IEPSA at Indosat

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Haidir Afesina Hendra Winata Mita Listyatri Andek Prabowo Aprian Eka Rahadi Chairunnisa Mirhelina Franciscus Xaverius Kresna Paska Agung Indri Pramantyo

The Scheme of the Process

Indosat was establlished became stateowned enterprises (SOEs)
1980

The government of Indonesia sell 41.94% stake in Indosat to STT (Singapore Technologies Telemedia, Pte. Ltd)
2002

1967

1969

1994

Started promotion Indosat is the second largest telecommunications company in Indonesia Market share in telecommunication market = 30% Owners: PT Satelindo & PT Indosat Multi Media Mobile (IM3) Competitive advantage (end of 1990): monopoly strategy IDD (001)

shares are traded on the stock exchange Jakarta, Surabaya, and New York

Indonesian Government 15%

Public 43.06%

STT 41.94%

Issues & Problems

Loss of sovereignty and national pride to Singapore The sale price that was undervalued Transparency of the international alliance process.

The Chronology
September 19th, 2002 when 14 investors were prequalified for the privatization of Indosat. November 7th, 2002, 8 preliminary bids were received from preliminary investors Assessment of Potential Investor : 1. Financial Backing (50%): Strong (100%), Medium (50%), Weak (0%) 2. Price (25%): Rank 1-12, 1-Highest, 12-Lowest 3. Commitment to Indosat Strategy (25%): Rank 1-12, 1-Highest, 12-Lowest Four evaluations teams consisting of representatives from the Ministry of Stateowned enterprises, Indosat, PT Danareksa Securitas and Credit Suisse First Boston (Singapore) Ltd

Phases
I. Planning Phase
1. Stakeholder Support Variables
a) b) c) d) Labor Union: The Ministry of SOEs was not transparent during privatization process and seems hide the transaction to Indonesia Communication Limited), different than previously offered to ST Telemedia. Politics: Privatization was pulling force from several political parties, supporting different strategic partner House of Representative: There was no official letter from HoR regarding the intended Indosats IEPSA. However, Ministry of SOE insisted that prior consultation with HoR was held three times in March and November 2002. Society/People: Privatization process had violated constitution to reserve economic sources and that turning government. Shares in Indosat were dangerous in terms of crime and telecommunication market monopoly. Government: It must oblige to IMFs requirement to do restructuring program, prior to continue lending financial aid to Indonesia. Company Management: There were resistances from Indosats top management on IEPSA initiation.

e)
f)

2. Strategic Match:
a) Capacity:
By completing the privatization of Indosat (divestment of Indosat of 4l.94 % shares), the government received US$ 9 M(23.46% higher than what was expected by APBN-National Revenue Expenditure Budget) 2002 of Rp. 6.5 trillion targeted by Ministry of State-owned Enterprise for the whole privatization scheme. Through privatization (IEPSA), the government aimed to improve the performance of the SOE.

b) Complementarity:
Aspect
Cultural and Management

Similarity
High power distance, low level of uncertainty avoidance, and masculinity

Difference
Time orientation:: Indonesia (loose time), Singapore (tight time)

Product & Services

Cellular services, multimedia, data communication and internet __

STT did not focus on the fixed line telecommunications. Singapore: Saturated Indonesia: Potential growing __

Market

International Alliance Experience

Indosat: DeTe Mobile (Germany) STT: StarHub, Equinix, Global Crossing, and Tele Choice. Decision-making: agreement based on consensus, preferring long-term employment, and possessing people-oriented leadership style (Hofstede, l984).

Management Practices

__

2. Phases & Factors

c) Strategic Importance
Indosat was an important strategic partner for STT to invest in and enter Indonesian telecommunications market. On the other hand, STT was a good partner with financing capability, and technological expertise, which would help increase the Indosat's market share. As alternative, for Indosat, there were Telecom Malaysia, Telstra in the region to make potential alliance, in other hand, STT has option to make alliance with Telkomsel or Excelcomindo in Indonesia.

II. Formation Phase A. Internal Support

There are two views of the sides, namely the management and workers, which is divided into two: supports the privatization and against the privatization. The reason is sovereignty and national pride. Therefore the importance to gain the support of union trade is through socialization and dialogue.

B. Strategic Planning
Both sides (Indosat & STT) are committed to build long-term investments and to avoid the employees lay off. To increase the number of BTS to 1000 units, improve the profitability, increase quality, increase the number of customers and increase market share.

II. Formation Phase C. Cultural Understanding

Culture understanding, a tangible feature that is needed as different nationalities would have different perspectives in any decision making. Trust and commitment are intangible features that are needed to solve any problems and differences in order to achieve the future goal. Therefore a successful alliance needs higher levels of trust, a strong commitment to the alliances

a. Trust b. Commitment

III. Operation Phase

1. Build Human Resource Two years after the alliance initiation, it had organized 252 in-house training sessions, 314 external training programs, investing a total of Rp 15.8 billion. The alliance provided 7 training days per employee or about 3% of total working days for people development. New Corporate Values Covered with integrity, cooperation, excellence, partnership, and focus to customers

2.

3.

Integrated one-stop excellent service performance to the customers. 2005 decentralized and empowered the organizationto stay close and be responsive to the customers. The alliance developed this new operating model by transforming and expanding the roles of the regions to become more independent and responsive to market development.

