A Case Study Of Uninor

As the centre of economic activity shifts towards east, Multinational corporations are increasingly adopting the inorganic route to growth in these markets. Mergers & Acquisitions, Joint ventures and strategic alliances are becoming the vehicle for establishing presence in markets like India, China and South Africa.

Fascinating as they may seem, Mergers & Acquisitions and Joint Ventures have also been the most complex transactions involving financial, business and cultural issues. Through this project, we intend to understand the motives which drive such transactions. Also, we intend to understand the parameters which are crucial to make any JV work. We have chosen to study the fiercely competitive Indian Telecom market for our study as it has seen numerous International players entering the lucrative market through Joint Ventures.

Our company for the study is Uninor, which is also one of the fastest growing new entrants in the sector. What makes the case of Uninor more interesting is the unique combination of India’s second largest real estate company, Unitech Ltd and Norway-based Telenor, the 6th largest mobile communications group in the world. The top management is drawn from Telenor’s global telecom specialists as well as Indians who have local expertise in developing telecom services in India. In this context, the cultural dimension to decision making in Uninor assumes enormous importance.

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Through the course of this study, we shall first look at mergers and acquisitions as a means to expand for companies. The key drivers, the specific motives as well as the examples related to situations which may mandate an M&A transaction instead of growing organically. In the next section, we shall look at the Indian telecom industry and its future potential for growth, major trends and the government regulations which have defined the industry and catalyzed Joint Ventures among foreign and Indian firms.

Then, we shall move over to the analysis of India according to Porter’s Diamond model and the cultural synchrony between India and Norway according to Hofstede’s cultural dimensions. These analyses shall enable us to evaluate the paradigms of this Joint Venture.

Subsequently, we shall analyze key components of Uninor’s Strategy in India and also its performance in the past year. We shall also look at its future growth strategy and the hurdles to achieving its targets. We shall conclude our study by looking at the transformative effect of strategic alliances and the Uninor case in India.

Introduction

The phrase mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity. An acquisition is also known as a takeover or buyout, in which one company buys the other (target company). When two companies come together and form a new company altogether, it is known as merger. On the contrary, an acquisition can be friendly or hostile depending on the size of the players involved.

Acquisition usually refers to the takeover of a smaller firm by a larger firm. However, one can notice sometimes an acquisition of a larger company by a smaller one. This phenomenon is known as a reverse takeover. The acquisition process is very complex with many dimensions influencing its outcome.

There are many reasons why a company seeks acquisition. One is that some vital resource may be otherwise difficult to obtain for the firm, especially if the resource is necessary to adapt and function successfully within the local environment. The following list, not an exhaustive one, gives few motives for company seeking International expansion.

Geographic and Industrial Diversification

Accelerating Growth

Industry Consolidation

Utilization of Lower Raw Material and Labor Costs

Leveraging Intangible Assets

Minimizing Tax Liabilities

Avoiding Entry Barriers

Fluctuating Exchange Rates

Following Customers

For instance, an existing company may have personnel that the investor cannot easily hire at a good price on its own. By buying an existing company, the buyer gets not only labor and management but also the organizational structure of the target company.

In addition, a company can also gain the good will and brand identification the local company has which is important for marketing mass consumer products, especially in a new market. One can also find financial considerations in few cases. For example, if a company depends substantially on local financing rather than on the transfer of capital may find it easier to gain access to local capital through an acquisition. Local suppliers find it relatively easy and are more comfortable interacting with an already existing company rather than a foreign enterprise.

In few cases, companies find acquisitions as a means to reduce costs and risks compared to setting up a fully owned subsidiary. A company may be able to buy facilities, particularly those which are performing poor for less than the cost of new construction. This saves a lot of money to the company. If an investor has a fear that a market does not justify added capacity, the risk of depressed prices and lower unit sales per producer occurs if it adds one more producer to the market is avoided by acquisition.

