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MANAGING INTERNATIONAL EQUITY PLACEMENT

STRATEGIC ALLIANCE

Case study in Indonesian State-Owned Enterprises and Bank Taken Overs

Harimukti Wandebori
Faculty of Behavioural, Management and Social Sciences
University of Twente, The Netherlands

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Harimukti Wandebori

Managing International Equity Placement Strategic Alliance: Case Study in

Indonesian State-Owned Enterprises and Bank Taken Overs

PhD dissertation:

Faculty of Behavioural, Management and Social Sciences

University of Twente, The Netherlands

ISBN: 978-90-365-4171-8

DOI-number: 10.3990/1.9789036541718

Copyright © Harimukti Wandebori: University of Twente, Enschede, The

Netherlands

All rights reserved. No part of this publication may be reproduced, stored in a

retrieval system, or transmitted in any form by any means, electronic, mechanical,

photocopying, recording or otherwise without written permission of the author

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MANAGING INTERNATIONAL EQUITY PLACEMENT
STRATEGIC ALLIANCE

CASE STUDY IN INDONESIAN STATE-OWNED ENTERPRISES

AND BANK TAKEN OVERS

DISSERTATION

to obtain
the degree of doctor at the University of Twente,
on the authority of the rector magnificus,
Prof.dr. T.T.M. Palstra,

on account of the decision of the graduation committee,

to be publicly defended
on Wednesday the 30th of November 2016 at 12:45 hrs.

by

Harimukti Wandebori
Born on the 20th of September 1971
in Jakarta, Indonesia

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This dissertation is approved by:

Promoter: Prof.dr. A.J. Groen

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Promotion Committee:

Chaiman: Prof.dr. Th.A.J. Toonen University of Twente, The Netherlands

Secretary: Prof.dr. Th.A.J. Toonen University of Twente, The Netherlands

Promoter: Prof.dr. A.J. Groen University of Twente, The Netherlands

Co Promoter: Prof.dr. H.J. Steenhuis Hawaii Pacific University, USA

Members: Prof.dr. S. Walsh University of Twente, The Netherlands

Dr. R. Harms University of Twente, The Netherlands

Prof.dr. R. Mahto University of New Mexico, USA

Prof.dr. B.J.W. Pennink Rijksuniversiteit Groningen, The Netherlands

Prof. L. Pretorius University of Pretoria, South Africa

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 Dedicated to Titik Nurhayati, Nabila, Ilhan, Salma, and Rizky.
To the memories of my parents: Sofyan Hamzah (1942-1988)
and Yayat Suchiati (1949-2006).

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ACKNOWLEDGEMENTS
Thanks God, Allah SWT the Almighty, eventually, I am able to finish the dissertation. Like many
others before me, I have realized a dissertation is not the product of an individual endeavor, rather it
is supported by many devoted colleagues. Doing a PhD dissertation for me is like riding a roller
coaster, it goes up and down. But, overall it is an amazing long and winding road for it reflects a
journey of many years of sacrifice, persistence, and excitement during which I have met
extraordinary people. I have a ‘bridge over troubled water’. To them all, I express my sincerest
appreciation and humbly acknowledge their contributions.
 I would like to convey my highest thankfulness to Prof.dr. A.J. Groen as my promoter for his
valuable insights and comments, suggestions and reviews to the document as well as encouraging
me to finish the dissertation and facilitating the resources and any activities during my stay at the
University of Twente and in Indonesia.
 My highest gratitude is to Prof.dr. Harm-Jan Steenhuis, who has encouraged me to refine, and
ultimately finish the dissertation with countless of critics and guidances with his erudite
supervision more than any others. Within the last five years, my daily lifes; notes, files, and even
dreams were filled with his meticulous and ardent supervision. Therefore, I hope that this
dissertation reflects his skillful supervision.
 I thank Prof.dr. E.J. de Bruijn as my previous mentor for his guidance, support, and inspiring
encouragement. Without his acceptance to my intention of pursuing this PhD Programme during
our meeting in Jakarta in 2003, this dissertation would not have been written.
 My beloved wife, Titik Nurhayati, who is very patient to support my PhD progress and always
besides me often without regard to her own convenience and with such great personal sacrifices.
Despite being faced by vast amount of obstacles in completing this dissertation, she still believes
in me. Therefore, I thank you for having shared your precious lifes with me and our four kids.
 My special thanks addressed to the late, previous dean and founder of School of Business and
Management ITB: Prof. Surna Tjahja Djajadiningrat. He encouraged me to finalize the PhD
program, and also provided references to the prominent interviewees. Each time I met him, the
only question that I faced was “when will you finish?” At the moment, I wish, I could tell him
that I finally pass this.
 To my PhD colleagues; Kodo Yokozawa, Muhammad Asif, David Kensah, Thijs Habets, Sandor
Löwik, Raymond Loohuis, and Michel Enrenhard, I thank you all for sharing academics
experiences, and also appreciate of our time to playing pingpong.

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 I also want to thank Mrs. Joyce Holsbeeke, Mrs. Hela Klaczynsi, and Ms. Monique Zuithof for
providing professional secretarial support and other assistances during my stay in The
Netherlands and Indonesia.
 To Indonesian Student Association in Enschede, thank you for sharing happiness with me. I never
forget our weekly badminton practice and our participation in Groens Cup, Indonesian students
sports gathering, in Groningen.
 I would like to thank to all colleagues at School of Business and Management ITB, especially to
Prof. Sudarso Kaderi Wiryono, Prof. Dermawan Wibisono, Prof. Utomo Sarjono Putro, Dr. Herry
Hudrasyah, MA, Dr. Aurik Gustomo, Dr. Gatot Yudoko, Prof. Jann Hidajat Tjakraatmadja, Prof.
Togar M. Simatupang, Dr. Subiakto Soekarno, Dr. Dwi Larso, Khrisna Ariyanto, and Dr. Mustika
Sufiati Purwanegara who encouraged me to finish this dissertation and always asked and
reminded: “Harimukti when will you finish the dissertation?”.
 My zeal of happinessis sourced from my daughters, and sons who always cheer the family up:
Nabila Shauma Lutfia (17 years), Muhammad Tariq Ilhan (12 years), Salma Naura Zalfa (10
years), and my little son Muhammad Rizky Hanan (4 years). Have spirit and guts to pursue your
dreams!

November 2016,

Harimukti Wandebori

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SUMMARY

The process of globalization has acquired substantial attention during the past decades. It is viewed
on the one hand as a beneficial process that provides a key contribution to world economic
development. It is also widely considered as an inevitable and irreversible process. International
strategic business alliances have the potential to provide an effective way to globalize more rapidly
and therefore enhance a company’s competitiveness (Dussauge & Garrette, 1999).
In Indonesia due to the economic crisis that emerged in 1997, many of the Indonesian State-Owned
Enterprises (SOE) suffered severely and many private companies were bankrupted. Some of these
private companies were taken-over by the government, for example several previously private
banks. In order to revitalize them, the government as the shareholder used formation of international
equity placement strategic alliances (IEPSAs) as one of the means for this revitalization.
International equity placement strategic alliance is an international cooperation that has a sharing
ownership between or among partners, whereby each of them retain their independence and identity
in all areas that are not subject to collaboration to gain mutual benefits and to strengthen their
competitive advantages.
The central research question of the research is defined as follows: How did the privatization
process through International Equity Placement Strategic Alliance take place in Indonesia?
In the objective to address the central research question, the following Research Questions were
formulated.
Firstly, in order to reveal the steps and phases in the privatization through IEPSA of the cases in
banking, cement, and telecommunications industries, the Research Question 1: What were the
steps/phases in the privatization through IEPSAs in Indonesia at the firm level in the banking,
cement, and telecommunications industries and how were they formulated?
Secondly, to obtain the model consisting of factors and variables which influence the steps and
phases, the Research Question 2: Which factors and variables influenced these steps and phases?
Thirdly, to find the relationships between (among) the factors and variables, the Research Question
3: How were the relationships between (among) factors and variables was created?
A case study research was preferable to be conducted to addressing the research questions and
fulfilling the research objective. In this research, six cases were selected. Indosat and Semen Gresik
were selected as companies which were SOE from the start while Bank Niaga, Bank Permata, Bank
International Indonesia, and Bank Central Asia were selected because they were once privately
owned, i.e. Bank Taken Over (BTO).

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The phases in the privatization through IEPSAs in Indonesia are composed of planning, formation,
operation, and termination. Establishing the planning phase in general consists of four steps: an
announcement, a first bidding stage (preliminary bid and due diligence), a second bidding stage and
concluding with a sales and purchase agreement. In each of the steps the following factors need to
be considered. They are; number of prospective partners, documented commitment, industry
regulatory involvement, level of opposition, and acceptability of price. The formation phase in
general comprises four steps: setting up new vision and mission, formulation of strategies,
implementation plan, and acceptance from the commissioners. The factors to be considered in each
of the steps are ownership percentage, market opportunities, time constraint, and informal
formulation of strategies. The operation phase in general is composed of three steps: enhancement
of human resources, organizational arrangement, and setting up control system. The factors to be
considered in each of the steps are previous separated subsidiary, already flat organization,
regulation, and corporate governance.
Eventually, the termination phase in general consists of two steps: existence of termination driver
and termination. In the termination phase of the IEPSA, the steps to be considered are existence of
termination driver with threat of monopoly and unfulfilled objective as factors to be well thought of.
In planning phase, the factors consist of stakeholder support and strategic match. The stakeholder
support comprises of society and internal organization. The stakeholder support factor consists of
variables, which are; transparency of the privatization, share price, degree of internal relationship,
fulfillment of budget deficit, company restructuring, unprecedented moment, limited shares in the
bourse, existence of the floor price, and plan for privatization. Jahansoozi (2006) mentioned that
when there is a lack of trust or a state of distrust exists in the organization-stakeholder relationship,
transparency is a required condition for rebuilding trust and commitment in the relationship. The
concept of transparency is linked to openness and is described as being both a relational
characteristics as well as an environmental condition for organizational processes. In addition to
Jahansoozi (2006), this research revealed that the transparency is influenced by the internal
organization support and the share price which is derived from company restructuring, opposition
from a number of managers and employees, reducing of budget deficit, unprecedented moment,
share price in the bourse, limited shares in the bourse, existence of floor price, and plan for
privatization.
Strategic match consists of capacity, complementarity, and strategic importance. The factor
comprises of attractiveness of macroeconomic conditions, attractiveness of product or service as
well as technology and financial performance, attractiveness of market, and alliance track record,
complementarity related to the attractiveness of market and resources, complementarity related to

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the attractiveness of market, complementarity related to the strategy, complementariry related to
resources, pressure on continuity, pressure of time on alliance, and alternative to cooperation. The
model of strategic match differs with Niederkofler (1991), Lorange and Roos (1992), Faulkner
(1995), Sierra (1995), Segil (1996), Medcof (1997), and Douma (1997) as from the unveiled
situation that there is existence of causal relationship between cultural understanding and strategic
match through the pressure on continuity as well as influence of strategic match on the stakeholder
support. Besides that, motivation of adaptation to local needs and standardization of system can
influence the complementarity sub factors in the strategic match.
Trust in the planning phase of an IEPSA is obtained through the sharing of communication which is
influenced by the stakeholder support and assurance of bidding offer. The sharing of
communication can consist of both goodwill and competence. They are endorsed by the stakeholder
who has prior knowledge about the partners and the intended IEPSA due to the positive influence of
strategic match to the stakeholder support. Related to competence, an existence of assurance of
bidding offer influences positively to the share of communication since it consists of assurance
about the transfer of competence, and capabilities between partners in the IEPSA. Thus, the model
obtained in this research refines Das and Teng (2001) who stated that trust is composed of goodwill
trust and competence trust.
In formation phase, the factors are internal support and strategic planning. Internal support includes
labor union and management support sub-factors. The factor consists of participation in the
implementation of strategic planning, guarantee on employment, fit in objective, and differences
between the current culture and old culture. In the model of internal organization support, strategic
plan influences internal organization by having plans which convince the entire organization to
participate in the implementation and provide guarantee of employment. This confirms Lorange and
Roos (1992) who mentioned that the entire organization should be sufficiently explained and clearly
motivated to ensure that everyone sees the tasks ahead and can focus on them as an opportunity.
Besides that, in this research it was revealed that a formulated strategic plan influences positively to
the cultural understanding which in turns endorse the participation in the implementation of
strategic plan. Other factor that enhances participation is the existence of fit in objective while
difference between the current culture with the old clan culture hinders participation.
In the strategic plan factor, it consists of commitment and existence of informal meeting on strategy
formulation. In the model of strategic plan, commitment is required by the partners to complement
and exploit the resources to obtain capabilities as sources of the alliance’s competitive advantage.
Lorange and Roos (1992) mentioned that creating a competitive advantage is desired in the strategic

