Executive Insights

Dialing into customer-centricity in telecom expansion

by Hilal Halaoui & Adel Belcaid
written by Hilal Halaoui & Adel Belcaid

Over the last few years, Middle Eastern governments have significantly opened up their telecommunications markets and broken up the monopolies of their state-owned, historic operators. Spectrum licenses were awarded at record prices and the new entrants engaged in head-to-head competition with the incumbents. As a result, mobile penetration soared and rapidly exceeded the psychological limit of 100 percent in many markets. In Saudi Arabia, for instance, mobile penetration was hovering around 30 percent in 2003. In 2008, it quadrupled to 120 percent according to Booz & Company analysis. While this spectacular growth brought countless benefits and choices to the end-users, it does mean today that mobile subscriber acquisition in the mainstream market has become a more difficult challenge. Thus, to achieve the growth and returns their shareholders have come to expect, leading Middle Eastern mobile operators have essentially pursued a two-pronged approach: on the one hand, they want to maximize the value capture from their domestic markets and defend their positions; on the other hand, those who can afford to are seeking additional growth in foreign, less penetrated markets.

While international expansion comes with an evident load of challenges that several Middle Eastern players are facing for the first time, maximizing value capture in the domestic market is, perhaps unexpectedly, no less challenging. It requires mobile operators to pursue, also for the first time, smaller niche segments, which typically crave customized value propositions and are usually ill-served by the generic, one-size-fits-all offerings that prevail in the mainstream markets.

Answering the call
Successfully pursuing niche segments is no small task for most operators in the region. It requires major discontinuities in just about every aspect of their business: strategy, branding, technology, organization structure, human resources, corporate culture… no area is spared! But mobile operators will find comfort in convergence, which comes with just the right toolkit to make them relevant to niche markets, at least from a technology point of view. Indeed, the convergence of media, fixed and mobile communications is making it possible for mobile operators to keep growing through customized value propositions targeting different customer segments. Mobile content is witnessing exponential growth and technology innovations, such as IMS (IP Multimedia System), promise superior and unprecedented user experiences centered around convergence. These game- changing technology developments are disruptive enough to not only bring niches within “business-case-proof” reach of mobile operators, but also to re-invent the mass market game and effectively turn it into a long tail of niches and segments, each with their own needs and wants and each with their own willingness to pay.
This is nothing short of a revolution in the mobile communications space and could mean a vast blue ocean of opportunities for players able to take advantage of them and augers well for the industry as a whole. Indeed, mobile operators stand to reap the benefits of price discrimination, service bundling and content differentiation, and the move away from cut-throat price competition that is characteristic of a mature or declining industry.
To make the most of this technology-driven opportunity and durably rejuvenate their domestic markets, regional mobile operators must first develop strategies aimed to firmly and unequivocally embrace convergence and its ‘customer first’ corollary. Their strategic intent should be to further their customer intimacy and understanding, to leverage the new technology-driven capabilities of convergence to come up with pertinent and multi-platform offerings that customers are willing to pay for. They should aim to provide integrated, end-to-end solutions that grow their shares of the customer wallet and reduce churn by increasing switching costs to customers. Next and foremost, regional mobile operators need to embark in major organization restructurings, moving away from product-centric organization and towards customer-centric structures. They should organize around well-defined customer segments while preserving any scale or scope advantages they might be deriving from their legacy structures.
A notable example of such restructuring is the Saudi Telecom Company (STC), who was among the first industry heavyweights to embark in a major structural transformation sparked by its FORWARD corporate strategy. At the heart of the FORWARD strategy lies the customer, whether an individual, a small business or a large corporation. To execute its ambitious corporate strategy, STC adopted a customer-centric structure that centered around four business units: personal, home, enterprise and wholesale, each of which is focused on a broad segment of the market and has profit and loss responsibility. These market-facing units are all supported by horizontal functions such as network and shared services. Concurrently, and to support the structural transformation and durably instilled in the minds of customers and employees alike, STC conducted a major re-branding exercise that aimed at affirming its new customer-centric direction and signaling to all stake-holders the completion of its 10-year long transformation from a public ministry of the Saudi government to an agile, market-oriented telecom heavyweight.

A corporate lifestyle choice
But customer-centricity does not stop at level one of a mobile operator’s organization structure. On the contrary, it can go far into levels two, three and beyond. Functions such as marketing, sales and customer care can be entirely structured around customer segments with product teams virtually absent. Customer-centricity can also turn into a corporate “lifestyle” as far as organization structure is concerned, with customer-centric inter-BU processes and one-stop-shop windows between downstream and upstream units.
In sum, customer-centricity clearly comes in different shades and shapes and the key organizational question for any mobile operator CEO should be: How customer-centric does my structure need to be? To answer this question, mobile operators need to understand the markets they operate in, including the mass and niche components. They also need to understand their capabilities, existing and envisioned. In the former, they should have a very good understanding of market segmentation and assess the appetite of each segment for service and product customization. In the latter, they should assess their ability to offer integrated solutions and accurately address the customization needs of their target segments. In both, they should strike the right balance between supply and demand and come up with an organizational structure that is tailored with just the right dose of a customer-centricity and realism to implement it.

