Issue (basis of the case), Response (of the parties in the case/Relevance/Recommendations (of the student), Application (to the issue or problem raised and the different options out there) and Conclusion (Analysis of the company’s response and well as your recommendations Thus, to expand on the above , the IRAC categories are the main “headings” of your written case summary and under the “IRAC” categories are sub-headings that may take the following forms, e.g. Basis of the case/Pertinent issues (Issue), Analysis of the fact pattern in the case (Response), alternative options prescribed (Application), Predicted, Possible, and Desired Outcomes (Conclusion) etc. must be part of the case summary.1.Does TCL need a second home market? How does expansion into new geographies add value? What did it learn from the Neotel experience?2.Is Russia a suitable home market for TCL? How does it compare with other emerging market options?3.What are the various entry options for a market like Russia? Compare and contrast acquisitions with alliances as well as with organic/ own play.4.Evaluate Pascal as an appropriate entry vehicle into Russia. What are its strengths and weaknesses?5.What challenges or risks would TCL face if it acquired Pascal?6.If TCL were to decide to pursue an investment in Pascal, what should be the valuation? Please state your assumptionsEach question must be between 800 – 1000 words, double spaced
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Indian School of Business
June 25, 2014
Srinivasa Addepalli | Prashant Kale
Tata Communications: Emerging Markets Growth Strategy
It was the evening before the quarterly board meeting of Tata Communications (TCL) in July 2012.
Mukesh Verma, TCL’s Chief Strategy Officer (CSO), reviewed his presentation. It appeared obvious
to him that the board would support the concept of expanding into new home markets; he had
gathered as much from earlier informal conversations. But his presentation went beyond the concept
stage — it included a specific investment proposal. The strategy team had, for several weeks, been
hard at work evaluating an opportunity to acquire Pascal, a Russian telecommunications company.
The team’s recommendation was to make a non-binding offer to Pascal’s private equity investors. But
Verma was not sure if it was a simple go/ no-go decision; in fact, he hadn’t even discussed this with
many members of the company’s Global Management Committee (GMC). If TCL were to proceed
with the non-binding bid due the following week, he would have to convince the Chief Executive
Officer (CEO) tonight so that the proposal could be included in the board presentation. Verma needed
to make a few calls urgently.
Globally, telecommunications (telecom) was a US$2.1 trillion industry in 2012, and was expected
to grow 5.1% per annum to US$2.7 trillion in 2017. Nearly 60% of the total US$2.1 trillion industry
was contributed by wireless services. Of the remaining US$800 billion in wireline, over 80% came
from basic services such as voice and low-bandwidth data services. The market was also segmented
based on the type of customers: enterprises, including small businesses, and individuals (usually
referred to as consumers). Enterprises were estimated to contribute about US$650 billion to the
telecom market in 2012, of which nearly US$250 billion was for wireless services and US$400 billion
for wireline voice and data services.
Enterprises purchased a variety of voice and data services from telecom operators. These
included traditional telephone services for voice communications, data lines to link their offices or
connect to the Internet, and newer services that included data centers to store their information
technology (IT) applications and data, audio and video conferencing solutions and outsourcing of their
telecom infrastructure management.
Company’s name disguised for confidentiality reasons.
“Worldwide Telecommunications Industry Revenue to Reach $2.7 Trillion by 2017, says Insight Research,” The Insight
Research Corporation, January 2, 2012, accessed on December 10, 2013
Tata Communications’ internal estimates.
Srinivasa Addepalli and Professor Prashant Kale prepared this case solely as a basis for class discussion. This case is not
intended to serve as an endorsement, a source of primary data, or an illustration of effective or ineffective management. This
case was developed under the aegis of the Centre for Teaching, Learning, and Case Development, ISB.
Copyright @ 2014 Indian School of Business. The publication may not be digitised, photocopied, or otherwise reproduced,
posted or transmitted, without the permission of the Indian School of Business.
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For the exclusive use of H. K, 2019.
