report of international equity placement strategic alliances: case at indosat
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7/29/2019 Report of International Equity Placement Strategic Alliances: Case at Indosat
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Syndicate 2 X46
MASTER OF BUSINESS ADMINISTRATIO
SCHOOL OF BUSINESS AND MANAGEME
INSTITUT TEKNOLOGI BANDUNG
2013
MM 5012
Business Strategy
GROUP SUMMARY ASSIGNMENT
INTERNATIONAL EQUITY PLACEMENT STRATEGIC
ALLIANCE – CASE STUDY AT INDOSAT
Syndicate 2 Executive 46 (Great Leader Syndicate)
29111311 Haidir Afesina29111328 HendraWinata
29111329 MitaListyatri
29111338 AndekPrabowo
29111344 AprianEkaRahadi
29111384 ChairunnisaMirhelina N
29111387 F X KresnaPaska
29111393 Agung Indri P.
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yndicate II – MBA ITB X.46 INTERNATIONAL EQUITY PLACEMENT STRATEGIC ALLIANCE – CASE STUDY AT INDOSAT
1. CASE SYNOPSIS
PT. Indonesian Satellite, Tbk (Indosat), Indonesia’s state no. 2 telecommunications company
became the first Indonesia corporate ever to seek international listing. It was the pioneer of other
state owned enterprise. Indosat was established in 1967 as a foreign investment company, and
started promotion in 1969. In 1980, Indosat became state-owned enterprises (SOEs), which are
wholly owned by the government of Indonesia. Furthermore in 1994, its shares are traded on the
stock exchange Jakarta, Surabaya, and New York. Therefore Indosat indirectly entered a
divestiture. Indosat has two cellular subsidiaries companies such as PT Satelit Palapa Indonesia
(Satelindo) and PT Indosat Multi Media Mobile (IM3) with 30% market share. Furthermore
Indosat is Indonesia's dominant international phone carrier. The potential buyers are thought to be
most interested in its mobile operations, given Indonesia the now-booming mobile sector.
At the end of 2002, the government of Indonesia sell 41.94% stake in Indosat to STT (Singapore
Technologies Telemedia, Pte. Ltd). Thus, Indosat return to foreign investment. The remaining
shares of government are 15% and the rests of the shares 43.06% belong to public. On the other
hand, STT Telemedia has been forced to weather protest by union angry about a sale to company
controlled by the Singapore government. It has also faced parliamentary probing into what some
nationalists see as the sale of a vital asset. Indosat privatization carried out by the Indonesian
government in 2002 constituted with the aim to cover the budget deficit of revenue budget
expenditure. Goes along with it, the government also set policies that restrict credit for state-owned
enterprise to obtain funds for further development.
Chronology of the alliance began on September 19th, 2002 when 14 investors were prequalified
for the privatization of Indosat. After the due diligence, on November 7th, 2002, 8 preliminary bids
were received from preliminary investors. Four evaluations teams consisting of representatives
from the Ministry of State-owned enterprises, Indosat, PT Danareksa Securitas and Credit SuisseFirst Boston (Singapore) Ltd as government financial advisor were formed to evaluate and analyze
the preliminary bids (Exhibit 1).
2. ISSUES and PROBLEMS
The sale of Indosat`s stakes as Indonesia`s no 2 telecommunication industry has been debated
throughout the country. From the perception of the loss of sovereignty and national pride to
Singapore to the sale price that was undervalued had negatively influence the state of trust and
commitment, especially the transparency of the international alliance process.
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yndicate II – MBA ITB X.46 INTERNATIONAL EQUITY PLACEMENT STRATEGIC ALLIANCE – CASE STUDY AT INDOSAT
3. ANALYSIS
The analyses cover the steps of IEPSA (International Equity Placement of Strategic Alliances) as
means of privatization. Compare to other type of strategic alliances, IEPSA has a higher risk as the
form partner have different nationality and culture.
3.1 Macro Economy
The Indonesian macroeconomics was still in the state of recovery after Asian economic ciris in
1997. There were some problems arises such as government budget deficit that has to be anticipate
and the Bali Bomb incident that had already deteriorated the condition. The privatization of
Indosat was part of industry restructuration program which was demanded by IMF. In 2002, prior
to the alliance, the GDP growth was 3.7%. The exchange rate for Indonesian Rupiah to American
US Dollar was IDR 9000 with high inflation rate (11.9%) and 13.8% interest rate. However, the
Jakarta Stock Exchange (JSE) bounced back in the level of 432 from level index of 392 in 2001.