Hilal halaoui is a principal and ADEL BELCAID an associate at Booz & Company

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Executive Insights

Buoyed by innovation, telecoms are 2009‘s smart investment

by Uwe Neumann
written by Uwe Neumann

The telecoms industry seems well equipped to deal with the crisis. As turnover is primarily generated by innovations, the industry is fairly resistant to fluctuations in business. Therefore, investors who want to protect themselves could be interested in adding telecom companies shares to their portfolio.

This New Year’s Eve, a record-breaking 360 million SMS messages were sent in France. That was over 30 percent more SMS messages than the previous New Year’s Eve. The telecoms operators seem to be barely feeling the effects of the recession. In fact, over the last few months, telecoms shares have demonstrated a relatively strong resistance to the turbulent stock market. While the wider European market suffered a loss in value of almost 30 percent since October 2008, the European telecoms sector fell by a modest 10 percent. Clearly the telecoms industry is not completely immune to the effects of an economic downturn, however, the negative influences will have less of an impact on turnover and margin development than they will in many other sectors. We have come to this conclusion for the following reasons:

Turnover is driven by innovation
There are two main elements that influence turnover when it comes to telecoms companies: client growth and turnover per customer in cellular phone and fixed line/broadband/internet sectors. Both elements have continued to grow over the last 10 years despite economic cycles and despite the fact that they are influenced by sector-specific factors such as regulation, price development, competition and market penetration. We expect these sector-specific influences to remain prevalent in the future as there is currently no firm evidence to suggest that the effect of the recession on income is causing clients to change the way they use their phones or changing the dynamic of customer growth. In fact, turnover will be even more driven by innovations. The success of Apple’s new 3G iPhone shows that clients are prepared to pay more per month for these innovative products than ever before — regardless of the financial crisis and economic downturn. Turnover trends are therefore more likely to be driven by the anticipation and implementation of a technological innovation (broadband and mobile internet) than periods of economic downturn.

Margins are likely to remain fairly stable
One of the main concerns for investors is margin development, which pessimists believe will suffer during the financial crisis and economic downturn due to increasing financing costs for investments and rising operating costs. However, we believe that the cost structure of telecoms companies is more flexible than people think. For example, a decline in customer growth leads to a reduction in marketing and acquisition costs. Less money is spent on mobile phone subsidies, which frees up operating margins to some extent. Over the last two years, many companies have also implemented cost reduction programs which will really start to pay off in 2009. Future investments can be delayed without risking a negative impact on daily business. Last but by no means least, we must mention baseline effects that no longer have an impact on operating margins due to the declining effects of administered tariff reductions — this includes tariff reductions resulting from roaming or termination fees, for example. Companies, therefore, have a sufficient safety net to absorb losses in turnover and keep their margins stable.

Steady cash flow and sound balance sheets
The aforementioned factors indicate that telecoms companies can keep cash flow generated by their operations at a fairly steady level. Based on current estimates for turnover, margins and cash flow between 2008 and 2011, the return forecast remains fairly stable even though growth in turnover seems to be fairly sluggish for the sector as a whole. Taking into account the low level of debt typically accrued by the telecoms industry in the past, the risk of refinancing is relatively minor. On average, the earnings before interest and taxes (EBIT) generated by the European telecoms industry cover its current interest expense more than five times over. These attributes are a major attraction to investors during a recession, which suggests that the industry will continue to outperform the market. Careful investors should therefore incorporate telecoms shares into their portfolio during the 2009 investment year.

Uwe Neumann is an equity analyst at Credit Suisse

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Executive Insights

Carbon offsets – the moral and necessary future of business

by Armen Vartanian
written by Armen Vartanian

The good news about global warming is that we are still talking about it, despite the current difficult economic circumstances. The downturn’s local consequences are being felt by everyone, so it is heartening that we are maintaining a dialogue on long-term issues. The bad news is that climate change is happening and mankind’s continued contributions are now proven. If unchecked, climate change will continue to grow into a problem that will eclipse today’s financial woes.
Here are some examples of the pending financial costs we will face as the earth’s environment alters: the economic and social impact of 150 million refugees from higher sea levels and lost farmland; greater heating and cooling costs to deal with more extreme temperatures (new highs and lows); rebuilding or relocation of entire regions due to weather and fire events, and crop prices volatility as ecosystems adapt to new weather patterns. These costs will reduce future cash flows to society and therefore they represent a liability for corporations today. Therefore, reducing your company’s impact on global warming and reducing this future liability is a value-creating endeavor.

