IM Group Assignment_ the Takeover Bid for Telkom (2)
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Transcript of IM Group Assignment_ the Takeover Bid for Telkom (2)
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Table of Contents
INTRODUCTION.............................................................................................................................. 2
1. SOCIO-CULTURAL FRAMEWORK...................................................................................... 2
2. ECOLOGICAL FRAMEWORK................................................................................................ 2
3. LEGAL FRAMEWORK............................................................................................................. 3
3.1. Employment....................................................................................................................... 4
3.2. Foreign Employees........................................................................................................... 4
3.3. Tax and Exchange Control.............................................................................................. 5
3.4. Communications............................................................................................................... 5
3.5. Competition Commission................................................................................................. 6
4. TECHNOLOGICAL FRAMEWORK....................................................................................... 6
4.1. Current considerations..................................................................................................... 6
4.2. Future plans....................................................................................................................... 7
5. POLITICAL FRAMEWORK..................................................................................................... 8
5.1. Challenges brought by governments involvement in Telkom................................... 9
5.2. Benefits of having government as regulator and shareholder................................. 10
6. FINANCIAL FRAMEWORK................................................................................................... 11
6.1. SA Economy.................................................................................................................... 11
6.2. Foreign Direct Investment............................................................................................. 12
6.3. Telkom SA Financial Results........................................................................................ 13
7. CONCLUSION........................................................................................................................ 17
8. RECOMMENDATIONS.......................................................................................................... 18
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INTRODUCTION
1. SOCIO-CULTURAL FRAMEWORK
2. ECOLOGICAL FRAMEWORK
Under the slogan "Green KT, Green Korea," KT established an environmental vision,
"Green Convergence Leader" that leads the construction of a green advanced
country." By converting the work environment into a green ecosystem, leading the
national economy into a green innovation, and searching for green growth engines,
KT was able to establish a greenhouse gas reduction target of 20%. Meanwhile,
Green IT working group committee was formed to implement green strategies.
Responding to Climate Changes
KT seeks to achieve a 20% reduction in CO2 emissions by 2013 (compared to 2007
emission level) through conservation of the existing energy sources, using alternative
eco-friendly energy, improving the communication and IT infrastructure and adopting
green technology in the work environment.
Real Time Monitoring of Energy Consumption
KT developed a real time energy consumption monitoring device to efficiently micro
manage the energy usage in buildings. The system is currently being applied at KTs
office buildings that particularly consume large amounts of energy.
GHG Emission Reduction through Videoconferencing
Video conferencing helps reduce carbon emissions as well as increase productivity
by accelerating decision-making and cutting travel costs. KT has built 90 video
conference rooms so staff can hold meetings via PC. Now staff members can
participate in conferences whenever and wherever they are.Cost saving
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Smart Working Center
Reduced mobile combustion and improved employee work efficiencies and also that
employees can work from home. KT is encouraging all employees to participate in
and practice Green IT. Negative impact on economy because people will use
less of e-Tolls and Toll gates.
Minus (-) Energy, Plus (+) Love Campaign
This is to practice energy conservation while providing energy welfare to the lower
income class. The energy amount saved at homes and office buildings during the
months of July and August, when energy consumption is high, can be converted to
pay for heating cost for needy neighbors under the campaign participants name.
This would add value to Eskoms energy saving initiative here in South Africa.
Paperless Campaign and e-Office Environment
Promoting the use of AnyFax, an e-fax system, as part of an ongoing drive to achieve
a truly paperless office environment. With the introduction of the e-fax system,
monthly paper use per person dropped by approximately 50 sheets (based on A4
size paper). The Typek A4 white paper is R159.00 per box (5x reams=500 sheets
per ream). 159/5 = R31.8 per ream, 31.8/500 = R0.0636. Therefore; monthly
paper use per person has dropped by approximately R3.18 (50x0.0636). e-Office
refers to an optimal working environment that minimizes environmental impact by
adopting information technology. They shifted a paper-based offline approval process
to an electronic business approval system, and operate an e-cabinet system whereby
various documents are stored and managed as electronic files rather than as paper
printouts stored in file cabinets.
