International Business Management - Essay Example

International Business Management: Continental Cablevision Inc./Fintelco Joint-Venture Plan Total Number of Words: 3,036 Introduction Back in 1963, Continental Cablevision, Inc. was founded by Amos Hostetter Jr. and H. Irving Grousbeck (Paddack & Bruner, 1997, p. 1). Serving 3 million subscribers in 16 states (p. 2), the company managed to become the third-largest cable company throughout the United States. Owned by Samuel Liberman, Fintelco a multiple-system operator (MSO) based in Buenos Aires, Argentina (p. 10). Just like Continental, Fintelco is also very successful. In fact, the company is known as one of the four the leading television-cable operator. The team behind Continental is very much aware the company will be the first U.S. cable company to consider and initiate a business transaction with Fintelco. However, the senior management behind the Continental team is looking for reassurance that the company will gain reasonable returns. For this reason, determining the possible risks associated with entering into a joint business venture with Fintelco is necessary. This study will first analyze how well the Argentina market could fit with Continental’s business strategy by discussing the potential opportunities and threats behind the venture plan of Continental and Fintelco. Upon analyzing the political and economical stability including the market in Argentina in terms of the selling price, terms and conditions, the importance of entering into joint-venture rather than acquiring an existing cable company as well as the possible returns and risks involved in pushing through with the joint-venture plan, this study will conclude whether or not the entry of Continental into the Argentine market can be considered as a good strategic move. It is crucial to examine the attractiveness of the Argentine market. Based on the gathered facts, whether or not Continental should consider Fintelco a good venture partner will be justified. With regards to the market price issue, this study will compute and elaborate as to whether or not Continental should consider $80 million to be a fair price as a 50% equity stake in Fintelco. Based on the computation, this paper will explore the major factors behind the need to encourage Continental’s CEO Mr. Hostetter to recommend pushing through the joint-venture proposal with Mr. Liberman. Potential Opportunities and Threats behind the Venture Plan of Continental and Fintelco Market and Business Expansion Strategy The Argentina market fit very well with Continental’s business strategy. Basically, the core business strategy of Continental is based on its continuous growth strategy. Continental’s expansion program enables the company to maximize the distribution of its operating costs within a specific geographic area. The said expansion strategy enables the company to have the power to offer competitive market prices to its target subscribers. Even before its existing technology becomes obsolete, the management team behind Continental ensures that the company has already invested a large sum of money not only on new technologies but also in other non-traditional cable services like residential and commercial voice, video and data communications services. For instance: Back in 1980, Continental successfully constructed and operated new cable-television systems in the United States. The market for cable-television systems has reached its maturation in 1987. Since the U.S. government implemented a deregulation law on cable industry aside from the 1984 Cable Act which allows the operators to increase its basic rates to enable them to reinvest the money on improving the content of its television programs, Continental managed to come up with Discovery Channel and other famous television shows as a way of capturing the audiences. As a result, the company was able to increase its annual revenues coming from its net advertising sales and the collected affiliation fees. Even though Continental is already enjoying as high as $5 billion revenues back in 1994, the company did not stop improving the quality service they offer to the public. In fact, the top management of Continental team even went as far as investing on advanced fiber-optic coaxial-cable architecture as the company marketed itself as a service provider of non-traditional cable services. Likewise, Continental decided entering into partnership contract with its competitors by acquiring 10% interests in PrimeStar and 20% interest in Teleport Communications aside from partnering with Performance Systems International which enabled the company to offer a fast Internet connection to its existing subscribers. Considering that the Continental has already saturated the market in the United States, expanding the business in Argentina is a very good strategy not only in the sense that Argentina is considered the