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plan. Therefore, this research unveiled that the state of strategic plan which comprises commitment
of partners in terms of resources has causal effect to the internal organization support.
In operation phase, the factors are human resource management, organizational arrangement,
management control system. The factors consist of collaborative people, opportunistic behavior,
decentralization of decision making, new value enhancement, planning, control structure, control
process, trust, commitment, share of communication, nurture the alliance, and unclear SPA.
Lorange and Roos (1992) mentioned that people in the strategic alliances represent core
competencies which need to be identified and cultivated. Strategic alliances arise through various
types of interactions between the partners. These interaction processes are of two principal types:
exchange and adaptation. In the model of human resource management of this research, it was
revealed that collaborative people are required in the IEPSA to tackle these processes of exchange
and adaptation. Nevertheless, opportunistic behavior can hinder the establishment of collaborative
people in the IEPSA. Besides that, it was unveiled that human resource management influences
positively to the management control system in the alliance and has causal effect with the evolved
cultural understanding.
To adapt to the dynamic environment as an organizational requirement of a strategic alliances as
mentioned by Bleeke and Ernst (1991) and Callahan and Mac Kenzie (1999), through a cross-case
analysis it was suggested that an IEPSA needs to decentralize its decision making. This can be
enhanced when partners in an IEPSA need to endorse new value to the alliance.
Behavior control is located within the human resource management where collaborative people are
aspired by the partners in the IEPSA. In the alliance, collaborative people who concern for others
and self are the ones control the required behavior in the IEPSA. Planning, control structure, and
control process have the role to establish an output control in the alliance. Social control is
embedded in the evolved cultural understanding which is composed of trust and commitment. This
factor (evolved cultural understanding) is established to accommodate the establishment of common
culture and values. This refines Das and Teng (2001) who mentioned that control in the strategic
alliances consists of behavior control, output control, and social control.
The model of evolved cultural understanding is consistent with Parkhe (1998) who stated that trust
can deliberately be “produced”. Trust, in accordance with the model as obtained in this research is
acquired by the establishment of management control system consisting of planning, control
structure and control process. The model is also consistent with Arino, de la Torre, and Ring (2001)
who stated that as the quality of the relational improves the potential for positive conflict resolution
increases, which in turn enhances the partners’ views of each other trustworthiness. Apart from
Arino et al. (2001), this research revealed that as the objective of the partners can be fulfilled in the

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IEPSA through the effective management control system, this situation enhances the evolved
cultural understanding in the alliance which is composed of trust and commitment. Consequently,
the situation can alleviate the cultural understanding inherited from the previous phases (planning
and formation phases).
Finally, in termination phase the factors are internal driver and external driver which consist of
strategic objectives, expectancy, corporate leadership, and failure to meet synergy, as well as
external environment variable. This confirms Kanter (1994), Sierra (1995), Porter (1998), and
Mockler (1999). In particular with IEPSA, it was also revealed that failure to meeting synergy is the
factor that influences the internal driver of strategic alliance termination.
Along the life cycle of an IEPSA, relationships of the factors can be obtained. In the planning and
formation phase, strategic match influences positively to the stakeholder and has reciprocal
influences with cultural understanding while stakeholder support has reciprocal influences with
cultural understanding. These relationships suggest that stakeholder support is initially established
through the information related to the prospective partners before or during the due diligence to
determine the strategic match between the prospective partners. Cultural understanding which is
composed of trust and commitment is established and enhances strategic match and stakeholder
support as well as the internal organization support in the formation phase. In other words, strategic
match, cultural understanding, stakeholder support, and internal organization support can be
enhanced with reciprocal relationships one to another. Internal organization support has reciprocal
relationships with strategic planning. Besides that, cultural understanding influences the evolved
cultural understanding in the operation phase. But, evolved cultural understanding can change due
to its reciprocal relationships with human resource management and management control system.
The latter is influenced by both human resource management and organizational arrangement.
Management control systems can be relatively easier to implement provided that planning, control
structure, and control process are positives due to the increasing trust level so that structure and
process mechanism were exercised in the culture of trust. In addition to Das and Teng (1998), in
banking industry, compliance to Good Corporate Governance and risk management had improved
the effectiveness of management control systems implementation. Besides that, the trust level had
improved due to the increasing level of these factors; organizational arrangement (through its
influence to management control system), and human resource management.
In the implementation, government should exercise transparency, establish related regulations,
undertake prior restructurization, conduct consistency, cooperate while at the same time suggest and
criticize the donor organization, and comply with the model established in this research. For the
firms, it should mind of the economic condition, set the fair value of the share price, possess

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dominant ownership structure of the foreign partner, implement the prior restructurization, enhance
the trust and commitment, and comply with the model in this research.

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TABLE OF CONTENTS
Page

ACKNOWLEDGEMENTS.............................................................................................................IX

SUMMARY.......................................................................................................................................XI

TABLE OF CONTENTS.............................................................................................................XVII

LIST OF TABLES......................................................................................................................XXIII

LIST OF FIGURES.................................................................................................................. XXVII

LIST OF ABBREVIATIONS.................................................................................................... XXIX

CHAPTER 1: INTRODUCTION ..................................................................................................... 1

1.1 Alliances and IEPSA ......................................................................................................................... 3
1.1.1 Classification of alliances ................................................................................................................................................................ 6
1.1.2 Definition of the IEPSA ................................................................................................................................................................ 10
1.2 Privatization ......................................................................................................................................11
1.2.1 Introduction ....................................................................................................................................................................................... 11
1.2.2 Privatization’s drivers and obstacles ......................................................................................................................................... 11
1.2.3 The connection between privatization and IEPSA ............................................................................................................... 14
1.3 Privatization in Indonesia through IEPSA ................................................................................15
1.3.1 Initial privatization developments.............................................................................................................................................. 15
1.3.2 Assessment of early privatization .............................................................................................................................................. 16
1.3.3 Economic situation .......................................................................................................................................................................... 18
1.3.4 Current privatization in Indonesia ............................................................................................................................................. 18
1.4 Research design ................................................................................................................................26
1.4.1 Problem definition ........................................................................................................................................................................... 26
1.4.2 The alliance life cycle .................................................................................................................................................................... 27
1.4.3 Industry selection ............................................................................................................................................................................. 29
1.4.4 Research questions .......................................................................................................................................................................... 33
1.4.5 Research contribution..................................................................................................................................................................... 34
1.5 Dissertation structure .....................................................................................................................34

CHAPTER 2: FRAMEWORK DEVELOPMENT ....................................................................... 37

2.1 Phases .................................................................................................................................................37
2.1.1 Alliance planning phase ................................................................................................................................................................ 38
2.1.2 Alliance formation phase .............................................................................................................................................................. 72
2.1.3 Alliance operation phase ............................................................................................................................................................... 76
2.1.4 Alliance termination phase ........................................................................................................................................................... 84
2.2 Common and specific characteristics ..........................................................................................86
2.3 Conceptual framework ...................................................................................................................91

CHAPTER 3: METHODOLOGY.................................................................................................. 95
3.1 Case study research .........................................................................................................................95
3.2 External validity ...............................................................................................................................95
3.2.1 Number of cases ............................................................................................................................................................................... 96
3.2.2 Case selection criteria .................................................................................................................................................................... 96

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 3.3 Construct validity and reliability .................................................................................................97
3.3.1 Multiple sources of evidence ....................................................................................................................................................... 97
3.3.2 Case respondents.............................................................................................................................................................................. 98
3.3.3 Case protocol.................................................................................................................................................................................. 102
3.4 Internal validity ............................................................................................................................. 102
3.5 Operationalization of the conceptual framework ................................................................. 103
3.5.1 Planning phase ............................................................................................................................................................................... 104
3.5.2 Formation phase ............................................................................................................................................................................ 107
3.5.3 Operation phase ............................................................................................................................................................................. 107
3.5.4 Termination phase ........................................................................................................................................................................ 108
3.6 Assessment of the factors, sub-factors, and components ..................................................... 108
3.7 Conclusion ...................................................................................................................................... 110

CHAPTER 4: CASE STUDY OF INDOSAT .............................................................................. 111

4.1 Description of Indosat .................................................................................................................. 111
4.1.1 Telecommunications industry before the intended IEPSA ............................................................................................ 111
4.1.2 The IEPSA initiation: September to December 2002 ...................................................................................................... 114
4.1.3 Setting up the IEPSA: January to March 2003 ................................................................................................................... 122
4.1.4 Running the IEPSA: April 2003 to May 2008.................................................................................................................... 124
4.1.5 Closing of the IEPSA: June 2008 ........................................................................................................................................... 127
4.2 Analysis ........................................................................................................................................... 129
4.2.1 Stakeholder support ..................................................................................................................................................................... 129
4.2.2 Strategic match .............................................................................................................................................................................. 130
4.2.3 Cultural understanding ................................................................................................................................................................ 132
4.2.4 Internal organization support .................................................................................................................................................... 132
4.2.5 Strategic planning ......................................................................................................................................................................... 132
4.2.6 Human resource management .................................................................................................................................................. 133
4.2.7 Organizational arrangement ...................................................................................................................................................... 133
4.2.8 Management control system ..................................................................................................................................................... 133
4.2.9 Evolved cultural understanding ............................................................................................................................................... 134
4.2.10 Internal driver................................................................................................................................................................................. 134
4.2.11 External driver ............................................................................................................................................................................... 135
4.3 Additional insights ........................................................................................................................ 135
4.3.1 Insights on the stakeholder support ........................................................................................................................................ 135
4.3.2 Insights on the internal organization support ...................................................................................................................... 136
4.3.3 Insights on the internal driver ................................................................................................................................................... 137
4.4 Conclusions..................................................................................................................................... 137

CHAPTER 5: CASE STUDY OF SEMEN GRESIK ................................................................. 141

5.1 Description of Semen Gresik ...................................................................................................... 141
5.1.1 Cement industry before the intended IEPSA ...................................................................................... 141
5.1.2 The IEPSA initiation: May to August 1998 ....................................................................................... 143
5.1.3 Setting up the IEPSA: September to December 1998 ...................................................................................................... 152
5.1.4 Running the IEPSA: January 1999 to June 2006 ............................................................................................................... 154
5.1.5 Closing of the IEPSA: July 2006 ............................................................................................................................................ 156
5.2 Analysis ........................................................................................................................................... 157
5.2.1 Stakeholder support ..................................................................................................................................................................... 157
5.2.2 Strategic match .............................................................................................................................................................................. 158
5.2.3 Cultural understanding ................................................................................................................................................................ 160
5.2.4 Internal organization support .................................................................................................................................................... 160
5.2.5 Strategic plan.................................................................................................................................................................................. 161
5.2.6 Human resource management .................................................................................................................................................. 161
5.2.7 Organizational arrangement ...................................................................................................................................................... 161
5.2.8 Management control system ..................................................................................................................................................... 162
5.2.9 Evolved cultural understanding ............................................................................................................................................... 162
5.2.10 Internal driver................................................................................................................................................................................. 163

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 5.2.11 External driver ............................................................................................................................................................................... 163
5.3 Additional insights ........................................................................................................................ 163
5.3.1 Insights on stakeholder support ............................................................................................................................................... 164
5.3.2 Insights on the strategic match ................................................................................................................................................. 165
5.3.3 Insights on the cultural understanding ................................................................................................................................... 167
5.3.4 Insights on the internal organization support ...................................................................................................................... 167
5.3.5 Insights on the evolved cultural understanding .................................................................................................................. 168
5.3.6 Insights on the internal driver ................................................................................................................................................... 169
5.4 Conclusions..................................................................................................................................... 169

CHAPTER 6: CASE STUDY OF BANK NIAGA ...................................................................... 173

6.1 Description of Bank Niaga .......................................................................................................... 173
6.1.1 Banking industry before the intended IEPSA ..................................................................................................................... 173
6.1.2 The IEPSA initiation: February to October 2002 .............................................................................................................. 179
6.1.3 Setting up the IEPSA: December 2002 ................................................................................................................................. 186
6.1.4 Running the IEPSA: January 2003 to March 2005 ........................................................................................................... 188
6.1.5 Closing of the IEPSA: April 2005 .......................................................................................................................................... 190
6.2 Analysis ........................................................................................................................................... 190
6.2.1 Stakeholder support ..................................................................................................................................................................... 191
6.2.2 Strategic match .............................................................................................................................................................................. 191
6.2.3 Cultural understanding ................................................................................................................................................................ 193
6.2.4 Internal organization support .................................................................................................................................................... 194
6.2.5 Strategic plan.................................................................................................................................................................................. 194
6.2.6 Human resource management .................................................................................................................................................. 194
6.2.7 Organizational arrangement ...................................................................................................................................................... 195
6.2.8 Management control system ..................................................................................................................................................... 195
6.2.9 Evolved cultural understanding ............................................................................................................................................... 196
6.2.10 Internal driver................................................................................................................................................................................. 196
6.2.11 External driver ............................................................................................................................................................................... 196
6.3 Additional insights ........................................................................................................................ 197
6.3.1 Insights on the stakeholder support ........................................................................................................................................ 197
6.3.2 Insights on the internal organization support ...................................................................................................................... 198
6.3.3 Insights on the strategic plan .................................................................................................................................................... 199
6.3.4 Insights on the management control system ........................................................................................................................ 199
6.4 Conclusions..................................................................................................................................... 200

