IM Group Assignment_ the Takeover Bid for Telkom (2)

8/13/2019 IM Group Assignment_ the Takeover Bid for Telkom (2)

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Page 1of 19The Warriors

Table of Contents

INTRODUCTION.............................................................................................................................. 2

1. SOCIO-CULTURAL FRAMEWORK...................................................................................... 2

2. ECOLOGICAL FRAMEWORK................................................................................................ 2

3. LEGAL FRAMEWORK............................................................................................................. 3

3.1. Employment....................................................................................................................... 4

3.2. Foreign Employees........................................................................................................... 4

3.3. Tax and Exchange Control.............................................................................................. 5

3.4. Communications............................................................................................................... 5

3.5. Competition Commission................................................................................................. 6

4. TECHNOLOGICAL FRAMEWORK....................................................................................... 6

4.1. Current considerations..................................................................................................... 6

4.2. Future plans....................................................................................................................... 7

5. POLITICAL FRAMEWORK..................................................................................................... 8

5.1. Challenges brought by governments involvement in Telkom................................... 9

5.2. Benefits of having government as regulator and shareholder................................. 10

6. FINANCIAL FRAMEWORK................................................................................................... 11

6.1. SA Economy.................................................................................................................... 11

6.2. Foreign Direct Investment............................................................................................. 12

6.3. Telkom SA Financial Results........................................................................................ 13

7. CONCLUSION........................................................................................................................ 17

8. RECOMMENDATIONS.......................................................................................................... 18


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INTRODUCTION

1. SOCIO-CULTURAL FRAMEWORK

2. ECOLOGICAL FRAMEWORK

Under the slogan "Green KT, Green Korea," KT established an environmental vision,

"Green Convergence Leader" that leads the construction of a green advanced

country." By converting the work environment into a green ecosystem, leading the

national economy into a green innovation, and searching for green growth engines,

KT was able to establish a greenhouse gas reduction target of 20%. Meanwhile,

Green IT working group committee was formed to implement green strategies.

Responding to Climate Changes

KT seeks to achieve a 20% reduction in CO2 emissions by 2013 (compared to 2007

emission level) through conservation of the existing energy sources, using alternative

eco-friendly energy, improving the communication and IT infrastructure and adopting

green technology in the work environment.

Real Time Monitoring of Energy Consumption

KT developed a real time energy consumption monitoring device to efficiently micro

manage the energy usage in buildings. The system is currently being applied at KTs

office buildings that particularly consume large amounts of energy.

GHG Emission Reduction through Videoconferencing

Video conferencing helps reduce carbon emissions as well as increase productivity

by accelerating decision-making and cutting travel costs. KT has built 90 video

conference rooms so staff can hold meetings via PC. Now staff members can

participate in conferences whenever and wherever they are.Cost saving


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Smart Working Center

Reduced mobile combustion and improved employee work efficiencies and also that

employees can work from home. KT is encouraging all employees to participate in

and practice Green IT. Negative impact on economy because people will use

less of e-Tolls and Toll gates.

Minus (-) Energy, Plus (+) Love Campaign

This is to practice energy conservation while providing energy welfare to the lower

income class. The energy amount saved at homes and office buildings during the

months of July and August, when energy consumption is high, can be converted to

pay for heating cost for needy neighbors under the campaign participants name.

This would add value to Eskoms energy saving initiative here in South Africa.

Paperless Campaign and e-Office Environment

Promoting the use of AnyFax, an e-fax system, as part of an ongoing drive to achieve

a truly paperless office environment. With the introduction of the e-fax system,

monthly paper use per person dropped by approximately 50 sheets (based on A4

size paper). The Typek A4 white paper is R159.00 per box (5x reams=500 sheets

per ream). 159/5 = R31.8 per ream, 31.8/500 = R0.0636. Therefore; monthly

paper use per person has dropped by approximately R3.18 (50x0.0636). e-Office

refers to an optimal working environment that minimizes environmental impact by

adopting information technology. They shifted a paper-based offline approval process

to an electronic business approval system, and operate an e-cabinet system whereby

various documents are stored and managed as electronic files rather than as paper

printouts stored in file cabinets.

