STRATEGIC ALLIANCES IN EMERGING MARKETS

 

December 2009

 

Authors		Fede Membrillera - Partner
		Zdenek Necas - Manager
		Shohinee Ghosh - Senior Researcher

 

 

 

 

 

 

 

Growth through strategic alliances has become more relevant in the current environment; successful alliance has the potential to achieve 1-4% revenue increase, 4-6% OPEX reduction and 5-9% CAPEX optimization

 

 

Introduction

 

The first wave of rapid expansion of telecom operators in Western Europe happened during the 1990s following industry liberalization. An industry dominated by national monopolies was suddenly open to other players with access to technology and funding. Debt was available to support expansion programs fuelling greenfield appetite followed by regional consolidation. After the initial expansion phase, operators started to look at emerging markets (e.g. Orange, Telefónica or Vodafone are clear examples of this). Again the process followed was quite similar, strong leverage on debt to fund acquisitions, Greenfields or buying regional players. Some players in emerging markets, took a very similar route, first consolidating in operators in the most immediate areas of influence followed by an aggressive international expansion (Etisalat, Zain or Qtel are good examples of players that took this route).

 

Today, in the scenario of shortage of debt, growth through strategic alliance offers a real alternative to other forms of non-organic growth. The purpose of this paper is to analyze the opportunities for strategic alliances under various market scenarios, establish the benefits presented by them, understand the importance of selecting the right partner, discuss applicable governance models and outline key success factors for a value creating collaboration.

 

 

KEY HIGHLIGHTS

 

 

 

Definition of Strategic Alliances

 

 

Strategic alliances are not an entirely new phenomenon. Their evolution has ranged from straightforward collaborations aimed at adopting best practices to create competitive advantage, all the way through to strengthening an operator’s position by leveraging economies of scale. At the turn of the century, as additional markets became accessible following the liberalization process, operators began to increasingly seek cross-border alliance opportunities.

 

 

	Exhibit 1
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As outlined in Exhibit 1, collaborations amongst two entities can take the form of contractual agreements or minority stakes. In the event of 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 of purchasing power, or the exchange of best practices. At the other end of 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 difference between M&As and strategic alliances is the level of equity involved. In the event of an M&A transaction, a controlling or majority stake is acquired and often 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 of a new entity.

 

Another consideration when classifying strategic alliances is the level of involvement of each of the partners. Typically, strategic partnerships based on management contracts will be characterized by a high degree of involvement without requiring any significant investments. Collaboration in specific functional areas such as R&D will require less involvement with higher capital contributions from partners as shown in Exhibit 2. In both cases, a path to full M&A transaction may become apparent as the partnership progresses.

 

 

	Exhibit 2
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Airline Industry – Pioneering Alliance Networks

 

One of the pioneering industries of strategic alliances has been the airline industry. The inherent competitiveness of the industry along with chronically low margins forced players to explore co-operative and collaborative options in the form of alliances. As illustrated in Exhibit 3, the aviation sector witnessed a gradual and progressive evolution of alliance arrangements, today boasting some of 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 – flights operated by one airline and jointly marketed as a flight for one or more other airlines. The success of this model was based on the premise that it maintained a competitive market place, whilst making thin routes feasible.

 

 

	Exhibit 3
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During the last decade, players started entering into strategic partnerships and global alliances – an approach that witnessed the increased integration of 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 value through clearly defined operating and decision structures, ensuring consistency of service and customer experience across all partners. Airlines that choose not to or cannot be part of a global alliance continue to pursue one-to-one partnerships leaving them with less financial upside but greater flexibility in terms of partner choice and commercial / operational models they wish to follow.

 

The value derived from such alliances ranges from increased revenues (from retaining higher value clientele and increased occupancy rates) to reduced expenditures (both OPEX and CAPEX) through infrastructure sharing and improved Efficiency of Service (EOS), and knowledge and skills sharing.

 

Noteworthy is the Air France KLM alliance formed in May 2004. The transaction was never perceived as an acquisition of KLM by Air France despite the 80% premium paid over spot price and difference in sizes. The overriding principle of the combination has been balance of growth and fairness of derived benefits. 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 separate airlines. Clear governance rules are in place supported by assurances to the Dutch state and KLM.

 

 

Scenarios of Telecom Strategic Alliances

 

Telecom strategic alliances can take various forms depending on the entities involved and the overall intent of the relationship. Market factors such as penetration, levels of competition and technological advancement also play a role in shaping a specific alliance. This paper focuses on three key alliance types between operators.

 

 

1. Operator – Operator Alliance

 

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 of their existing (often saturated) markets and smaller players seeking further growth in their domestic markets. By way of their network of affiliates 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 of Products & Services (P&S) and an attractive brand. In some cases, global operators may also offer their partner further value through savings in OPEX and CAPEX.