Using the Sales and Purchase Agreement (SPA) from JSE as the base data for alliance valuation
which would be the selling price, the Indosat`s shares had already plummeted 50% from its highest
price in May 2001. Thus the government considers it necessary to privatize Indosat by sell some
shares to foreigners. It also believed that foreign company has enough capital in order to improve
and develop Indosat.
3.2 Industry Analysis
Network industries such as telecommunications are undergoing dramatic transformation.
Telecommunication is a large and dynamic business that continues to enjoy significant growth
worldwide in past few quarters. It is a mature industry that has been globally available for some
time. Competition is often already intense amongst the established player. The increasing
globalization can be seen from cross border investment and international alliances in develop and
developing countries. In addition the main drivers are advances in information and communication
technologies and privatization. Privatization removed the SEOs productive resources form
government ownership and political influence. Although privatization is now a global
phenomenon, there are significant differences in develop, emerging, and traditional economies. In
SOEs such as Indonesia, the goals and objectives may change frequently with consequent loss of
consistent in strategic direction. It usually comes from the top level of the organization, the
political party in power and the minister responsible for SOEs.
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3.3 Planning Phase
3.3.1 Stakeholder Support
Following privatization, the organizational goal has to reflect its key stakeholder objectives.
Therefore the support of stakeholders in the alliance was influenced by a number of factors such as
political agenda, security, transparency, etc. Each variable possessed its own specific reason:
a) 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.
b) Politics
Privatization was pulling force from several political parties, supporting different
strategic partner
c) House of Representative
There was no official letter from HoR regarding the intended Indosat’s IEPSA.
However, Ministry of SOE insisted that prior consultation with HoR was held three
times in March and November 2002.
d) 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.
e) Government
It must oblige to IMF’s requirement to do restructuring program, prior to continue
lending financial aid to Indonesia.
f) Company Management
There were resistances from Indosat’s top management on IEPSA initiation.
3.3.2 Strategic Match
Strategic match factors are differentiated into 3 sub factors: capacity, complementary and strategic
importance (Exhibit 2) (Niederkofler-1991, Lorange and Roos-1992, Sierra-1995, Segil-1996,Medcof -1997,Douma-1997).
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yndicate II – MBA ITB X.46 INTERNATIONAL EQUITY PLACEMENT STRATEGIC ALLIANCE – CASE STUDY AT INDOSAT
a. Capacity
By completing the privatization of Indosat (divestment of Indosat of 4l.94 % shares), the
government received US$ 9 million (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. The government, in the divestment 434,250,000
shares Seri B, received the fund US$ 627 million. Until 2001, 63% of SOEs recorded very low
rates of growth or even losses according to the Ministry of State-Owned Enterprises, only 13 SOEs
recorded high sustainable growth of revenue of over l8%, 19 recorded 'sustainable growth' (7-18%)
and l0 recorded 'low growth' (less than 7%). Through privatization (IEPSA), the government aimed
to improve the performance of the SOE.
b. Complementarity
Comparison between partners will be discussed first before describe the complementarity. From
cultural & management aspect, Indonesia and Singapore have similarities in terms of high power
distance, low level of uncertainty avoidance, and masculinity while difference was in time
orientation where Indonesian preferred to have loose time orientation while Singaporean was tight
time orientation (Exhibit 3) (Hofstede, 1984). On the other hand, Singaporean telecommunications
market had already saturated (68% cellular market penetration of the total number of population)
while in Indonesia has potential for growth in certain markets area (Exhibit 4)
Related to comparison between Indosat and STT, there are several complementarity between them
in some aspects below:
• In terms of past alliances track record, both partners was considered complementary.
• In terms of product and innovation, both partners can be considered as complementary
because Indosat's wide range of product, good quality and innovation interacted with
excellent product and innovation of STT's.
• Customer base, both partners performed an excellent complementary alliance. The
Indosat customer base was growing while that of STT was mature.
• In terms of complementarity of management practices variables in the capacity sub-
factor, both partners had both similarities in the consensus-based decision-making and
people-oriented leadership style.