CHAPTER 7: CASE STUDY OF BANK PERMATA ............................................................... 205

7.1 Description of Bank Permata ..................................................................................................... 205
7.1.1 Banking industry before the intended IEPSA ..................................................................................................................... 206
7.1.2 The IEPSA initiation: July to November 2004 ................................................................................................................... 208
7.1.3 Setting up the IEPSA: December 2004 to March 2005 ................................................................................................... 214
7.1.4 Running the IEPSA: April 2005 to August 2006 .............................................................................................................. 217
7.1.5 Closing of the IEPSA: September 20 .................................................................................................................................... 220
7.2 Analysis ........................................................................................................................................... 220
7.2.1 Stakeholder support ..................................................................................................................................................................... 221
7.2.2 Strategic match .............................................................................................................................................................................. 222
7.2.3 Cultural understanding ................................................................................................................................................................ 224
7.2.4 Internal organization support .................................................................................................................................................... 224
7.2.5 Strategic planning ......................................................................................................................................................................... 224
7.2.6 Human resource management .................................................................................................................................................. 225
7.2.7 Organizational arrangement ...................................................................................................................................................... 225
7.2.8 Management control system ..................................................................................................................................................... 225
7.2.9 Evolved cultural understanding ............................................................................................................................................... 226
7.2.10 Internal driver................................................................................................................................................................................. 227
7.2.11 External driver ............................................................................................................................................................................... 227
7.3 Additional insights ........................................................................................................................ 227
7.3.1 Insights on the stakeholder support ........................................................................................................................................ 228

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 7.3.2 Insights on the internal organization support ...................................................................................................................... 229
7.3.3 Insights on the human resource management ..................................................................................................................... 230
7.3.4 Insights on the management control system ........................................................................................................................ 230
7.4 Conclusions..................................................................................................................................... 231

CHAPTER 8: CASE STUDY OF BANK INTERNATIONAL INDONESIA ......................... 235

8.1 Description of Bank International Indonesia ......................................................................... 235
8.1.1 Banking industry before the intended IEPSA ..................................................................................................................... 236
8.1.2 The IEPSA initiation: July to November 2003 ................................................................................................................... 238
8.1.3 Setting up the IEPSA: December 2003 to March 2004 ................................................................................................... 244
8.1.4 Running the IEPSA: April 2004 to October 2006 ............................................................................................................. 246
8.1.5 Closing of the IEPSA: November 2006 ................................................................................................................................ 249
8.2 Analysis ........................................................................................................................................... 249
8.2.1 Stakeholder support ..................................................................................................................................................................... 250
8.2.2 Strategic match .............................................................................................................................................................................. 250
8.2.3 Cultural understanding ................................................................................................................................................................ 252
8.2.4 Internal organization support .................................................................................................................................................... 253
8.2.5 Strategic plan.................................................................................................................................................................................. 253
8.2.6 Human resource management .................................................................................................................................................. 254
8.2.7 Organizational arrangement ...................................................................................................................................................... 254
8.2.8 Management control system ..................................................................................................................................................... 255
8.2.9 Evolved cultural understanding ............................................................................................................................................... 255
8.2.10 Internal driver................................................................................................................................................................................. 256
8.2.11 External driver ............................................................................................................................................................................... 256
8.3 Additional insights ........................................................................................................................ 257
8.3.1 Insights on the stakeholder support ........................................................................................................................................ 257
8.3.2 Insights on the internal organization support ...................................................................................................................... 258
8.3.3 Insights on the organizational arrangement ......................................................................................................................... 259
8.3.4 Insights on the management control system........................................................................................................................ 260
8.4 Conclusions..................................................................................................................................... 260

CHAPTER 9: CASE STUDY OF BANK CENTRAL ASIA ..................................................... 265

9.1 Description of Bank Central Asia ............................................................................................. 265
9.1.1 Banking industry before the intended IEPSA ..................................................................................................................... 265
9.1.2 The IEPSA initiation: December 2001 to March 2002 ................................................................................................... 268
9.1.3 Setting up the IEPSA: April to June 2002 ........................................................................................................................... 274
9.1.4 Running the IEPSA: July 2002 to September 2006 .......................................................................................................... 276
9.1.5 Closing of the IEPSA: October 2006 ..................................................................................................................................... 279
9.2 Analysis ........................................................................................................................................... 279
9.2.1 Stakeholder support ..................................................................................................................................................................... 280
9.2.2 Strategic match .............................................................................................................................................................................. 280
9.2.3 Cultural understanding ................................................................................................................................................................ 283
9.2.4 Internal organization support .................................................................................................................................................... 283
9.2.5 Strategic planning ......................................................................................................................................................................... 283
9.2.6 Human resource management .................................................................................................................................................. 284
9.2.7 Organizational arrangement ...................................................................................................................................................... 284
9.2.8 Management control system ..................................................................................................................................................... 284
9.2.9 Evolved cultural understanding ............................................................................................................................................... 285
9.2.10 Internal driver................................................................................................................................................................................. 286
9.2.11 External driver ............................................................................................................................................................................... 286
9.3 Additional insights ........................................................................................................................ 287
9.3.1 Insights on the stakeholder support ........................................................................................................................................ 287
9.3.2 Insights on the internal organization support ...................................................................................................................... 288
9.3.3 Insights on the management control system ........................................................................................................................ 289
9.4 Conclusion ...................................................................................................................................... 289

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CHAPTER 10: CROSS-CASE ANALYSIS ............................................................................... 293
10.1 Introduction ................................................................................................................................. 293
10.2 First research question .............................................................................................................. 295
10.2.1 Planning phase ............................................................................................................................................................................... 295
10.2.2 Formation phase ............................................................................................................................................................................ 299
10.2.3 Operation phase ............................................................................................................................................................................. 301
10.2.4 Termination phase ........................................................................................................................................................................ 303
10.2.5 Knowledge contribution ............................................................................................................................................................. 305
10.3 Second research question .......................................................................................................... 305
10.3.1 Planning Phase ............................................................................................................................................................................... 307
10.3.2 Formation Phase ............................................................................................................................................................................ 314
10.3.3 Operation Phase ............................................................................................................................................................................ 317
10.3.4 Termination Phase ........................................................................................................................................................................ 324
10.3.5 Knowledge contribution ............................................................................................................................................................. 325
10.4 Third research question ............................................................................................................ 328
10.4.1 Relationship of the factors ......................................................................................................................................................... 328
10.4.2 Knowledge contribution ............................................................................................................................................................. 330
10.5 Conclusions .................................................................................................................................. 330

CHAPTER 11: CONCLUSIONS, REFLECTIONS, AND RECOMMENDATIONS ........... 333

11.1 Conclusions .................................................................................................................................. 333
11.1.1 Phases ............................................................................................................................................................................................... 333
11.1.2 Factors and variables ................................................................................................................................................................... 334
11.1.3 Relationship of factors ................................................................................................................................................................ 338
11.2 Reflections .................................................................................................................................... 342
11.2.1 Reflection of research expectations ........................................................................................................................................ 342
11.2.2 Reflection of the research model ............................................................................................................................................. 344
11.3 Recommendations....................................................................................................................... 346
11.3.1 Recommendations for the government ................................................................................................................................. 347
11.3.2 Recommendation for the firms ................................................................................................................................................ 349
11.3.3 Recommendation for further research ................................................................................................................................... 350

References .............................................................................................................................................. 351

Appendices ............................................................................................................................................. 363

Appendix A: Valuation of Indosat ........................................................................................................................................................... 363
Appendix B: Valuation of Semen Gresik .............................................................................................................................................. 364
Appendix C: Valuation of Bank Niaga .................................................................................................................................................. 365
Appendix D: Valuation of Bank Permata .............................................................................................................................................. 366
Appendix E: Valuation of Bank International Indonesia ................................................................................................................. 368
Appendix F: Valuation of Bank Central Asia ...................................................................................................................................... 370

xxi
xxii
LIST OF TABLES
Page
Table 1.1: Definitions of a strategic alliance ................................................................................................ 5
Table 1.2: Preferred alliance types................................................................................................................ 7
Table 1.3: The classification of strategic alliance according to a specific objective .................................... 7
Table 1.4: The position of IEPSA in the strategic alliance ........................................................................... 9
Table 1.5: The strategic alliance in terms of level of risk and speed .......................................................... 10
Table 1.6: Privatization drivers ................................................................................................................... 12
Table 1.7: The connection between IEPSA and privatization .................................................................... 15
Table 1.8: Indonesian macroeconomics indicators .................................................................................... 18
Table 1.9: Types and numbers of Indonesian SOE..................................................................................... 20
Table 1.10: Enterprises that were privatized until 2008 ............................................................................... 21
Table 1.11: SOEs that are scheduled for privatization.................................................................................. 21
Table 1.12: The contents of law UU No. 19/2003 ........................................................................................ 22
Table 1.13: The focus of attention upon the life cycle.................................................................................. 27
Table 1.14: Summary of bank restructuring as of 1999................................................................................ 30
Table 1.15: Prominent recapitalized and taken over bank and their ownership after privatization
as of 2004 .................................................................................................................................. 30
Table 1.16: Cement industry scheme ............................................................................................................ 32
Table 2.1: Alliance life-cycle stages and relevant activities ....................................................................... 37
Table 2.2: The strategic alliance life cycle ................................................................................................. 37
Table 2.3: The sub-factors of strategic match ............................................................................................. 51
Table 2.4: Tangible Resources.................................................................................................................... 64
Table 2.5: Intangible Resources.................................................................................................................. 64
Table 2.6: The evolutionary of trust in alliance phases life cycle ............................................................... 83
Table 2.7: Variables in termination phase and the driving forces .............................................................. 83
Table 2.8: Factors for International Equity Placement Strategic Alliance.................................................. 92
Table 3.1: Indosat data gathering scheme ................................................................................................... 99
Table 3.2: Semen Gresik data gathering scheme ........................................................................................ 99
Table 3.3: Bank Niaga data gathering scheme .......................................................................................... 100
Table 3.4: Bank Permata data gathering scheme ...................................................................................... 100
Table 3.5: Bank International Indonesia data gathering scheme .............................................................. 101
Table 3.6: Bank Central Asia data gathering scheme ............................................................................... 101
Table 3.7: Collected data .......................................................................................................................... 102
Table 3.8: Operationalization of stakeholder support concept ................................................................. 104
Table 3.9: Operationalization of the strategic match concept ................................................................... 106
Table 3.10: Operationalization of cultural understanding concept ............................................................. 107
Table 3.11: Operationalization of formation phase .................................................................................... 107
Table 3.12: Operationalization of operation phase ..................................................................................... 108
Table 3.13: Operationalization of variables in the termination phase ........................................................ 108
Table 4.1: Ownership structure of Satelindo until 2000 ........................................................................... 112
Table 4.2: Ownership structure of Telkomsel until 2000 ......................................................................... 112
Table 4.3: Comparisons between the old and new law of telecommunications ....................................... 113
Table 4.4: Pre-qualified investors of Indosat’s IEPSA ............................................................................. 114
Table 4.5: The evaluation team and its task .............................................................................................. 116
Table 4.6: The assessments of the big three investors .............................................................................. 116
Table 4.7: Number of subscribers ............................................................................................................. 119
Table 4.8: The downturn of Indosat’s share six months before IEPSA .................................................... 120
Table 4.9: Comparison between selling share price and fair value of Indosat ......................................... 120
Table 4.10: The scheme of transaction cost of Indosat’s IEPSA ................................................................ 121
Table 4.11: Board of Directors of Indosat .................................................................................................. 123
Table 4.12: Board of Commissioners of Indosat ........................................................................................ 123
Table 4.13: Strategy components of Indosat in 2002.................................................................................. 124
Table 4.14: Indicators and performances of Indosat in 2002 and 2007 ...................................................... 127
Table 4.15: Time and duration of each phase ............................................................................................. 129

