Reliance Flag Telecom Acquisition 6o614e

Reliance Flag Telecom Acquisition Reliance Infocom

Reliance Infocom was born out of the dream of visionary leader Late Dhirubhai Ambani, who believed in making a phone call cheaper than a postcard. During that period mobile was considered a luxury and Reliance Infocom created a stir by its launch scheme “Moonsoon Dhamaka” where it started offering mobile phones at unbelievable price of Rs 501 and STD calling rates at 0.40 paise per min. Reliance Infocom during the Ambani brothers split went to Anil Dhirubhai Ambani Group of companies and was renamed as reliance communication. In 2007 it earned a revenue of US$ 4 Billion and has a employee strength of 33,000 employees. It was the first company of reliance group to make a international acquisition of Flag Telecom for US$ 211 Billion (Roughly INR 950 Crore). FLAG Telecom

Flag telecom started in 1990 as leading provider of international wholesale network transport and communication services with under sea cables of 50,000 Km. In 2001 Flag filled for a bankruptcy under chapter 11. In 2002 it emerged out of bankruptcy. In Jan 2004 Reliance Infocom acquired Flag Telecom for a valuation of US$ 211 Million for a control of 100% equity of the company. Flag at its peak in stock market had a valuation of US$ 7 million. Post marger Flag was renames as Reliance Globalcom and manages the Global Telecom operations of India‟s largest Integrated Telecom Service Provider. Some of the Acquisitions by Reliance in telecom sector

The first acquisition by any Reliance group of company was Flag Telecom acquired in 2004. Buoyed by the confidence it went to acquire few more companies. In 2006 it acquired Yipes for US$ 300 Million to enter into enterprise Ethernet business. It acquired the existing clients of Yipes in USA. Reliance Communication formed a t Venture with Glasshouse Technologies to offer services in remote storage. In 2008 it entered cutting edge Wimax business by acquiring eWave for a undisclosed amount. In March 2008 it acquired a network service provider company Vanco for $ 76.9 Million Strengths & Strategies of Acquisition of Reliance

Strengths of Reliance in Acquisition *Aggressive in launching services *Great brand and goodwill *Acquisitions funded by internal accruals *Distressed buying and turning around Strategies of Reliance in Acquisition

*Vertical integration *Technology collaboration *New Service offering & Completing the Portfolio *Access to New Markets Government Regulations & Policies Why FLAG Telecom?

*Access to Technology - Reliance or for that matter India did not have the capability to foray into undersea cable and wholesale network communication services market. So, it was a wise decision to grow inorganically by acquiring any player having experience and technology in that domain. And, Reliance had a good relationship with FLAG, as it was one of the suppliers or vendors for Reliance. *Robust Service Delivery Platform- By acquisition of the undersea cable system of Flag and also other services and technologies of it, Reliance can offer its clients End-to-End solution globally with a robust service delivery platform of FLAG. *Global Expansion- This acquisition gave Reliance a smooth entry into America, Europe, Middle East and Asia Telecom business, as FLAG had a customer base of more than 180 leading operators, including all of the top 10 international carriers. *Attractive Valuation- Flag had filed for bankruptcy in 2001 and it came out of it in 2002, but Flag had highest market cap of US$ 7 Billion at its peak share value. Also, at the time of acquisition it had assets worth US $ 3.5 Billion and the liabilities worth US $ 3 Billion. So, at the price of US$ 211 Million, FLAG was a great buy for Reliance *Strategic Acquisition- Entry into digital infrastructure business of FLAG later helped its entry in remote storage, Ethernet, bandwidth leasing, IP services, etc. So, Reliance could offer entire portfolio of services under one umbrella. Other Competitors for the Acquisition Phoenix-based Pivotal Private Equity was very aggressive in its pursuit of telecom-related assets and launched a $220 million offer for global fiber network operator Flag Telecom Group Ltd., which already had a $207 million buyout agreement with a unit of Indian conglomerate Reliance Group, Reliance Gateway. But the board of London-based Flag still remained committed to the deal with Reliance Gateway Net Ltd., which gave stockholders $95.61 a share, a of more than 50% above the close prior to the offer.

FLAG had made an announcement on November 19, 2003, that the US-based private equity company called Pivotal Private Equity has offered to acquire FLAG Telecom for a consideration of $220 million, higher than Reliance's offer of $207 million. This worked out to $110 per share, versus Reliance's $95.61 per share. Reliance Gateway had initially offered $207 million for the beleaguered Flag but weeks later raised its offer to $211 million, with a price of $97.41 per share, when Pivotal, a private equity investor, put in a higher bid of $220 million. Pivotal Private Equity had in June 2003 received approval from a U.S. bankruptcy judge to acquire an undersea fiber-optic cable linking the United States and Japan operated by a Global Crossing subsidiary. Pivotal Private Equity, a subsidiary of Pivotal Group, a real estate

and investment firm located at the Camelback Esplanade in Phoenix, bought Pacific Crossing Ltd. and its underutilized trans-Pacific cable for a bargain-basement price of $63 million. However, on January 8, 2004, a third party (whose identity had not been revealed) made a fresh bid to acquire Flag Telecom for $240 million. Flag reported to the Securities Exchange Commission that its board had decided not to pursue the bid. How was it done?