3. LEGAL FRAMEWORK

SOUTH AFRICA: REGULATORY ENVIRONMENT

General1

1 USA Bureau of Democracy, Human rights, and Labor. 2008 Country Reports on Human

Rights Practices Report. February 25, 2009
http://www.state.gov/j/drl/rls/hrrpt/2008/index.htmhttp://www.state.gov/j/drl/rls/hrrpt/2008/index.htmhttp://www.state.gov/j/drl/rls/hrrpt/2008/index.htmhttp://www.state.gov/j/drl/rls/hrrpt/2008/index.htm


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South Africa is a multiparty parliamentary democracy, in which constitutional power is

shared between the president and the parliament. The legal system in South Africa is

based on:

Common law.

Statute.

Case law.

Customary law.

3.1. Employment

Employment in South Africa is regulated by statute, common law and contract.

Legislation, for example, the Labour Relations Act 1995 (LRA) grants employees

protection against unfair dismissal and unfair labour practices. Most contracts of

employment are subject to the Basic Conditions of Employment Act 1997 (BCEA),

which inter aliaestablishes a 45 hour workweek, standardizes time and a half pay for

overtime, and authorizes four months of maternity leave for women.

In South Africa the law protects both foreigners and immigrant workers. On 28 March

2008, the Commission for Conciliation, Mediation, and Arbitration (CCMA) ruled in

favour of a foreign employee whose employment contract had been terminated by

Discovery Health Limited when the employee's temporary work permit had expired.

The CCMA's ruling established that foreign workers are included and protected by

South Africas labour legislation.2 The Employment Equity Act 55 of 1998 and the

Broad Based Black Economic EmpowermentAct 53 of 2003 was instituted by the

government aims to promote and achieve equality in the workplace (in South Africa

termed "equity"), by advancing people from designated groups. The designated

groups who are to be advanced include all people of colour, women (including white

women) andpeople with disabilities (including whites).

3.2. Foreign Employees

Foreign employees must obtain a work permit before starting work in South Africa.

The main consideration in issuing work permits is whether or not a South African

citizen or permanent resident with appropriate skills is available to take up the

2 Discovery Health Limited v CCMA & others [2008] 7 BLLR 633 (LC)
http://en.wikipedia.org/wiki/Broad_Based_Black_Economic_Empowermenthttp://en.wikipedia.org/wiki/Broad_Based_Black_Economic_Empowermenthttp://en.wikipedia.org/wiki/People_with_disabilitieshttp://en.wikipedia.org/wiki/People_with_disabilitieshttp://en.wikipedia.org/wiki/Broad_Based_Black_Economic_Empowerment


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appointment. The cost to apply for a work permit is approximately R 2257, 52 and it

takes anywhere from ten days to a month to obtain, depending on the embassy, high

commission or consulate where the application is submitted. There are various

categories of work permits, including:

General work permit.

Exceptional skills permit.

Intra-company transfer permit.

3.3. Tax and Exchange Control

Depending on the provisions of the double tax treaty ( DTT), if any, concluded

between South Africa and a foreign employees country of residence, the employee

might be subject to income tax in South Africa. If the employee is employed by a

foreign company and is seconded to South Africa, the income tax can be withheld by

the representative of the employer in South Africa, if there is one.3 Dividends

received by or accrued to any person, resident or non-resident, from a South African

resident company are exempt from tax. South African companies pay 10%

withholding tax on dividends declared to their shareholders.

The South African Reserve Bank imposes exchange controls on South African

residents. Currency must not be transferred by a South African resident into, or out

of, South Africa, except in accordance with the terms of the Exchange Control

Regulations of 1961.

3.4. Communications

The Independent Communications Authority of South Africa (ICASA) is the

telecommunications and broadcasting regulator, created through the merger of the

South African Telecommunications Authority and the Independent Broadcasting

Authority in 2002, under the terms of the ICASA Act No. 13 of 2000. In 2006, the

ICASA Amendment Act No. 3 of 2006 amended the ICASA Act. The regulator

operates three divisionsthe broadcasting, telecommunications and postal divisions.