A company may choose to build if

No desired company is available for acquisition

Acquisition will lead to carry over problems

Acquisition is harder to finance

Strategic Alliances

Alliances can be described based on their objectives and where they fit in a firm’s value chain. In terms of objectives, one can assume that scale alliances aim at providing efficiency through risk pooling i.e. pooling of similar assets so that individual partners can carry out business activities in which they already have good experience. On the other hand, link alliances make use of complementary resources to expand into new business areas. Each organization entering into a cross-border alliance has its own objectives for operating internationally. Further some alliances take place between partner entities functioning on a different level of value chain, known as vertical alliance, and sometimes on the same level of value chain known as horizontal alliance.

On a broader scale, the objectives for cross-border mergers can be divided into the following three categories which were refined earlier.

Sales expansion

Resource acquisition

Risk minimization

The following section describes in detail the influence of each of these objectives on the decision of a merger.

General Motives:

To Spread and reduce costs:

To manufacture or sell in foreign countries, any company must incur certain fixed costs. If the volume of business is small, it is cheaper for the company to outsource the work to a specialist rather than handle it internally. The outsourcing agent can spread the costs to more than one company and thus reap the benefits of economies of scale. If the business increases, then the company can rethink its plan of outsourcing and produce everything internally. The company handling the production or sales can lower its average costs by covering its fixed costs more fully. On the other hand, the outsourcing company does not have to incur the fixed costs that otherwise be charged to a small amount of production volume thus overburdening the customers in turn.

To Specialize in Competencies:

Each company has a unique combination of competencies. It is better for a company to concentrate on those activities that best fits its competencies and improve its performance and leaving out the other activities in which the core competency of the firm does not lie. This concentration can be horizontal as well as vertical.

To Avoid or Counter Competition:

It is not common to notice few markets that are not large enough to hold many competitors. ITC, for example, observed this phenomenon and pre-empted the competition to emerge as a big player in the Indian industry. Any potential threat should be nipped in the bud itself. Sometimes companies also combine resources to fight a market leader and share the profits jointly. For example, Coca-Cola and Danone’s joint effort to challenge PepsiCo and Nestle can be viewed as one such strategic move.

To secure Vertical and Horizontal Links:

It is clear that there are numerous potential cost savings and supply assurances in case of a vertical integration. However, sometimes companies lack the competency or the resources necessary to manage the complete value and supply chain. In these instances it is common to notice a merger. For example, LUKOIL has abundant oil reserves but as it lacked final distribution skills, in addition to making acquisitions abroad, it also made arrangements in countries that ensure a good market for its petroleum.

Horizontal links provide finished products and components. For such kind of finished products, economies of scope can be achieved in distribution by having a full line of products to sell thus increasing the sales per fixed cost of a visit to potential customer.

To Gain Knowledge:

In the present competitive world innovating new ideas to develop products and deliver them is necessary to gain an edge over the rival. Many companies go for a merger to learn about a partner’s technology, operating methods so their own competencies will broaden and deepen, making them more competitive in the future. We can consider the example of Chinese government that allows foreign companies to tap the Chinese market in exchange for their transfer of technology.

Specific Motives

To gain Location-specific Assets:

The following factors create barriers for companies that want to operate abroad.

Cultural

Political

Competitive

Economic differences

Going for a merger or an acquisition equips the company to handle these differences and thus providing profitability. For example, Walmart first tried to enter Japanese market but withdrew its operations only to return with a Japanese partner, Seiyu, which is more familiar with local tastes and rules for opening new stores.

To Overcome Governmental Constraints:

Few nations require compulsory presence of a domestic player as a partner in the operations of a foreign company while few don’t. In this case a merger is more favorable. The legal factors which constraint may be

Direct prohibitions against certain operating firms

Indirect prohibitions (regulations affecting profitability)

Mergers and Acquisitions that take place across countries allow for greater spreading of assets among the partner nations.