3. LEGAL FRAMEWORK
SOUTH AFRICA: REGULATORY ENVIRONMENT
General1
1 USA Bureau of Democracy, Human rights, and Labor. 2008 Country Reports on Human
Rights Practices Report. February 25, 2009
http://www.state.gov/j/drl/rls/hrrpt/2008/index.htmhttp://www.state.gov/j/drl/rls/hrrpt/2008/index.htmhttp://www.state.gov/j/drl/rls/hrrpt/2008/index.htmhttp://www.state.gov/j/drl/rls/hrrpt/2008/index.htm -
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South Africa is a multiparty parliamentary democracy, in which constitutional power is
shared between the president and the parliament. The legal system in South Africa is
based on:
Common law.
Statute.
Case law.
Customary law.
3.1. Employment
Employment in South Africa is regulated by statute, common law and contract.
Legislation, for example, the Labour Relations Act 1995 (LRA) grants employees
protection against unfair dismissal and unfair labour practices. Most contracts of
employment are subject to the Basic Conditions of Employment Act 1997 (BCEA),
which inter aliaestablishes a 45 hour workweek, standardizes time and a half pay for
overtime, and authorizes four months of maternity leave for women.
In South Africa the law protects both foreigners and immigrant workers. On 28 March
2008, the Commission for Conciliation, Mediation, and Arbitration (CCMA) ruled in
favour of a foreign employee whose employment contract had been terminated by
Discovery Health Limited when the employee's temporary work permit had expired.
The CCMA's ruling established that foreign workers are included and protected by
South Africas labour legislation.2 The Employment Equity Act 55 of 1998 and the
Broad Based Black Economic EmpowermentAct 53 of 2003 was instituted by the
government aims to promote and achieve equality in the workplace (in South Africa
termed "equity"), by advancing people from designated groups. The designated
groups who are to be advanced include all people of colour, women (including white
women) andpeople with disabilities (including whites).
3.2. Foreign Employees
Foreign employees must obtain a work permit before starting work in South Africa.
The main consideration in issuing work permits is whether or not a South African
citizen or permanent resident with appropriate skills is available to take up the
2 Discovery Health Limited v CCMA & others [2008] 7 BLLR 633 (LC)
http://en.wikipedia.org/wiki/Broad_Based_Black_Economic_Empowermenthttp://en.wikipedia.org/wiki/Broad_Based_Black_Economic_Empowermenthttp://en.wikipedia.org/wiki/People_with_disabilitieshttp://en.wikipedia.org/wiki/People_with_disabilitieshttp://en.wikipedia.org/wiki/Broad_Based_Black_Economic_Empowerment -
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appointment. The cost to apply for a work permit is approximately R 2257, 52 and it
takes anywhere from ten days to a month to obtain, depending on the embassy, high
commission or consulate where the application is submitted. There are various
categories of work permits, including:
General work permit.
Exceptional skills permit.
Intra-company transfer permit.
3.3. Tax and Exchange Control
Depending on the provisions of the double tax treaty ( DTT), if any, concluded
between South Africa and a foreign employees country of residence, the employee
might be subject to income tax in South Africa. If the employee is employed by a
foreign company and is seconded to South Africa, the income tax can be withheld by
the representative of the employer in South Africa, if there is one.3 Dividends
received by or accrued to any person, resident or non-resident, from a South African
resident company are exempt from tax. South African companies pay 10%
withholding tax on dividends declared to their shareholders.
The South African Reserve Bank imposes exchange controls on South African
residents. Currency must not be transferred by a South African resident into, or out
of, South Africa, except in accordance with the terms of the Exchange Control
Regulations of 1961.
3.4. Communications
The Independent Communications Authority of South Africa (ICASA) is the
telecommunications and broadcasting regulator, created through the merger of the
South African Telecommunications Authority and the Independent Broadcasting
Authority in 2002, under the terms of the ICASA Act No. 13 of 2000. In 2006, the
ICASA Amendment Act No. 3 of 2006 amended the ICASA Act. The regulator
operates three divisionsthe broadcasting, telecommunications and postal divisions.