second-largest country in South America but also the fact that Argentina’s telecommunications market is still underdeveloped (p. 9). By untapping the telecommunications market, Continental will be able to easily create a new business opportunity by penetrating the market of Argentina. The cable business is not new in Argentina. However, there is only 50% market penetration for cable (p. 7; See Exhibit 10 on page 23). It means that Continental still has the business opportunity to capture the other 50% of the cable market. In line with this matter, the best way to penetrate the market in Argentina is by entering into a joint-venture with Fintelco. Analyzing the Current Political and Economic Situation in Argentina One of the core business used by Continental when expanding its business in another location / country is to know more about the current political and economic situation in its chosen geographic area. This particular business strategy is crucial behind the success of Continental’s business expansion plan. By determining the key factors that may contribute to the increase of potential profit, Hostetter together with the rest of the top management team of Continental could develop new business strategies that could result to a promising future business partnership between Continental and Fintelco. Aiming to promote political and economic stability back in 1993, Carlos Menem implemented the “bedrock of Argentina’s new economic order” aside from putting together the Chamber of Deputies who were assigned to support his proposed economic programs (p. 5). As part of the proposed economic program, Menem supported the opening of its foreign trade and investment. The Argentinean government removed all possible global trading restrictions by reducing its tariff rates as a way of encouraging foreign investors to operate their business in Argentina. Basically, the reduced the tariff rate is only one factor that could make the joint-business plan with Fintelco more attractive. The cable business in Argentina particularly those that are based in Buenos Aires has been deregulated by the government. (p. 7) As part of protecting the welfare of foreign investors under the said deregulation plan, the Reciprocal Protection and Encouraging of Investments Treaty which was signed back in October 1994 (p. 9). The treaty allows the U.S. investors in Argentina to own as much as 100% of Argentine cable systems aside from the 25% of broadcast-television stations (p. 9). For this reason, a tight market competition in the cable and programming market is expected. Continental is financially capable of investing on the development of not only new cable programs that will suite the taste, culture and preferences of its target market in Argentina, the company is also capable of purchasing the shares of Fintelco in the long run. Another benefit that Continental would receive out of entering into a joint-venture with Fintelco is the fact that the Argentine government is using the same national and local law for both the domestic and foreign cable operators. Since the same law applies to both domestic and foreign cable operators, Continental can be assured that fair treatment will be given to them once they started operating its business in Argentina. Back in 1994, the Argentina’s government wanted to promote the technology development behind the wireless-cable market by awarding MMDS or wireless-cable licenses for channels throughout the country. Given the fact that Fintelco owns licenses in several areas in Argentina (p. 9), it would be very easy on the part of Continental to penetrate a bigger portion of the market. Considering these point-of-views, there is a strong possibility that entering into a joint-venture with Fintelco will open up huge business opportunity on the part of Continental. On top of the political situation in Argentina, there are several significant economic signs showing Argentina’s improved economic status. Aside from reducing Argentina’s inflation rate from 95.5% in March 1990 down to 4.7% within a short span of nine months, the fact that the Argentine government was able to reduce the public-sector deficit from 17.5% of GDP in 1989 to 2.5% of GDP in 1990 as well the economic boom in Argentina from -6.3% in 1989 up to 9.8% in 1991 and 4.0% in 1994 is already a positive sign of a strong economic stability in the country (pp. 5 – 6). On top of the said positive signs of economic progress, Argentina had the highest GDP/capita of $8,258 and the 3rd largest GDP of $280 billion throughout the Latin America (p. 6). In general, the stock market performance is another economic measurement of trading activities that is happening in Argentina. Although the Argentine stock market crashed on the 29th of May 1992 up to the 30th of November 1992 (See Exhibit 4 on p. 17), Merval stock market trend became positive after promoting initial public offering (IPO) activities to increase the trading volume, foreign investment, professionalism and sector-based price differentiation (p. 6). Basically, the positive trend in Argentine stock market suggest that business is doing well which eventually regains back the confidence of the local and international investors. Given that the exchange rate in Argentina was pegged at the rate of 1 peso/US$1 is also beneficial on the part of Continental since the company will not have to worry about the possible fluctuations in the monetary currency. (p. 5) Likewise, the low interest rate of 10.11% as of January 1994 makes it attractive on the part of Continental to pursue its plan for a joint-venture with Fintelco (p. 6). Importance of Entering into Joint-venture rather than an Acquiring an Existing Cable Company Business expansion should not be focused on expanding the business domestically because of the possibility that the business could eventually saturate the local market. For this reason, expanding the business of Continental globally is necessary to ensure that the company will not become stagnant. Aside from the fact that people in Buenos Aires are using the Spanish language as their official language, this place is very much dominated by a large group of European heritage including the Spanish, Italian and German. Because of language and cultural barrier, it would be very difficult on the part of Continental to expand its business by going through a direct acquisition of a stable and existing cable company in another country. Considering this point-of-view, it is best on the part of Continental to enter into a joint-venture with Fintelco. Possible Returns and Risks Involved in Pushing through the Joint-venture Plan The market in Argentina is very attractive on the part of Continental. On top of more than 11 million people living in Buenos Aires, the total population in Argentina has reached roughly 33 million back in 1991. Basically, the large number of people residing in the area means that Continental entering into a joint-venture with Fintelco would bring in a bigger market share potential. Considering that the market price for basic wireline subscribers in Argentina is as high as US$35/month as compared to US$28/month in the United States (p. 7; See Exhibit 11 on page 25) whereas the market price of the cable systems per subscriber in Argentina is between $500 – $1,200 (as of 1994) (p. 9), there is a huge possibility on the part of Continental to earn bigger profit each year. Although pegging the Argentina’s monetary exchange rate at 1 peso/US$1 is also beneficial on the part of Continental since the company will not have to worry about the possible fluctuations in the monetary currency, there is a strong risks that Continental will have to shoulder some monetary opportunity loss. Based on the historical data on its foreign exchange rate, the actual exchange rate between the years 1989 up to 1991 was way below 1 peso per 1 US dollar (See Exhibit 8 on p. 21). It simply means that each time the peso strengthens over the US dollar, Continental and Fintelco will not be able to receive any increase in profit. Should Continental consider Fintelco a Good Venture Partner? The Joint-Venture Plan between Continental and Fintelco a Good Strategic Move. For this reason, Continental should consider pushing through its plan to enter into a joint-venture with Fintelco. Back in 1994, there were as much as 11 million people living in Buenos Aires. Even though Cablevision’s and Fincable’s subscribers and 50% of Multicanal’s subscribers are mostly located in and around Buenos Aires, the remaining potential market for cable business among others is still as high as almost 9.4 million potential subscribers. (See Figure I – Potential Cable Market in Argentina below) Figure I – Potential Cable Market in Argentina Total Population in Buenos Aires, Argentina 11,000,000 Less: Cablevision’s Subscribers 523,900 Fincable’s Subscribers 354,000 Multicanal’s Subscribers (689,000 / 2) 344,500 Fintelco 390,000 ( 1,612,400) Total Potential Subscribers 9,387,600 Aside from the huge potential market for Continental, the relatively high market price for the basic wireline subscribers in Argentina is another significant factor to consider. In Argentina, the cost of subscribing the basic wireline is as high as US$35 as compared to US$28 in the United States (p. 7; See Exhibit 11 on page 25). In case Continental could get at least half of the total potential subscribers, the company together with Fintelco could earn as much as US$1,971,396,000 annual net sales for the said service. (See Figure II – Extra Profit in Argentina per Subscriber of Basic Wireline on page 11) Since the market price of the cable systems per subscriber in Argentina is between $500 – $1,200 (as of 1994) (p. 9), Continental and Fintelco could have additional revenue as much as US$3,989,730,000 given that the company is