xxiii
Table 4.16: Relationships for the stakeholder support factor ..................................................................... 130
Table 4.17: Relationships for the strategic match factor ............................................................................ 131
Table 4.18: Relationship in cultural understanding factor .......................................................................... 132
Table 4.19: Relationships for the internal organization support factor ....................................................... 132
Table 4.20: Relationships for the strategic planning factor ........................................................................ 133
Table 4.21: Relationships for the human resource management factor ...................................................... 133
Table 4.22: Relationships for the organizational arrangement factor ......................................................... 133
Table 4.23: Relationships for the management control system factor ........................................................ 134
Table 4.24: Relationships for the evolved cultural understanding factor ................................................... 134
Table 4.25: Relationships for the Internal driver factor .............................................................................. 135
Table 4.26: Relationships for the external driver factor ............................................................................. 135
Table 4.27: Relationship of factors based on the Indosat case ................................................................... 139
Table 5.1: Market share of cement industry ............................................................................................. 142
Table 5.2: Cement consumption per segment 1997 – 1998 ...................................................................... 143
Table 5.3: Invited investors of Semen Gresik’s IEPSA ............................................................................ 143
Table 5.4: The evaluation team and its task on the first stage of bidding ................................................. 143
Table 5.5: The scheme plan of Semen Gresik ownership ......................................................................... 144
Table 5.6: Data on global cement companies in 1998 .............................................................................. 147
Table 5.7: Share price of Semen Gresik from June 1997 to July 1998 ..................................................... 149
Table 5.8: Comparison value of equity per share ..................................................................................... 150
Table 5.9: Board of Directors of Semen Gresik........................................................................................ 152
Table 5.10: Board of Commissioners of Semen Gresik.............................................................................. 152
Table 5.11: Strategy components of Semen Gresik in 1998 ....................................................................... 153
Table 5.12: Indicators and performances of Semen Gresik in 1998 and 2005 ........................................... 156
Table 5.13: Time and duration of each phase ............................................................................................. 157
Table 5.14: Relationships for the stakeholder support factor ..................................................................... 158
Table 5.15: Relationships for the strategic match factor ............................................................................ 159
Table 5.16: Relationship in cultural understanding factor .......................................................................... 160
Table 5.17: Relationships for the internal organization support factor....................................................... 160
Table 5.18: Relationships for the strategic planning factor ........................................................................ 161
Table 5.19: Relationships for the human resource management factor ...................................................... 161
Table 5.20: Relationships for the organizational arrangement factor ......................................................... 161
Table 5.21: Relationships for the management control system factor ........................................................ 162
Table 5.22: Relationships for the evolved cultural understanding factor ................................................... 163
Table 5.23: Relationships for the Internal driver factor .............................................................................. 163
Table 5.24: Relationships for the external driver factor ............................................................................. 163
Table 5.25: Relationship of factors based on the Semen Gresik case......................................................... 171
Table 6.1: Cost of recapitalization and government’s shares at Bank Niaga ............................................ 178
Table 6.2: Key Financial Indicators of Bank Niaga.................................................................................. 178
Table 6.3: Top banks in Indonesia (2002) ................................................................................................ 179
Table 6.4: The evaluation team and its task on the first stage of bidding ................................................. 180
Table 6.5: Shortlisted investors of Bank Niaga’s IEPSA ......................................................................... 180
Table 6.6: The evaluation team and its task on the second stage of bidding ............................................ 181
Table 6.7: Share price of Bank Niaga from February to June 2002 ......................................................... 185
Table 6.8: Comparison between selling share price and fair value of Bank Niaga .................................. 186
Table 6.9: Board of Directors of Bank Niaga ........................................................................................... 186
Table 6.10: Board of Commissioners of Bank Niaga ................................................................................. 187
Table 6.11: Strategy components of Bank Niaga in 2002 .......................................................................... 187
Table 6.12: Indicators and performances of Bank Niaga in 2002 and 2004 ............................................... 189
Table 6.13: Time and duration of each phase ............................................................................................. 190
Table 6.14: Relationships for the stakeholder support factor ..................................................................... 191
Table 6.15: Relationships for the strategic match factor ............................................................................ 193
Table 6.16: Relationship in cultural understanding factor .......................................................................... 193
Table 6.17: Relationships for the internal organization support factor ....................................................... 194
Table 6.18: Relationships for the strategic planning factor ........................................................................ 194
Table 6.19: Relationships for the human resource management factor ...................................................... 195

xxiv
Table 6.20: Relationships for the organizational arrangement factor ......................................................... 195
Table 6.21: Relationships for the management control system factor ........................................................ 195
Table 6.22: Relationships for the evolved cultural understanding factor ................................................... 196
Table 6.23: Relationships for the internal driver factor .............................................................................. 196
Table 6.24: Relationships for the external driver factor ............................................................................. 197
Table 6.25: Relationship of factors based on the Bank Niaga case ............................................................ 202
Table 7.1: Owner of the banks merged as Bank Permata ......................................................................... 205
Table 7.2: Cost of recapitalization and government’s shares at Bank Permata ....................................... 207
Table 7.3: Key Financial Indicators of Bank Permata .............................................................................. 208
Table 7.4: The top banks in Indonesia (2004) .......................................................................................... 208
Table 7.5: The evaluation team and its task on the first stage of bidding ................................................. 209
Table 7.6: Shortlisted investors of Bank Permata’s IEPSA ...................................................................... 209
Table 7.7: The evaluation team and its task on the second stage of bidding ............................................ 210
Table 7.8: Share price of Bank Permata from July to November 2004 .................................................... 214
Table 7.9: Comparison between selling share price and fair value of Bank Permata ............................... 214
Table 7.10: Board of Directors of Bank Permata........................................................................................ 214
Table 7.11: Board of Commissioners of Bank Permata.............................................................................. 215
Table 7.12: Strategy components of Bank Permata in 2004 ....................................................................... 216
Table 7.13: Indicators and performances of Bank Permata in 2004 and 2006 ........................................... 220
Table 7.14: Time and duration of each phase ............................................................................................. 221
Table 7.15: Relationships for the stakeholder support factor ..................................................................... 221
Table 7.16: Relationship in strategic match factor ..................................................................................... 223
Table 7.17: Relationship in cultural understanding factor .......................................................................... 224
Table 7.18: Relationships for the internal organization support factor ....................................................... 224
Table 7.19: Relationships for the strategic planning factor ........................................................................ 225
Table 7.20: Relationships for the human resource management factor ...................................................... 225
Table 7.21: Relationships for the organizational arrangement factor ......................................................... 225
Table 7.22: Relationships for the management control system factor ........................................................ 226
Table 7.23: Relationships for the evolved cultural understanding factor ................................................... 227
Table 7.24: Relationships for the internal driver factor .............................................................................. 227
Table 7.25: Relationships for the external driver factor ............................................................................. 227
Table 7.26: Relationships of factors based on the Bank Permata case ....................................................... 227
Table 8.1: Cost of recapitalization and government’s shares at BII ......................................................... 236
Table 8.2: The progress of BII’s Key Financial Indicators....................................................................... 237
Table 8.3: Top banks in Indonesia (2003) ................................................................................................ 238
Table 8.4: The evaluation team and its task on the first stage of bidding ................................................. 239
Table 8.5: The evaluation team and its task on the second stage of bidding ............................................ 239
Table 8.6: The assessments of the big two investors ................................................................................ 240
Table 8.7: Comparison between selling share price and fair value of BII ................................................ 243
Table 8.8: Board of Directors of BII ......................................................................................................... 244
Table 8.9: Board of Commissioners of Bank BII ..................................................................................... 244
Table 8.10: Strategy components of BII in 2004 ........................................................................................ 245
Table 8.11: Indicators and performances of BII from 2003 to 2006 .......................................................... 248
Table 8.12: Time and duration of each phase ............................................................................................. 249
Table 8.13: Relationships for the stakeholder support factor ..................................................................... 250
Table 8.14: Relationship in strategic match factor ..................................................................................... 252
Table 8.15: Relationship in cultural understanding factor .......................................................................... 253
Table 8.16: Relationships for the internal organization support factor ....................................................... 253
Table 8.17: Relationships for the strategic planning factor ........................................................................ 253
Table 8.18: Relationships for the human resource management factor ...................................................... 254
Table 8.19: Relationships for the organizational arrangement factor ......................................................... 254
Table 8.20: Relationships for the management control system factor ........................................................ 255
Table 8.21: Relationships for the evolved cultural understanding factor ................................................... 256
Table 8.22: Relationships for the internal driver factor .............................................................................. 256
Table 8.23: Relationships for the external driver factor ............................................................................. 256
Table 8.24: Relationship of factors based on the BII case .......................................................................... 262

xxv
Table 9.1: Cost of recapitalization and government’s shares at BCA ...................................................... 266
Table 9.2: Key Financial Indicators of Bank BCA ................................................................................... 266
Table 9.3: Top banks in Indonesia (2002) ................................................................................................ 267
Table 9.4: The evaluation team and its task .............................................................................................. 269
Table 9.5: Share price of BCA from July to November 2004 .................................................................. 273
Table 9.6: Comparison between selling share price and fair value of BCA ............................................. 273
Table 9.7: Board of Directors of BCA ...................................................................................................... 274
Table 9.8: Board of Commissioners of BCA ............................................................................................ 275
Table 9.9: Strategy components of BCA in 2002 ..................................................................................... 275
Table 9.10: Decentralization of loan decision making ............................................................................... 277
Table 9.11: Indicators and performances of BCAfrom 2002 to 2005......................................................... 278
Table 9.12: Time and duration of each phase ............................................................................................. 279
Table 9.13: Relationshipsfor the stakeholder support factor ...................................................................... 280
Table 9.14: Relationship in strategic match factor ..................................................................................... 282
Table 9.15: Relationship in cultural understanding factor .......................................................................... 283
Table 9.16: Relationships for the internal organization support factor ....................................................... 283
Table 9.17: Relationships for the strategic planning factor ........................................................................ 283
Table 9.18: Relationships for the human resource management factor ...................................................... 284
Table 9.19: Relationships for the organizational arrangement factor ......................................................... 284
Table 9.20: Relationships for the management control system factor ........................................................ 285
Table 9.21: Relationships for the evolved cultural understanding factor ................................................... 286
Table 9.22: Relationships for the internal driver factor .............................................................................. 286
Table 9.23: Relationships for the external driver factor ............................................................................. 286
Table 9.24: Relationship of factors based on the BCA case ....................................................................... 291
Table 10.1: Cross-case data of the IEPSA profiles ..................................................................................... 294
Table 10.2: The president and accompanying IEPSA case(s) .................................................................... 295
Table 10.3: Duration of the phase in months .............................................................................................. 295
Table 10.4: Steps in the planning phase...................................................................................................... 297
Table 10.5: Forming the BOD and BOC .................................................................................................... 299
Table 10.6: Steps in the formation phase .................................................................................................... 300
Table 10.7: Steps in the operation phase .................................................................................................... 302
Table 10.8: Steps in the termination phase ................................................................................................. 304
Table 10.9: The result of factor influences ................................................................................................. 306
Table 10.10: The result of stakeholder support ............................................................................................ 307
Table 10.11: The result of strategic match.................................................................................................... 310
Table 10.12: The result of cultural understanding ........................................................................................ 313
Table 10.13: The result of internal organization support .............................................................................. 315
Table 10.14: The result of strategic plan ...................................................................................................... 316
Table 10.15: The result of human resource management ............................................................................. 318
Table 10.16: The result of organizational arrangement ................................................................................ 319
Table 10.17: The result of management control system ............................................................................... 320
Table 10.18: The result of evolved cultural understanding .......................................................................... 322
Table 10.19: The result of factors in termination phase ....................................................................................... 324
Table 10.20: Relationship of the factors ................................................................................................................. 328

xxvi
LIST OF FIGURES
Page
Figure 1.1: Strategic alliance structures ......................................................................................................... 8
Figure 1.2: International equity placement strategic alliance....................................................................... 11
Figure 1.3: Principles of privatization .......................................................................................................... 23
Figure 1.4: Hierarchy of the privatization scheme ....................................................................................... 25
Figure 1.5: Statutory foundation of privatization program .......................................................................... 25
Figure 1.6: Banking restructuring scheme ................................................................................................... 29
Figure 1.7: Privatization for the cash of bank restructurization and liquidity support ................................. 31
Figure 1.8: Diagram of Temasek Holdings .................................................................................................. 33
Figure 1.9: Dissertation structure ................................................................................................................. 36
Figure 2.1: Planning and Formation phase of a strategic alliance................................................................ 38
Figure 2.2: Life cycle of an international equity placement strategic alliance ............................................. 38
Figure 2.3: Relationship of company condition prior to privatization, and plan for privatization
variables with the stakeholder support ...................................................................................... 41
Figure 2.4: Relationship of change of ownership, share price, and transparency of the privatization
process variables with the stakeholder support ......................................................................... 43
Figure 2.5: Relationship of GDP growth and currency rate variables with the strategic match .................. 53
Figure 2.6: Relationship of market share and growth of market variables with the strategic match ........... 55
Figure 2.7: Relationship of partner’s experience and partner’s successfulness variables with
the strategic match ..................................................................................................................... 56
Figure 2.8: Relationship of quality and innovativeness of product or service variables with
the strategic match ..................................................................................................................... 58
Figure 2.9: Relationship of technology of product or service and information technology variables
with the strategic match ............................................................................................................. 59
Figure 2.10: Relationship of profitability and growth of revenue variables with the strategic match ........... 60
Figure 2.11: Relationship of complementarity sub-factor with the strategic match ...................................... 62
Figure 2.12: Relationship of strategic importance sub-factor ........................................................................ 66
Figure 2.13: Cultural understanding of strategic alliance .............................................................................. 69
Figure 2.14: Trust and control in strategic alliance ........................................................................................ 70
Figure 2.15: Relationship of share of communication, trust, with cultural understanding ............................ 71
Figure 2.16: Relationship of nurture the alliance, commitment, with cultural understanding ....................... 72
Figure 2.17: Planning phase of international equity placement strategic alliance ......................................... 72
Figure 2.18: Relationship of participation in the implementation of strategic planning with
internal organization support ..................................................................................................... 74
Figure 2.19: Relationship of commitment with internal organization support .............................................. 75
Figure 2.20: Formation phase of international equity placement strategic alliance ....................................... 75
Figure 2.21: Interpersonal conflict handling style.......................................................................................... 77
Figure 2.22: Relationship of collaborative people and human resource management ................................... 77
Figure 2.23: Relationship of flattened organization, and decentralization of decision making
with organizational arrangement ............................................................................................... 78
Figure 2.24: Management control system ...................................................................................................... 79
Figure 2.25: Relationship of planning, control structure, control process, with management
control system............................................................................................................................ 80
Figure 2.26: Operational phase of strategic alliance ...................................................................................... 81
Figure 2.27: Relationship of performance of the alliance, commitment, with cultural understanding .......... 82
Figure 2.28: Termination phase of strategic alliance ..................................................................................... 85
Figure 2.29: Conceptual framework for international equity placement strategic alliance............................ 91
Figure 3.1: Data analysis framework ......................................................................................................... 103
Figure 3.2: Conceptual framework............................................................................................................. 105
Figure 4.1: Ownership structure of Indosat after IEPSA ........................................................................... 117
Figure 4.2: The parties involved in the SPA: intended and fact................................................................. 122
Figure 4.3: The number of cellular subscribers in Indonesia ..................................................................... 126
Figure 4.4: Ownership of Temasek Holding Limited ................................................................................ 128