To Diversify Geographically:

Operations in many countries (diversification geographically) can smoothen the company’s sales and earnings as the business cycles occur at different times within different countries. Though this might not be the actual reason for diversification this does play a minor role in decision making. Mainly, if a product conditions favor a diversification rather than a concentration strategy, due to product life cycle etc, then there exists a strong reason for establishing foreign presence by collaborative arrangements, mergers. The higher the risk managers perceive in a foreign market, the greater their desire to form collaborative arrangements in that market.

Problems with Mergers and other alliances

Having discussed in detail the reasons why a company goes for a cross-border merger, it also makes sense to highlight the difficulties that arise while collaborating with another company.

Each of the above factors is very important while considering a decision to acquire or merge with another company. The stake involved, the management attention, cultural differences, contribution to the merger etc play a key role in its success.

Telecom industry in India

Introduction

Telecommunications industry is one of the fastest growing industries in India and also one of the fastest growing telecom markets in the world. Telecom Industry is evaluated with the following parameters:

Number of subscribers: According to the Telecom Regulatory Authority of India (TRAI), the number of telephone subscriber base in the country reached 653.92 million as on May 31, 2010

Growth rate: An increase of 2.49 per cent from 638.05 million in April 2010. 

Teledensity (Telephones per 100 people): Overall teledensity in India has reached 55.38

Some major investments

The attractiveness of the telecom market has resulted in high investments from across the world which was the reason for entry of numerous foreign players and introduction of new services. Recent bidding for 3G network spectrum allocation was one of the most followed biddings due to the high stakes involved for some of the best players in telecom industry.

According to the Department of Industrial Policy and Promotion (DIPP), the telecommunications sector which includes radio paging, mobile services and basic telephone services attracted foreign direct investment (FDI) worth US$ 2,554 million during 2009-10. The cumulative flow of FDI in the sector during April 2000 and March 2010 is US$ 8,930.61 million.

The Merger and Acquisition deals in telecom industry were worth US$ 22.73 billion during April-June 2010, which represented 67.19 per cent of the total valuation of the deals across all the sectors during the period analyzed. 

Some of the recent Mergers and Acquisitions include:

Reliance Communication Ltd that merged GTL infrastructure Ltd, its telecom tower business, for US$ 11 billion

Other major M&A deals included acquiring of Kuwait-based Zain telecom’s African business for US$ 10.7 billion by BhartiAirtel 

Acquisition of Infotel broadband for US$ 1032.26 million by Reliance Industries

Norway-based telecom operator Telenor has bought a further 7 per cent in Unitech Wireless for a little over US$ 431.3 million. Telenor now has 67.25 per cent hold of the company

New trends- The Gamechangers

3G services

Public sector companies namely BSNL and MTNL have already launched their 3G services across India in all 22 circles. The other companies (All of them were private entities) took part in a 3G auction process that was held to give 3G licenses in all the 22 circles. The bidding started after numerous political interventions stopped it for almost 2 years. The process started with a lot of media attention mainly due to the delay in the process and the amount of investments that were expected, especially for all India license.

The process was completed using an e-bidding process that was held simultaneously with broadband wireless auctions for a period of 34 days. The auction prices went beyond expectations.

A pan-India bid for third generation spectrum stood at US$ 3.6 billion. However no operator could bid and obtain the pan India license. The Anil Ambani-led Reliance Communication bagged the highest number of 13 circles at a cost of US$ 1.9 billion, followed by BhartiAirtel in 12, Idea in 11 and Vodafone and the Tatas in nine circles each, according to the Department of Telecommunications.

Rural telephony

One concern that remains in the telecom industry is the penetration to rural India that has not been up to the expected levels till now. Prime Minister, Manmohan Singh opined, “Although the growth in the last few years has been truly impressive and our tariffs are among the lowest in the world, vast stretches of our rural population have little or no telecom penetration. Rural tele-density is still in single digits. I had heard of plans for a Phone in Every Village some twenty years ago. We have not yet reached that goal. This is why we have emphasized telecom connectivity in our Bharat Nirman programme”.

