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Analysis of the Internationalisation of the MTN Group

Dries Oelofse

Subject: Business Environment Number of pages: 12 Due date: 17/10/2011 Group: MBA Modular Group 2010 E1 Lecturer: Dr Karsten Wellner
Office use only: Date received:

Table of contents
Table of contents List of Tables 1. INTRODUCTION 1.1 GENERAL OVERVIEW 1.2 FINANCIAL OVERVIEW 2. MTN INTERNATIONALISATION PROCESS 2.1 HISTORY 2.2 STRATEGIES PLANNED AND FOLLOWED 2.2.1 Timing and Tactics 2.2.2 The One that got away 2.2.3 Future Strategies 3. ANALYSIS OF THE INTERNATIONALISATION OF MTN 3.1 TIMING 3.2 DIVERSIFYING RISK 3.3 EXTENT OF INTERNATIONALISATION 3.3.1 Quantitative Measures 3.3.2 Qualitative Measures 3.3.3 Conclusion 4. ALTERNATIVE STRATEGIES 4.1 CONSOLIDATION OF THE INDUSTRY UNDERWAY 4.2 TAKING ADVANTAGE OF GLOBALISATION WITH A LONG-TERM VIEW 5. REFERENCES i ii 1 1 1 1 1 2 2 3 3 4 4 4 4 4 5 6 6 6 7 9

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List of Tables
Table 1: MTN Group history in International business arena (MTN Group, 2011) 2

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1. INTRODUCTION 1.1 GENERAL OVERVIEW MTN is one of the largest telecommunication companies in the developing world. It has a head office based in Johannesburg, South Africa but has almost 35 000 employees in 21 countries in Africa, Asia and the Middle East. MTN provides cellular phone and data services to a combined 488 million potential subscribers and has a market penetration of approximately 29% (MTN Group, 2011). 1.2 FINANCIAL OVERVIEW MTN has a market cap of more than R250 billion and had a revenue of R114 billion for the year ending December, 2010. In the 21 countries MTN are active they have the majority of market share in 15 of those countries (Nhleko, 2011). Traditionally MTN is a cell phone company but data costs from subscriptions are contributing an ever-larger portion of the companys earnings. The company also invested heavily into new undersea internet cables to support this very important aspect of the telecommunications sector. MTN is a well-managed company and in an environment where there were not many opportunities for growth, MTN managed a better operating margin of 44%, up from 41% thus controlling their costs much better. MTN as a brand is also very valuable and is the only brand listed on the BrandFinance Global 500 index at number 199 with a value of almost $5 billion (Nhleko, 2011). MTN is a transnational company with a large footprint in emerging markets and a grand vision of being the telecommunications leader in developing economies. The process of being active in 21 countries and having 68% of its total revenue contributed from outside its home market of South Africa started soon after MTN started its operations. 2. MTN INTERNATIONALISATION PROCESS 2.1 HISTORY In Table 1 there is a summary of the international expansion of the MTN group. From starting as a South African company it not only managed to secure a substantial local market share but also a significant presence 21 developing economies.

2 Table 1: MTN Group history in International business arena (MTN Group, 2011) Time period 1994 1997 1999 2000 2001 2005 2006 Activities M-Tell acquires South African Operations Licenses for Swaziland, Uganda and Rwanda with operations starting soon after License for Cameroon License for Nigeria Stakes in companies in Cte d'Ivoire, Zambia, Botswana, Congo and IranCell Investcom LLC acquired for R33,5 Billion providing a footprint in 8 additional countries as well as new licences for Guinea and Afghanistan Bharti Airtel deal to create third largest telecommunications company in the world fails Still active in 21 countries Data Cable investments and significant CAPEX Recently less CAPEX

2009

2.2 STRATEGIES PLANNED AND FOLLOWED MTN has a vision to be the leader in telecommunications in developing markets. The company has three main strategic pillars: participating in the consolidation of the emerging markets telecoms sector and reducing the concentration of MTNs earnings; leveraging MTNs existing footprint and intellectual capacity; and pursuing convergence and operational excellence.