A major threat to mobile network operator revenues has been the RICA (Regulation

3 Hale A and Makola M. Doing Business in South Africa. 2011. Bowman Gilfillan.


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of Interception of Communication Act), which has contributed to a slowdown in the

growth of subscriber numbers.4

3.5. Competition CommissionOne of the most important powers that the Competition Commission has is to

investigate and approve or prohibit mergers between companies of a certain size.

The Act defines a merger as the direct or indirect acquisition or direct or indirect

establishment of control...over the whole or part of the business of another firm. In

everyday language this could take the form of a simple acquisition of another

company, a hostile takeover of another company or a planned and agreed merger

between two companies. The issue therefore is the establishment of control.

4. TECHNOLOGICAL FRAMEWORK

This part of the assignment will look at the technological framework under which the

Telkom and the Korea-based telecommunication KT Corporation (KT) companies

have to consider in order for them to do business together in this globalized world.

Consideration will be given to both the differences and compatibilities that wouldmake a strong case for the deal between Telkom and KT to be successful. Before

one starts discussing this aspect of the deal an assumption is made that KT has

already decided that it wants to reopen the negotiations and that it still wants to buy

the 20% stake in Telkom.

4.1. Current considerations

According to Hamilton and Webster (2012), technology refers to the know-how or

pool of ideas or knowledge available to society. They further indicate that the know-

how can be written down and transferred easily to others but also add that there is

the know-how that cannot be transferred and this know-how is called tacit knowledge.

This therefore means the deal between Telkom and KT will among other things

involve the transfer of the mentioned knowledge, both codified and tacit.

4 Pierre-Alain Sur. Communications Review. Telecoms in Africa: innovating and inspiring.

Volume 17, No. 1.PricewaterhouseCoopers LLP.


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As Africa's largest integrated communications company, Telkom is said to be a key

and strategic asset in the roll-out of telecommunications infrastructure in the country

and this is as an effort to improve the skills of the South African citizens. Telkom is

therefore facing a very big challenge of ensuring easy access to Information and

Communications Technology to all South Africans both in urban and rural areas. In

order to achieve this objective Telkom has consistently focused on maximising

performance of existing products in order to retain customers and to ensure that the

best value proposition is offered in the market. One of the ideas that Telkom has is to

build the fibre-to-the-home network in South Africa especially in dense urban areas.

A senior executive at KT proposes that wireless and copper connectivity be

considered to other areas of the country given that the country is large as compared

to the Korean market. KT boasts 87% connectivity via high-speed fibre optic cables

which could be used as an argument to partner with Telkom to achieve its target of

rolling-out connectivity to all citizens by 2020.

4.2. Future plans

Telkom aims to be the first large telecommunications operator to launch the fourth

generation (4G) commercial mobile network using the long-term Evolution (LTE)

Technology. Telkom has already started working with KT to build an LTE networkregardless of the collapse of the deal by Government. This are good news for KT to

consider given that KT has a wealth of experience in building such networks with

about 18000 4G base stations in Korea. According to Telkom, the company has to

capitalise on its strengths, including the network and relationships with business, to

provide higher speeds and end-to-end reliability that cannot be matched by its

competitors. This notion would therefore have made perfect sense if the deal

between Telkom and KT was to be successful, but as we already know this was not

the case.

In the past few years Telkom has improved a lot in terms of its products innovation

and launch which has enabled the company to new products to the market faster and

continues to reshape their offerings to allow for further demand-driven products to

enter the market. As of September 2012, Telkom had approximately 3.9 million

telephone access lines in service and 99.9% of the telephone access lines were

connected to digital exchanges. In comparison to KT Corp, the service provider had asignificant contribution in providing integrated wired and wireless communication


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services and turning South Korea into arguably one of the countries with the fastest

and most expansive internet connections as well as the most wired and digitally

connected country in the world. In this regard KT Corp can benefit immensely in

assisting Telkom to take South Africa to this level of technological capabilities.