In addition, they also paid for wireless voice and data connections for their employees, and were
increasingly adopting value added services (e.g. vehicle tracking systems for logistics purposes and
remote surveillance solutions for security) using wireless networks. The enterprise wireless market
was estimated to grow over 5% per annum to 2017. However, the enterprise wireline market was
expected to grow at a slower rate of 3.9% annually, due to a decline in voice services and an almost
flattish trend in data connectivity services. Managed services and outsourcing were expected to
partially compensate for the decline in traditional wireline services (see Exhibit 1 for a summary of key
enterprise service offerings and terms).
The largest players in the enterprise wireline market were the original incumbent telecom
operators in the developed market countries. With their ownership of extensive wireline (fiber and
copper) networks and strong (though declining) cash flows from providing voice services, incumbents
such as AT&T and Verizon in the United States, BT in the United Kingdom, Orange in France, NTT in
Japan and Deutsche Telekom in Germany dominated the enterprise markets in their respective
countries. Further, with most of the largest multinational corporations (MNCs) having their origins in
these five markets, these operators tended to be their primary choice for providing telecom services
for their cross-border requirements.
Founded by Jamsetji Tata in 1868, the Tata group of companies was one of the largest Indian
conglomerates, with over 100 operating companies in seven business sectors: communications and
information technology, engineering, materials, services, energy, consumer products and chemicals.
Tata companies employed over 500,000 people worldwide and earned US$100 billion in revenues
during 2011-12. Nearly 60% of the group’s revenues came from its international operations, from
markets outside India. Tata Sons Limited and Tata Industries Limited were the two holding companies
that had varying levels of ownership among the group companies. Every Tata company, including 32
that were publicly listed, operated independently and was managed by its respective board of
The Tata group created India’s first and largest IT company, Tata Consultancy Services (TCS), in
1968, long before India became known for its software prowess. TCS, which began its journey as a
division of Tata Sons, was hived off and publicly listed in 2004. In 2012, TCS employed over 200,000
people and recorded revenues of US$10 billion. TCS served nearly 1,000 large MNCs around the
world and its customer base included 49 of the Fortune 100 companies.
The Tata group’s first major venture in the communications industry was Tata Teleservices Ltd
(TTL), which began in 1996 as a fixed line telephone provider in the southern Indian state of Andhra
Pradesh and eventually expanded to become a nationwide provider of mobile services by 2005. In
2009, Japan’s leading mobile operator, NTT DOCOMO, acquired a 26% strategic stake in TTL and
the company’s mobile services were rebranded as Tata DOCOMO. A year later, TTL became the first
mobile operator to launch third generation (3G) mobile services in India. TTL primarily served
consumers and small businesses with predominantly mobile/ wireless offerings.
293 of the Fortune 500 companies were from the US, UK, France, Germany and Japan. See “Global 500”, CNN
Money, July 23, 2012,, accessed on December 10,
Tata Group website, accessed on December 10,
Tata Group website, accessed on December 10, 2013
Tata Consultancy Services website, accessed on
December 10, 2013.
2 | Tata Communications: Emerging Markets Growth Strategy
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Origin and Privatization
TCL’s origins can be traced back to the Indian Radio and Cable Communications Company, which
began providing international communications services to and from India in 1932. The company
became a department of the Indian government following independence in 1947, and in 1986, was
incorporated as Videsh Sanchar Nigam Limited (VSNL), a company wholly owned by the government
of India. VSNL was the only company with a license to provide international voice and data
connectivity in India. In 1999-2000, VSNL became the first Indian government owned company to
have a public offering, not just in India but overseas as well. In February 2002, the Tata group
acquired a 45% stake and management control in VSNL — the culmination of a long and public
divestment process. The Tata group saw VSNL as filling a gap in its goal of providing a wide bouquet
of telecom services, including international connectivity, to Indian customers. The government
continued to hold a 26% stake in the company, with the rest held by public shareholders. VSNL
shares were listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange of India
(NSE) and its American depository receipts (ADRs) were listed on the New York Stock Exchange
The government had already decided as part of its liberalization policies that VSNL’s monopoly on
international telecom services would end on March 31, 2002. The company faced considerable
competition in its core and highly profitable business of carrying international voice calls to and from
India. Within two years, its revenues and gross margins from that business fell almost 70-80%. The
company’s management was left with the twin challenge of eyeing new revenue sources while
undertaking a drastic reduction in its largely fixed cost operations.