The growth of green
Companies worldwide reduce their contribution to climate change for many reasons, including complying with a corporate mandate, saving money by using less power, pleasing and retaining employees, improving corporate brand image and also doing ‘the right thing’ in joining the fight against climate change. From Morocco to Iran, there are many examples in the Middle East and North Africa (MENA) region of companies taking action on carbon emissions. Green building standards are being adopted in the UAE, Qatar and Bahrain. Abu Dhabi’s ambitious $15 billion dollar Masdar initiative, with its various funds and programs and a 50,000 resident carbon-neutral city, is a shining example of visionary green thinking that will generate value. Sabban Properties intends to make its $274 million Sabban Towers the first carbon neutral development in the MENA. Renewable energy projects, including wind and solar, are in advanced stages in Morocco, Jordan, Egypt, and Turkey. Startup recyclers are recovering value from significant construction wastes around the region.
An innovative and cheap way for an organization to reduce its carbon footprint with minimal effort is through the purchase of carbon offsets. Carbon offsets are essentially contracts that commit a third-party project company, usually in low-cost environments, to reduce carbon emissions on the purchaser’s behalf. For example, one offset project in Ethiopia replaces villagers’ kerosene-burning stoves with lower-emission butane stoves.
In order to attain ‘carbon neutrality,’ a person must measure their organization’s carbon footprint and purchase enough offsets to reduce the client’s emissions to zero, making them ‘carbon neutral.’ Then they must work to reduce their footprint so that the following year the number of carbon offsets needed to reduce their emissions to zero is lower than the previous. Eventually, the number of third-party carbon offsets needed to remain carbon neutral will be minimal and the outcome is significant reductions in carbon emissions.

How ‘on’ are offsets?
Opponents to the purchase of carbon offsets claim that they create a feeling of a clean conscience without actually changing the buyer’s behavior. We disagree. By following the process described above, a company can reduce their future liability from carbon emissions by contributing to offset solutions that are already set up. Then, at the same time, the company would be committing to reducing their carbon footprint through internal reductions — thus guaranteeing behavior change. Due to the global nature of climate change, purchasing carbon offsets from elsewhere in the world and reducing emissions locally have the same net effect on this worldwide problem.
The rationality of this argument, when translated to the context of the UAE, for example, would be as follows: an individual in the UAE can purchase carbon offsets worth $400 and reduce his carbon footprint to zero. If that same individual were to purchase and install solar panels on his home to offset his carbon emissions from automobile use and air travel, the system would cost him more than $10,000 and would last for around 10 years, costing him on average, $1,000 per year to achieve carbon neutrality instead of $400 with offsets. And the same thing goes for companies. The average company in the UAE can bring their headquarters, including flights, to carbon neutral for less than $35,000 per year.
The only question is, what are you waiting for? Reducing your carbon footprint is relatively inexpensive, easy to do with local specialists and just might help you sleep better at night.

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Comment

An empty coup

by Peter Grimsditch
written by Peter Grimsditch

Obama orders arrest of three four-star generals. Air Force and Marine chiefs accused of trying to overthrow the administration.” If these headlines were splashed across the front pages of the American press, worries in the United States about healthcare, stimulus packages and budget deficits would pale into afterthoughts. Yet life in Turkey continues as normal, at least for the moment, despite last month’s arrests of 49 former and active military officers. Those held include two former commanders of naval operations, two admirals, three vice-generals and one vice-admiral, as well as two rear admirals and two brigadier generals still on active duty.

On the surface, the arrests are an extension of the round-up over the past two years of nearly 300 people who are alleged to have been plotting to overthrow the government of the Justice and Development Party (AKP). The bizarre schemes in the latest charges included planning for a mosque to be bombed and a Turkish fighter jet to be shot down, so the armed forces could step in to rescue the country from chaos, conveniently deposing a democratically elected government perceived by some to be hell-bent on turning Turkey into an Islamic state.

The latest skirmish between the AKP and the military prompted President Abdullah Gul to arrange a meeting between Prime Minister Recep Tayyip Erdogan and armed forces chief General Ilker Basbug. After three hours of talks, Gul’s office said that any “current problems would be solved within the framework of the constitution.”

So, no joy for those fearing (or others hoping for) a military coup. In fact, the prospect is highly unlikely since the whole world has changed since the military last flexed its muscles that way in 1980. Turkey is no longer the last outpost before the start of the evil Soviet empire, and there is less incentive for foreign states to sanction military coups. The current charges stem from 2003 and a war game codenamed Sledgehammer, which included steps to unseat the Erdogan government by creating chaos in the country with the help of terrorist attacks, according to press reports. The AKP says it was for real; the army says it was part of a normal exercise.

Erdogan has distanced himself from the arrests by saying that the judiciary is in charge of the investigation and technically he is correct.

What may be just as intriguing as the alleged plot is the role in its revelation played by the Taraf newspaper, which has revealed many of the stories about the equally alleged coup attempt. The paper is only two years old, and its inception coincided with widespread arrests in relation to the “Ergenekon conspiracy” case, in which well over 200 people are still under arrest for conspiracy to overthrow the government. Taraf claims to have received material from military officers who are opposed to the plots. The fledgling daily has scooped its better-established rivals with lurid tales. The inherent conflict between the AKP and self-styled staunch secularists is rife with conjecture but not replete with facts. Each time the AKP uses its legitimate powers of patronage to appoint supporters into various establishment jobs, it risks the charge of adding yet another brick to the Islamist state it is supposedly building. There is never a mention that the secularists had been appointing their own favorites for more half a century before the AKP came into power in 2002.  Predecessors of the AKP presided over rampant inflation — some lottery prizes are still advertised as offering prize money of trillions of liras — and wholesale corruption. The AKP has reduced inflation to single digits, expanded the economy at a rate never seen in modern Turkey’s history and stabilized the currency.