• In terms of technology and financial, domestic partner benefitted from the technological
expertise from foreign partner especially in the cellular and internet
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yndicate II – MBA ITB X.46 INTERNATIONAL EQUITY PLACEMENT STRATEGIC ALLIANCE – CASE STUDY AT INDOSAT
telecommunications services. While, foreign partner had the technology adaptation
perspective on the vast developing market. Moreover, Indosat was able to obtain low
cost financing through highly rated STT's obligation, and in return through market
penetration opportunity the alliance would provide dividend for foreign partner.
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.
3.4 Formation Phase
In the formation phase, there are two aspects that need to be strengthened: internal support and
strategic planning. In between there is cultural understanding variable in the initial phases: trust
and commitment.
3.4.1 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.
3.4.2 Strategic Planning
Both sides (Indosat & STT) are committed to build long-term investments and to avoid the
employees lay off. The strategic Plan is to increase the number of BTS to 1000 units, improve the
profitability, increase quality, increase the number of customers and increase market share.
3.4.3 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
The environment of trust in the alliance was split into those who opposed and the ones
who supported. This alliance should be able to trust each other. STT through its CEO
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committed to invest for the long-term, while Indosat to convince the opposition parties
that the relationship will bring benefit to both of the parties and to ensure there is no
employee lay off.
b. Commitment
STT CEO Statement “Basically we are committed to all of the demands”. On the
organization’s point of view the employees committed to achieve the objective of the
alliance by aligning the management and employee objectives through the set up of
Employee Stock Option Program (ESOP)
3.5 Operation Phase
The need for human resource development management and training programs to all layers within
organization is highly important in order to managed newly privatized company. Thus the
importance of leadership and participation in the privatization restructuring processes is
substantial. The industry has transformed from just technology industry to service industry that is
customer oriented.
a) 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 IDR 15.8 billion. The alliance
provided 7 training days per employee or about 3% of total working days for people
development.
b) New Corporate Values
Covered with integrity, cooperation, excellence, partnership, and focus to customers
c) Integrated one-stop Excellent Service Performance to the Customers
2005 decentralized and empowered the organization to 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.
d) Indosat Vision
To become a leading cellular/wireless focused, fully integrated telecommunications
network and services provider in Indonesia
e) Indosat Mission
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To provide and develop innovative and quality products, services and solutions, which
offered the best value to the customers
f) 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
3.6 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. Pay a fine IDR 15 billion to state treasury
b. Stop ownership of shares in Indosat or Telkomsel by releasing of the shares at these
companies
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%
3.7 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.
Share Price
The Indosat’s share price during the process of forming the alliance was about 50% below the
shares bought by STT, which was IDR 12,950. Based on DCF valuation, the price was much lower
than the valuation of DCF finding. The fair value per share was IDR 43,231 with estimated
terminal growth of 3.5%. During December 2002, the time of alliance started, the average price in
the exchange was IDR 8,900 Government claim basis to its premium of 50% of the selling share
price to STT was the last stock exchange price but its valuation ignored the downturn of indosat’s
shares within the last six months which had plunged from its highest level per price in 2002.
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yndicate II – MBA ITB X.46 INTERNATIONAL EQUITY PLACEMENT STRATEGIC ALLIANCE – CASE STUDY AT INDOSAT
Based on calculation above, can be see that was happened Negative Spread for Indonesia
Government in terms Selling Purchase Agreement of Indosat share. The fair valuation of indosat
based on the existing condition and its potential growth. Based on the Discounted Cash Flow
Valuation (DCF) the fair value per share was IDR. 43,231 with estimated terminal growth of 3.5%.
Donor Pressure
The IMF bailed Indonesia out in the Asia financial crisis. There was a 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. It’s one of main factor that drives government release shares in Indosat.
TransparencyIEPSA transparency upon the stakeholder there were problems. There were the same advisors for
the two actions, as it might reduce the possibility of competition among the financial advisors.
Danareksa and Credit Suisse First Boston (CSFB) did not have license to operate in Indonesia.
CSFB just established 1.5 years earlier. The tender of short listed bidders: Telkom Malaysia and
STT, the government did not announce the offering price of Telkom Malaysia. The sign of sales
and purchase agreement, it was not STT which sign, but instead through its special purpose
vehicle, ICL (Indonesia Communications Limited) which was located in Mauritius.
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4. CONCLUSIONS and RECOMMENDATIONS
4.1 Conclusions
1. Initial degree of success of the alliance (in planning and formation phases) was determined
primarily by the state of transparency and stakeholder support.
