst two entities can take the

orm o contractual agreements

or minority stakes. In the event o

non-equity contracts, we consider a

partnership a strategic alliance when

cooperation is established in several

key areas, such as marketing, Product

and Services (P&S) development,

consolidation o purchasing power, or

the exchange o best practices. At the

other end o the spectrum, non-equity

agreements are simple sales contracts

limited in time and scope, lacking any

strategic intent.

With regards to equity agreements,

the key dierence between M&As

and strategic alliances is the level o

equity involved. In the event o an

M&A transaction, a controlling or

majority stake is acquired and oten

one or more entities involved cease

to exist. Strategic alliances typically

involve minority stake investments or

collaboration based on joint venture

with equal equity participation and

the creation o a new entity.

Another consideration when

classiying strategic alliances is

the level o involvement o each

o the partners. Typically, strategic

partnerships based on management

contracts will be characterized by a

high degree o involvement without

requiring any signiicant investments.

Collaboration in speciic unctional

areas such as R&D will require less

involvement with higher capital

contributions rom partners as

shown in Exhibit 2. In both cases, a

path to ull M&A transaction may

become apparent as the partnership

progresses.


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Airline Industry Pioneering AllianceNetworksOne o the pioneering industries o

strategic alliances has been the airline

industry. The inherent competitiveness

o the industry along with chronically

low margins orced players to explore

co-operative and collaborative options

in the orm o alliances. As illustrated

in Exhibit 3, the aviation sector

witnessed a gradual and progressiveevolution o alliance arrangements,

today boasting some o the most

prominent partnerships. It started with

simple interline arrangements involving

commercial agreements between

individual airlines to handle passengers

traveling on itineraries across multiple

airlines. Later, this evolved into what

began to be known as code share

fights operated by one airline and

jointly marketed as a fight or one ormore other airlines. The success o this

model was based on the premise that it

maintained a competitive market place,

whilst making thin routes easible.

During the last decade, players started

entering into strategic partnerships

and global alliances an approach that

witnessed the increased integration o

capabilities and operations. Noteworthy

amongst them have been three global

airline alliances; Star Alliance, Sky Team

and One World, consolidating some

previous one-to-one partnerships. These

global alliances deliver additional valuethrough clearly dened operating and

decision structures, ensuring consistency

o service and customer experience

across all partners. Airlines that choose

not to or cannot be part o a global

alliance continue to pursue one-to-one

partnerships leaving them with less

nancial upside but greater fexibility in

terms o partner choice and commercial

/ operational models they wish to ollow.

The value derived rom such alliances

ranges rom increased revenues (rom

retaining higher value clientele and

increased occupancy rates) to reduced

expenditures (both OPEX and CAPEX)

through inrastructure sharing and

improved Eciency o Service (EOS),

and knowledge and skills sharing.

Noteworthy is the Air France KLM

alliance ormed in May 2004. Thetransaction was never perceived as an

acquisition o KLM by Air France despite

the 80% premium paid over spot price

and dierence in sizes. The overriding

principle o the combination has been

balance o growth and airness o

derived benets. Focus has remained

on the top line and not cost synergies

allowing appropriate implementation

pace as both Air France and KLM

continue to operate as two separateairlines. Clear governance rules are in

place supported by assurances to the

Dutch state and KLM.

EXHIBIT 3: EVOLUTION OF PARTNERSHIPS IN THE AIRLINE INDUSTRY



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purchase o US$1 billion worth o

stock in each other making the Spanish

operator the largest single investor

in the company with 8% o shares.

China Unicom would in turn acquire a

0.9% stake in Telenica, the ormer

Spanish telecoms monopoly, which

owns the European mobile operator

O2 and is the largest mobile operator

in Latin America. The alliance betweenTelenica and China Unicom dates

back to 2005 when Telenica invested

in China Netcom, that was acquired by

China Unicom ater the restructuring

o the Chinese telecom industry. As a

result o this recent development, China

Unicom subsequently repurchased

a 3.8% stake held by SK Telecom.

A separate alliance between China

Unicom and SK Telecom was ormed in

2006 to exploit potential synergies ortheir respective CDMA networks. The

divestment was uelled by the act that

the alliances rational ceased to exist as

China Unicom sold its CDMA network

to China Telecom.

Case: Vodafone-led alliances

Vodaone is an organization that has

traditionally used strategic alliances to

uel its growth. Leveraging its brand and

advanced P&S suite, it allows partneroperators to benet rom its R&D eorts

and brand recognition while in turn

expanding its geographical ootprint and

seamless service to its own customers

with minimal capital investment.