Some financial analysts warn the very public spat between the army and the government will destroy all these economic gains. One report said the lira would quickly lose 8 percent. More sanguine (and cynical) observers recall the results of the so-called ‘e-coup’ in April 2007, when the army warned the AKP not to pose a threat to secularism, and the attempt to close down the party in 2008. In both cases the markets and the currency quickly recovered.

There is no particular reason to believe that this trial of strength will have any different consequence, and a military coup in Turkey these days is as likely as Obama arresting four-star generals.

Peter Grimsditch is Executive Magazine’s Istanbul-based correspondent

 

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Executive Insights

Successful development of small and medium-sized enterprises

by Ziad Ferzly
written by Ziad Ferzly

The majority of enterprises around the world are small and medium-sized enterprises (SMEs). According to the European Union, a small enterprise has a headcount of less than 50, and less than $12.5 million in turnover. A medium- sized enterprise has 50 to 249 employees, and a turnover below $62 million. There is a lot of attention given by international organizations, government agencies and donor institutions to the development of SMEs. SMEs are the backbone of economies, especially since they easily constitute more than 90 percent of the businesses in a given country. In fact, small businesses alone tend to make up more than 90 percent of all businesses and they typically come to mind when SMEs are mentioned. SME development ends up being the main component of economic development. SME development programs should typically focus on:

Better business environment: Policy makers should take the interests and input of SMEs into account when changing existing policies, rules, and regulations, or when setting new ones. Cutting red tape and streamlining processes are crucial to helping all companies grow. Starting a business, closing a business, hiring employees, letting them go, and enforcing contracts are just some aspects of the business environment that need to be evaluated and improved.
Improved access to finance: Capital is the lifeblood of a company. Small businesses are usually at a disadvantage when it comes to accessing finance to operate and grow. Creating and strengthening a variety of financing mechanisms (e.g. loan guarantees) are important to providing SMEs with required capital. Governments can make much longer-term investments than private investors, and can reap rewards in different forms, from higher employment and taxes to capital returns and productivity.
Greater access to services: SMEs typically need services and resources that they cannot afford or cannot pursue on their own. Providing business skills and entrepreneurship training, improving access to new markets, encouraging import substitution and enhancing coordination between companies in one economic sector are a few examples of SME assistance that can be offered.
Those who are planning, funding, and running SME development programs, and other types of programs too, should realize that many factors affect the success of their efforts. They include:
Commitment to success: The various players who are in charge of the SME development programs need to be committed to these programs, their stated goals, and their success. While this seems self- evident and intuitive, many programs do not really succeed because the people in charge do not care enough about the results.
Backing for the right time: Institutions need to back or support programs for the necessary length of time. So, if a program needs six years to achieve its goals and become sustainable, funding should not be cut after four years.
Knowledge and expertise: The people managing SME programs must know how development works. Consultants and employees should also have experience working with SMEs in a region, and expertise in the sectors targeted for assistance, as well as the functional help being offered.
Market-driven approach: It is important to listen to SMEs and understand what they need rather than come with a predetermined view of what they require. A short survey can shed light on what SMEs want. If SMEs are not willing to even partially pay for certain services, even when they can afford them, then those services are probably not needed.
Tailored programs: While “what” should be included in a SME development program at a very high level can be similar between two countries, “how” to proceed and “who” should drive can certainly vary from one country to the next. A tailored program will yield better results than one that is pre- packaged and imported from another country.
Overall coordination: Typically, there are many programs running at the same time in a country or a region. To avoid overlap, it is important to understand what other programs are doing to properly coordinate between them. That way, the SME program can have maximum effectiveness.
Flexibility: Finally, the programs need to be flexible and respond to changing needs as they arise. The implementation phase can reveal issues that were not apparent at program inception. The ability to respond to new data or changing conditions is important to the overall success of these programs.
Setting policies with SMEs in mind and having programs targeting their development and growth is good for the entire economy, and can benefit larger and more capable companies. Large companies benefit from a vibrant SME sector that can provide them with needed products and services. At the end of the day, SME development is critical to overall economic development.

ZIAD FERZLY is managing director at Cedarwood Advisors, which provides strategic, financial, and investment management services to companies, investment firms, institutions and governments around the globe.