However, KT as a bigger company in sales value compare to Telkom should guard

against what Hamilton and Webster (2012) call technological diffusion. They indicate

that as the larger company, KT will be the most innovative and protection of its patent

ownership will be very critical. So, this means a need for careful consideration of the

South Africa Intellectual Property (IP) laws and regulations.

Over the next five years Telkom aims to become the number one provider of fixed

and convergence communication and network services to the business market and tobe a player in the cloud services. The company does not have enough skilled

employees to handle applications and unified communication and have recently paid

retention packages to a small group of employees. KT can provide this much needed

skills transfer as quoted by Hamilton and Webster (2012), Kotler (2009) argues that

cloud computing can also put Telkom in a very good position to compete with

companies in richer economies.

5. POLITICAL FRAMEWORK

One cannot consider investing in Telkom and ignore the political environment within

which Telkom operates particularly because South African Politics are dominated by

one big party which happens to be both the player and the referee in the ICT

industry. The ANC-led government provides oversight in the ICT industry though

legislation and the regulatory bodies that it has established. ICASA is appointed by

government to oversee the industry through the Electronic Communications Act

(ECA). There are also institutions like the Competition Commission which is given the

role of ensuring that all the players in the ICT industry compete fairly. On the other

hand government is the majority shareholder in Telkom which makes government

very influential inside the organisation. They influence the selection of board

members and the appointment of the CEO.


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5.1. Challenges brought by governments involvement in Telkom.

One of Governmnents key focus areas as reflected in the ruling partys election

manifesto is the reduction of unemployment. It therefore becomes difficult for

government to balance the pursuit of profit / efficiency with the fight against

uneployment. This is more complicated by the alliance partnership that the ruling

party has with the Confederation of South African Workers Union (COSATU) whose

most important goal is to preserve jobs. Telkoms latest financial statements indicate

that a big part of Telkoms rising expenses is on employees.

The Chief Financial Officer, Jacques in his 2012 financial results report spoke about

the importance of reducing costs in order for Telkom to remain profitable and

indirectly stated that this cannot be achieved without reducing employees. Mr Roy

Kruger, the Minister of Telecommunications technical advisor was quoted at the

2012 ICT Indaba saying that Telkom is over sized and that it can work better with a

quarter of its current 22 000 employees. If this advice is followed, about 16 500

employees would lose their jobs and this could cost the ruling party votes in the next

elections. It is therefore important for KT Corp to realise that Telkom will sacrifice

profits in order to help secure the ruling party votes in the elections.

The National Development Plan from the Planning Commission expresses the

governments desire to rollout broadband country wide including in the rural areas.

Telkom is expected to play a major role in this rollout which may not even be

profitable for Telkom. Kruger was also quoted saying private companies are looking

after profitable areas while government is obliged to look after rural areas. From this

statement it becomes apparent that profitability is not really important for the

government and this is contrary to what other Telkoms shareholders want. Why

would KT Corp want to buy a stake in the organisation that is prioritising government

agenda over profitability?

Apart from Telkoms involvement in many corporate social investment initiatives, it is

often accused of spending money in government activities and events that benefit

some politicians in the ruling party. Examples include the expenditure on the 2012

ICT indaba in which the Ministers boyfriend is alleged to have made millions ofrands, The R12m that is spend on the breakfasts that are hosted by the New Age


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newspaper (owned by the Gupta family which is said to be close to the president)

and many other functions. In some functions like the Soccer World Cup and Africa

Cup of Nations Telkom provides services at much lower prices in support of the

governments interest in those functions. Expenditure on such functions will translate

into a loss of revenue for KT Corp .