The Vodaone alliance with Telekom

Malaysia, signed in 2006, is a good

example o a successul Vodaone-

led partnership. Vodaone signed a

Partner Network Agreement withTelekom Malaysia covering the three

TM subsidiaries; Celcom (Malaysia), XL

(Indonesia) and Dialog (Sri Lanka). The

Telecom strategic alliances can take

various orms depending on the entities

involved and the overall intent o the

relationship. Market actors such as

penetration, levels o competition and

technological advancement also play a

role in shaping a specic alliance. This

paper ocuses on three key alliance

types between operators.

Opraor Opraor1.Aanc

Alliances involving two independent

operators may include partnerships

between equally sized operators or

between local players teaming up with

bigger, more established international

players. Such alliances involve leading

global or regional operators seeking

growth outside o their existing (otensaturated) markets and smaller players

seeking urther growth in their domestic

markets. By way o their network o

aliates and partners, the global or

regional operator can extend their brand

and value proposition into new markets,

creating global brand recognition and,

entering high growth markets with

minimal investment. The local operator

in turn gains access to an extended suite

o Products & Services (P&S) and anattractive brand. In some cases, global

operators may also oer their partner

urther value through savings in OPEX

and CAPEX.

Case: Telefnica and China Unicom

In September 2009, Telenica and

China Unicom announced a partnership

including cooperation in R&D, roaming,

joint procurement o equipment,

inrastructural development, jointdevelopment o mobile services and the

provision o services to multinational

clients. They also announced the

Scenarios o TelecomStrategic Alliances


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the quality o their customer base whilst

sharing the costs.

Case: Bridge Mobile Alliance

Bridge Mobile Alliance is a business

alliance o eleven major mobile

companies in Asia and Australia.

Members include Singtel (Singapore),

Airtel (India), AIS (Thailand), CSL

(Hong Kong), CTM (Macau), Globe

(Philippines), Maxis (Malaysia), Optus

(Australia), SK Telecom (S. Korea),

Taiwan Mobile (Taiwan) and Telkomsel

(Indonesia). The alliance is built on

seamless service connectivity and a

suite o integrated value-added services

or all alliance members subscribers,

roaming across each others networks.

The alliance acts as a commercial vehicle

in which all the operators jointly invest

to build and establish a regional mobile

inrastructure on a common service

platorm enabling seamless experience

or customers while roaming. The

alliance also serves as a ocal point to

develop new P&S on a regional basis

and creates competitive advantages and

dierentiation or the mobile operators

in their respective markets, wherein the

objective is to be a magnet to attract

leading handset, network equipment

provider, and technology and content

players to establish high value-added

mobile activities.

Aancs bwn3.opraor and non-

opraors

Alliances between operators and other

telecom players have existed in the

past. However, the trend has recently

witnessed an uptake as operators look

at outsourcing some o their traditional

core unctions previously regarded

as key dierentiators. Most common

are alliances between operators and

equipment vendors or the purposes o

planning, deployment and build-outso networks and providing back oce

unctions such as IT, billing and business

intelligence. In the areas o Network

deal allowed the three operators to gain

access to Vodaones international voice

and data roaming services, together

with Vodaones suite o business

solutions. In return, Vodaone extended

its brand and services into high-growth

mobile markets, pursuing a low-risk,

non-equity strategy and provided its

customers with access to preerential

roaming rates.

Another example o a successul non-

equity strategic agreement is the du

and Vodaone alliance ormed in 2009.

The essence o the partnership is to

better meet the needs o their respective

customers in the UAE. The rst phase

o the agreement allowed du, a new

entrant in the UAE market, to gain

access to Vodaones extensive suite o

products, services and devices or the

UAE market. Both Vodaone and du

customers gained preerential roaming

rates on the partners networks. du is

also able to leverage Vodaone Groups

procurement to achieve cost reductions.

During the second phase o the

agreement announced in late October

2009, additional joint initiatives were

explored including mobile broadband

connectivity products, secure remote

mobile access or small business users,

converged email solutions, aster and

exclusive access to new models o

handsets.

Aancs poong 2.

rsourcs o mupopraors

Another proven strategic alliance

scenario is partnership between

multiple operators, both incumbents

and challengers, aimed at providing

customers seamless services and

customer experience across wider

region. Alliance partners may also

collaborate in P&S development

and jointly invest to build a regionalinrastructure. By doing so, operators

are able to attract and retain high value

customers, maintaining or increasing


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pricing modalities are measured by way

o network usage in terms o US$ per

erlang while the recurring payments are

linked to usage and assured quality as

per stipulations in predened SLAs. Inthe IT area, IBM signed a partnership

that would include management o all

o the operators IT unctions wherein

the pay-out to the vendor was a % o

the operators annual revenues. Such

mechanisms ensure a close integration

between operator and vendor stressing

the essence o commitment in

successul alliances.