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Finance

Solidere – equity research guide

by Marwan Salem
written by Marwan Salem

Solidere is a Lebanese real estate development company established in 1994 and listed on the Beirut Stock Exchange. Solidere is a single purpose company exclusively responsible for the reconstruction and the development of the Beirut Central District.
The company is also engaged in real estate development outside of Lebanon through its associate Solidere International. In 2006, Solidere management obtained shareholder approval to venture into urban planning and real estate development outside Lebanon, in an effort to expand master development activities overseas. As a result, Solidere founded Solidere International (SI), becoming managing shareholder with 37.2 percent ownership.
Solidere’s long-term strategic objective is to diversify its revenue mix to compensate for the erosion of its finite land bank in Beirut City Center. Therefore, since 2007, Solidere has embarked on a bold expansion plan with a view to securing new revenue streams. The core aspects of Solidere’s long-term strategic objective encompasses the following:
• International growth strategy with SI
• Increasing rental income up to $100 million
• Increasing revenues generated from consulting services
We have performed an estimation of land and property prices per square meter of built-up area (BUA), based on management data and independently collected recent land sales figures. In order to be on the conservative side, we have adjusted the data. The resulting estimated net asset value per share is $48.55.
Solidere’s recognized revenues in 2007 amounted to $310 million resulting mainly from land sales, most of which came from contracts signed in previous years. Total revenues grew by 33 percent, eight percent and 12 percent in 2005, 2006 and 2007 respectively to reach $310 million by the end of 2007. This increase in total revenues was primarily driven by a surge in land sales. We believe this trend can be sustainably driven by the projected revenues from land sales, expected to increase drastically with the near completion of the infrastructure in the reclaimed area (1.4 million square meters of BUA) and the depletion of the traditional area (0.45 million square meters of BUA). Solidere’s total revenues are expected to steadily increase from $310 million in 2007 to $630 million by end 2012.
Solidere is expected to record an increasing net income, which is projected to reach $237 million in 2009 and $435 million in 2011. The resulting compounded average growth rate (CAGR) of net income from end 2007 until end 2012 should be equal to 16.8 percent.
Solidere has adequate cash reserves. The company’s cash position at end 2004 stood at $116 million, rising to $328 million at end 2007. Its accounts and notes receivables grew in parallel from $211 million at end 2004 to $319 million during the same period. All in all, the company has increased its liquid assets/total assets ratio from 16 percent by end 2004, up to 27 percent by end 2007, implying a good liquidity position.
We have decided to pursue a DCF valuation for Solidere (standalone) and have assumed the NPV of Solidere’s share in SI to be equal to its book value.
We believe this methodology properly reflects the fair value of Solidere as it is too early to envisage accurate future cash flows for SI due to its nascent status and the unstable regional real estate scene.
Our fair value estimate, derived from the discounted cash flow of solidere standalone projections, in addition to the book value of SI, amounts to $29 per share, resulting in an important upside potential. It is worthwhile to note that any positive outcome from Solidere International would have an important impact on the Solidere share price.

Marwan Salem is head of research & advisory and Raya Freyha is financial analyst at FFA Private Bank

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Executive Insights

Drive Communication

by Paul Boulos
written by Paul Boulos

How a country is perceived on the world stage by its own people or by other nations is crucial to its survival and success in the new globalized model. Nation branding and country positioning is an untapped concept in Lebanon and what it has to offer. While the notion of nation branding is not new on an international scale, on a regional scale it represents a hidden opportunity for Lebanon. Whether based on individual national objectives of trade, investment, travel and tourism, or through NGOs, positioning a country’s brand is more important than ever for small countries like Lebanon.
As a brand, so far Lebanon has been most successful at manufacturing human talent. This talent has demonstrated that it is cultured, competent and cost efficient. It mainly resides in the diaspora, a large pool of potential that has not yet been linked back to the ‘mother brand.’

Arab nation brands
Some Arab localities have made serious attempts to style their countries as brands, according to the national agenda of their governments and international interests. Examples of this include Dubai, Doha, Abu Dhabi and Manama. Dubai was sought after for its transit and service qualities; Doha as an international sports and education destination; Abu Dhabi for its culture and Manama as a smart business choice.
We have seen other attempts via one-off campaigns by the ministries of tourism in places like Turkey and Egypt. Yet such campaigns fell short of promoting their country brand under one unifying umbrella. India, China and Australia could serve as good examples of exploiting nation branding by building one unifying brand.

What does it take?
Today, the world we live in has no geographic boundaries when it comes to conducting business, especially when it comes to communication. If we are to shift our mindset and think of Lebanon as a ‘creative nation’ brand, we must first define the key performance indicators. Second, we must identify the industries that are considered ‘creative’ and see what it takes to execute them.
Thinking of Lebanon as a creative nation brand, we must be able to define our brand promise: For what do we stand? What is our cutting edge offering? What is the content that we will offer on the international market? How we will deliver it? What is our target market? Who are our customers and what do we know about them?

The ‘attention age’
Welcome to the ‘attention age’, where before delivering a message in a cluttered environment, countries must rise to the challenge of grabbing attention. Then, they must deliver a promise, live up to it and earn the respect and trust of investors, consumers, media and other nations.
The information age is over. We have officially entered the attention age, whereby attention is won and credibility through creative talent is the only sustainer. Lebanon is an ideal platform for a creative nation brand, as more and more products and businesses export ideas instead of tangible commodities. If we are to think of Lebanon as a cultural product, then this could be a start. The demand for creative products and industries is growing as consumers are more into cultural exchange and social media. In fact, consumers today are using creative products and selling them in order to connect with specific dreams and lifestyles.