2. 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.
3. In the alliance, the transparency variable that determined the initial degree of success was
influenced by share price.
4. That was happened negative spread for Indonesia Government in terms of Selling Purchase
Agreement of Indosat share to STT.
The deal therefore represents a major win for the Indonesian government, which needs funds to
plug a budget deficit and rid itself of a crippling debt burden. However, the price sensitivity is
understandable as the share price should be above than what has been agreed. In addition the
difficulty is not between the Singapore government and the Indonesian government, the difficulty
is within Indonesia’s political process, with objections being played out as part of “political
theatre” on the Indonesian side. The need of trust and commitment in order to build strong
alliances between different cultures is highly important.
Table 1. SWOT Analysis
Strenghts Weaknesses
• FDI
• International image (less governmentintervention)
• Increase its services and becomecustomer focus oriented
• Potential knowledge managementtransfer from Singapore to Indonesia
• Stock price < Fair stock price
• Acquisition process might have atendency to cause certain friction incorporate culture
• The eventual control of satellite byforeign party that would put the statesecurity or confidential state informationin jeopardy
• Indosat’s divestment loaded with publicdeception
Opportunities Threats
• Extra fund to expand BTS andinfrastructure for technology advance
• Create jobs
• Opportunities to be world classcompany
• Union labor strike
• Strategic policy PT.Indosat controlled by foreign
• Investment conditions in Indonesia arevery influenced by the politicalstability
• Different culture create conflict
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yndicate II – MBA ITB X.46 INTERNATIONAL EQUITY PLACEMENT STRATEGIC ALLIANCE – CASE STUDY AT INDOSAT
4.2 Recommendations
The main successful factor of company alliance is transparency, especially in shares selling price.
In addition the corporate valuation must also calculate from existing condition about corporate
value fairly.
5. LESSONS LEARNED
The lessons learned that could be taken from the case are;
1. Privatization is vehicle for foreign direct investment (FDI)
2. Privatization id fundamental transformational strategy both at the organizational level and the
macroeconomic level
3. The cultural understanding is important in order to build strong international alliances
4. Bargaining power of government is needed to avoid negative spread in equity placement
strategic alliance.
REFERENCES
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
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yndicate II – MBA ITB X.46 INTERNATIONAL EQUITY PLACEMENT STRATEGIC ALLIANCE – CASE STUDY AT INDOSAT
Appendix
Exhibit 1. Scheme of the process of forming the alliance
Source: Wandebori (2008)
Exhibit 2. Strategic match of international strategic alliance
Source: Niederkofler-1991, Lorange and Roos-1992, Sierra-1995, Segil-1996, Medcof -1997,Douma-1997,cited on
Wandebori et al (2011)
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yndicate II – MBA ITB X.46 INTERNATIONAL EQUITY PLACEMENT STRATEGIC ALLIANCE – CASE STUDY AT INDOSAT
Exhibit 3. Indonesia vs Singapore Culture Comparison
Source: Hofstede (1984)
Exhibit 4. Number of Subscriber of Indonesian Operator (*until June 2002)
Source: PT Telkom (2002)
‐
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
2000 2001 2002
Telkomsel
Satelindo
Excelcomindo
Metrosel
Komselindo
Telesera
Mobisel
IM3
Natrindo
Total
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yndicate II – MBA ITB X.46 INTERNATIONAL EQUITY PLACEMENT STRATEGIC ALLIANCE – CASE STUDY AT INDOSAT
Exhibit 5 Comparison Between Indosat (Indonesia) vs STT (Singapore)
Exhibit 6 The fair Value of Indosat’s equity per share woth the associated terminal value
Aspect Similarity Difference
Cultural and
Management
High power distance, low level of uncertainty avoidance, andmasculinity
Time orientation:: Indonesia(loose time), Singapore (tighttime)
Product & Services Cellular services, multimedia, datacommunication and internet
STT did not focus on the fixed
line telecommunications.
Market __ Singapore: Saturated
Indonesia: Potential growing
International
Alliance Experience
Indosat: DeTe Mobile (Germany)
STT: StarHub, Equinix, GlobalCrossing, and Tele Choice.
__
Management
Practices
Decision-making: agreement based on consensus, preferringlong-term employment, and
possessing people-orientedleadership style (Hofstede, l984).
__
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Exhibit 7. Phase of IEPSA
Source: Wandebori et al (2011)