Management Perspectives

The recent acquisition of Air India, India’s national carrier, by the Tata Group was celebrated by a large part of the Indian population. Many called it the Indian civil aviation story coming a full circle. However, several experts cautioned those indulging in superlative speculations on the transformation of Air India into a profitable world-class airline, with some reality check. They highlighted the ‘baggage’ with which the lossmaking public sector undertaking (PSU) is returning to the ‘Tata stable’ and have listed a series of areas from efficiency to professionalism, and people practices to brand management, as areas of challenge that Tatas will have to deftly handle in their endeavours of transforming the Maharaja to the iconic status it enjoyed in the global civil aviation space under the leadership of JRD Tata, nearly 50 years ago. Several aviation aficionados have provided scenarios of turnaround strategies that the Tata Group might adopt to bring about the much-needed makeover. In this context, it is worthwhile going back in time 20 years, when the Tata Group had acquired another PSU in the telecom sector, and the way in which it was turned around to become a global telecommunications major. There may be several learnings from this story, albeit from a different sector and context, for the team working on Air India’s transformation.

In February 2002, the Tatas formally acquired 25 per cent equity stake (with management control) at r1,439 crores in Videsh Sanchar Nigam Ltd. (VSNL) by signing the shareholders’ agreement with the Government of India. This was part of the Vajpayee-led government’s privatisation initiatives. At that time, VSNL was predominantly an international voice company with a monopoly in India. To gain majority equity control in the company, Tatas purchased the remaining shares of VSNL from the market. The VSNL investment was part of Tata Group’s long-term strategy of entering the bustling telecom sector, which had immense domestic and global growth potential. VSNL came relatively cash-rich due to years of earning on every international call made from India.

Soon the scenario changed. Few months after the takeover, the government unexpectedly killed VSNL’s monopoly in international long distance (ILD) telephony. Consequently, call rates plunged from US$2 (r86) to 5 cents a minute. The Tatas realised that they would have to find new businesses and markets for VSNL that offered better margins and were more aligned to differentiation. They initiated a globalisation drive fuelled by acquisitions and diversification away from the commoditized space of carrying voice, which had contributed 98 per cent of revenue in 2002. In 2003, VSNL opened offices in USA, UK, and Sri Lanka, with the international division based out of Singapore. Let us see what was happening on the other side of the globe.

Internet and IT were gradually seizing the world. Since 1997, global internet traffic roughly doubled every year. In anticipation of making quick bucks on the back of the dotcom boom, much of the industry was convinced that traffic was doubling every 100 days. This led to investments of trillions of dollars in creating telecom infrastructure to support the supposedly required bandwidth. Andrew Odlyzko, head of the digital technology center at the University of Minnesota, observed that between 1998 and 2002, total transmission capacity increased 500-fold while the demand for transmission capacity merely quadrupled, a rise that could easily be accommodated by existing networks. Consequently, around US$150 billion were unnecessarily spent to build telecom networks in USA and another US$50 billion in other parts of the world, especially in Europe. When it became evident that the projected explosion of demand for internet was not going to happen anytime soon, there was a huge fall in market capitalisation of telecom infrastructure and equipment companies. Some like Nortel suffered a fall in market cap from US$400 billion in 2000 to US$3 billion in 2002. Others like WorldCom indulged in accounting frauds by falsifying profits to the tune of US$11 billion.

Tyco Global Network (TGN) was one such global, under-sea fibre-optic network of the Tyco conglomerate. It had invested over US$3.5 billion in building one of the world’s most advanced and integrated network that provided seamless connectivity across 50,000 kilometres of undersea and terrestrial cables across USA, Europe, Africa, and Asia. It surpassed any global network in terms of design capacity. Between 1991 and 2001 under the leadership of the now-disgraced CEO Dennis Kozlowski , Tyco had acquired 1,000 companies at an investment of US$63 billion. TGN was thus part of Tyco’s ambitious growth plans. In November 2003, when Edward Breen took over as chairman and CEO of Tyco, he ventured to sell many commercially non-rewarding businesses of the conglomerate. This included TGN which was bleeding cash and had never made money for Tyco. Tata Communications first came to know of this opportunity through Goldman Sachs in March 2004. By the time the news became public, eight prospective bidders were eyeing the network including VSNL and Reliance Infocomm from India. The other bidders included Singapore Technologies, California-based Trinity Ventures and US-based Pivotal Private Equity.

Becoming the world’s biggest carrier of international phone calls Tyco and VSNL already had an existing relationship. The two had signed a turnkey supply contract for a 3,100 kilometres undersea fibre-optic system connecting Chennai with Singapore to meet current and future voice, data and internet bandwidth demands from India to South East Asia and to various tech hubs on the west coast of USA. The Tyco acquisition would give VSNL (now Tata Communications) an instant global network and improve its competitive position in Indian markets, where a telecom war with Bharti Telecom and Reliance Infocomm was beginning to unfold. The latter had already acquired Flag Telecom, a US-based company in November 2003 for US$207 million. Flag had a 27,000 kilometres cable system connecting UK with Japan via India but had filed for bankruptcy in April 2002. Bharti had a 23,000 kilometres advanced fibre optic domestic long-distance network connecting 300 towns and cities across India.

Competition had led to decline in Tata Communications’ business within India (which had till then enjoyed a monopoly) with a 50 per cent fall in revenues in the international voice business between 2002 and 2004. A shift of focus towards data services and global connectivity for providing end-to-end solutions for enterprises and telecom carriers was a strategic imperative. This was a huge business opportunity with India becoming the BPO and IT offshoring hub of the world. The TGN acquisition would provide Tata Communications access to unrestrained bandwidth on the Atlantic and Pacific routes for over a decade and strengthen its competitive position in Indian markets. The board was convinced of the opportunity.