Lebanon’s success in creative sectors
Lebanon has made some interesting breakthroughs in various sectors, which could easily be labeled as creative industries or creative sectors driven by talent. Examples of this include advertising, architecture, design, arts, media, film, music, tourism and gastronomy. All these creative industries have as their nucleus the work, ideas, energy and creativity of a small team. Positioning Lebanon as a creative nation brand takes much more than designing just a nice logo with an appealing tag line. It takes having the human talent, the energy, the will and a common vision. The biggest problem with branding a nation like Lebanon is there are many different organizations that operate in a sporadic and slow manner. They do not liaise with other entities such as the ministries of tourism, trade or export organizations. Essentially, everyone does their own thing. It’s nearly impossible to get everything together and host it all under the country’s umbrella. Thus comes the need to define a common vision as to what Lebanon should stand for as a creative brand.

Nation brand assessment measures
The Anholt nation brands index offers a systematic approach to measuring nations’ brand equities in an index that he sets for national assets, characteristics and competencies. These include exports, people, governance, tourism, culture and heritage, immigration and investment.
In essence, countries are a lot like humans. Therefore it is important to consider the emotional attributes of these nations as they are perceived by others in the world. Despite all the chaos that Lebanon is witnessing and the instability that surrounds it, we have no excuse not to think in this untapped strategic and essential direction. As chaotic as our nation is, we have a trilingual culture, competency and cost efficiency. Hence, we stand a real chance to succeed in the emerging new world order where geographic boundaries no longer apply. As for the present and the future, Lebanon as a creative brand must focus all its efforts on harboring, developing and retaining its own creative talent.

PAUL BOULOS is business development director — Middle East & North Africa, at Drive Communication

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Finance

IPO Watch – Hints of a thaw

by Executive Staff
written by Executive Staff

Given the ongoing weakness in regional equity markets right now, it’s no surprise that the IPO market is still on the ropes. Many financial analysts from Ernest & Young, UBS, Gulf Capital, Global Invest and others maintain that 2009 will experience slow growth in IPO opportunities, and equity capital markets desks from Dubai to Saudi Arabia are sitting on their hands.

But some market observers are optimistic about the ice jam breaking for IPOs in the near-term, especially sometime in the second half of 2009. “The IPO window is closed for the moment due to prevailing market sentiments,” Ali Khan, executive director of capital markets at Arqaam Capital says. “However, six or nine months is a long time in capital markets, especially these days… once there is a better understanding of pricing trends, stock markets may rally well before house prices actually reach bottom, as investors will take a 12 to 18 month view ahead,” he adds.
The region’s IPO market is nowhere near recovery, but it looks like investors will have several offerings to choose from in the coming months. Saudi Arabia’s Mawarid Holding has appointed Saudi Hollandi Capital as lead manager for the planned IPO of its unit, Meed Trading Company. Although the company did not provide the details of the offering, the IPO is expected to be launched by the end of the 2009 after regulatory approvals. Meed Trading, which operates more than 200 retail outlets across the kingdom, “will be restructured prior to the IPO to make it a majority stake holder in seven other subsidiaries of the Mawarid Group,” the company said in a statement.
Also in Saudi Arabia, Abdul Mohsen Al Hokair Tourism & Development Group, announced plans for an IPO to raise funds to develop tourism projects on the Saudi coast and further develop plans to construct over 30 hotels across the Arab world. The company did not provide details as to the size of the offering and possible launch date, but Abdul Mohsen Al Hokair, the group’s chairman, said the launching is very much dependent “on the performance of the local stock market.”
In the region’s most battered economy due to the global financial crisis, one announcement came out of Dubai. Private charter Silver Air, said it will launch an IPO as part of its strategy to raise capital to expand its fleet with three additional Boeing aircraft. “This acquisition would be funded by an IPO in two to three years time with a listing in Dubai,” Steffen Harpoth, chief executive of Silver Air, told the press.
Meanwhile, the IPO of Etihad Atheeb Telecommunication or Atheeb, Saudi Arabia’s second fixed-line operator, was 3.5 times covered with subscriptions totaling more than $282 million. Atheeb launched its IPO in early February and the float was closely watched by market observers to assess investors’ appetite for IPOs. The company expects to list on the local stock market before mid-March and will begin its commercial operations by mid-2009.

Syrian markets
In the Levant, the Damascus Securities Exchange gave the go ahead to Bank Audi Syria and the United Group for Publishing, Advertising and Marketing, to list their shares. Bank Audi Syria is a subsidiary of Lebanon’s Bank Audi. Bank Audi Syria’s capital stood at $54.3 million at the end of 2007, according to available data. While Damascus-based United Group’s capital stood at $6.51 million at the end of last September.
Some analysts believe that individual and institutional investors remain in defensive mode, and in light of the current economic fundamentals and overall valuations, investors are more likely to buy shares in undervalued companies than in an IPO. “Investors’ reluctance regarding IPOs is understandable,” Samer Shaheene, senior analyst at Bloomberg says. “Many have been stung by stock market declines and a risk-tolerance level for IPOs is on the low end,” he adds. This has forced companies to seek out new sources of capital, where possible.
However, precedence shows that investors will always seek and find good investment opportunities in any market conditions. “When there is a period of lower-than-normal IPO issuance, bounce back is possible,” Jad Hawali, analyst at Zawya.com says. “The bounce back can happen without a solid overall equity market simply because there is pent-up demand for capital by private companies,” he added.
According to available data from Zawya.com, there are close to 60 IPOs planned for 2009 so far. Although there are alternative means to raising capital, the IPO is a favorite course for regional investors. Given the swiftness with which investors and companies respond to changing financial and economic conditions, this scenario may be what will play out at the end of the first quarter.