Case: Celcoms association on mobilecontent

In 2007, Zingmobile and ESPN STAR

Sports announced a partnership

to launch mobileESPN on Celcoms

network in Malaysia. The content

platorm enabled sports ans to access

premium customizable sports content

in the orm o live news coverage,

in-depth match analysis, breaking

news and top stories, allowing

subscribers to get updates and access

their avorite sports. The services were

oered by subscription or as on-

demand download.

and IT, the alliances are urther evolving

towards a managed services model

which, in addition to prior tasks, takes

into account end to end maintenance,

operations and system integration.

Alliances between operators and

content providers are also increasingly

popular with the spread o data

enabled phones and the deployment o

advanced networks.

Case: Bharti Airtels association with

telecom vendors

One o the rst alliances on outsourcing

o core unctions to vendors was

ormed by Indian operator Bharti

Airtel in 2004. The operator stunned

the telecom world when it partnered

with established players such as

Ericsson, Nokia Siemens, IBM, and

six BPOs in multi-million dollar deals

to outsource its network, IT, and call

centre unctionalities. The concept

led to some very innovative business

models o managed capacity and

revenue-sharing. In the network area,

the operator opts or a pay-per-use

model or network capacity usage,

hence avoiding the upront capital

expenditure. The capacity usage and


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EXHIBIT 4: SOURCES OF VALUE FROM STRATEGIC ALLIANCES


Value generated bystrategic alliances

Commitment rom the parties

involved: To guarantee an allianceslong term success, partners need

to pursue a common interest which

is most eciently met through the

ormation o an alliance. Synergies

that result in mutual benet is

usually the strongest guarantee o a

successul partnership.

Clearly dened roles and

responsibilities or each party:

The alliances ull potential can

be achieved only when there is

no ambiguity about the roles and

responsibilities within the alliance.

The amount o value creation rom a strategic

alliance depends on the individual circumstances

o each o partnership. Some o the most relevant

elements required to ensure ull potential value

creation are:

Mechanisms need to be in place

allowing or regular tracking o theperormance / results achieved.

Strong governance model: The

rules and processes shaping the

alliance and guaranteeing smooth

decision making need to be clearly

dened rom the beginning o

the partnership. Weak corporate

governance will cause unair

distribution o both eort and

generated value leading to the

erosion o the alliances ull potential

and ultimately to its demise.


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as call centre, distribution and back-

oce can also lead to signicant cost

reductions or both parties. Billing,

payment and collection are common

units considered as shared services.

The value generated by increased

revenues and reduced costs can be

substantial. Delta Partners estimates that

in successul strategic alliances there is

potential to achieve increased revenues

o 1-4%, OPEX reductions o 4-6% and

CAPEX optimization o 5-9%.

EXHIBIT 5: PARTNER SELECTION


The sources o value in an alliance can

be two-old, tangible and intangible

depending on i) the type o alliance and

ii) collaborative areas. Exhibit 4 describes

the dierent sources o value generated

by strategic alliances.

Bnf: Rvnu grow

Strategic partnerships drives the

opportunities or new revenue streams.

The magnitude o these opportunities

depends on the partnerships scope and

objectives. The main drivers are:

Access to new markets: Geographic

expansion resulting rom a strategic

alliance allows the operator to expand

their addressable market, delivering

an increased customer base and

revenues.

Access to new products: An alliance

can allow an operator to expand

its P&S portolio, delivering new

oerings such as m-commerce,

navigation services and a range o

additional value-added services,strengthening its value proposition

to deliver improved acquisition and

retention capabilities.

Dierentiation: Additional revenues

rom a strategic alliance do not need

to be linked with a new market or

product, rather rom enhancement

o an operators positioning in

their respective market(s). Brand

enhancement through co-branding

initiatives between a domestic

operator and globally recognized

operator can lead to both acquisition

and retention benets.

Bnf: Dcrasd coss

Strategic alliances are also oten ormed

to achieve signicant reductions o both

OPEX and CAPEX. Key drivers include

asset/inrastructure sharing, resource

sharing, and knowledge transer.

Procurement: Increased economies

o scale through access to vendor

rame agreements can signicantly

reduce procurement costs, especially

in the case o smaller players lacking

sucient volume and scale.

Network: Application o best practice

in such areas as network maintenance

and management can generate

reductions in OPEX, and cooperation

and optimization in network build

(and sharing) can deliver CAPEX

reductions.

Research & Development: Alliance

partners can share nancial and

intellectual capital resources, and

make joint investments to collectively

reap the benets o innovation in

technologies, products & services.