A major threat to mobile network operator revenues has been the RICA (Regulation
3 Hale A and Makola M. Doing Business in South Africa. 2011. Bowman Gilfillan.
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of Interception of Communication Act), which has contributed to a slowdown in the
growth of subscriber numbers.4
3.5. Competition CommissionOne of the most important powers that the Competition Commission has is to
investigate and approve or prohibit mergers between companies of a certain size.
The Act defines a merger as the direct or indirect acquisition or direct or indirect
establishment of control...over the whole or part of the business of another firm. In
everyday language this could take the form of a simple acquisition of another
company, a hostile takeover of another company or a planned and agreed merger
between two companies. The issue therefore is the establishment of control.
4. TECHNOLOGICAL FRAMEWORK
This part of the assignment will look at the technological framework under which the
Telkom and the Korea-based telecommunication KT Corporation (KT) companies
have to consider in order for them to do business together in this globalized world.
Consideration will be given to both the differences and compatibilities that wouldmake a strong case for the deal between Telkom and KT to be successful. Before
one starts discussing this aspect of the deal an assumption is made that KT has
already decided that it wants to reopen the negotiations and that it still wants to buy
the 20% stake in Telkom.
4.1. Current considerations
According to Hamilton and Webster (2012), technology refers to the know-how or
pool of ideas or knowledge available to society. They further indicate that the know-
how can be written down and transferred easily to others but also add that there is
the know-how that cannot be transferred and this know-how is called tacit knowledge.
This therefore means the deal between Telkom and KT will among other things
involve the transfer of the mentioned knowledge, both codified and tacit.
4 Pierre-Alain Sur. Communications Review. Telecoms in Africa: innovating and inspiring.
Volume 17, No. 1.PricewaterhouseCoopers LLP.
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As Africa's largest integrated communications company, Telkom is said to be a key
and strategic asset in the roll-out of telecommunications infrastructure in the country
and this is as an effort to improve the skills of the South African citizens. Telkom is
therefore facing a very big challenge of ensuring easy access to Information and
Communications Technology to all South Africans both in urban and rural areas. In
order to achieve this objective Telkom has consistently focused on maximising
performance of existing products in order to retain customers and to ensure that the
best value proposition is offered in the market. One of the ideas that Telkom has is to
build the fibre-to-the-home network in South Africa especially in dense urban areas.
A senior executive at KT proposes that wireless and copper connectivity be
considered to other areas of the country given that the country is large as compared
to the Korean market. KT boasts 87% connectivity via high-speed fibre optic cables
which could be used as an argument to partner with Telkom to achieve its target of
rolling-out connectivity to all citizens by 2020.
4.2. Future plans
Telkom aims to be the first large telecommunications operator to launch the fourth
generation (4G) commercial mobile network using the long-term Evolution (LTE)
Technology. Telkom has already started working with KT to build an LTE networkregardless of the collapse of the deal by Government. This are good news for KT to
consider given that KT has a wealth of experience in building such networks with
about 18000 4G base stations in Korea. According to Telkom, the company has to
capitalise on its strengths, including the network and relationships with business, to
provide higher speeds and end-to-end reliability that cannot be matched by its
competitors. This notion would therefore have made perfect sense if the deal
between Telkom and KT was to be successful, but as we already know this was not
the case.
In the past few years Telkom has improved a lot in terms of its products innovation
and launch which has enabled the company to new products to the market faster and
continues to reshape their offerings to allow for further demand-driven products to
enter the market. As of September 2012, Telkom had approximately 3.9 million
telephone access lines in service and 99.9% of the telephone access lines were
connected to digital exchanges. In comparison to KT Corp, the service provider had asignificant contribution in providing integrated wired and wireless communication
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services and turning South Korea into arguably one of the countries with the fastest
and most expansive internet connections as well as the most wired and digitally
connected country in the world. In this regard KT Corp can benefit immensely in
assisting Telkom to take South Africa to this level of technological capabilities.