*Amalgamation Offer of Gateway Net Bermuda Ltd, wholly owned subsidiary of Reliance Gateway Net Ltd, which in turn was a wholly owned subsidiary of Reliance Infocom. Since Flag Telecom was a company ed in Bermuda and Gateway Net Bermuda Ltd. Was also ed in Bermuda, it is assumed that there would have been better synergies for the amalgamation process. *Amalgamation agreement signed unanimously by both companies‟ directors on October 2003. There was voting done among the shareholders of Flag Telecom and a staggering 85%+ voted in favour of the amalgamation. *Agreement stated acquisition of 100% of the company's common shares on a fully diluted basis for an aggregate purchase price of US$207 million, reflecting a per share price of US$95.61, which was 50% higher than the closing price. Thus it was indeed a very lucrative offer difficult to refuse. *Bid price raised to $211, considering a higher bid made by Pivotal to FLAG. Though this did not match up to the offer made by Pivotal, the Board of Flag Telecom had better trust on the offer made by Gateway Net. *Reliance secured the beneficial ownership of 50.5% before SGM, from 3 big stake holders namely, Harbert(37.1%), Triage(8.6%), Jackson Insurance company(4.8%) *FLAG had close to 400 employees, no layoffs were assured and the top management team was also kept same. This move further increased the trust and belief which investors had in Reliance. This in fact helped Reliance in ensuring smooth acquisition of many other companies in times to come. *January 2004 Shareholders approve the Amalgamation in Special General Meeting -FLAG Telecom becomes the wholly owned subsidiary of Reliance Infocom Post Merger Scenario

*Turnaround- From loss making subsidiary in 03-04, Flag broken even in Sept 06 and Contributes to 25% of Reliance Communication business & provides backbone to other 25% *FALCON- Spent $400 Million to build 11,600 Km cable system to leverage Flag‟s assets. Connectivity to Middle east and North Africa. Connected the market unconnected by OFC *Competition- Tata group acquired Tyco Global Network (TGN) for $130 million. *April 2006, Reliance Globalcom formed integrating service offerings of FLAG, Yipes and other divisions in Reliance Communication as „One stop shop access‟ to India.

*Largest private undersea cables spanning 65,000 Km integrated with 1,10,000 Km domestic OFC. Enables Global Service Delivery Model connecting business markets in India, the Middle East, Asia, Europe, and the U.S. *More than 50 million customers (as on June 08), including 1.5 million overseas retail customers, 1850 corporate clients, and more than 250 global carriers *Overall a successful acquisition, the starting point of Great Indian Takeovers and Confidence booster for Economy

Global access: Acquires Flag Telecom for $207m Posted: Oct 17, 2003 at 0000 hrs IST MUMBAI, OCTOBER 16 Reliance Industries, India’s largest private sector firm, announced its first global acquisition of Flag Telecom, a Nasdaq-listed global fibre optic infrastructure firm, for $207 million (around Rs 1,000 crore). This is the largest acquisition by any Indian company abroad in the services sector. In a dramatic move soon after its news conference, Anil Ambani asked journalists to wait for 10 extra minutes for a ‘major announcement’. The announcement — to coincide with a similar announcement in the US — later turned out to be the biggest ever acquisition by Reliance Industries abroad. Tata acquisition of UK-based Tetley for Rs 1,874 crore by far is the biggest overseas acquisition ever abroad. What is Flag Telecom? • Flag Telecom is a leading provider of international wholesale network transport and communications services to carriers, internet service providers, content providers and other broadband operators. • Its unique network spans four continents, connecting key markets in the Middle East, Asia, the USA and Europe. • It owns and operates an underwater cable system, the longest man-made structure ever built, stretching almost 28,000 km from the UK to Japan; With 16 operational landing points in 13 countries. Bermuda-based Flag, he later said, is listed on both London Stock Exchange and NASDAQ but was facing Chapter 11 bankruptcy proceedings in the US. At its peak the company had a market capitalisation of $7 billion. However, the company made huge losses and went into bankruptcy in 2002. For the nine months ended September 2002, Flag recorded a net loss of $787.4 million compared to a net loss of $170.8 million for the nine months ended September 2001. The foreign company owns 50,000 kilometres of fibre optic network across four major continents: US, Europe, Asia and Middle East. Ambani said the acquisition will help Reliance telecom customer’s global access at lower rates. ‘‘The board of directors of Flag Telecom has approved our bid and the acquisition will be subject to all regulatory approvals,’’ Ambani added.