GCC telecom operators to benefit from expansion drive - Booz and Co study

To succeed, they must focus on integrating their businesses and realizing the synergies they envisioned during the acquisition stage. Furthermore they must continuously monitor their investments and evaluate their performance vis-à-vis financial and strategic objectives. The current economic downturn and slow down in M&A activities of some operators, means more emphasis can be placed on value extraction and group capabilities development.

Becoming International:

Ghassan Hasbani, a partner at Booz & Company, explained:

"Change has been rapid in the GCC's telecom sector. Liberalization and aggressive international expansion has produced international telecom operators. "With their footprints expanding across the Gulf and beyond, they will soon benefit from the expansion drive."

Those operators that successfully transition from independent multi-market companies to integrated international companies will sustain competitive advantage by understanding:

• How can we create the synergies envisioned during the acquisition stage?
• What type of international operating structure do we need?
• How can we best govern international subsidiaries?
• How can we effectively manage the international investment portfolio?

Creating Lasting Synergies:

Synergies, at the heart of GCC telecom deals in recent years, have justified the strategic relevance of an M&A, and consequently justified high acquisition premiums. There are natural points of integration across the entire footprint of these companies that can drive economies of scale. Cross-border synergies can increase revenue and generate savings; from reduced roaming charges to operating expenses and capital expenses.

- Increasing Revenue

International voice traffic is a large percentage of overall revenues in the GCC, driven by high disposable income and a large expatriate population. "Expatriates calling home enable operators to create a strong cross border presence and save on international interconnection costs," stated Mohamad Mourad, a principal at Booz & Company. Some savings can be passed on to subscribers in tariff reductions and promotions.

Operators can generate higher roaming revenues when subscribers travel within their footprint - by offering lower charges. Developing innovative products across the entire Gulf can also generate revenue. The common Arabic language creates a great opportunity: a mobile Arabic television program, or Arabic songs, could be sold by an operator across the Middle East.

- Generating Savings

If roamers can use their operator's international network, roaming charges paid to other operators can be saved. Moreover, telecom operators can realize capital expenditures savings by centralizing procurement and vendor relationships. "Operators can also achieve operational expenditure savings via the creation of common shared services across the whole multi-market organization," stated Ghassan.

Creating international organizational effectiveness:

In expanding their international footprint, regional operators must adopt a strong operating model enabling them to attain sufficient control at the group level, while allowing autonomy of local operations. It should also enable the creation of synergies across the group; like effectively managing the talent pipeline.

International operators can select an operating structure that is geography based, segment-based, function-based or product-based, while some create hybrids of two or more. The decision is based on factors including level of internationalization, size of domestic market, proximity and clustering of subsidiaries, variety of service offerings/ technologies, and positions in various markets.

Geography-based structure: Each subsidiary has its dedicated functional departments and full profit and loss (P&L) responsibility and allows for high levels of focus on local markets and regions. This however can result in the duplication of resources and may inhibit collaboration and integration.

"This structure is common when the operator's footprint is widely spread as in the case of Telenor which structures its operations on the Nordic, Asia and Central/Eastern European geographical clusters. An operator's level of international reach defines the form of the geography-based structure: whether it operates as country-based (domestic operations), cluster-based (as with Telenor's different clusters), or local vs. international (e.g. dividing operations with specific domestic/international focuses)," Mourad explained.

Segment-based structure: Segment-based structures are becoming common following increased focus on customer centricity. The most common structure covers four key market segments: individual users, home users, enterprise users, and wholesale customers. At the international level, customer centric organizations have yet to gain the same momentum as at local level.

This model is most effective when customer segments are homogeneous across international operations. "It is however complex to manage and can often result in an insufficient focus on international operations when an existing domestic business generates a significant portion of revenues," stated Hasbani.

Function-based structure: Function based structures pool all function specific resources together. There is a common corporate core and a shared-services structure to help create synergies. This allows for high specialization and creates strong people development and career planning and helps to create economies of scale and standardization within the functional departments. The main limitation of this structure is its lack of focus on customers and markets. The complexity and high volume of operational details across geographic regions can hinder focus on emerging markets or customer segments and is therefore more common among local, rather than regional or international players.

Product-based structure: Product based structures in telecom largely include fixed line or mobile services. The emergence of fixed mobile convergence and the increasing focus of telecom operators on the front end of the value chain make this model increasingly uncommon. Many players will however adopt a product based structure in their local operations.

Hybrid structure: With the advantages and challenges of the organizational structures, operators may need to implement hybrid structures. These hybrid structures are variations and/or combinations of the different structures and are tailored to the unique requirements of an operator.

Governing International Subsidies:

"As telecom operators maximize their ROI, they will need to pay particular attention to the interface between the group and its subsidiaries," cited Mourad. They must take a leadership role and create a governance structure that makes subsidiaries operate as part of the whole, rather than as independent entities.

Operators need to ensure all information rights are received systematically and in line with the shareholders' agreements and legal rights. These should then be channeled to respective stakeholders. Investment documentation should be kept and maintained and adherence to investment shareholders' agreements proactively managed by the operator at the group level.

Managing the investment portfolio:

GCC telecom operators need to constantly evaluate investments from a holistic perspective to see how well, or how poorly, investments are performing. This process evaluates existing investments from financial and strategic standpoints across the group and focuses on the intrinsic business value of an asset. It measures the state of the current portfolio against the overall investment strategy and determines the respective actions.

Portfolio management improves ROI and increases decision making transparency. "Moreover, it makes the most of internal resources, and determines where future investments should be made based on the existing portfolio. Adopting a rigorous approach will enhance long-term value," said Hasbani.

To have a full view of investments, operators should perform a strategic assessment and a financial assessment and then aggregate these analyses to understand where investments stand against each other and against the target objectives for value creation.

- Strategic Assessment

Market attractiveness and internal capabilities should be considered to evaluate the strategic importance of each investment. This includes market size, growth rate, competitive intensity, entry barriers, and market risk. The operator must conduct a careful analysis of the subsidiary's ability to succeed in the market and the synergies that can be realized, and will include marketing strategy, sales and distribution, technology, customer service, management strength, and product portfolio.

- Financial Assessment

This determines whether an investment is maximizing its returns. A comparison must be made between the value of the investment to the operator based on the business plan, and current market value of the asset. "To effectively perform a financial assessment, operators must continuously update the business forecasts for each investment," explained Mourad. These are based on recent performance, and include an estimation of the benefits of synergies to determine the overall financial impact.

- The Full Picture of the Portfolio

Combining strategic and financial assessments allows the operator to find how best to maximize shareholder value and allocate capital effectively. Operators need to take an approach similar to private equity groups, adding new assets and being ready to divest existing assets when the time is right, and restructure their portfolio.

By mapping all investments along both the strategic and financial dimensions, investments are allocated to various categories. Investments with low strategic value that remain worthwhile would be those with strong financial returns. These are investments that have strong market positioning, in markets that are not very attractive. These are star investments and candidates for further investment and would typically not require the active involvement of group management.

"Investments that have low strategic value and weak financial returns would be those in unattractive markets that do not have the right capabilities to succeed and would potentially be considered for divestment," stated Hasbani. These would require group management intervention to realize the full value of the investment. Often, the underlying factors driving underperformance are inadequate funding and weak local management teams.