xxvii
Figure 4.5: Stakeholder support – adjusted ................................................................................................ 136
Figure 4.6: Internal support - adjusted ....................................................................................................... 137
Figure 4.7: Internal driver - adjusted.......................................................................................................... 137
Figure 5.1: Shares and ownership of Semen Gresik after IEPSA .............................................................. 145
Figure 5.2: Stakeholder support – adjusted ................................................................................................ 165
Figure 5.3: Strategic match - adjusted........................................................................................................ 166
Figure 5.4: Cultural understanding - adjusted ............................................................................................ 167
Figure 5.5: Internal support - adjusted ....................................................................................................... 168
Figure 5.6: Evolved cultural understanding - adjusted............................................................................... 168
Figure 5.7: Internal driver - adjusted.......................................................................................................... 169
Figure 6.1: Economic Crisis ....................................................................................................................... 174
Figure 6.2: Ownership structure of Bank Niaga after IEPSA .................................................................... 183
Figure 6.3: Stakeholder support – adjusted ................................................................................................ 198
Figure 6.4: Internal organization support - adjusted .................................................................................. 199
Figure 6.5: Strategic plan - adjusted........................................................................................................... 199
Figure 6.6: Management control system - adjusted ................................................................................... 200
Figure 7.1: Ownership structure of Bank Permata after IEPSA ................................................................. 211
Figure 7.2: Stakeholder support – adjusted ................................................................................................ 229
Figure 7.3: Internal organization support - adjusted .................................................................................. 230
Figure 7.4: Human resource management - adjusted ................................................................................. 230
Figure 7.5: Management control system - adjusted ................................................................................... 231
Figure 8.1: Ownership structure of BII after IEPSA .................................................................................. 240
Figure 8.2: BII share performance in 2003 ................................................................................................ 243
Figure 8.3: Stakeholder support – adjusted ................................................................................................ 258
Figure 8.4: Internal organization support - adjusted .................................................................................. 259
Figure 8.5: Organizational arrangement - adjusted .................................................................................... 259
Figure 8.6: Management control system - adjusted ................................................................................... 260
Figure 9.1: Ownership structure of BCA after IEPSA ............................................................................... 271
Figure 9.2: Stakeholder support – adjusted ................................................................................................ 288
Figure 9.3: Internal organization support - adjusted .................................................................................. 289
Figure 9.4: Management control system - adjusted ................................................................................... 289
Figure 10.1: The planning phase .................................................................................................................. 295
Figure 10.2: The planning phase - adjusted ................................................................................................. 298
Figure 10.3: The formation phase ................................................................................................................ 299
Figure 10.4: The formation phase - adjusted................................................................................................ 301
Figure 10.5: The operation phase ................................................................................................................. 301
Figure 10.6: The operation phase - adjusted ................................................................................................ 303
Figure 10.7: The termination phase.............................................................................................................. 303
Figure 10.8: The termination phase - adjusted ............................................................................................. 304
Figure 10.9: Stakeholder support – adjusted ................................................................................................ 309
Figure 10.10: Strategic match - adjusted........................................................................................................ 312
Figure 10.11: Cultural understanding - adjusted ............................................................................................ 314
Figure 10.12: Internal organization support – adjusted.................................................................................. 316
Figure 10.13: Strategic plan - adjusted........................................................................................................... 317
Figure 10.14: Human resource management - adjusted ................................................................................. 318
Figure 10.15: Organizational arrangement - adjusted .................................................................................... 319
Figure 10.16: Management control system - adjusted ................................................................................... 321
Figure 10.17: Evolved cultural understanding - adjusted............................................................................... 323
Figure 10.18: Internal driver - adjusted.......................................................................................................... 325
Figure 10.19: Relationship of the factors ....................................................................................................... 330
Figure 11.1: Bundling of capacity and its influence on performance of an IEPSA ..................................... 341
Figure 11.2: Cultural understanding, strategic match, and stakeholder support ......................................... 342

xxviii
LIST OF ABBREVIATIONS
ADB Asian Development Bank
BBO Bank Beku Operasi
BBKU Bank Beku Kegiatan Usaha
BPPN Badan Penyehatan Perbankan Nasional
BPS Badan Pusat Statistik
BKPM Badan Kordinasi Penanaman Modal
BLBI Bantuan Likuiditas Bank Indonesia
BTO Bank Taken Over
BUMN Badan Usaha Milik Negara
CAR Capital Adequacy Ratio
DCF Discounted Cash Flow
EMBO Employee and Management Buyout
E(Rm) Expected Return on the Market
EVA Economic Value Added
FCFE Free Cash Flow to Equity
FDI Foreign Direct Investment
GDP Gross Domestic Product
IBRA Indonesian Banking Restructuring Agency
IEPSA International Equity Placement Strategic Alliance
IMF International Monetary Fund
IPO Initial Public Offering
KSF Key Success Factor
LDR Loan to Deposit Ratio
LoI Letter of Intent
NPL Non Performing Loan
Perjan Perusahaan Jawatan
PMA Penanaman Modal Asing
PP Peraturan Pemerintah
PPA Perusahaan Pengelola Aset
Perum Perusahaan Umum
PT Perusahaan Terbatas
Rf Risk Free Rate
RDB Regional Development Bank
Rm Return on the Market
ROE Return on Equity
ROA Return on Asset
SOE State-Owned Enterprises
SPV Special Purpose Vehicle
STT Singapore Technology Telemedia
SingTel Singapore Telecommunications
UU Undang Undang
Qtel Qatar Telecom

xxix
xxx
CHAPTER 1: INTRODUCTION
The process of globalization has acquired substantial attention during the past decades. It is viewed
on the one hand as a beneficial process that provides a key contribution to world economic
development. It is also widely considered as an inevitable and irreversible process. It has provided
the path to expand sales and consequently lead to expansion of production capacity and it achieved
to benefit from the economic of scales. It has also provided the benefits by realizing vertical
integration, rationalizing production, and access to (new) production resources (IMF Report, 2001).
On the other hand, it is noticed that it bears strong negative effects too to this process. It is
attributed that it increases inequality within and between nations that it threatens employment and
the living standards of large groups of people and that it thwarts social progress.
Business alliances are being formed as a part of this globalization process. The forming of those is
one of the means through which this globalization is realized. International strategic business
alliances have the potential to provide an effective way to globalize more rapidly and therefore
enhance a company’s competitiveness (Dussauge & Garrette, 1999). Making international
acquisitions is both costly and risky, setting up a network of wholly owned foreign subsidiaries
requires a long time. The alternative of providing licensing agreements has as disadvantage that
these provide limited control. For those reasons international strategic alliances are frequently
deemed more suitable for expansion and participation in this globalization process because they
allow the partner companies to pool resources in order to produce a global product and distribute it
worldwide (Dussauge & Garrette, 1999).
In Indonesia due to the economic crisis that emerged in 1997, many of the Indonesian State-Owned
Enterprises (SOEs) suffered severely and many private companies were bankrupted. Some of these
private companies were taken-over by the government, for example several previously private
banks. In order to revitalize them, the government as the shareholder used formation of international
equity placement strategic alliances (IEPSAs) as one of the means for this revitalization. In
Indonesia, an IEPSA is one of the options for privatization, in accordance with Law UU No.
19/2003. This particular privatization form through an IEPSA has become a common construct in
Indonesia. The first IEPSA realization was the Semen Gresik alliance with Cemex in 1998. As a
reaction on the economic crisis in 1997-1998 the government planned the formation of IEPSAs and
made list of potential SOEs and Taken-Over Banks eligible for it. This IEPSA form of privatization
ended in 2004 with the Bank Permata IEPSA.
Despite the perceived potential benefits of IEPSAs, the process of formation and management of
IEPSAs turned out to be frequently problematic (Pangestu & Goeltom, 2001; Pangestu, 2003).

1
Managing IEPSA can be more difficult than other types of alliances (such as establishing a new
company via a joint venture) because building from scratch can be an easier process than changing
the existing organizations. An example of such difficulties was provided by the headline of a
national Indonesian newspaper which indicated it as “robbery” (Republika, February 10, 2003). The
article discussed issues concerned with the Indosat IEPSA. In particular problems with identity of
the buyer of Indosat, the share price of Indosat, and the special purpose vehicle (SPV) constructed.
This buyer of Indosat’s shares was Singapore Technologies Telemedia (STT) Singapore, which was
owned by the same group of ownership with Singapore Telecommunications (SingTel) as part of
Temasek Holdings (a Singaporean State-Owned Enterprise). In 2001, SingTel bought the shares of
Telkomsel (competitor of Indosat) as much as 17.28% from KPN (a Dutch landline and mobile
telecommunications company). Moreover, a year later SingTel increased its shares to 35%. The
condition led to a new monopoly, where one group of companies dominated the Indonesian
telecommunications industry. It was against the new telecommunications law UU No. 36/1999
which was designed to eliminate monopolies. The share price of government’s shares sold to STT
Singapore was considered very low in comparison with the calculations from the merger and
acquisition valuation in Indosat’s subsidiaries a year earlier. Furthermore, the issue of transparency
appeared when the foreign partner used the Indonesian Communications Limited (ICL), with the
headquarter in Mauritius, was to sign the Sales and Purchase agreement instead of STT as the party
in the Sales and Purchase Agreement (SPA).
The article also described the IEPSA of Semen Gresik as one of the cases of “robbery”. This term
was used as both SOEs were regarded by the stakeholders (especially labor union, top management,
and society) as one of the best performing SOEs in Indonesia, but actually was sold to the foreign
company for a relatively low price. There existed transparency problems such as suspicions that
parts of the incoming funds were transferred to the political parties and that there had been insider
trading prior to the Sales and Purchase Agreement (SPA). Semen Gresik was sold after the
exchange rate of rupiah had plummeted to Rp 14,500 per US$ from Rp 2,500 in the earlier year.
The depreciation of Rupiah to U.S. Dollar affected to the low valuation of Semen Gresik when sold
to Cemex.
As Indosat was sold with much lower price than its calculated valuation derived from its prior
merger and acquisition a year earlier confirmed the new law of telecommunications, nationalist
sentimentswere prominent in both IEPSAs reflected as “anti foreign intrusion to the companies
which belonged to the state”.
A vast amount of literatures about strategic alliances, joint ventures and collaboration is available.
In spite of the noted problems with the IEPSAs, the subject of equity placement alliance appears to

2
be less investigated than other types of alliances (Mulyowahyudi, 2001). As a special type of an
alliance, it has its own characteristics. The situation in Indonesia provides an opportunity for
research on the process of forming and functioning of IEPSAs, in the setting of an economy in
transition. The purpose of this research is formulated as to gain insight into IEPSAs by studying
privatization processes in the form of IEPSAs in the Indonesian context.
The key items in the purpose statement will be discussed in the next sections, i.e. alliances and the
specifics of IEPSAs (1.1), privatization (1.2), and the Indonesian context of privatization through
IEPSAs (1.3).

1.1 Alliances and IEPSA

The proliferation of strategic alliances has been anticipated by Peter Drucker who has suggested
that the greatest change in the way business is being conducted is in the accelerating growth of
relationships based not on ownership but on partnership (Inkpen, 1996).
Different forms of cooperation between companies have been formed since the formation of
companies or any sort of entrepreneurial activities. According to Draulans, deMan, & Volberda
(2003: 151) the co-operation between firms is a very old phenomenon. They also notice, however,
that there has been a clearly discernible increase in the number of alliances during the past decades.
Early alliance literature dates from the 1960’s and the work of Evan (1966) and Warren (1967) on
inter-organizational relationships. Different forms of alliances have become more important for
companies and management according to Duysters, Duyster, Kok, & Vaandrager (1999: 344).
Several authors provide a definition of a strategic alliance, see Forrest (1992), Wilchocks & Choi
(1994), Cobianchi (1994), Contractor & Ra (2000), Das & Teng (2000), and Holtbrügge (2004). An
overview of definitions is provided in table 1.1. Common processes and structures that occurred in
strategic alliances can be determined from this table. These are:
 Process: The process of setting up and operating strategic alliances includes pursuing a set of
agreed goals, sharing respective complementary assets and core competencies, gaining mutual
benefits, and strengthening competitive advantages.
 Structure: In terms of business structure, an international strategic alliance is strategic and
tactical, between two or more companies from different countries, each of them retain their
independence and identity in all areas that are not subject to collaboration.