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Executive Insights

EM Leadership Center

by Tommy Weir
written by Tommy Weir

Enough for now with giving attention solely to the limitations imposed by this financial crisis — instead take a break and concentrate on the coming opportunities. There is an immeasurable potential to grow your business, but it requires a market shift.
This market shift can be summarized by the term ‘peopleization’ — meaning the ‘massive people markets’. Never before in history have there been markets with the size and density of today’s. Three realities define peopleization and they are having a remarkable influence on the future of business.

The world is growing — huge
The current population of the world is nearing seven billion and growing by 135 people per minute. To put this in perspective, note that it took from the beginning of history until the early 1800s for the world’s population to reach one billion. Then, in 1927, more than 125 years later, it passed two billion. In 1987, the world population was five billion; 12 years later, in October 1999, it passed six billion.
Now every 14 years the world will grow by another one billion people. It’s no wonder that so many people are concerned about what this means for our future. You also need to be attentive to what this means for your business.
When we talk about world population, we may be distracted by the magnitude of the number. So, let’s break down what it means for the population to grow by one billion every 14 years. That means the world grows by approximately 71.5 million people each year, or close to 196,000 people per day. In other words, every eight days or so the world’s population increases enough to add a city the size of Beirut.

The world is becoming eastern
Think about this: while the West is sleeping, the entire rest of the world is working — literally and figuratively. The focus of the world is no longer on the West. Success is and will continue to come when you turn to the East. At one point, if you wanted to make it big, you had to succeed in Europe and then it moved to the US. Now if you want to make it big you must succeed in China and India.
The world is now an Asian World. The picture is changing; the developed world is growing at a measly rate of two people per minute and the developing world at an astonishing rate of 151 people per minute.
In terms of economic size, China will soon by-pass Japan and the United States. China is today’s powerhouse. The power of the market shift comes alive when you add together GDP growth and population growth. For example, China is growing at a rate of at least two times that of the US, and they are four times as big. Make this calculation and determine the impact it will have on business.
Asia is becoming the anchor economy of the world. They are the leading global importer; in addition, they are now a leading exporter and trendsetter. They not only dominate the region, they have a controlling interest in the world. This is the location of future business.

The world is urban
In 2007, the world reached the invisible, but momentous milestone of becoming an urban world with more than 52 percent of the world living in densely populated, high- rise cities. And the growth of the urban world is not showing any signs of slowing down as every second two people make the dream-fulfilling journey from the rural world to the urban world.
While the world’s urban population grew very rapidly over the 20th century (from 220 million to 2.8 billion), the next few decades will see an unprecedented scale of urban growth in the developing world. The cities of the emerging markets will comprise 81 percent of the urban footprint and be home to more than five billion people. The cities in the East are exploding compared to the snail’s paced growth of the cities in the developed world.
In order to make the market shift, you need to be able to answer a couple of questions: “What does the market shift mean for my business?” and “How can I make the shift?”
How can you succeed if you are not there?

Tommy Weir, Ph.D., is executive director of the EM Leadership Center, specializing in strategic leadership development for fast-growth and emerging markets.

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Finance

Merrill Lynch – Gary Dugan (Q&A)

by Executive Staff
written by Executive Staff

Currently the managing director and chief investment officer of Merrill Lynch Global Wealth Management in Europe, the Middle East and Africa (EMEA), Gary Dugan has been in the financial business for more than 25 years — previous positions include managing director and global markets strategist at JPMorgan Institutional Investment Management and the Private Bank, and managing director and head of research and investment strategy at Barclays Wealth. Executive had the pleasure of a candid, one-on-one interview with Dugan after his ‘Year Ahead 2009’ presentation in Beirut, to discuss the effects of the global financial crisis on the region’s markets.

E How has the global financial crisis affected your operations in the Middle East? How have your clients been affected?
We found that clients have moved from being quite aggressive risk takers — so they were prepared to buy in emerging markets and local equities — and now they’re much more risk averse. If you look at the kind of marginal investment they are now making, it’s more in cash and gold — very, very safe investments. So I think their whole appetite for risk has changed and dropped quite dramatically. I would say that both the revenues and the scale of the assets that are available there for our business has dropped quite dramatically. But I think people in the past might have wanted to do it themselves, because it just seemed so easy — you went and bought a building one week and the next week you went and made 15 percent. They now realize that it’s not that easy and they need more advice. We’ve never seen so many people come into our presentations, we’ve never had so many phone calls, as people want to talk through what’s going on — they need advice, greater advice then we’ve seen for some time.

E Has the Bank of America acquisition of Merrill Lynch affected your operations?
I can’t comment, sorry.