However, KT as a bigger company in sales value compare to Telkom should guard
against what Hamilton and Webster (2012) call technological diffusion. They indicate
that as the larger company, KT will be the most innovative and protection of its patent
ownership will be very critical. So, this means a need for careful consideration of the
South Africa Intellectual Property (IP) laws and regulations.
Over the next five years Telkom aims to become the number one provider of fixed
and convergence communication and network services to the business market and tobe a player in the cloud services. The company does not have enough skilled
employees to handle applications and unified communication and have recently paid
retention packages to a small group of employees. KT can provide this much needed
skills transfer as quoted by Hamilton and Webster (2012), Kotler (2009) argues that
cloud computing can also put Telkom in a very good position to compete with
companies in richer economies.
5. POLITICAL FRAMEWORK
One cannot consider investing in Telkom and ignore the political environment within
which Telkom operates particularly because South African Politics are dominated by
one big party which happens to be both the player and the referee in the ICT
industry. The ANC-led government provides oversight in the ICT industry though
legislation and the regulatory bodies that it has established. ICASA is appointed by
government to oversee the industry through the Electronic Communications Act
(ECA). There are also institutions like the Competition Commission which is given the
role of ensuring that all the players in the ICT industry compete fairly. On the other
hand government is the majority shareholder in Telkom which makes government
very influential inside the organisation. They influence the selection of board
members and the appointment of the CEO.
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5.1. Challenges brought by governments involvement in Telkom.
One of Governmnents key focus areas as reflected in the ruling partys election
manifesto is the reduction of unemployment. It therefore becomes difficult for
government to balance the pursuit of profit / efficiency with the fight against
uneployment. This is more complicated by the alliance partnership that the ruling
party has with the Confederation of South African Workers Union (COSATU) whose
most important goal is to preserve jobs. Telkoms latest financial statements indicate
that a big part of Telkoms rising expenses is on employees.
The Chief Financial Officer, Jacques in his 2012 financial results report spoke about
the importance of reducing costs in order for Telkom to remain profitable and
indirectly stated that this cannot be achieved without reducing employees. Mr Roy
Kruger, the Minister of Telecommunications technical advisor was quoted at the
2012 ICT Indaba saying that Telkom is over sized and that it can work better with a
quarter of its current 22 000 employees. If this advice is followed, about 16 500
employees would lose their jobs and this could cost the ruling party votes in the next
elections. It is therefore important for KT Corp to realise that Telkom will sacrifice
profits in order to help secure the ruling party votes in the elections.
The National Development Plan from the Planning Commission expresses the
governments desire to rollout broadband country wide including in the rural areas.
Telkom is expected to play a major role in this rollout which may not even be
profitable for Telkom. Kruger was also quoted saying private companies are looking
after profitable areas while government is obliged to look after rural areas. From this
statement it becomes apparent that profitability is not really important for the
government and this is contrary to what other Telkoms shareholders want. Why
would KT Corp want to buy a stake in the organisation that is prioritising government
agenda over profitability?
Apart from Telkoms involvement in many corporate social investment initiatives, it is
often accused of spending money in government activities and events that benefit
some politicians in the ruling party. Examples include the expenditure on the 2012
ICT indaba in which the Ministers boyfriend is alleged to have made millions ofrands, The R12m that is spend on the breakfasts that are hosted by the New Age
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newspaper (owned by the Gupta family which is said to be close to the president)
and many other functions. In some functions like the Soccer World Cup and Africa
Cup of Nations Telkom provides services at much lower prices in support of the
governments interest in those functions. Expenditure on such functions will translate
into a loss of revenue for KT Corp .
The Minister of Telecommunications was tasked in June 2012 to investigate and
present few options for Telkom in terms of direction, and to date nothing has been
reported to the public and Telkom. This creates a lot of uncertainty and lack of
direction in Telkom. Some major decisions about the direction of Telkom are taken at
the partys conference which delays decision making in the organisation. This also
mean that even when Telkom has qualified / skilled top management with business
acumen, their ability to determine the direction of the organisation is humpered by the
requirement to have its decisions ratified buy the political party. Regardless of how
much money KT Corp invests in Telkom, it may still be difficult for KT Corp to
influence the direction and decision making in Telkom.