The Minister of Telecommunications was tasked in June 2012 to investigate and

present few options for Telkom in terms of direction, and to date nothing has been

reported to the public and Telkom. This creates a lot of uncertainty and lack of

direction in Telkom. Some major decisions about the direction of Telkom are taken at

the partys conference which delays decision making in the organisation. This also

mean that even when Telkom has qualified / skilled top management with business

acumen, their ability to determine the direction of the organisation is humpered by the

requirement to have its decisions ratified buy the political party. Regardless of how

much money KT Corp invests in Telkom, it may still be difficult for KT Corp to

influence the direction and decision making in Telkom.

The ruling partys internal politics and factions often results in changes in the

Executive. Government has changed the Minister of Telecommunications couple of

times in the past few years and this often results in change in the leadership of

Telkom. This is clearly seen in the number of times that Government has changed

Telkoms CEOs and chairman of the board. This constant change in the leadership of

Telkom brings instability in the organisation and affects the employees morale. As a

result Telkom often battles to perform to its maximum potential.

5.2. Benefits of having government as regulator and shareholder

If Telkom was to close down because of financial difficulties unemployment figures

would rise, poverty would increase and governments national broadband roll-out

plans would also fail. It is clearly in the best interest of government that Telkom

survives. As witnessed in other government owned institutions like Denel, SABC and

SAA in the past, bailout from government is almost guaranteed in the case where

Telkoms finances reach crisis levels.


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ICASA is often criticised for indecisiveness and non performance in its role as the

regulator. It took them a long time to implement the essential facilities policies and

this delayed other service providers ability to share in Telkoms infrastructure. A

number of policy matters under ICASAs watch have been outstanding for a long time

and they include Local Loop Unbundling (LLU), allocation of radio frequency

spectrum. All these issues humper fair competition. This benefits government as a

shareholder in Telkom and this explains why governments intervention to experdiate

the resolution of these outstanding policy matters is not forthcoming. Basically

Telkom is enjoying its dominance in the ICT industry because of ICASAs lack of

performance and governments indifference to these matters continue to benefit

Telkom.

6. FINANCIAL FRAMEWORK

6.1. SA Economy

Companies that are operating in the current market face a challenging and

competitive global market. There are many business challenges that the company

and country must take into account. These challenges are also directly impacting theSouth African economy. South Africas economy is dependent on the global trade to

survive. This is supported by the government policies that should be able to

contribute to the foreign direct investment.

The capital infrastructure plan detailed by the President during the official opening of

the Parliament gave the assurance that the South African economy with be able to

grow due to job creations due to construction.

The annual Gross Domestic Product had been marginally decreasing in the last five

years with the best decline in 2009 due to the recession. There has been a steady

decline on the inflation rate. The inflation is current forecasted to be within the

projected range of 3 to 6% as the economy improves. If the depreciation of the rand

is to continue and sustained at very competitive together with the monitoring of the

inflation, the recovery in the economy will be expected.

Below is the table that shows the movement of key market indicators within the SouthAfrica:


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Source: World Bank

6.2. Foreign Direct Investment

South Africa had shown a significant increase in foreign direct investment over the

last few years. With the abolishing of sanctions and end of apartheid, South Africa is

now part of the global economy and trade with most international companies

investing in the local economy.

The following table shows the movement on the foreign direct investment since 2000.


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Foreign direct investment has increased from mid R300bn to nearly R1000bn by the

turn of 2010. This reflects a confidence in the local economy. The Government also

create an environment for doing business and investment through effective fiscal and

monetary policy that create stability and growth in the economy.

6.3. Telkom SA Financial Results

Operational Overview

Telkom faces many challenges at the moment but we will advance calmly,

determined and focused on delivering on the promise of our business and strategygoing forward. Nombulelo Moholi, Group Chief Executive Officer, Telkom.

Operational data sourced from Telkom Ltd financial results shows a declining trend

from their main operations for fixed line market and it has decline by more than 25%

between 2008/09 to 2011/12. The current situation is of a concern and urgent steps

need to be taken to address the downward trend. This can be partially attributed by

management taking a strategic decision move away from relying from its revenue and

operations from fixed-line voice to focus on broadband and data related revenue instead.