The strategic pillars would have encompassed several strategic objectives and while those are not readily available, the tactics used and the timing with which they were executed can be easily analysed. 2.2.1 Timing and Tactics MTN started operations in the early 1990s when GSM technology was really coming to the fore and the possibilities of cell phone companies became evident. At this time MTN management

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3 had to move quickly to take advantage of the relatively unregulated African market at that stage, which they did and various operating licenses early until 2001. MTN set up subsidiary companies in these new markets and to this day maintain a strong market share This pioneer/first mover advantage gave MTN a solid base from which to pursue its future growth strategy that quickly became that of a follower strategy once the markets were relatively saturated and no more new licenses were available from regulators. MTN then turned to an opportunistic Merger and Acquisition phase and from 2005, this was the main method of growth from then 2001 to 2006. MTN used its intellectual capacity (expertise and experience) to acquire substantial stakes in many developing economy companies and by doing so increased their footprint and potential subscriber base. 2.2.2 The One that got away In 2009 a very big merger deal worth $23 billion with Bharti Airtel from India fell through (Rediff, 2009). It would have created the worlds third largest telecommunications company if it could be approved and provided MTN shareholders with tremendous growth opportunities through access to large Asian markets, especially the Indian market. While the Indian government supported the deal, the South African government did not and the deal was cancelled. It was a missed opportunity to be part of a truly global company and one that would certainly meet all MTN strategic objectives. It was a real shame that the South African government could not be more flexible and as one of the biggest developing markets in India, the missed opportunity to have access can be described as the one that got away. 2.2.3 Future Strategies MTN is now in a phase where its implementation of the three strategic pillars mentioned above is being focussed on consolidation and cost reduction. With new technologies becoming available, mostly smart-phones the company sees a lot of growth potential within its current asset base. Its investments in data cables coming into developing economies mean that there is a lot of potential to now increase shareholder value because of new technology uptake. The company has dramatically decreased their capital expenditure and is focusing on cost cutting measures and growth in their subscription base and data usage as main drivers going forward. Through their internationalisation strategy MTN has managed to create a footprint in 21 countries and is poised for further growth.

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4 3. ANALYSIS OF THE INTERNATIONALISATION OF MTN MTN as a company is a true South African success story, and in many things that they did up to 2006 management were aggressive, entrepreneurial and visionary. Both the timing and the tactics in pursuing their strategy were good and there are several outcomes that can be discussed further. 3.1 TIMING With the clear strategic focus on emerging economies, MTN had to consider the country specific and cross national timing of their entry into the markets. The emerging markets were relatively underdeveloped which certainly did increase the risk but also presented an opportunity to get first mover advantage in new markets. MTN decided on a sprinkler-timing strategy to enter many different markets as soon as possible, which is why they secured licences and set up subsidiaries as soon as possible. Once there were no more unlicensed markets MTN changed their approach to one of merger and acquisition to participate in ever more developing markets. Today, timing is less relevant because of the market maturity and growth lies in identifying other prospects. 3.2 DIVERSIFYING RISK Developing countries provide quite a high-risk environment in which to do business. MTN recognises this and mitigates the risk of operating in developing economies by being active in as many as possible. Through their initial drive to register licenses in as many economies as possible and through their subsequent merger and acquisitions, they have and will continue to spread the base of their income over many developing economies. 3.3 EXTENT OF INTERNATIONALISATION 3.3.1 Quantitative Measures MTN is a truly international organisation, and there are quantitative measures that can be used to substantiate such a claim. According to the 2010 Annual Report MTN generates 68% of all revenues outside of South Africas borders. MTN Nigeria is also the largest operation in the group with more than 35 million subscribers. There are 20 subsidiaries that operate internationally and a further two holding companies (MTN Dubai and MTN Mauritius) that are not registered inside South Africa.

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5 3.3.2 Qualitative Measures The extent of the internationalisation and the success of the approach can be qualitatively analysed by using two methods. The Perlmutter model (Wellner, 2011) and the Bartlett/Ghosal model (Wellner 2011). Perlmutter MTN can be classified according to the Perlmutter model as a Geo-centric. MTN is a complex organisation that must fit into the regional requirements and expectations of regulators and customers. The MTN executive committee is of diverse nationalities and is based throughout the 21 countries MTN operates in. The company maintains its branding, which is similar throughout its areas of operation, but does customise the experience with the particular country in which it operates in mind. Senior Vice Presidents in the group are based outside of South Africa and as a result will bring a diverse experience and different perspectives to the groups operations. MTN does very well to be a truly international organisation while being locally relevant and making collective experiences across the whole group part of the knowledge pool through a diverse executive committee and board. Bartlett/Ghosal When focusing more on sectors and industries MTN is a good example of an international company as well. MTN has invested heavily in infrastructure to support its business and provides a high quality standardised service across all regions it operates in mainly because of the standardisation of telecommunications devices and communications methods. While central decision making related to the expansion of the group is a reality, local operations and decision making for delivering a service seems to be the norm. The standardised service that is telecommunications is delivered through a local subsidiary/partner with the customers in mind. The group growth in subscribers is also driven deliberately by individual countries that aim to please customers they serve. MTNs investment in infrastructure enables it to reduce CAPEX in the short term and with the ever increasing demand for their products and service growth in their business, especially in the area of data (as smartphones and tablets go into developing markets) should for the bulk of their growth in the foreseeable future.