VSNL’s infrastructure in 2002 was mostly in the form of capacities on international submarine
cables and satellites that helped connect India with the rest of the world. The company management
turned its attention to building capabilities within India, rolling out high-speed fiber networks
connecting about 400 major cities to each other. In addition, VSNL also laid fiber networks within the
top 12 cities to extend international and national connectivity to central business districts. The goal
was to provide large corporates, mostly banks and software and outsourcing companies, with very
high-speed data networks to their various branch locations or client sites. In 2003-2004, VSNL also
began the construction of a submarine cable to connect Chennai on the west coast of India and
Singapore; this was expected to primarily serve Indian IT firms that required connectivity to various
technology hubs on the west coast of the United States.
Global Expansion (2004-07)
The transformation of VSNL from a public sector monopoly to a global challenger was also aided
by several overseas acquisitions and investments during 2004-2007. VSNL acquired Tyco Global
Network (TGN), a division of Tyco International, for US$130 million in 2004. TGN had submarine
cables across the Atlantic and Pacific oceans as well as additional connectivity in Europe. Tyco had
built these cables for a reported US$2.5-3 billion during the telecom boom of the early 2000s, but the
dot-com crash bankrupted many such cable systems. The acquisition of TGN, combined with the
cable systems that VSNL already owned and a few that it built later, made the company a leading
provider of intercontinental high-speed connectivity. The subsequent dramatic surge in demand for
bandwidth (aided by the growth of services such as Facebook, video conferencing, mobile broadband,
etc.), validated the company’s bet on acquiring critical and valuable telecom infrastructure during a
Within weeks of completing the TGN acquisition, the company announced the purchase of
Teleglobe, an NYSE listed company, for US$239 million. Teleglobe was a leading provider of
international voice services and operated a global Internet backbone network. Teleglobe was
headquartered in Montreal, Quebec and majority owned by the private equity firm Cerberus. The
combination of VSNL’s strong international voice position in India and Teleglobe’s global volumes and
Tata Communications: Emerging Markets Growth Strategy | 3
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operating efficiencies created an industry leader in the international voice market. Further, Teleglobe’s
Internet backbone and the TGN submarine cable network shared strong synergies.
The VSNL-TGN-Teleglobe consolidation had become a case study on acquisition integration.
Recognizing the superior market knowledge and systems that Teleglobe possessed, the combined
voice business was integrated into one organization under the leadership of the Teleglobe team. This
led to very high levels of goodwill as well as greater than anticipated synergy benefits. VSNL’s
leadership believed that in order for the company to be truly global, the organization structure needed
to enable the strategy. The best talent should be hired from wherever it was available and located
wherever it made the most business sense.
Entry into South Africa (2005 onwards)
In 2005, VSNL applied to become the strategic partner (with 26% stake) for a new fixed-line,
second national operator license in South Africa with an investment commitment of about US$200
million. After several delays in the licensing process and initial hiccups in rolling out its network,
Neotel launched its services in late 2006. Finding experienced local managers with skills in nextgeneration technologies and services was a major challenge for Neotel, an unknown brand in the
market. While TCL, as VSNL had been renamed at the end of 2007, had sent some of its experts on
deputation to build the business, it decided that Neotel would be developed as a South African
company with a local management team. Neotel was also faced with larger than planned investments
in building a fiber backbone connecting major cities in South Africa; eventually Neotel agreed to cobuild a part of the network along with other operators (who were both competitors and potential
customers), in order to improve the economics of the investment.
In 2008, the Tata group increased its stake in Neotel to 56% by buying out other shareholders; it
was expected that the majority stake would promote faster decision making at Neotel.
considered South Africa to be an important market, strategic to its global enterprise and carrier
strategy. Africa in general, and South Africa in particular, was on the radar of several MNCs; further,
many large South African companies were also seeking to expand into the rest of Africa and Europe.