Telkom will have to compete with established role player in the broadband and date like

Vodacom, MTN, Cell C and Neotel. The strategic focus has seen Telkom launching 8.ta

mobile division in 2011 and investing on capital and infrastructure development in the mobile

communication into the market. There was a positive response from the market that saw a

huge increase by more than 100% in the subscriber base between 2010/11 and 2011/12.

The table below show the operational data for the company for the last four financial year

period:


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Group Operating Revenue

Telkom has shown a decline of total revenue of 10% from R36.8bn in 2008/09 to

R33.1bn in 2011/12. Telkom generate (R30.6m) of the revenue from the fixed line

including subscriptions & connection, traffic, interconnection and data which

represent 92% of their total Gross Revenue. The rest of the revenue is generated

from the Mobile, international and other related income. The revenue on fixed line

over the period of four years had also show a sharp decline. This is a seriousconcern as they are losing the market and revenue on the market they should be

dominating as results of monopoly they had in the market. The following table shows

the breakdown of their revenue in the last four years:

Operational Data

2008/09 2009/10 2010/11 2011/12

Telkom South Africa

ADSL Subscribers 548,015 647,462 751,625 827,091Calling Plan Subscribers 590,590 715,221 783,193 819,018

Fixed access lines 4,451,000 4,273,000 4,152,000 3,995,000

Fixed line peneration rate (%) 9.1 8.7 8.3 7.9

Revenue per fixed access line ( R ) 5,349 5,345 4,863 4,865

Total fixed-line traffic (millions of minutes) 24,869,000 23,082,000 20,545,000 19,372,000

Interconnection 4,088 4,728 3,984 4,231

Internet all access subscribers 423,196 511,535 543,316 523,057

Managed data network sites 29,979 33,226 34,163 38,902

Total Company employees 23,520 23,247 22,884 20,939

Fixed access lines per employee 189 184 182 191

Telkom Mobile

Total subscribers n/a n/a 1,199,596 3,053,393

Active Subscribers n/a n/a 473,604 1,483,401

Telkom International

Africa Online subscribers 18,441 15,607 - -

MWEB Africa subscribers - - 19,777 -

iWayAfrica - - 25,184 22,386

Source: Telkom SA Limited Group Annual Results


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Gross Operating Expenses

Telkom spend R31.2bn in the 2011/12 representing an increase of 6% increase

compared to 2010/11 which is just above the annual inflation rate. The main expense

in Telkom is Employees Benefit expenses which represent 28% of the total gross

expenditure, selling and admin expenses and depreciation. The table below shows

the breakdown of costs:

Telkom has spent an amount of Rxxx on Research and Development compared to

Rxxx (2011/12), this represent an increase xx% and spending of Rxxx in the last four

years.

Condensed consolidated statement of financial position as at 31 March

Telkom has stable balance sheet over the last four years. The exception was on

2009 when a significant disposal Vodacom shares. This has resulted in the portion of

Rm 2008/09 2009/10 2010/11 2011/12

Fixed line 33,523 33,487 31,533 30,638

Subscriptions & connections 6,614 6,814 6,763 6,900

Traffic 15,323 13,893 12,045 11,078

Interconnection 2,084 2,608 1,679 1,757Data 9,310 9,969 10,699 10,517

Other 192 203 347 386

Mobile - - 81 1,200

International 1,900 1,887 413 368

Other revenue & eliminations 1,361 1,655 1,281 873

Total Revenue 36,784 37,029 33,308 33,079


Rm 2008/09 2009/10 2010/11 2011/12

Employees expenses 8,015 8,925 9,716 8,636Payment to other operators 8,430 8,386 5,567 5,484

Selling, general and admin expenses 5,704 6,643 5,545 7,193

Service fees 2,579 2,702 2,886 2,974

Operating leases 833 966 764 825

Depreciation, Amortisation,

impairement & write-off 4,659 5,124 4,965 6,138

Gross operating expenses 30,220 32,746 29,443 31,250



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their assets and liabilities being disposed to Vodafone. The assets and liabilities are

well managed. The following is Telkom Balance Sheet as at 31 March:

Capital Spending

The capital investment has decline by 50% by R4.8bn over the last four years from

R9.6bn (2009) to R4.8bn (2012). This is a major concern as the company is in the

technologically environment it must invest a huge capital in order to meet the new

technology available in the market. Capital projects must be prioritize to ensure that

those projects that increases revenue earning capacities are undertaken to ensure

that the company remains competitive. The capital spending on Multilinks could have

been used enhance the baseline technology to unsure that the fixed line market is

still attractive and competitive.