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6 According to the Bartlett/Ghosal model MTN is a transnational company that offers a highly standardised and high quality product to customers at a local level and with their local needs in mind. 3.3.3 Conclusion MTN demonstrates through quantitative and qualitative measures that they are a truly international organisation that incorporates the best characteristics (according to the models used) of international organisations. It is a Geo-centric, transnational organisation that succeeded in establishing the MTN brand as a dominant force in the developing markets telecommunications industry. 4. ALTERNATIVE STRATEGIES The tactics used and the timing of executing them allowed MTN to pursue their strategic objectives very successfully and establish a truly international footprint in their target markets. Their initial drive to enter developing markets as pioneers was successful, since the telecommunication industry is highly regulated and very competitive. The subsequent actions of growing the geographic footprint in accordance with their strategy and as a risk mitigation effort, was also reasonably successful. The action that created the most value for shareholders was that of the acquisition of Investcom LLC that substantially increased the number of potential subscribers and the footprint of the group. The biggest area of concern is that of the failure of the merger with Bharti Airtel. 4.1 CONSOLIDATION OF THE INDUSTRY UNDERWAY The first of the three strategic pillars of the MTN group states that the group wants to participate in the consolidation of the emerging markets telecommunications industry and reduce the concentration of its earnings. This means that the MTN Group sees growth for its shareholders by continuing mergers and acquisitions where possible in as many different developing economies as possible. The problem is that the consolidation of the market has been continuing apace with MTN by no means the only active company in the markets it targets it can almost be said; all the low hanging fruit has been picked. MTN states that it is still interested in looking for opportunistic mergers and acquisitions but are there still easily targeted opportunities like the opportunities they took in the late 1990s and early 2000s?

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7 4.2 TAKING ADVANTAGE OF GLOBALISATION WITH A LONG-TERM VIEW Arguing that so called mega mergers is perhaps the next logical step in the consolidation of the telecommunication industry in developing economies is not a farfetched idea. The proposed deal between Bharti Airtel and MTN would have created a truly giant company capable of influencing and perhaps even penetrating any market available (Rediff, 2009). It would have also provided MTN with access to one of the future economic powerhouses in India and could have delivered immense shareholder value. The problem was local regulation that prevented the proposed dual listing of the companies in South Africa and India. The Indian government reportedly spoke at the highest level to the South African government in support of the deal and yet the South African government could not be flexible enough. Was the South African Government short-sited or indeed wise to not allow this deal? Would MTN loose its South African identity and would the country loose some tax revenue? Or would the country gain not only the prestige of the worlds number three telecommunications company but immense potential future earnings from increased global business in the fastest growing economies on earth. MTN should have tried harder to make this deal work or should have had the foresight to prepare the regulatory environment to accommodate a deal of such magnitude. MTNs strategy is ironically South Africas with this country part of a group of growing developing economies and the need to do more business internationally. Furthermore, there is considerable political representation into the governing political establishment on the board of MTN through their Chairperson. MTN should recognise the important role government plays in them following their strategy and delivering value to their shareholders. They recognise it in each of the 21 countries they operate but perhaps ironically not in the one in which they can meet their number one strategic objective. MTN should evaluate the local regulatory environments suitability for doing global business and should form part of an active business lobby to bring necessary changes to legislation to the attention of government. Globalisation and international business is always perceived as a threat to local jobs and producers (Business Day, 2011), but the opportunities to take the advantage is rarely recognised. By helping to shape the regulatory environment companies like MTN with a mandate to internationalise their business can bring value not just to their global shareholders AJ Oelofse

8 but to the South African economy as well. It will be in their active pursuit of common ground with the South African government that the MTN Group can go from a South African success story to a global success story.

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9 5. REFERENCES Business Day, States court bid to undo Walmart merger, http://www.businessday.co.za/articles/Content.aspx?id=148801, 2011 MTN Group, MTN Group Limited, Integrated Business Report for the year ended 31 December 2010, 2011 MTN Nigeria, http://www.mtnonline.com/about-mtn/corporate-information, 2011 Phuthuma Nhleko, Nazir Patel, Cyril Ramaphosa, Sifiso Dabengwa, MTN Group Limited, Final Audited Results for the year ended 31 December 2010, 2011 Nazir Pattel, Debbi Millar, Review of results and funding outlook for year ended 31 December 2010 Presented May 2011MTN, 2011 Rediff Business, http://business.rediff.com/report/2009/sep/30/tech-bharti-mtn-deal-called-

off.htm, 2009 Karsten Wellner, Business Environment Lecture Notes, 2011

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10 6. POWERPOINT PRESENTATION

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