The ruling partys internal politics and factions often results in changes in the
Executive. Government has changed the Minister of Telecommunications couple of
times in the past few years and this often results in change in the leadership of
Telkom. This is clearly seen in the number of times that Government has changed
Telkoms CEOs and chairman of the board. This constant change in the leadership of
Telkom brings instability in the organisation and affects the employees morale. As a
result Telkom often battles to perform to its maximum potential.
5.2. Benefits of having government as regulator and shareholder
If Telkom was to close down because of financial difficulties unemployment figures
would rise, poverty would increase and governments national broadband roll-out
plans would also fail. It is clearly in the best interest of government that Telkom
survives. As witnessed in other government owned institutions like Denel, SABC and
SAA in the past, bailout from government is almost guaranteed in the case where
Telkoms finances reach crisis levels.
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ICASA is often criticised for indecisiveness and non performance in its role as the
regulator. It took them a long time to implement the essential facilities policies and
this delayed other service providers ability to share in Telkoms infrastructure. A
number of policy matters under ICASAs watch have been outstanding for a long time
and they include Local Loop Unbundling (LLU), allocation of radio frequency
spectrum. All these issues humper fair competition. This benefits government as a
shareholder in Telkom and this explains why governments intervention to experdiate
the resolution of these outstanding policy matters is not forthcoming. Basically
Telkom is enjoying its dominance in the ICT industry because of ICASAs lack of
performance and governments indifference to these matters continue to benefit
Telkom.
6. FINANCIAL FRAMEWORK
6.1. SA Economy
Companies that are operating in the current market face a challenging and
competitive global market. There are many business challenges that the company
and country must take into account. These challenges are also directly impacting theSouth African economy. South Africas economy is dependent on the global trade to
survive. This is supported by the government policies that should be able to
contribute to the foreign direct investment.
The capital infrastructure plan detailed by the President during the official opening of
the Parliament gave the assurance that the South African economy with be able to
grow due to job creations due to construction.
The annual Gross Domestic Product had been marginally decreasing in the last five
years with the best decline in 2009 due to the recession. There has been a steady
decline on the inflation rate. The inflation is current forecasted to be within the
projected range of 3 to 6% as the economy improves. If the depreciation of the rand
is to continue and sustained at very competitive together with the monitoring of the
inflation, the recovery in the economy will be expected.
Below is the table that shows the movement of key market indicators within the SouthAfrica:
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Source: World Bank
6.2. Foreign Direct Investment
South Africa had shown a significant increase in foreign direct investment over the
last few years. With the abolishing of sanctions and end of apartheid, South Africa is
now part of the global economy and trade with most international companies
investing in the local economy.
The following table shows the movement on the foreign direct investment since 2000.
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Foreign direct investment has increased from mid R300bn to nearly R1000bn by the
turn of 2010. This reflects a confidence in the local economy. The Government also
create an environment for doing business and investment through effective fiscal and
monetary policy that create stability and growth in the economy.
6.3. Telkom SA Financial Results
Operational Overview
Telkom faces many challenges at the moment but we will advance calmly,
determined and focused on delivering on the promise of our business and strategygoing forward. Nombulelo Moholi, Group Chief Executive Officer, Telkom.
Operational data sourced from Telkom Ltd financial results shows a declining trend
from their main operations for fixed line market and it has decline by more than 25%
between 2008/09 to 2011/12. The current situation is of a concern and urgent steps
need to be taken to address the downward trend. This can be partially attributed by
management taking a strategic decision move away from relying from its revenue and
operations from fixed-line voice to focus on broadband and data related revenue instead.
Telkom will have to compete with established role player in the broadband and date like
Vodacom, MTN, Cell C and Neotel. The strategic focus has seen Telkom launching 8.ta
mobile division in 2011 and investing on capital and infrastructure development in the mobile
communication into the market. There was a positive response from the market that saw a
huge increase by more than 100% in the subscriber base between 2010/11 and 2011/12.