The TCL and Neotel sales teams had successfully bid for a few large, multi-country network deals and
the pipeline for such opportunities was increasing. TCL had also helped Neotel pioneer some
innovative managed services in the South African market. It was estimated that about 10% of Neotel’s
revenues in fiscal 2012 from the enterprise segment were the result of this joint engagement with
However, it was not all easy going at Neotel. Its losses for fiscal 2010 increased to ZAR 1.15 billion
(about US$157 million) from ZAR 739.5 million the previous year. Towards the end of 2010, Neotel
announced a major restructuring exercise to right-size and right-skill the organization in light of its
slower than anticipated growth. Even so, in 2011, TCL had to increase its stake in Neotel to 61.5% by
buying out some shareholders who were not keen to continue funding its operations.
Finally, during the quarter ended September 2011, about five years after it began operations,
Neotel became EBITDA positive. Although it had been an arduous journey, it was becoming clear
that Neotel was a growth driver for TCL’s business portfolio. Neotel’s revenues were at US$360
million (a growth of 19% over the previous year) in fiscal 2012, contributing 12% to TCL’s topline (see
Exhibit 2 for TCL’s financials from 2010-2012 and Exhibit 3 for segment-wise performance). The
management estimates for fiscal 2013 were to grow revenues by at least 10% and improve EBITDA
margins to about 12%.
Sanjai, P. R. “VSNL Eyes $1 Bn Revenue from S Africa,” Business Standard, April 21, 2006,, accessed on December
10, 2013.
“Tatas Hike Stake in SA’s Neotel to 56%,” ET Bureau, The Economic Times, June 25, 2008, communication-tata-africa-tc,
accessed on December 10, 2013.
EBITDA refers to earnings before interest, taxes, depreciation and amortization.
4 | Tata Communications: Emerging Markets Growth Strategy
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For the exclusive use of H. K, 2019.
New World of Communications (2008-12)
The VSNL legacy and the TGN and Teleglobe acquisitions had given TCL a strong presence in the
wholesale market, i.e., serving other telecom service providers with voice, data and Internet
connectivity. However, the wholesale business was considered a slow growth and relatively low
margin business; TCL, like many of its peers, wished to grow its revenues from the enterprise
segment, which had stickier relationships and therefore better margins. TCL’s major focus during its
first five-year plan period (2007-2012) was to target large corporate customers that wanted multicountry or multi-region telecom services. TCL launched a range of services that leveraged its core
infrastructure strengths to provide connectivity (e.g. virtual private networks), collaboration (e.g. video
conferencing) and cloud (e.g. storage on demand) services to its customers.
TCL termed its strategy a “New World of Communications” with three major dimensions:
1. Emerging markets focus: TCL’s major competitors were developed market players, unlike TCL,
which had its roots in India and investments in Asia, Africa and the Middle East. It sought to
position itself as the go-to provider of services when large corporates sought to expand in the
emerging market regions.
2. IP and cloud services: Most of TCL’s infrastructure had been built in the 21 century, whereas
its competitors had a significant amount of older technologies to grapple with. This enabled
TCL to offer customers the latest technologies and standards since it did not have to protect
considerably large legacy revenues. Further, TCL sought to offer innovative commercial/ pricing
models that enabled customers to reduce upfront technology investments and only pay per
3. “Asian touch” customer experience: The telecom industry was infamous for its poor customer
service. TCL, as a challenger, tried to be more flexible and responsive than its peers. In fact,
the company set itself an audacious goal of becoming the “Singapore Airlines (SQ) of the
telecom industry”.
By 2012, TCL was a global telecom service provider offering voice, network, collaboration and IT
infrastructure services to telecom service providers and large enterprises. TCL was the number one
provider of network services to enterprises in India. It was also number one globally in international
voice traffic with over 45 billion minutes per year. TCL owned and operated the world’s largest
submarine cable network — the only network that circumnavigated the globe. It operated a leading
Internet backbone, ranked seventh globally by size and was among the top 10 in most regions
TCL’s consolidated revenues in fiscal 2012 were nearly US$3 billion (a 13% growth over the
previous year) with an operating margin of 12.6% and a net loss of US$166 million. TCL employed
about 7,000 people in …
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