TRAI suggested the following in 2008-09 report:

“It has been observed that despite several attempts over the last ten years, telecom infrastructure in rural areas is lagging behind the expected levels. There has been a phenomenal spurt in the growth of tele-density in the country with the evolution of new wireless technologies, but the gap between the urban and rural teledensity has been increasing”.

As can be seen in the figure the growth of telecom in rural India has been lagging and hence the government and TRAI are giving stricter guidelines to telecom companies about the rural penetration. Hence telecom penetration would play a vital role in telecom operators’ strategy for the coming years.

Mergers and Acquisitions in Telecom in India

As already discussed there are many reasons for a company to pursue the path of Mergers and Acquisitions. In telecom industry in India some of the reasons why companies take up M & A are:

General motives

To spread and reduce costs

To specialize in competencies

To gain knowledge

Specific motives

To gain location-specific assets

To overcome governmental constraints

To diversify geographically

One reason that stands out the most in these set of factors is the governmental constraints. The governmental constraints in telecom industry are laid out through Department of Telecom and they are monitored by Telecom Regulatory Authority of India. The constraints on foreign investment in India are as follows:

FDI upto 100% in

Telecom manufacturing

ISP’s without gateways

Infrastructure provider (IP) – I

Call Centres

IT enabled services

FDI upto 74% in

ISP’s with gateways

IP – II

Radio Paging

FDI upto 49% in other telecom services

Cellular

Basic

NLD and other services

Expected strategy path in Telecom sector in India

Following graph shows the Price sensitivity of the market versus the cost leadership that a company should achieve:

India

Price Sensitivity

Cost leadership Differentiation

Any company that wants to enter the Indian market should look at attaining cost leadership as the market is highly price sensitive. Cost leadership can be achieved through economies of scale if the partnering firm is an existing telecom player with established network resources.

Motives for going Global for any company

Uninor’s motives for going Global

Spreading costs

Achieving specialization

Avoiding competition in domestic market

Securing Vertical and Horizontal links

Gaining technical expertise

Increase revenue to sustain growth

Tapping new markets due to saturation of domestic market

Diversifying geographically i.e. International presence

Hofstede cultural dimension differences between India and Norway

Country

PDI

IDV

MAS

UAI

India

77

48

56

40

Norway

31

69

8

50

PDI – Power Distance Index

IDV – Individualism

MAS – Masculinity

UAI – Uncertainty Avoidance Index

Source: Greet Hofstede Scores -ITIM International

Hofstede’s cultural Dimension

INDIA

NORWAY

Power Distance

Very High. In India the level of inequality is endorsed by the followers as well as the leaders

Low. The inequality in power distribution in Norway is very less

Individualism

Moderately high. Collectivism is expected to the levels of family ties to a very large extent and has no political sense

Very High. The relationships between individuals are weak limited to his/her immediate family

Masculinity

High. More preference is given to the materialistic gains in India

Low. In Norway feminine values such as quality of life are given more preference

Uncertainty Avoidance

Low. Opinions are subjected to change. More oriented towards the acceptance of uncertainty

Moderately High. People in Norway are less likely to accept uncertainty

According to the survey conducted by Hofstede among IBM employees India has power distance index as the where as in Norway Individualism is ranked higher than the other cultural dimensions. From the above figure it is clearly evident that there are significant cultural differences between India and Norway. The western management theories and practices that are successful in Norway may not work well in India. Indians hold different cultural core values than their western counter parts. The Indian culture is hierarchical where the cultural norms have changed the way of thinking which affects various management operations, which Norwegian firms may find it difficult to understand. There is a huge difference between Indian and Norwegian work culture.

In India a little authority is given to the middle management or lower management in decision making, in general top management beholds the full authority to make decisions. Whereas in Norway decision making process in a conflict situation involving individuals of different levels of seniority. The management style in India is less aggressive in comparison with Norwegian style. Indians prefer male values such as competitiveness, assertiveness, ambition and the accumulation of wealth and materialistic possessions whereas in Norway people prefer female values such as relationships and quality of life. In Norway people are more oriented to develop and display their individual personalities and to choose their own affiliations than in India.