The table below show the operational data for the company for the last four financial year
period:
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Group Operating Revenue
Telkom has shown a decline of total revenue of 10% from R36.8bn in 2008/09 to
R33.1bn in 2011/12. Telkom generate (R30.6m) of the revenue from the fixed line
including subscriptions & connection, traffic, interconnection and data which
represent 92% of their total Gross Revenue. The rest of the revenue is generated
from the Mobile, international and other related income. The revenue on fixed line
over the period of four years had also show a sharp decline. This is a seriousconcern as they are losing the market and revenue on the market they should be
dominating as results of monopoly they had in the market. The following table shows
the breakdown of their revenue in the last four years:
Operational Data
2008/09 2009/10 2010/11 2011/12
Telkom South Africa
ADSL Subscribers 548,015 647,462 751,625 827,091Calling Plan Subscribers 590,590 715,221 783,193 819,018
Fixed access lines 4,451,000 4,273,000 4,152,000 3,995,000
Fixed line peneration rate (%) 9.1 8.7 8.3 7.9
Revenue per fixed access line ( R ) 5,349 5,345 4,863 4,865
Total fixed-line traffic (millions of minutes) 24,869,000 23,082,000 20,545,000 19,372,000
Interconnection 4,088 4,728 3,984 4,231
Internet all access subscribers 423,196 511,535 543,316 523,057
Managed data network sites 29,979 33,226 34,163 38,902
Total Company employees 23,520 23,247 22,884 20,939
Fixed access lines per employee 189 184 182 191
Telkom Mobile
Total subscribers n/a n/a 1,199,596 3,053,393
Active Subscribers n/a n/a 473,604 1,483,401
Telkom International
Africa Online subscribers 18,441 15,607 - -
MWEB Africa subscribers - - 19,777 -
iWayAfrica - - 25,184 22,386
Source: Telkom SA Limited Group Annual Results
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Gross Operating Expenses
Telkom spend R31.2bn in the 2011/12 representing an increase of 6% increase
compared to 2010/11 which is just above the annual inflation rate. The main expense
in Telkom is Employees Benefit expenses which represent 28% of the total gross
expenditure, selling and admin expenses and depreciation. The table below shows
the breakdown of costs:
Telkom has spent an amount of Rxxx on Research and Development compared to
Rxxx (2011/12), this represent an increase xx% and spending of Rxxx in the last four
years.
Condensed consolidated statement of financial position as at 31 March
Telkom has stable balance sheet over the last four years. The exception was on
2009 when a significant disposal Vodacom shares. This has resulted in the portion of
Rm 2008/09 2009/10 2010/11 2011/12
Fixed line 33,523 33,487 31,533 30,638
Subscriptions & connections 6,614 6,814 6,763 6,900
Traffic 15,323 13,893 12,045 11,078
Interconnection 2,084 2,608 1,679 1,757Data 9,310 9,969 10,699 10,517
Other 192 203 347 386
Mobile - - 81 1,200
International 1,900 1,887 413 368
Other revenue & eliminations 1,361 1,655 1,281 873
Total Revenue 36,784 37,029 33,308 33,079
Source: Telkom SA Limited Group Annual Results
Rm 2008/09 2009/10 2010/11 2011/12
Employees expenses 8,015 8,925 9,716 8,636Payment to other operators 8,430 8,386 5,567 5,484
Selling, general and admin expenses 5,704 6,643 5,545 7,193
Service fees 2,579 2,702 2,886 2,974
Operating leases 833 966 764 825
Depreciation, Amortisation,
impairement & write-off 4,659 5,124 4,965 6,138
Gross operating expenses 30,220 32,746 29,443 31,250
Source: Telkom SA Limited Group Annual Results
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their assets and liabilities being disposed to Vodafone. The assets and liabilities are
well managed. The following is Telkom Balance Sheet as at 31 March:
Capital Spending
The capital investment has decline by 50% by R4.8bn over the last four years from
R9.6bn (2009) to R4.8bn (2012). This is a major concern as the company is in the
technologically environment it must invest a huge capital in order to meet the new
technology available in the market. Capital projects must be prioritize to ensure that
those projects that increases revenue earning capacities are undertaken to ensure
that the company remains competitive. The capital spending on Multilinks could have
been used enhance the baseline technology to unsure that the fixed line market is
still attractive and competitive.