Other areas: Sharing unctions such

EXHIBIT 6: ILLUSTRATIVE EXAMPLE OF A TYPICAL OPERATOR



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EXHIBIT 7: PARTNERSHIP GOVERNANCE MODEL


Partner Selection &Governance Model

Subsequently, a company screens the

portolio o available partners with

potential to oer the desired assets /

resources. Using clear selection lters

is critical during this phase. Delta

Partners recommends that the ollowing

approach should be employed when

identiying suitable partners:

Once a company sees the value in orming a

strategic alliance, it has to select the right partners

and establish a solid governance model to ensure

transormation o the initial strategic intent into

uture value. When selecting a suitable alliance

partner, a company must rst determine which

assets it seeks and what it can oer in exchange.

Simple supply and demand economics apply here as

shown in Exhibit 5.

Simultaneous negotiations: Lead

several negotiations in parallel in

order to select the most suitable

alliance partner(s).

Top management involvement: The

top management should be involved

in the negotiations in order to provide

credibility and commitment.


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Conclusion

The current economic climate means

that growth through strategic

alliances becomes more relevant or

operators than in times o debt and

equity abundance. For many telecom

players, growing by pooling resources

with other industry participants might

be the only option to achieve their

growth targets together with gaining

other benets such as increased

operational eciency.

Even though the credit markets will

eventually open up and valuations will

recover, Delta Partners expects that

telecom executives will continue to

leverage strategic alliances fexibility,

low risk and eciency as they

continue to expand their ootprint,

P&S portolio and to reduce costs.

The impact and diversity o strategic

alliances, especially in a competitive

sector such as telecoms, will ensure

their longevity and replication across

geographies and along the telecom

value chain.

benets in the alliance arrangement are

ullled. Although the details o every

alliance are unique, there are a common

set o characteristics that guide the

governance model set up:

Decision making: Establish clear

hierarchy o decision making, leaving

no ambiguity in terms o decisions

concerning the alliance.

Results monitoring: Introduce

monitoring o the results achieved to

ensure that the agreed cooperation

delivers the quality standards and

objectives.

Dispute resolution: Dene an eective

dispute resolution mechanismenabling the ecient resolution o

any conficts that may arise during the

existence o the alliance.

The actual governance model set-

up revolves around the scope o

cooperation and the need or ormal

management structure and control.

Simple non-equity agreements will

require a less complex governance

model than partnerships with a high

degree o involvement or investment

as shown in Exhibit 7.

Asset dilution prevention: Do not

orm alliances with partners that have

the potential to dilute the quality o

your core assets such as brand and/or

service level.Competitors: Operators should

avoid orming alliances with direct

competitors and partners that run the

risk o being absorbed by competitors

or players rom other alliances. They

should also avoid developing alliances

with players with overlapping

capabilities and interests. Finally, the

most advanced abilities and expertise

should not be shared unless the risks

o leak can be suciently mitigated.

The biggest hurdle during the initial

negotiations is oten a lack o trust.

Scoping the objective o the alliance

clearly at an early stage and limiting

the inormation sharing to the dened

scope can oten overcome such issues.

Leveraging the clean room approach

with the assistance o third parties can

also prove benecial.

Once agreement to orm a strategic

alliance has been reached, a governance

model has to be established to ensure

that partners expectations o the


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Delta Partnersis the leading management advisory and investment rm specialised in Telecoms, Media and Technology (TMT) in

high growth markets. It has more than 130 proessionals operating across 50 markets in the Middle East, Arica, Eastern Europe and

Emerging Asia. From its oces in Dubai, Johannesburg, Bahrain and Barcelona, Delta Partners provides three highly synergistic services:

Management Advisory, Private Equity and Corporate Finance.

Advisory: Delta Partners advisory proessionals partner with C-Level executives in telecom operators, vendors and other TMT

players to help them address their most challenging strategic issues in a ast-growing and liberalising market environment in over 50

markets.

Private Equity: As a und manager, Delta Partners manages a $80M private equity und, targeting investment opportunities in

the TMT space in high growth markets. The ocus is the Middle East, Arica, Eastern Europe and Emerging Asia. Delta Partners

private equity und leverages the rms unique TMT industry expertise to create value or its investors throughout each stage o the

investment cycle, rom deal sourcing to supporting portolio companies in driving value extraction.

Corporate Finance: Delta Partners provides corporate nance services and has been involved in several buy-side and sell-side

telecom transactions in the region. As true industry specialists, the rm oers a dierentiated value proposition to investors

and industry players in the region. Delta Partners actively leverages its close link to its private equity arm to access the investor

community as well as top-level nancial talent.

Delta Partners delivers tangible results to its clients and investors through an exclusive sector, geographic ocus and its synergistic

business model.

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Strategic Alliances in Emerging Markets - December 2009