Abstract
The case talks about Airtel’s Zain acquisition and its entry into 15 African countries: Burkina Faso, Chad, Democratic Republic of the Congo, Republic of the Congo, Gabon, Ghana, Kenya, Madagascar, Malawi, Niger, Nigeria, Sierra Leone, Tanzania, Uganda and Zambia. After a long turbulent journey, it was a successful deal to acquire Africa’s second largest telecom company Zain Africa BV’s operations for an enterprise value of $10.7 billion. It fulfilled Airtel’s long-cherished dream of business expansion outside India and was an efficient means to extend Airtel’s global footprint. The hope was high that Africa with its billion population and vast natural resources and a teledensity of less than 30 per cent could be a market for Airtel’s next growth engine where it could run its business model and establish its brand. The case provides a nice description of the deal and the stages of Airtel’s innovative strategies for building low-cost telecom business model in the global arena.
The case mentions the numerous challenges that the deal had undergone. The 15 African countries are quite diverse and hence local customization is an indispensable marketing strategy. The low-cost Airtel model that had succeeded and served millions of customers in rural India might not be fully applicable for Africa. The post-deal time points were full of uncertainty over the future course of Airtel’s operation in Africa, as the case mentions: ‘Average revenue per user (ARPU) of African operations decreased by 12 per cent to $ 6.5 in June 2012 quarter compared to that two years back. Per minute revenue also went down by 35 per cent in the same period leading to 1.70 percent reduction in operating margin, which was at 25.8 per cent in the June 2012 quarter.’ Increasing tariffs was not a very good option as Africa is a price-sensitive and highly competitive market. There were high hopes that the debt-financed deal would be serviced entirely out of the Africa operations.
The case provides a brief description of Bharti Telecom’s rise led by Mr Sunil Mittal, who started exploring business opportunities from an industrial town, Ludhiana. With lack of experience at the initial stage, he started his small-scale business, but soon based on his strategic and innovative skills he started diversifying his business products. The case depicts that at every stage of his career, even though the success was much below his expectations he never gave up until some gains were visible. With his acumen and skills in strategic collaborations and keen business observations while exploring global markets, he could succeed in making his novel business ideas doable. Importing portable generators and a tie-up with Suzuki, importing push-button telephones and a tie-up with Kingtel are some of the examples. Sunil used the opportunity of high premium in the push-button telephone business in Ludhiana but soon his business was hit by a change in the government’s policy decision of making it a level playing field. The survival strategy was then again a tie-up with the German company Siemens AG.
It was in the mid-1980s that the telecom industry in India started taking-off, and there was growing competition. Sunil took a ‘focused strategy approach’, rather than ‘business diversification approach’. He started disinvesting in small businesses and investing in telecom-related supply chain businesses. In the early 1990s, when government opened up telecom industry to private players Bharti won the bid. This time it was Bharti’s ‘innovative idea’ of taking aerial photography, helicopter photography and digitized maps of circles in their bid, apart from an intensive research with limited capital that helped him win the bid at that ‘make or break’ moment. Then Bharti launched Delhi’s first cellular service under the Airtel brand in 1995, which ended up bringing in revenues of ₹3 billion against an estimation of ₹1 billion. But the real challenges began when the big players entered and the rule of the game was as simple as acquire and grow or get acquired. With a focused approach of understanding customers’ requirement, better delivery of services and outsourcing value chains as and when required, Bharti could grow and succeed in getting a larger revenue market share.
It was in 2008 when the local market was getting saturated and entry of private players started price wars, Bharti decided to tap the global market that remained unexplored so far. It aimed at acquiring the MTN group, a South Africa-based telecom group operating in 21 countries in Africa and the Middle East, but failed. Sunil was looking at potential markets in Africa and after a long struggle he could win the Zain acquisition. Later on, he applied his innovative methods of cost savings, such as infrastructure and network sharing. Nonetheless, its entry spurred price wars in the African telecom market.
The case rightly mentions that the expected benefit of the deal was huge with low teledensity in the area and growing middle-income group, but what might have been Airtel’s insights on estimating the expected cost—both in socio-economic and in accounting sense? An important question that might come up to the reader’s mind is that why did the large global players keep the area unexplored if the expected benefit and revenue potential was so huge? It seems from the case description that it was the expected gain that had driven the deal; the market perception was short-sighted and less pragmatic.
The case nudges the thoughts in the industrial organization literature that when should firms internationalize, at which stage of their growth curve? How risky is an acquisition when the market is open to price shocks and uncertainty? The case shows that ‘one size fits all’ strategy is not a pragmatic approach while opening up in any global market ‘X’ at some point ‘t’, even for a firm that has succeeded in similar operations at some place ‘Y’ (different from ‘X’) at some point ‘t1’ (different from ‘t’). It throws light on a business strategy question: Is exploring risky global market with debt-driven projects worthwhile, at a time when cut-throat domestic competitions start squeezing out profit?