The detail of the capital spending is as follows:
Rm 2009 2010 2011 2012
ASSETSNon-current Assets 51,002 44,518 43,943 42,362
Current Assets 11,287 12,301 10,315 10,206
Assets of disposal held for sale 23,482 - 89 -
Total Assets 85,771 56,819 54,347 52,568
EQUITY AND LIABILITITIES
Equity attributable to owners 34,642 29,925 29,635 29,707
Non-controlling interests 853 339 387 434
Total Equity 35,495 30,264 30,022 30,141
Non-current Liabilities 16,970 14,204 14,974 12,718
Current Liabilities 17,433 12,351 8,899 9,709
Liabilities of disposal groups held f 15,873 - 452 -
Total Liabilitities 50,276 26,555 24,325 22,427
Total Equity and Liabilities 85,771 56,819 54,347 52,568
Source: Telkom SA Limited Group Annual Results
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7. CONCLUSION
Technology
The following can be concluded after a careful consideration of all the factors. KT will
be able to:
Assist Telkom achieve its expansion targets while benefiting market share.
Support the innovation drive of Telkom and build customer confidence
Gain access to the growing ICT will sector in South Africa.
Partner with Telkom to advance business into the African continent
Political
Governments drive to reduce unemployment prevents it from reducing
employee numbers even when this proves to be efficient. KT Corp may
therefore be investing in inefficient company.
Governments obligation to rollout broadband in rural areas at all costs
may be unprofitable. KT Corp may not make as much profit as they would
have wanted.
Problems may arise whenever KT Corp as a shareholder disagrees with
Telkoms expenditure on some government initiatives and functions. In fact
KT Corp may not be able to control these expenditures.
Governments indecisiveness may delay decision making and therefore
Rm 2009 2010 2011 2012
Baseline 3,327 2,366 1,736 1,822
Mobile - - 1,475 1,372
Network evolution 1,373 654 550 733
Multilinks 2,791 1,036 - -Other expenditure 2,138 1,321 780 856
Total Gross Capital Expenditure 9,629 5,377 4,541 4,783
Source: Telkom SA Limited Group Annual Results
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delay the implementation of KT Corps ideas.
KT Corp may not be able to bring stability into Telkom for as long as
Telkom leadership is determined by government and it will be a bad idea
to invest in an instable company.
Telkom has lost some skilled top managers because they were not
allowed to run the organisation the best way they know how especially
when their ideas conflicted with the governments objectives. KT Corp has
the skills and other valuable resources like knowledge from their research
& development but with governments control they may not be able to
implement most of their ideas and those that they do implement may be
delayed so clearly investing in Telkom may not be a good idea for KT
Corp.
8. RECOMMENDATIONS
Legal
In order to invest in South Africa, it is of utmost importance that KT Corp comply with
the South African regulatory framework. It is therefore advised that KR Corp:
Notify the Competition Commission and ICASA of their intention to buy shares
in Telkom, and ask for a declaratory order as to whether the transaction must
be regulated by the Competition Commission;
Complies with South African employment regulations, specifically by obtaining
work permits if Korean employees are send to South Africa;
Complies with South African tax regulation, and the overpayment of tax by
Korean employees in South Africa; and
Complies with South Africas EEA, BBBEE and Foreign Exchange act.
Political
If KT Corp is still interested in investing in South Africas ICT Industry, it
must consider buying a stake in a company that does not have
government as a shareholder like Neotel which is still fairly new in the
market.
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KT Corp may also wait to see if Telkom will be finally split between
Wholesale and Retail and only then buy a stake in Telkom Retail which will
be privately owned.