Porter’s Diamond Model for India

Demand:

India consists of a population of 1.14 billion, 17.31% of the world’s population. It has around 300 million population of highly consumable middle class status. India is ranked second in the world in terms of having the largest telecommunication network, after china with more than 653 million subscribers. The telecom market in India has been growing by 20 to 40 percent every year since past 3 years. And is expected to grow with a CAGR of 11% in the coming next 10 years. The Indian telecom market is estimated to be $8 billion in 2010. 83% of market share comprises of basic service providers and only 17% value added service providers. Emerging technologies like 3G and penetration of internet in telecom sector are going to be growth drivers in the Indian telecom industry because of increase in demand for latest technologies.

Supporting Industries:

The Indian telecom industry has vast range of state of the art telecom equipment manufacturers. The production of telecom equipment is valued at $12.3billion in 2010. Indian imports of telecom equipment accounted for 21% of US equipment production in 2009. Further Indian mobile companies strengthened their market position by launching various handsets. Indian mobile phone brands consists of 14% markets share. Telecommunication equipment major Nokia Siemens is planning source components worth $28.5 billion from India in 2010-11. In 2009 it sourced components worth $20 billion. Indian telecom equipment production is estimated grow at a CAGR of 17.1% to reach $25 billion by 2014. India is fast emerging as a hub for global telecom Manufacturing and the production and exports of telecom equipment in the country have been on a steady rise. Leading global players have made significant investments in setting up manufacturing and R&D facilities in India, with many more being planned.

Resource Endowment

India is a knowledge pool with cheap labor. Indian telecom industry has skilled labor available at low cost. With abundant skills availability, there are large swathes of lower tier vendors who can still compete on costs.

Industry Structure and Firm Strategy

Indian telecom industry is the world’s cheapest service provider. Indian telecom market has viewed a tremendous average growth rate of 40% for the last 3 years. It has become very competitive recently with advent of global players after the government made a policy change allowing FDI up to 74% in telecom industry. Major players are rapidly increasing their market share by continuously improving their network coverage, technology, customer relations by offering their services at significantly lower prices. New entrants like Virgin mobile, Aircel etc. are trying to position themselves as low cost value added service providers focusing on emerging technologies.

Telenor is the world’s 7th largest telecommunications service provider and it aims to be a leading global mobile operator by leveraging on its international experience and technological expertise. It wants to achieve its goal by focusing on three regions

Consolidation of its position in the voice market through global expansions, acquisitions, mergers and JVs/partnerships

Mobile to Mobile communications and financial services

Telecom/media/IT convergence, primarily through third-party applications and services

UNINOR- The Genesis

Unitech Wireless won a wireless services licence for all 22 Indian telecom circles in2008. In early 2009, Unitech Group and Telenor agreed on a majority take-over by Telenor of Unitech’s wireless business. Telenor acquired a 33%, 49% and 60% stake in the company in March, May and November 2009, respectively. In September, the mobile operation changed its name to Uninor. On October 19 2009, the Cabinet Committee (CCEA) announced approved Telenor’s acquisition of up to 74% in Unitech Wireless.

UNINOR Presence

Uninor launched its service in India in December in 8 telecom circles. It turned out to be the speediest telecom roll-out in India. Within 5 months, it entered five more circles including the metros of Mumbai and Kolkata.

Uninor has its headquarters at Gurgaon and 11 regional headquarters in the following cities:

Kolkata – Kolkata, West Bengal & Orissa Circle

Delhi / Noida (NCR) – Delhi, Western Uttar Pradesh, Uttarakhand & Rajasthan Circle

Patna – Bihar & Jharkhand Circle

Mumbai – Mumbai, Maharashtra & Gujarat

Lucknow

Guwahati

Chandigarh

Indore

Ahmedabad

Chennai – Chennai, Tamil Nadu

Bangalore – Karnataka Circle

Hyderabad – Andhra Pradesh Circle

Kochi- Kerala Circle

Uninor’s Strategic Alliances

Uninor has outsourced its major operational functions to established players with proven expertise. The operational model is based on low-cost operations with a gradual network-build up, infrastructure sharing, comparatively cheap GSM equipment sourced from international markets, and IT-outsourcing.