From the above commonalities for process and business structure the definition of an international
strategic alliance is formulated as:

3
 A cooperation that is strategic and tactical between two or more companies, from
different countries, to pursue a set of agreed goals through continuously sharing their
respective complementary assets and core competencies, whereby each of them
retain their independence and identity in all areas that are not subject to
collaboration, in order to gain mutual benefits and to strengthen their competitive
advantages.

4
 Table 1.1: Definitions of a strategic alliance
No Author Definition
1. Contractor & Ra (2000) An alliance is any cooperative or joint action between two companies on a contractual and/or equity joint venture basis
2. Das & Teng (2000) Strategic alliance is a voluntary cooperative interfirm agreements aimed at achieving competitive advantage for the partners
3. Willcocks & Choi (1994) Strategic alliance is interorganizational relationships involving voluntary, collaborative efforts of two or more organizations to
create and add to, if not maximize, their joint value
4. Forrest (1989) Strategic alliance is collaboration between firms and other organizations, both short-term and long-term, which can involve either
partial or contractual ownership, and are developed for strategic reasons
5. Cobianchi (1994) Strategic alliance is a short or long-term cooperative agreement between domestic and/or foreign companies in which their
cooperative efforts will synergize their collaborative resources to yield a mutual benefit greater that their individual efforts
6. Holtbrügge (2004) Strategic alliance is two or more entities unite to pursue a set of important, agreed upon goals while in some way remaining
independent subsequent to the formation of an alliance.

5
1.1.1 Classification of alliances
Alliances can take a variety of forms: joint ventures, R&D contracts, joint R&D, joint production,
joint marketing, supplier relationships and distribution agreements (Lorange & Roos, 1992; Gates,
1993; Yoshino & Rangan, 1995). Because of the various types of alliances categorizing the
different types of alliances provides insight of strategic alliances. Three major ways of categorizing
alliances can be discriminated.
1 By the resources pooled, following Das & Teng (2000)
2 By the difference/similarity of companies entering into the alliance, following Jolly (2001
and 2002)
3 According to specific objective in which the companies create the alliance, or how the
alliance is structured, following Kuglin (2002)
The first type of categorization is based on the Resource Based View. Das & Teng (2000: 43-46)
provides four types of alliances: 1) joint ventures, 2) minority equity alliances, 3) bilateral contract-
based alliances and 4) unilateral contract based alliances. In this view, joint ventures involve the
creation of a legally separate company of which the alliance partners are normally the founding
shareholders. Minority equity alliances occur when one or more partners take an equity position in
another partner company. In bilateral alliances, partners put in resources and work together on a
continuing basis. The key feature of unilateral contract based alliances is that the firms carry out
their obligations independently of each other. The key argument of Das & Teng (2000) is that both
parties bring valuable resources to the alliance. Furthermore, the type of alliance chosen should be
guided by the type of resources that are combined. The preferred alliance types (from focal firm A’s
perspective) are presented in the table 1.2. Equity joint ventures are created to substantially
integrate the joint efforts of partners-separate entities in which the partners literally work together.
It provides the best opportunities to acquire partners’ tacit knowledge and other knowledge-based
resources (Das & Teng, 2000). However, the partners are also wary of losing their knowledge-based
resources in a highly integrated operation in joint venture. So, they tend to prefer equity joint
ventures only when their knowledge-based resource type is not the primary resource in the alliance
(Das & Teng, 2000). In minority equity alliances, one or more partners take an equity position in
the other. Firms will prefer minority equity alliances when they have primarily knowledge-based
resources to contribute to the alliance and their partners have primarily property-based resources
(Das & Teng, 2000). When both partners have knowledge-based resources, the equity joint ventures
are not suitable since there will be racing of learning before the alliances terminate. The better
choice is a bilateral contract-based alliance if the mission is one of learning. Unilateral contract-
based alliances will be preferable when both partners intend to contribute primarily property-based

6
resources to a prospective alliance. Unilateral contract-based alliances will provide the requisite
clarity for exchange of property rights. For example, if financing for distribution channels is
needed, then a distribution agreement will suffice.
In IEPSA in the context of Indonesia, the Partner Firm B can be regarded as Indonesian SOE or
Bank Taken Over (BTO) which provides property resources and the Partner Firm A is the foreign
partner which provides the knowledge resources.

Table 1.2: Preferred alliance types

Partner Firm (B)

Partner Firm (A)

Property-Based Knowledge-Based
Resources Resources
Property-Based Unilateral Contract-
Resources Equity Joint Ventures
based Alliances
Knowledge-Based Minority Equity Bilateral Contract-
Resources Alliances based Alliances

Jolly (2001 and 2002) suggests another type of categorization, partial conform to Das & Teng
(2000). Jolly also acknowledges the central role played by the pooled resources but brings in other
aspects. Comparing the two companies on a number of variables such as customers, suppliers,
ownership, size and culture the aim is to determine how related or unrelated the two alliance
partners are (Jolly, 2002). According to this, two types of alliances can be identified; endogamic
and exogamic (Jolly, 2002: 48). Endogamic alliances are formed between companies in related
environments that pool similar resources. Exogamic alliances are formed between companies with
different backgrounds, who are pooling ‘differentiated’, specific resources. An example of
endogamic alliance is joint design and/or production of parts by car manufacturers while a typical
exogamic alliance is an alliance between a pharmaceutical company and a small biotech firm.
The third way to categorize alliances is based on the specific objective which the alliance is created,
or how the alliance is structured. Table 1.3 presents several authors who have classified the strategic
alliances based on this third categorization.

Table 1.3: The classification of strategic alliance according to a specific objective

No Author Classification
1. Pucik (1988) Alliances for technological change, e.g. cross-licensing, Co-production and
OEM agreements, Sales and distribution ties, Joint product development
programmes
2. Kanter (1989) Multi-company service consortia, e.g. for R&D, Stakeholders alliances
(vertical alliances), or alliances between companies at different parts of the
value chain, e.g. supply/producer complementary coalitions
3. Cobianchi Marketing agreements, technology licensing, joint product development,
(1994) distribution agreements, comprehensive joint ventures, research partnerships,

7
 No Author Classification
manufacturing agreements, equity investments, consortia
4. Kuglin (2002) Sales alliances, solution-specific alliance

Based on the previous literature an overview of the different types of alliances is developed which
is depicted in figure 1.1.

Figure 1.1: Strategic alliance structures

Strategic Alliance

Non-equity
Classification alliance
Equity Alliance

Form Collaboration
Equity
Joint Venture
Arrangement

Partnership contracts
involving: Equity Placement Equity Swap
- Research & Development
Type - Product Development
- Sourcing
- Manufacturing
- Marketing
- Distribution/service

Context: International International International Joint

Equity Placement Equity Swap Venture
International

Privatisation in the
Subject of investigation: international equity
placement strategic
State-owned Enterprise alliance

The developed classification in figure 1.1 is provided based on the existing literature. It combines
ideas of Yoshino & Rangan (1995) (who classified the strategic alliance into contractual (type of
collaboration) and equity alliance) as well as Mulyowahyudi (2001) (who further classified the
strategic alliance into joint venture, collaboration, and equity arrangement). As also presented in
table 1.4, the form is a further classification of the strategic alliance after the equity and non-equity
alliance which consists of collaboration, equity arrangement, and joint venture. Dussauge &
Garrette’s classification (1999) and Cobianchi’s (1994) were in line with the type of strategic
alliance. Furthermore, the classification of Kuglin (2002) was in line with the context of strategic
alliance. The type of alliance is a further classification of strategic alliance form which consists of
partnership contract, equity placement, and equity swap.

8
For the equity alliance there is a transfer of equity in the alliance in which each partner has a stake
in the alliance. The forms of equity alliance are joint venture and equity arrangement. In the non-
equity strategic alliance, there is no transfer of equity in the alliance. This form of non-equity
alliance refers to collaboration. The equity strategic alliance is further formed into equity
arrangements and joint ventures. The non-equity alliance can be broken down into several forms of
collaborative strategic alliances. The definition of a joint venture is two companies that cooperate in
the creation of a new, separate business entity in order to reach mutually compatible goals (Segil,
1996). Collaboration can include joint R&D, joint manufacturing, joint marketing, shared
distribution, shared inventory, joint product development and standard setting. Yoshino and Rangan
(1995) described it as a non-traditional contract. It is therefore the most flexible and potentially the
least committed form of alliance at least at the outset (Yoshino & Rangan, 1995).
The international equity placement strategic alliance and the equity swap are the types of equity
alliance classification in the form of equity arrangement. There are common shares of equity in this
form. The difference between equity placement and equity swap is that there is an interchange of
equity between partners in the equity swap, while for the equity placement only one partner has
equity of the other partner. The context of IEPSA is geographical area between (among) companies
from different countries, in this research is Indonesia. The subject of investigation in this research is
privatization and thus one of the companies is a State-Owned Enterprise (SOE). A SOE is defined
as a company in which the state has at least 51% of equity share. Although sharing of stock also
occurs in the joint venture strategic alliance, the difference is that in a joint venture the object of the
alliance is a new entity owned by partners. In the equity placement it is an existing entity. Secondly,
in general the speed of the creation of the alliance is faster for an equity placement alliance than for
a joint venture. The joint venture needs timing to acquiring determinant for independence from its
parent companies (Sierra, 1995).

Table 1.4: The position of IEPSA in the strategic alliance

Classification Equity Alliance
Form Equity Arrangement
Type Equity Placement
Context International
Subject of investigation State-Owned Enterprise

Third, the collaboration is different from an equity placement and a joint venture. The difference is
that collaboration is a non-equity alliance while an equity placement and a joint venture are equity
alliances. The following table depicts the similarities and differences of strategic alliances

9
according to equity-based classification. The table is based on the classification by Segil (1996)
who classified the strategic alliance based on level of risk and speed.

Table 1.5: The strategic alliance in terms of level of risk and speed

Equity arrangement:
High

Equity Placement &

Level of Risk

Joint venture
Swap
Low

Collaboration

Low High

Level of Speed

1.1.2 Definition of the IEPSA

The purchase of one company’s equity by another company for cash, stock, or other considerations
is the characteristic of equity placement (Segil, 1996). The elements of equity placement are
‘equity’ which means ownership interest in a corporation in the form of common stock or preferred
stock (www.investorwords.com/1726/equity.html), and ‘placement’ which means the selling and
purchasing of new securities (www.investorwords.com/3708/placement.html). By purchasing one
company’s equity, one or more collaborative companies take(s) ownership in the company (Das &
Teng, 1998).
For this research an international equity placement strategic alliance is defined as:
A cooperation that is strategic and tactical between two or more companies, from
different countries, in which one or more of collaborative companies take(s) on
ownership in the other(s) by purchasing of one company’s equity so there is a
sharing ownership between or among partners, that unite to pursue a set of agreed
goals through continuously sharing their respective complementary assets and core
competencies, whereby each of them retain their independence and identity in all
areas that are not subject to collaboration, in order to gain mutual benefits and to
strengthen their competitive advantages.
Figure 1.2 depicts the international equity placement strategic alliances. In the figure, company A is
considered as a foreign company in country A which buys the portion of government’s shares in
company B (SOE or BTO) in country B to form an IEPSA which produces product/service.

10
 Figure 1.2: International equity placement strategic alliance

Company A
Company A
Company B

Country A Country B

Product/Service

Alliance location

1.2 Privatization
1.2.1 Introduction
There is a broad view in society that privatization provides the solution for the problems of state-
owned enterprises. By selling state-owned enterprises to the private sector, the reasoning is that
these entities will become less politicized, more efficient, and thus will provide higher quality
products and services. Administrative corruption will cease because its cost can no longer be hidden
or being subsidized, and better managers will be attracted. Tax revenues from profits will increase,
and the public treasury will be strengthened (Heracleous, 1999).
The definition of privatization in broad terms is the transfer of ownership and/or control of state-
owned organizations to private investors (Heracleous, 1999). More specifically, privatization can
take several forms. It can be complete or partial in terms of the amount of equity sold to private
investors. It can be full or selective in terms of which parts of the state enterprises are sold. It can
involve liberalization where a competitive climate and market factors are promoted in place of the
previous monopolistic or oligopolistic climate. It may or may not involve transfer of ownership,
where the latter can be achieved through methods such as leasing of state facilities for a fee,
bringing in external management, or contracting out the provision of particular service.

1.2.2 Privatization’s drivers and obstacles

The widespread process of privatization has been brought on by several factors, but the primary
factor is the generally disappointing performance of state-owned enterprises (SOEs) in terms of
efficiency and profitability. The widespread phenomenon of privatization is increasingly located in
developing countries. These countries have relied more on SOEs than developed countries and in
many cases SOEs became a heavy fiscal burden on the state. The growth of the private sector in
many developing countries has been slowed down through government regulation of industries and

11
the directing of scarce credit to inefficient SOEs (Kikeri et al., 1994). In addition to poor SOE
performance, privatization activity has been influenced by a number of variables or “drivers” as
provided in table 1.6.