Arun Gandhi, then director at Tata Sons, who led the acquisition process highlighted the uniqueness of this deal. Unlike other acquisitions, this one did not involve buying shares. Instead, it involved acquiring undersea assets at various locations, and 11-12 landing stations in many countries starting from Japan on the Pacific, going into USA and on the other side coming around the globe. It was for the first time anybody was acquiring undersea assets across the globe. After three months of due diligence, Tata Communications submitted an all-cash bid for US$155 million. Three months later, in November 2004, Tata Communications finally clinched the deal at US$130 million (r585 crores) (with certain technical strings attached) for acquiring a 60,000 kilometres of state-of-the-art undersea cable network in the continents of North America, Europe and Asia.

No acquisition is without its unique complexities. Gandhi recalled an interesting situation in Portugal, where Tatas could not acquire the cable assets under their licensing laws but had to acquire Tyco’s subsidiary in Portugal. This happened two days before Tatas were to close the transaction. Compared to acquiring an asset, acquiring a company has its own problems, particularly about any contingent liabilities or disputes. ‘In those two days, I had to get done due diligence in Portugal while sitting in New York. Confirmation on assets acquired in Japan also started coming in. When Japan was awake, things were still sleepy in New York. We almost didn’t sleep for two days while closing the transaction. We had to have lawyers and people in every jurisdiction of the globe.

They had to be told what to do, what not to do, and what confirmation we wanted, before we could close the transaction and give the cheque,’ recalled Gandhi with a sense of excitement.

Just when he thought the transaction was over, a new complication emerged. Tata Communications had to issue the cheque on a Monday morning to Tyco’s CFO. Gandhi had informed the Tata team in India about this. They confirmed that they would transfer the money with their international bank’s branch in India, and the cheque would be issued by the bank’s branch in New York. On Friday evening, Gandhi called that bank’s office in New York requesting for the banker’s cheque at 9 am on Monday. They refused stating that these cheques were only printed at some place in New Jersey, and by the time the cheque is printed, and the courier brings it to Gandhi, it would be mid-day. An extremely upset Gandhi retorted, ‘Look, my money is already with you in your branch, and you can’t give me a cheque! I am not accepting it. Give me the name of the senior most person in the bank and I’ll speak to him.’ He called the bank’s senior most executive, ‘You have my money and I am not accepting your branch’s statement that I can’t have the cheque because you don’t know when to print it and how it would be delivered. Do whatever you must do, I want this cheque at 9 am on my table.’ To his delight, the cheque was on Gandhi’s table exactly at 9 am on Monday morning. ‘What was the reason for his insistence?’ I asked Gandhi. ‘I had agreed for a time to close the transaction with Tyco’s CFO. I didn’t want to call him and say that I am not closing the transaction at the scheduled time because I don’t have a cheque! What would he think of the Tatas?’ confessed Gandhi.

With the required government approvals obtained in the USA, India and other countries, Tata Communications completed TGN’s acquisition on July 1, 2005 through formation of subsidiaries in various countries. Tatas had acquired the entire network with assets worth US$ 2.5 billion at less than 10 per cent of its value. Quoting Warren Buffet’s M&A principle: ‘Buy good businesses at fair prices and not fair businesses at good prices’, Gandhi emphasised that buying good businesses at fair price meant knowing fully well why the seller wants to sell the enterprise. Just like in the case of Ford wanting to sell JLR as it was in urgent need of funds, Tyco too was bleeding on TGN’s business and wanted to dispose the assets at the earliest. It was also the best time to acquire. Though current markets were down, yet future prospects were bright. Srinivasa Addepalli, former chief strategy officer at Tata Communications, observed that the subsequent surge in demand for bandwidth due to growth in social media, video conferencing and mobile broadband, validated the company’s bet on acquiring critical and valuable telecom infrastructure during a downturn.

The deal was a clear steal for Tatas as Tata Communications had cash reserves of r1,600 crores at that time. It had also earned r880 crores from the sale of two satellites. Thus, it could make the purchase through internal accruals with no debt component. Srinath Narasimhan, then executive director at Tata Communications, who later became CEO, described the deal as ‘A major step forward in our drive to offer our enterprise and carrier customers seamless, end-to-end telecommunications solutions that circle the globe.’

With the acquisition of TGN, Tata Communications became the world’s largest provider of submarine cable bandwidth. With fast-paced development in global communication, the company invested over US$2 billion in a series of acquisitions over next few years including Canada-based Teleglobe , and a majority stake in South African communications network operator, Neotel. In typical Tata style, it developed Neotel as a South African company with a local management team. The synergies, scale, assets, and competences gained from these acquisitions created an industry leader across markets. The sales, marketing and customer service skills that were weak during the VSNL years were tweaked post-acquisition. Tata Communications focused its efforts in building a customer service organisation, creating right skills in employees, and building good processes and systems around it, including investments in IT. Over the years, nearly one-third of its employees were based outside India.

By 2021, Tata Communications became the world’s largest wholly owned and most advanced subsea fibre network with a presence in 190+ countries across the globe. It connected four out of five mobile subscribers worldwide and carried around 30 per cent of the world’s internet routes. It connected businesses to 80 per cent of the world’s cloud giants and served over 7,000 customers globally that represented 300+ Fortune 500 companies. Due to internationalisation of operations, nearly 80 per cent of company revenue was generated outside India. In less than two decades, Tatas had been supremely successful in converting a sluggish public-sector enterprise like VSNL into a global telecommunications conglomerate.