Uninor has entered into network and base station service agreements with partners with expertise in given areas like-

Wireless-TT Info Service Limited for Tower sharing agreements

Alcatel-Lucent, Huawei Technologies India, Nokia Siemens Networks and Ericsson Telecommunications for network and radio equipment.

Wipro Technologies for integrated IT services.

UNINOR’s Strategy in India

Uninor based its growth model in the fiercely competitive Indian market by providing value to the customers through a new tariff, called ‘Dynamic Pricing’. Dynamic Pricing is an innovative pricing strategy that Uninor has pioneered in which the customer is charged different charges depending on the location and the network to which the call is made. Going by the maximum discount offered by the company, a one-minute call could cost as low as 24 paise compared to 60 paise charged by other operators.

UNINOR- Performance in India

In the month of June, Uninor topped the list of new mobile operators by adding maximum connections to the tune of 1.01 million. The new mobile service providers together accounted for 1.65 million which was 13.5% of the total mobile subscriber additions during this period.

Source: Share Khan Brokerage report on Telecom sector, 16th July 2010

Uninor had added just 2.1m active subscribers i.e. just 50% of the reported 4.3m as of Mar-10. The company defines active subscribers as those that used network during last 30 days. Even on active subscribers, ARPU at ~Rs 86 suggests low usage especially given that mobile revenues could have a higher contribution from activation fee during the launch period. The tariff cuts aimed at increasing the user might be a reason for the low ARPU.

The new mobile operators including Etisalat DB, Loop , Uninor, Videocon, and STel added just 1.7 million new users in June 2010. Uninor added 10 lakh subscribers during this period. It is around 15 per cent of 12.29 million new subscriber base added during this duration by the industry.

As a result, barring Uninor, none of the other players has managed to get even 1% market share of the 456-million subscriber GSM mobile market.

According to the TRAI licence conditions, new operators are required to complete roll out in all the circles within three years and that deadline is fast approaching.

CAPEX Guidance Lowered by TELENOR

Telenor cut back its India capex guidance by 25% i.e. Rs5.5bn for FY10. Uninor reasoned this to a combination of lack of spectrum, the stringent security clearance process for equipments and the need to adjust roll-out speed for distributors. Uninor may find it tough to retain traffic beyond 1-2 quarters given the low level of tariffs already.

Uninor has rolled out 18,000 cell sites (which was around 13,300 at end-Dec 2009). Uninor is currently operating in 13 circles with subscriber base of 43 lakhs (which was 1.2 million at December end 2009).

Conclusion

Through the course of the study, we assessed the reasons which make M&A and other means of inorganic growth, the preferred route to enter a market for international corporations. We tried to list down the motives and the vision behind such cross border transactions. We realized that a diverse range of parameters drive M&A’s globally. They can range from getting around government regulations to gaining a first mover advantage in a growing market.

As more global corporations try to establish their foothold over the emerging markets, we witness interesting new trends. Their entry into emerging markets is increasingly by partnering with the local companies. This is perhaps also catalyzed by government regulations which stipulate maximum FDI limits for multinational corporations from abroad.

We also looked at factors which contribute to the decision to enter/not enter a particular market for a corporation including the competitive advantage to the corporation and the cultural synergies between the parent market of the company and the new prospective market.

We chose the extremely dynamic telecom sector for our analysis as it has seen numerous international players enter through the JV route. We analysed the dynamics of the telecom sector and the fallout of the recent 3G spectrum allocations on the sector.

Uninor is the case we took for analyzing the actual details of an existing JV. We chose Uninor as its unique in the way that unitech wireless had no pri