Table 1.6: Privatization drivers (adapted from Price Waterhouse, 1996)

Ideological shifts Collapse of Marxist ideologies & movement towards free market economies
Donor pressure Donor agencies and nations have been exerting increasing pressure on
governments to encourage private participation in infrastructure Development
Regional States which do not embark on privatization program risk becoming
bandwagoning technologically obsolete compared to neighboring states/regions which have done
so
Fiscal imperatives High subsidies to inefficient SOEs became a burden on scarce government
resources and intensified the risk of economic stagnation
Globalization of Global competition further exposed the inefficiencies of SOEs and increased the
commerce pressure for improvement
Globalization of The easier availability of global funds as well as the growth of local capital
finance markets facilitate the finance of large privatization project
Institutional The appointment of state boards to assist privatization and international agencies’
capacity encouragement of private investment has aided the privatization process
Growing middle A growing middle class has increased the demand for premium goods and
class services in such areas as communications and transportation, thus encouraging
private sector involvement in their provision
Technological The private sector now has the knowledge to design and manage infrastructure to
advancement operate efficiently, as well as the capacity to operate beyond boundaries of
national networks, e.g. as in the case of telecommunications

There are major hurdles to privatization at both the policy and administrative level (Austin,
Wortzel, & Coburn, 1986).
In the policy level, the hurdles can be differentiated into several barriers as the following (Austin et
al., 1986).

Political and ideological barriers

Privatization obviously encounters the largest ideological barriers in a socialist economy. However,
even in capitalist and mixed economies, ideological arguments keep privatization off the policy
agenda. Frequently, these ideological claims may in fact cloak political motives. In Argentina, for
example some state enterprises produce military hard-ware or other goods considered essential to
national security and are therefore considered untouchable. In Africa, SOEs have been retained for
their value as nationalistic symbols of independence from the yoke of colonialism. In Britain, the
privatization moves have been viewed by some as a political move aimed at changing the existing
patterns of empowerment. Privatization is considered as a political attack. It seems as a means of
plundering public sector assets and redistributing wealth to the wealthy and to industry and
commerce. But it is more than an attack on public spending and workers’ conditions, it was also
considered as an attack on trade unionism. In Germany, the government cut back plans to reduce its

12
holdings in its national airline, Lufthansa. Opposition came from within the ruling coalition on the
grounds that it might lead to new foreign shareholders’ gaining influence in the company.
Furthermore, there was concern that, in private hands, the airlines might not continue to buy aircraft
from Airbus Industries, the German-French-British-Spanish consortium.

Economic barriers
A number of countries believe that government ownership is the optimal economic entity for
handling natural monopolies. Others believe that their state enterprises are run efficiently, and in
some cases this may be true. For example, the state oil company in Venezuela is widely recognized
as being among the best-run enterprises in the country. Korean public enterprises are usually
regarded as efficiently run, as are most as efficiently run, as are most of the government companies
in Austria and Sweden.

Social barriers
Policy makers view some activities or assets of the public enterprises as social goods that belong to
public sphere. For years, British privatization processes have been slowed by the arguments of
powerful labor unions that privatization increases unemployment, reduces the standards of living
and working conditions of public sector workers, and further increases the gap between the rich
(who can afford private education, private healthcare, and housing) and the poor (who cannot afford
those things).
In the administrative level, the obstacles of privatization can be obtained in the following condition
(Austin et al., 1986).

Buyer willingness
Potential private sector buyers have other opportunities to use their funds. They are typically
interested in high, but safe, returns on their capital investments. The government is most interested
in selling those SOEs with the greatest losses. Since profitable SOEs provide positive cash flows,
governments are less inclined to offer them for sale. Potentials private sectors are not interested in
the losers unless the price is extremely low (which is politically risky for the government selling the
enterprise) or the government policies causing the losses can be changed (which government are
also unwilling to do from the political standpoint). A further dis-incentive for private investors is
the uncertainty of future government regulatory actions and the risk of being renationalized if the
political winds shift, as has happened in Britain on several occasions between the Conservative and
Liberal governments.

13
Buyer capacity
Even when private sector buyers are interested in acquiring public enterprises, the financial capacity
of the private sector may be inadequate. In part, this may be an issue of timing. The pressure to sell
is greatest when performance is poorest. The private enterprises’ losses are often high when the
company is in recession. Unfortunately, this is likely to be the time when the private sector’s buying
capacity is most limited and when private sector managers and entrepreneurs are most burdened
with maintaining their existing enterprises.

Enterprise size: The sheer size of the public enterprises sector, and even of individual enterprises
in many countries, often exceeds the capital available to private buyers.

Administrative mechanisms: Selling an enterprise is administratively complex. A major hurdle is

assessing the value of the company. A task made all the more difficult in the developing nations by
the lack of capital markets, investment bankers, and valuation specialists.

Institutional resistance: Because of their multiple objectives and broad sphere of activities, public
enterprises typically enjoy the support of many groups with vested interests in continued
government control. At the highest level there is the head of the state, who may genuinely favor
privatization of state enterprises but whose awareness of political risk and unfavorable publicity
may make him or her hesitant to act. Government bureaucrats within supervising ministries resist
privatization or hinder its implementation because they fear privatization will erode their influence
and power. Similar resistance comes from SOE managers and employees who believe their jobs
may be at stake if new owners attempt to rationalize employment. Finally, customers who sell to or
buy from SEOs on relatively favorable terms are afraid they will be deprived of these benefits if
privatization occurs. They can exercise political pressure to maintaining the status quo.

1.2.3 The connection between privatization and IEPSA

The privatization of the state-owned enterprises (SOEs) exists in three forms. These are 1) the
selling of the government shares into international companies, 2) initial public offering on the stock
exchange, and 3) the selling of the government shares to the employees (El-Namaki & Foster,
1996). Based on the earlier provided definition of international equity placement strategic alliance,
a connection between privatization and international equity placement strategic alliance can be
developed. This is represented in table 1.7.

14
 Table 1.7: The connection between IEPSA and privatization
Privatization in the form of equity
Criteria International strategic alliances
placement
Process  Unite to pursue a set of agreed goals  SOE and foreign company pursue a set
 Sharing respective complementary of agreed goals, sharing respective
assets and core competencies complementary assets and core
 Gaining mutual benefits competencies in order to gain mutual
 Strengthening competitive benefits and strengthen competitive
advantages advantages

Structure  Strategic and tactical  The alliance is strategic and tactical by

 Between two or more companies both SOE and foreign company
from different countries
Specific to Equity Placement Strategic
Alliance
Process  Purchase of one company’s equity  The SOE’s shares purchased by foreign
Structure  One of collaborative companies company, hence it takes ownership of
takes on ownership in the other(s) the SOE

From the definition of international equity placement strategic alliances provided earlier and the
comparison provided in table 1.7, it can be seen that the first type of privatization of SOEs’ (the
selling of the government shares to international strategic companies) is identical with the concept
of international equity placement strategic alliances.

1.3 Privatization in Indonesia through IEPSA

1.3.1 Initial privatization developments
Following the sharp decrease of the price of oil in the mid 1980s and in order to keep economic
growth, the government of Indonesia planned to generate new revenues through emphasizing
privatization to offset the falling revenues from oil. This turned out to be only talk and no action
was taken (Hill, 2000: 103-105). In 1989, the finance minister announced that 52 state-owned
enterprises (SOEs) would be listed on the Jakarta Stock Exchange between 1990 and 1992 (Habir,
1990: 101). Almost none of this intention was realized. In 1993, the minister of research and
technology, B.J. Habibie, claimed that a similar number could be sold within a very short time
frame (McLeod 1993: 7). Again, almost nothing came of what was claimed to be realized by the
minister.
As indicated, privatization again came to prominence as a reaction on the economic crisis that hit
Indonesia shortly after the unexpected float of the Thai baht in July 1997. It was one of the policies
to which the government committed itself as a condition for the obtaining of financial assistance by
the IMF in November 1997 (GOI 1997). The reason was that because of private capital was fleeing
the country it became necessary to persuade the markets that henceforth the government would pay
attention to microeconomic reform as a precondition for the return of rapid growth.

15
This would require SOEs (previously used as instruments for the distribution of patronage by way
of artificially high buying prices, artificially low selling prices, privileged access to jobs and cheap
loans or even grants) to be divested. However, before any such divestments could take place the
crisis worsened and the banking system began to crumble. The government responded eventually by
issuing a blanket guarantee of the banks’ liabilities. This avoided a system-wide run on bank’s
deposits, but many banks failed, nevertheless. To make good of its guarantee, the government opted
to issue bonds, which were used to compensate banks that took over failed banks’ liabilities, or to
inject as new equity in banks that were kept alive, even though their capital had become negative
(McLeod, 2002). The volume of these bonds was large, amounting to Rp 644 trillion, or around $75
billion at mid 2002 exchange rates. The cost of servicing the bonds has become a major component
of government spending, with interest payment accounting for some 17% of the budget total in
2002 (Deuster, 2002: 20). As a consequence, privatization was now seen by the government as
important. This is not so much as a signal of the government’s commitment to policy reform but
because of its potential to contribute revenue to offset the interest payments on these bank
recapitalization bonds which amounted to Rp 644 trillion or about more than 40% of GDP in 2002
(Pangestu, 2003). The annual coupon rate of these bonds was from 10% to 16.5% (Pangestu, 2003).
Nevertheless, progress has remained extremely slow, some privatization of the companies that
enlisted in the Letter of Intent (LoI) with IMF to be privatized were delayed. Examples of this were
the intended IEPSAs of BCA and Bank Niaga which scheduled to hold in 2001 but delayed for one
year.

1.3.2 Assessment of early privatization

There are number of explanations for the lack of progress with privatization in the urgent need for
additional funds. The funds were acquired because of increasing amount of budget deficit that
reached its record high to -3.7% in 2001 (McLeod, 2004). This lack of progress was sourced both
from the external and internal circumstances. The external circumstances were the stakeholder
sentiment, regulatory system, and the timing. The internal circumstances were the SOEs which were
treated as cash cows.
Stakeholder sentiment: Nationalist sentiment was strong, and the government was reluctant to
push too hard with privatization if this would result in foreign ownership of what were regarded as
key economic assets. Also the speaker of the People’s Consultative Assembly publicly voiced his
objections to the sale of firms under government control to foreign interests. From the point of view
of foreign investors themselves there was also considerable reluctance in part, due to anti-foreigner
sentiment.

16
Regulatory system: In addition, there were great concerns among both foreign and domestic
businesses about the condition of the economy. Also, there was concern about the ability of the
government to implement policies to get SOEs to improve capacity utilization. Perhaps more
fundamentally, moreover, there was a very widespread lack of trust in the legal system. Corruption
and incompetence were endemic, and there had been several prominent examples where foreign
firms were particularly badly treated by the Indonesian courts (Pangestu & Goeltom, 2001: 147;
Athukorala, 2002: 145-147).
Timing: Those who had been opposing privatization often argued that it was simply not the right
time. The economy was still operating far below its capacity; the large conglomerates (that had
dominated the modern sector of the economy for many years) were seemingly experiencing great
difficulties. For example they could not afford to service their existing debt let alone acquire new
assets. There were also fundamental concerns about the near-term future for Indonesia’s economy
and a lack of confidence in the ability of the government to perform. The problem with this
argument was that it implicitly assumed that enterprise valuations would eventually improve.
SOEs as cash cows: State-Owned Enterprises were regarded as cash cows that could be used for
the enrichment of individuals and, especially, for financing the political parties in newly democratic
Indonesia, where the name of the game currently is to boost representation in the House of
Representation in the House of Representatives and the People’s Consultative Assembly (McLeod,
2002).
The composition and size of domestic public debt provided to the banks during crisis can be
classified into two categories: the recapitalization bonds for the commercial banks and the
repayment bonds to Bank Indonesia. The amount of outstanding debt increased rapidly, along with
the programme of bank restructuring and recapitalization from 1998 to 2000. The total government
bond in December 2001 was more than US$ 67 billion, or about 50 per cent of GDP.
The total amount of bond to recapitalize the banking sector was US$ 42 billion, or about 43 percent
of the total asset in all commercial banks in the country in the end of 2001. The size of government
bond in the balance sheet of the banking system was certainly much larger than the total amount of
outstanding credit of about US$ 29 billion. The increasing amount of government bonds reflects the
problems of banking restructuring and the crisis of confidence which were caused by the initial
closure of the 16 banks, insufficient deposit guarantee initially, delays and political interference in
bank restructuring and compounded by the political crisis.
The total amount of repayment bonds to Bank Indonesia amounted to about US$ 26 billion in
December 2001. These bonds consist mainly of the repayment bonds to cover the BLBI (Liquidity
Support Bank Indonesia) channeled by Bank Indonesia from 1997-1998 (US$ 17 billion) and the

17
bank guarantee provided by Bank Indonesia as part of the bank restructuring programme (US$ 9
billion).
There are many controversies surrounding the issuance of BLBI bonds regarding the size of the
liquidity support that could be much larger than the asset of the troubled bank itself; and the assets
pledged by the bank owners and shareholders in return to the support given by Bank Indonesia
being significantly less than the amount of liquidity support received by these banks. The
government audit agency found many irregularities in process of channeling the liquidity by Bank
Indonesia.