The detail of the capital spending is as follows:

Rm 2009 2010 2011 2012

ASSETSNon-current Assets 51,002 44,518 43,943 42,362

Current Assets 11,287 12,301 10,315 10,206

Assets of disposal held for sale 23,482 - 89 -

Total Assets 85,771 56,819 54,347 52,568

EQUITY AND LIABILITITIES

Equity attributable to owners 34,642 29,925 29,635 29,707

Non-controlling interests 853 339 387 434

Total Equity 35,495 30,264 30,022 30,141

Non-current Liabilities 16,970 14,204 14,974 12,718

Current Liabilities 17,433 12,351 8,899 9,709

Liabilities of disposal groups held f 15,873 - 452 -

Total Liabilitities 50,276 26,555 24,325 22,427

Total Equity and Liabilities 85,771 56,819 54,347 52,568



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7. CONCLUSION

Technology

The following can be concluded after a careful consideration of all the factors. KT will

be able to:

Assist Telkom achieve its expansion targets while benefiting market share.

Support the innovation drive of Telkom and build customer confidence

Gain access to the growing ICT will sector in South Africa.

Partner with Telkom to advance business into the African continent

Political

Governments drive to reduce unemployment prevents it from reducing

employee numbers even when this proves to be efficient. KT Corp may

therefore be investing in inefficient company.

Governments obligation to rollout broadband in rural areas at all costs

may be unprofitable. KT Corp may not make as much profit as they would

have wanted.

Problems may arise whenever KT Corp as a shareholder disagrees with

Telkoms expenditure on some government initiatives and functions. In fact

KT Corp may not be able to control these expenditures.

Governments indecisiveness may delay decision making and therefore

Rm 2009 2010 2011 2012

Baseline 3,327 2,366 1,736 1,822

Mobile - - 1,475 1,372

Network evolution 1,373 654 550 733

Multilinks 2,791 1,036 - -Other expenditure 2,138 1,321 780 856

Total Gross Capital Expenditure 9,629 5,377 4,541 4,783



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delay the implementation of KT Corps ideas.

KT Corp may not be able to bring stability into Telkom for as long as

Telkom leadership is determined by government and it will be a bad idea

to invest in an instable company.

Telkom has lost some skilled top managers because they were not

allowed to run the organisation the best way they know how especially

when their ideas conflicted with the governments objectives. KT Corp has

the skills and other valuable resources like knowledge from their research

& development but with governments control they may not be able to

implement most of their ideas and those that they do implement may be

delayed so clearly investing in Telkom may not be a good idea for KT

Corp.

8. RECOMMENDATIONS

Legal

In order to invest in South Africa, it is of utmost importance that KT Corp comply with

the South African regulatory framework. It is therefore advised that KR Corp:

Notify the Competition Commission and ICASA of their intention to buy shares

in Telkom, and ask for a declaratory order as to whether the transaction must

be regulated by the Competition Commission;

Complies with South African employment regulations, specifically by obtaining

work permits if Korean employees are send to South Africa;

Complies with South African tax regulation, and the overpayment of tax by

Korean employees in South Africa; and

Complies with South Africas EEA, BBBEE and Foreign Exchange act.

Political

If KT Corp is still interested in investing in South Africas ICT Industry, it

must consider buying a stake in a company that does not have

government as a shareholder like Neotel which is still fairly new in the

market.


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KT Corp may also wait to see if Telkom will be finally split between

Wholesale and Retail and only then buy a stake in Telkom Retail which will

be privately owned.

Documents

IM Group Assignment_ the Takeover Bid for Telkom (2)