E Where do you see the greatest opportunities for growth in the MENA region?
I suppose by country, in terms of the robustness of the business, it’s countries like Saudi Arabia and Kuwait in particular. Purely because the economies there have got even greater support from their governments, they’re holding on to their GDP, the local economies are more insulated from the outside world and if they do have internal problems there is sufficient government resources in order to stimulate the economy. I suppose the one disappoint we’re seeing at the moment — but it was coming — is Dubai, because you see this heavy reliance on cash flows from the central bank and from Abu Dhabi, which have a question mark over them. Also, because people have been so heavily leveraged into property, once property collapses they really have no wealth or free cash flow left. So the opportunities are going to be difficult in the future, but there are still some stronger markets that we’re seeing elsewhere in our franchise.

E So how do you think markets like Dubai can recover? With the economy of Dubai so dependent on its property sector, what are the key components to help them recover in the future?
Well, you hope that people have learned a lesson — that the kind of one single asset that they were playing, they realize that they need diversification and a more international perspective in the way in which they invest. So we’re hoping that when they come to us they’ll be thinking, “If I’m going to stay in property, maybe I’ll look at London, New York, or other places. Maybe I’ll think about buying bonds to settle offside my very high risk asset in property.” So we’re getting a greater diversification of assets, we’re talking to our clients about more asset classes and more vehicles than we’ve ever done before. We’ve already had a massive pick-up in interest in commodities just from this visit as people see that as the opportunity — not to make huge amounts of money, but to provide some diversification against the risk they still have in their illiquid investments.

E What do you foresee as the most difficult challenges in the next 12 to 18 months?
I think in the immediate term the biggest disappointment will be a sense that 2010 is not going to be that much better. The growth in that year will be around the world only about one to 1.5 percent, whereas people had hoped we’re going to go back to the four and five percent numbers we’d had before. The second thing is — and this is a dramatic shift from where we’ve been for the last 20 to 30 years — so much less inflation around the world, even here in Lebanon you may be talking about inflation rates that get down close to zero — in the developed world, numbers that are negative, and again, whilst Japan has been the one country that has suffered that and struggled with it, we could see the whole world struggling with it. So it means a different environment for the way people live their lives — you have to go and ask for a discount everywhere, you’re going to have businesses that are unfortunately going to have to lay-off more staff to take down their cost base — so it is a very big change that needs to be underway in 2009.

E What strategy will Merrill Lynch be using in 2009 to increase risk and investment appetite amongst their clients?
I think there’s a wholesale change inside the banking industry. Clearly mergers mean companies need to get to know each other again and change is inevitable. I think what we’re going to have to work very hard to do is: one, you’ve got to start to re-invent the investment proposition for clients, because people will be less certain about the future, they’ll be more nervous about the investments they make. So we’re going to have to focus more on, what I call, the safer, traditional investments of bonds, be more prudent and away from investments that were made in the past in things like structured products and derivative instruments. The second thing is — and this will come in two ways in the sense that in the past it was fairly easy to sell something — in the future you’re going to need to do a great deal more work with the clients providing very strong guidance. That to me is much healthier as the clients will be more aware of the risks they take on in certain investments and they are more involved that way.

E Do you think it will be easier now to identify toxic assets or risky investments since the fallout of the global markets?
My secret hope is that… regulation saves the clients themselves. I’ll be honest with you, in my whole career there [were] many times where you advise clients not to do things but unfortunately people get so excited with the tops of markets — like the Dubai property marketing doubling. As we saw back in 2000, people thought technology stocks were going to give 30 percent returns every year for the next 100 years and it didn’t matter what you said to clients, you couldn’t stop them from doing it. I say we’ve got our own role to play in saving humans from their own faults — call it greed or whatever you want — but we’ve got to try and stop these bubbles from forming in the future. It can’t just be done by investment banks, it’s got to be done by heavy regulation.

E So would you say that global investors are in need of a reality check?
A desperate reality check! But as I said, I think there should have been a reality check after the huge losses in the tech bust. Yet, just five years later people were making even bigger mistakes with more money. So I just sense that we’ll get more bubbles in the future and we’ll go through some of the cycles again. I just hope that the next cycle doesn’t take the financial system down as it has done at this stage — this is a very dramatic deterioration and it will take many years to repair.

E Do you think a major mistake made by investors in the past is that they were only thinking on a short-term, profit basis?
I think it was simpler than that. I think what we had over the last 15 years — because of central bank policy and principal in the US — was that any time the markets got into difficulties, they were bailed out. If you were patient enough to wait one or two years, whatever you bought would have gone up to the price you paid and beyond it again. It wasn’t quite the case in the technology sector, but that was the insurance policy you had and then they realized this time around there was no insurance policy. The insurance policy would have had to have been so big that it would have been bigger than this planet, quite honestly. So I think that is the wake-up call, that the huge speculative booms we had are the past and that the insurance policy is no longer there. People require higher return from things but they’re also going to have to be far more patient. The other important point is that in the past, the saving that went on was very, very modest. Around the world, in the future the saving has got to be greater because the available returns are going to be smaller. That’s good news for our industry — we should see more cash inflows — but clients have got to reset what they hoped for.

 

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