 

 

 

2. Alliances pooling the resources of multiple operators

 

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 regional infrastructure. By doing so, operators are able to attract and retain high value customers, maintaining or increasing the quality of their customer base whilst sharing the costs.

 

 

3. Alliances between operator and non-operators

 

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 of their traditional core functions previously regarded as key differentiators. Most common are alliances between operators and equipment vendors for the purposes of planning, deployment and build-outs of networks and providing back office functions such as IT, billing and business intelligence. In the areas of Network and IT, the alliances are further 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 of data enabled phones and the deployment of advanced networks.

 

 

 

 

Value generated by strategic alliances

 

 

Commitment from the parties involved: To guarantee an alliance’s long term success, partners need to pursue a common interest which is most efficiently met through the formation of an alliance. Synergies that result in mutual benefit is usually the strongest guarantee of a successful partnership.

 

Clearly defined roles and responsibilities for each party: The alliance’s full potential can be achieved only when there is no ambiguity about the roles and responsibilities within the alliance. Mechanisms need to be in place allowing for regular tracking of the performance / results achieved.

 

Strong governance model: The rules and processes shaping the alliance and guaranteeing smooth decision making need to be clearly defined from the beginning of the partnership. Weak corporate governance will cause unfair distribution of both effort and generated value leading to the erosion of the alliance’s full potential and ultimately to its demise.

 

The sources of value in an alliance can be two-fold, tangible and intangible depending on i) the type of alliance and ii) collaborative areas. Exhibit 4 describes the different sources of value generated by strategic alliances.

 

 

	Exhibit 4
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Benefit: Revenue growth

 

Strategic partnerships drives the opportunities for new revenue streams. The magnitude of these opportunities depends on the partnership’s scope and objectives. The main drivers are:

 

Access to new markets: Geographic expansion resulting from 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 portfolio, delivering new offerings such as m-commerce, navigation services and a range of additional value-added services, strengthening its value proposition to deliver improved acquisition and retention capabilities.

 

Differentiation: Additional revenues from a strategic alliance do not need to be linked with a new market or product, rather from enhancement of an operator’s 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 benefits.

 

 

Benefit: Decreased costs

 

Strategic alliances are also often formed to achieve significant reductions of both OPEX and CAPEX. Key drivers include asset/infrastructure sharing, resource sharing, and knowledge transfer.

 

Procurement: Increased economies of scale through access to vendor frame agreements can significantly reduce procurement costs, especially in the case of smaller players lacking sufficient volume and scale.

 

Network: Application of 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 financial and intellectual capital resources, and make joint investments to collectively reap the benefits of innovation in technologies, products & services.

 

Other areas: Sharing functions such as call centre, distribution and back-office can also lead to significant cost reductions for 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 successful strategic alliances there is potential to achieve increased revenues of 1-4%, OPEX reductions of 4-6% and CAPEX optimization of 5-9%.

 

 

	Exibit 6
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Partner Selection & Governance Model

 

 

 

	Exhibit 5
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Subsequently, a company screens the portfolio of available partners with potential to offer the desired assets / resources. Using clear selection filters is critical during this phase. Delta Partners recommends that the following approach should be employed when identifying suitable partners:

 

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.

 

Asset dilution prevention: Do not form alliances with partners that have the potential to dilute the quality of your core assets such as brand and/or service level.

 

Competitors: Operators should avoid forming alliances with direct competitors and partners that run the risk of being absorbed by competitors or players from 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 of leak can be sufficiently mitigated.

 

The biggest hurdle during the initial negotiations is often a lack of trust. Scoping the objective of the alliance clearly at an early stage and limiting the information sharing to the defined scope can often overcome such issues. Leveraging the ‘clean room’ approach with the assistance of third parties can also prove beneficial.

 

Once agreement to form a strategic alliance has been reached, a governance model has to be established to ensure that partners’ expectations of the benefits in the alliance arrangement are fulfilled. Although the details of every alliance are unique, there are a common set of characteristics that guide the governance model set up:

 

Decision making: Establish clear hierarchy of decision making, leaving no ambiguity in terms of decisions concerning the alliance.

 

Results monitoring: Introduce monitoring of the results achieved to ensure that the agreed cooperation delivers the quality standards and objectives.

 

Dispute resolution: Define an effective dispute resolution mechanism enabling the efficient resolution of any conflicts that may arise during the existence of the alliance.

 

The actual governance model set-up revolves around the scope of cooperation and the need for formal management structure and control. Simple non-equity agreements will require a less complex governance model than partnerships with a high degree of involvement or investment as shown in Exhibit 7.

 

 

	Exhibit 7
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Conclusion