able to win half of the total potential subscribers paying at least US$850 per subscription (See Figure III – Extra Profit in Argentina per Subscriber of Cable System below) Figure II – Extra Profit in Argentina per Subscriber of Basic Wireline US$ Half of the Total Potential Subscribers 4,693,800 Cost of Basic Wireline Subscription in Argentina ________35 Net Expected Sales per month 164,283,000 X 12 months 12 Net Expected Sales per year 1,971,396,000 Figure III – Extra Profit in Argentina per Subscriber of Cable System US$ Half of the Total Potential Subscribers 4,693,800 Cost of Cable Subscription in Argentina _______850 Net Expected Sales 3,989,730,000 Should Continental consider $80 million to be a Fair Price as a 50% Equity Stake in Fintelco? The main purpose why Continental would want to enter into a joint-venture with Fintelco is to have a reliable guide on how to do the cable business in Argentina considering the social and cultural differences between the two countries. Upon weighing the business opportunities and the associated risks behind pursuing the business expansion plan, the $80 million investment in exchange with the 50% equity stake in Fintelco and the $70 million fund which will be used in deploying advanced technology in Fintelco is fair enough. Based on the computed net expected sales, Continental together with Fintelco could earn revenue of US$5,961,126,000 [US$1,971,396,000 + US$3,989,730,000] upon tapping at least half of the total potential subscribers for cable and basic wireline services. In case Continental and Fintelco could capture only 10% of the total prospective subscribers, both companies could still earn as much as US$1,192,225,200 [US$394,279,200 + US$797,946,000] each year. (See Figure IV & V – Extra Profit in Argentina for 10% of Total Expected Subscriber of Basic Wireline and Cable below) Figure IV – Extra Profit in Argentina for 10% of Total Expected Subscriber of Basic Wireline US$ 10% of the Total Potential Subscribers 938,760 Cost of Basic Wireline Subscription in Argentina ________35 Net Expected Sales 32,856,600 X 12 months 12 Net Expected Sales per year 394,279,200 Figure V – Extra Profit in Argentina for 10% of Total Expected Subscriber of Cable System US$ 10% of the Total Potential Subscribers 938,760 Cost of Cable Subscription in Argentina _______850 Net Expected Sales 797,946,000 Aside from the potential earnings from the underdeveloped market in Argentina, the political aspect of conducting a business in Argentina is equally attractive. Aside from the low tariff rate, the implementation of the Reciprocal Protection and Encouraging of Investments Treaty legally allow Continental to own as much as 100% of Fintelco’s business in cable systems. The legal system behind conducting a cable business in Argentina is good since the government is using the same national and local law for both domestic and foreign cable operators. With the use of only one law on cable businesses, Continental can be assured that the business will not face bias treatment as compared to other domestic cable operators. Since Argentine government is very supportive of improving the wireless-cable technology in the country, Fintelco was able to acquire its own license to operate MMDS in several areas in the country. By entering into a joint-venture with Fintelco, Continental could also share the same benefits without having the need to go through a long process of acquiring the license. Likewise, the presence of Fintelco could help prevent Continental from producing programs that are out of the cultural and social acceptance of the people in Argentina. With the assistance of Fintelco, there is a strong possibility that its people could gradually learn from Fintelco how to win the acceptance of the Continental’s target market. Therefore, the said strategy could minimize the risks that Continental would lose huge amount of money out of investing on programs that will not be patronized by its target audiences. Conclusion Given that Mr. Hostetter’s business strategy is based on being decisive and aggressive entry into new markets, the plan of Continental to enter into a joint-venture with Fintelco is very promising. For this reason, it is safe to conclude that Continental’s expansion approach is very much consistent with the business strategy of Mr. Hostetter. With regards to their concern with the significance of currency risk involved, the management team behind Continental should not be bothered with the fact that Fintelco’s revenues would be dominated in pesos while its liabilities, interest expense and programming costs would be dominated in US dollars since the exchange rate between the two countries has been pegged by the Argentine government. *** End *** References Paddack, K., & Bruner, R. F. (1997). Continental Cablevision, Inc./Fintelco Joint Venture. Darden Business Publishing - University of Virginia. Read More