III. Operation Phase

4. Indosat Vision To become a leading cellular/wireless focused, fully integrated telecommunications network and services provider in Indonesia Indosat Mission To provide and develop innovative and quality products, services and solutions, which offered the best value to the customers Control Mechanism Audit Committee and Remuneration Committee to assist Board of Commissioners in the execution of their duties. Each Committee had a written charter outlining its duties and responsibilities that approved by the Board of Commissioners.

5.

6.

IV. Termination Phase

June 2008, KPPU which upheld the Central Jakarta District Court decided that Temasek Holding which consists of the companies: STT and Singtel had violated Article 27 letter (a) of Act No. 5 Year 1999 concerning Prohibition of Monopolistic Practices and Unfair Business Competition. a. b. Pay a fine IDR 15 billion to state treasury Stop ownership of shares in Indosat or Telkomsel by releasing of the shares at these companies up to 50% within 12 months

Temasek sell its stake at Indosat to Qatar Telecom (Qtel) worth USD 1.8 Billion. STT also considered that within this situation, its better to leave the alliance when they had acquired gain in the share as much as 300%

V. Specific Characteristic

Firms form strategic alliances to reduce competition, enhance their competitive capabilities, gain access to resources, take advantage of opportunities, build strategic flexibility, and innovate. To achieve these objectives, they must select the right partners and develop trust.

V. Specific Characteristics
Share Price Based on DCF valuation, the price was much lower than the valuation of DCF finding. The fair value per share was Rp43.231 with estimated terminal growth of 3.5%. During December 2002, the time of alliance started, the average price in the exchange was Rp8.900. The Indosats share price during the process of forming the alliance was about 50% below the shares bought by STT which was Rp12.950.

V. Specific Characteristic
Fair Value associated by terminal value

V. Specific Characteristic
Donor Pressure Bail out from The IMF Indonesia in the Asia financial crisis. Letter of Intent (LOI) between IMF and Government of Indonesia which was arranged on October 19, 1998 and May 17, 2000. In the LOI, there was a clausal of SOEs privatization, and one of the candidates of IEPSA in 2002 was Indosat.
Transparency
Same advisors for the two actions, as it might reduce the possibility of competition among the financial advisors. The tender of short listed bidders: Telkom Malaysia and STT, the government did not announce the offering price of Telkom Malaysia. Danareksa and Credit Suisse First Boston (CSFB) did not have license to operate in Indonesia. Just established 1.5 years earlier.

CONCLUSIONS
Initial degree of success of the alliance (in planning and formation phases) was determined primarily by the state of transparency and stakeholder support. Although the initial degree of IEPSA was not successful, there were intervening actions set up by both partners to improve the successfulness in the operation phase. In the alliance, the transparency variable that determined the initial degree of success was influenced by share price. That was happened Negative Spread for Indonesia Government in terms Selling Purchase Agreement of Indosat share to STT.

SWOT Analysis
Strenghts

Weaknesses

FDI International image (less government intervention) Increase its services and become customer focus oriented
Potential knowledge management transfer from Singapore to Indonesia

Stock price < Fair stock price Acquisition process might have a tendency to cause certain friction in corporate culture The eventual control of satellite by foreign party that would put the state security or confidential state information in jeopardy Indosats divestment loaded with public deception

Opportunities

Threats
Union labor strike Strategic policy PT.Indosat controlled by foreign Investment conditions in Indonesia are very influenced by the political stability Different culture create conflict

Extra fund to expand BTS and infrastructure for technology advance Create jobs Opportunities to be world class company

RECOMMENDATIONS
The main successful factor of company alliance is transparency, especially in shares selling price. The corporate valuation must also calculate from existing condition about corporate value fairly.

Relationship of factors and variables at Indosat

Capital market index +/+/Maceo environment +/Exchange rate of Rupiah Intervention of management Interest rate +/+/+/+/Debt rate +/Share price +/Competitors bidding price +/+/Trust and commitment Stakeholder support +/Initial degree of success of IEPSA (Planning Phase) (Formation Phase) +/+/Transparency Percentage of objectives achieved +/+ + Intervention of polititcian Intervention of donor pressure Consultation with House of representative Conformity with the regulation

+/-

+/-

+/+ +/Intervention related to trust and commitment + + Human resource management +/Communication and socialization of program Firm +/+/Final degree of success of IEPSA (Operation Phase) Industry +/Macro environment www.themegallery.com Organization arrangement Management control system

+/-

Exhibit 4. Number of Subscriber of Indonesian Operator (*until June 2002)

8,000,000 Telkomsel 7,000,000

Satelindo
Excelcomindo Metrosel Komselindo

6,000,000

5,000,000

4,000,000 Telesera 3,000,000 Mobisel IM3

2,000,000

Natrindo
1,000,000 Total 2000 2001 2002

www.themegallery.com

REFERENCE
Ireland, R.D, Hoskisson, R.E, and Hitt, M.A (2011), The Management of Strategy; Concept & Cases, 9th Edition, South-Western Cengage Learning
Wandebori, Harimukti (2008), International Equity Placement Strategic Alliance, Case at Indosat

Wandebori, Hari, Joost de Bruijn2, Eric and Jan Steenhuis, Harm (2011), Required Steps of Managing International Equity Placement Strategic Alliance, The Asian Journal of Technology Management Vol. 4 No. 2, SBM-ITB

End of Presentation

Thank you for your attention