1.3.3 Economic situation

Economic recovery in Indonesia began in 2000 but remained initially moderate: GDP growth is
about 3.2% in 2002, 4.4% in 2003, and 4.8% in 2004 (BKPM)1. As a comparison, Gross Domestic
Product (GDP) growth exceeded 7% annually in the decades before the financial crisis, leading to
fundamental changes in the structure of the economy and helping elevate Indonesia from a low-to
middle-income country (World Bank, 2008). As a result of a more conducive political and security
situation, the Indonesian economic situation in the year 2007 improved. Economic growth was
6.3% with an inflation rate of 6.6% (BPS, 2007). The Rupiah currency strengthened compared to
the US$, from Rp 10,400/US$ in the year 2001 to Rp 8,919/US$ by the end of 2007. The main
economic indicators are provided in table 1.8.

Table 1.8: Indonesian macroeconomics indicators (adapted from Bank of Indonesia, 2009
No. Item 2001 2002 2003 2004 2005 2006 2007 2008 2009
1. GDP growth (%) 3.4 3.7 3.8 4.5 5.5 5.6 6.3 6.1 4.5
2. Inflation rate (%) 11.5 11.9 5.2 6.4 17.11 6.6 6.6 9.8 2.8
3. Interest rate (%) 17.9 13.8 9.5 7.3 12.7 9.8 8.10 9.5 6.25
4. Exchange rate 10,400 8,940 8,000 8,790 9,330 8,520 8,919 9,699 9,300

1.3.4 Current privatization in Indonesia

This section contributes to the current privatization in Indonesia. The first part relates to the
situation of SOE; performance, types, and contribution to the growth of economic. The second part
relates with the enterprises that were privatized until 2008, and the SOEs that are scheduled for
privatization. The third part is the regulation that relates with SOE; definition, objectives, and
privatization.
The average Return on Asset (ROA) of SOEs in the year 2001 was 2.28% (Bappenas, 2006). By
2007, there were over 139 state-owned enterprises with total asset of approximately Rp 1,850

1
BKPM Indonesia’s Investment coordinating Board

18
trillion or equal to US$ 206 billion. Their average ROA in the year 2007 was only 3.8%. SOEs
provided earning of Rp 71.49 trillion or equal to US$ 7.9 billion, dividend of Rp 22 trillion (US$
2.4 billion), and tax payment of Rp 21.45 trillion or equal to US$ 2.4 billion. These SOEs were not
supporting the nation’s economy since the ROAs were much lower than the cost of equity and cost
of debt of the firms. By definition the cost of equity is the required return of equity (Damodaran,
2008), Cost of Equity = Rf + Equity Beta * (E(Rm) - Rf) where, Rf (Riskfree rate) is the expected
return with certainty, Equity Beta is the measurement of risk in the industry and company, and
E(Rm) is expected Return on the Market Index. And cost debt is the rate of debt of the company
which is equal to the riskfree rate adds with company’s default rate (Damodaran, 2008).
As an illustration of the cost of equity and cost of debt of bank firm in Indonesia in 2007.
Risk free rate = 9.5 % (in accordance with government bond rate in 10 years in 2007, (Damodaran,
2008)).
Equity Beta = 1 (equity beta of bank industry (Damodaran, 2008)).
E(Rm) – Rf = 7.25% (risk premium of Indonesia, (Damodaran, 2008)).
Cost of Equity = 9.5% + 1 * 7.25% = 16.75%
Cost of Debt = 7.25% + 1.75% = 9% (default rating AA- according to Pefindo, obligation rate
Indonesia).
The calculated cost of equity and cost of debt are much higher than the average ROA of SOEs in
2001 and 2007 which were 2.28% and 3.8%. It can be concluded that the financial achievements of
SOEs were not adequate to supporting national economy.
In 2002, there were 158 State-Owned Enterprises and they decreased to 139 state-owned enterprises
in 2007 as presented in the table 1.9. There are four types of SOEs; the definitions can be obtained
as the following:
Perjan is a form of state-owned enterprises whose entire capital is owned by the government. This
treaty is public oriented service SOE so that always suffered lose financial performance.
Perum is a form of state-owned enterprises whose entire capital is owned by the government and is
not divided into shares. It aims of providing public benefits, goods and/or high-quality services and
at the same time pursuing the benefits based on the principle of corporate management.
Persero is a form of state-owned enterprises in the form of a limited liability company whose
capital is divided into shares of which least 51% owned by the government. Itsmain goal is the
pursuit of profit.
Persero Tbk. Company whose capital and number of shareholders meet the law of PP 12/1998 or
the company which issues the shares in the capital market in accordance with legislation of capital
market, UU No. 8/1995.

19
Table 1.9: Types and numbers of Indonesian SOE (adapted from BUMN Minister Republic of
Indonesia, 2007)
No. Description 2002 2003 2004 2005 2006
1. Perjan 15 14 14 0 0
2. Perum 11 13 13 13 13
3. Persero 124 119 119 114 114
4. Persero Tbk 8 11 12 12 12
Total number SOEs 158 157 158 139 139

Tesoro (1999) describes the Indonesian SOEs as having a lack of transparency with regard to
running the companies. The public is mostly kept in the dark with regard to what extend and why
the SOEs have a profit or loss. In addition, most government enterprises have monopoly rights in
their fields. Generally, the service provided is not accommodating at all. Mismanagement, poor
regulation or simple inertia left more than half of state-owned enterprises “unhealthy”. State-
appointed managers ran companies like fiefdoms; bloated, failing industries were kept alive more
from national pride than economic sense. They were overseen by touchy ministers and entrenched
managers. They were wrapped in a mythology of development. Slimming down or selling off these
sacred cows meant playing with fire (Tesoro, 1999).
The extensive set of SOEs also limits dynamic economic growth. SOEs, with access to subsidized
Government financing, are inefficient, drain public finances, and encourage corruption. Direct
budget subsidies largely flowing to SOEs, represent roughly 3% of GDP. Privatization of SOEs
under regulatory structure is essential to provide a basis for new investment, improved
competitiveness, and long-term growth. The most common privatization forms in Indonesia are the
Initial Public Offering and International Equity Placement Strategic Alliance. Aside from problems
with SOEs, previously private companies also suffered from the economic crisis, especially in the
banking industry where the banks experienced high Non Performing Loans and the customers
massively collected their deposits provided the bank with liquidity problems. For example, Bank
Central Asia, Bank International Indonesia, Bank Danamon, Bank Permata, Astra International, and
Indocement. The government bought the shares and restructured the companies under the National
Bank Restructuring Agency (IBRA) and later on taken-over and managedby the State-Owned
Restructuring Company (PPA). National Bank Restructuring Agency (abbreviated: IBRA) is a
government institution established by the Presidential Decree Number 27 Year 1998 on the
Formation of IBRA. This institution was established with the main task for the restructuring of
banking, asset settlement problems and seek refunds are distributed to the state banking sector.
Since performance was judged less than satisfactory, under the government of President Megawati
Sukarnoputri, the institute was disbanded on February 27, 2004 under Presidential Decree No. 15 of
2004 on Duties and Dissolution The termination of IBRA. The State-Owned Restructuring

20
Company (PPA) took-over and managed the remaining works. SOEs and the previously mentioned
private companies’ shares have been sold or were scheduled to be sold to foreign companies. One
of the forms through which this was planned to take place was the international equity placement
strategic alliance.
The privatization target in the year 2004 was about US$ 500 million (BKPM, 2003)2. Tables 1.10
and 1.11 provide an overview of the privatization scheme in Indonesia.

Table 1.10: Enterprises that were privatized until 2008

No. Companies Type of Industry Method of Privatization
1. PT. Semen Gresik (SOE) Cement Producer Equity placement with Cemex Mexico
2. PT. Indosat Tbk (SOE) Satellite Provider IPO and equity placement with STT Singapore
3. PT. Telkom Tbk (SOE) Telecommunications IPO & equity placement with Singtel Singapore
4. PT. Tambang Timah Tbk (SOE) Mining Industry IPO
5. PT. Aneka Tambang Tbk (SOE) Mining Industry IPO
6. PT. Pelindo II (SOE) Harbor Services IPO
7. PT. Pelindo III (SOE) Harbor Services IPO
8. PT. Bank Central Asia* Banking Equity placement with Farallon USA
9. PT. Indocement * Cement Producer Equity placement with HeidelbergGermany
10. PT. Perusahaan Pembangunan Construction IPO
11. PT. Adhi Karya Construction IPO and EMBO
12. PT. Bank Mandiri Banking IPO
13. PT. Bank BRI Banking IPO
14. PT. PGN Gas IPO
15. PT. Bank Danamon* Banking Equity placement with Temasek Singapore and
Deutsche Bank
16. PT. Bank Niaga* Banking Equity placement with Commercial Bank
Malaysia
17. PT. Bank International Indonesia* Banking Equity placement with Kookmin Bank South
Korea and Temasek Singapore
18. BT. Bank BNI Banking IPO and secondary offering
19. PT. Jakarta International Container Freight forwarding Equity placement with Hutchison Whampoa
Hongkong
20. PT. Bank Permata* Banking Equity placement with Standard Chartered Bank
and Astra International
21. PT. Jasa Marga Toll Road IPO
* Previous private company

Table 1.11: SOEs that are scheduled for privatization

(Adapted from Ministry of State-Owned Enterprise and other sources)
No. State Owned Enterprise Type of Industry Method of Privatization
1. PT. Kimia Farma Tbk Pharmaceutical IPO or Equity Placement
2. PT. Angkasa Pura Airport Services IPO or Equity Placement
3. PT. Iglas Glass Industry IPO or Equity Placement
4. PT. Cambrics Garment IPO or Equity Placement
5. PT. Atmindo Electrical IPO or Equity Placement
6. PT. Kertas Padalarang Paper IPO or Equity Placement
7. PT. Basuki Rahmat Paper IPO or Equity Placement
8. PT. Kertas Blabak Paper IPO or Equity Placement
9. PT. Indra Karya Engineering IPO or Equity Placement

2
The privatization target in 2003

21
 No. State Owned Enterprise Type of Industry Method of Privatization
10. PT. Virama Karya Engineering IPO or Equity Placement
11. PT. Yodya Karya Engineering IPO or Equity Placement
12. PT. Ina Karya Engineering IPO or Equity Placement
13. PT. Rekayasa Industri Engineering IPO or Equity Placement
14. PT. Intirub Tire Industry IPO or Equity Placement
15. PT. Dok Koja Bahari Harbor Services IPO or Equity Placement
16. PT. Jakarta International Hotel Development Hotel IPO or Equity Placement
17. PT. Krakatau Steel Steel Industry IPO or Equity Placement
18. PT. Merpati Nusantara Airlines Airlines IPO or Equity Placement
19. PT. Garuda Indonesia Airlines IPO or Equity Placement
20. PT. Rukindo Excavation IPO or Equity Placement
21. PT. INTI Telecommunications IPO or Equity Placement
22. PT. Rukindo Excavation IPO or Equity Placement

Legal aspects of privatization have been set up through UU No. 19/2003 about State Owned
Enterprises. It consists of 95 articles of regulatory aspects of SOE including privatization as
presented in the following table 1.12.

Table 1.12: The contents of law UU No. 19/2003

Part Article(s) Article Content
explained
Part I 1-9 - General terms
- Definitions of SOE, Perseroan, Perseroan Terbuka, Perum,
Ministry, Director, Commissioner, Resources,
Restructurization, Privatization, General meeting of
shareholders
- Objectives, Statute, Management, Control, Governance
Part II 10-33 - Persero
Part III 34-62 - Perum
Part IV 72-78 Restructurization and privatization
72 - Purpose and objective of restructurization
73 - Scope of restructurization
74 √ The objectives of privatization
75 √ The principles of privatization
76 √ Criteria of SOEs that can be privatized
77 √ The SOEs that can not be privatized
78 √ Methods of privatization
Part V 79-80 √ Privatization committee
81 √ Privatization policy
Part VI 82 √ Consultation on privatization
83 - Further unnoticed policy of privatization
84 √ Conflict of interest
Part VII 85 √ Information confidentiality
Part VIII 86 - Privatization output
Part IX 87-92 - Other provisions
Part X 93 - Transitional provisions
Part XI 94-95 - Closing provisions

As presented in the table, the Law UU No.19/2003 about State-Owned Enterprises consists of nine
parts, which are general terms, persero, perum, restructurization and privatization, privatization
committee, consultation on privatization, information confidentiality, privatization output, other
provisions, transitional provisions, and closing provisions. In the previous sections, the definitions

22
of SOE, persero, and perum related with Part I, II, and III have been provided so they are not
mentioned in this section. The following description of chosen articles in the law are based on the
dissertation’s concerns which relate with Part IV, V, and VI of the law; restructurization and
privatization, committee and policy, and consultation, especially the privatization part. They
exclude the articles 72 and 73 about restructurization but include other articles relate with the
objectives of privatization, principles or privatization, methods of privatization, privatization
committee, policy, consultation, conflict of interest, and information confidentiality.
The objectives of privatization: The objectives of privatization in Indonesia are determined in
accordance with UU No.19/2003, article no. 74. This is 1) to increase public ownership of the firm,
2) to increase efficiency and productivity, 3) to create a structure of good financial and managerial
finance, 4) a healthy and competitive industrial structure with global orientation, and 5) to improve
the working climate, macroeconomics, and market capacity. In general, the objectives of
privatization are to increase the firm’s performance, added value, and public ownership of the firm.
The principal of privatization: The principles of privatization in Indonesiaare ruled by UU No.
19/2003 article no. 75 and Kepmen BUMN No. 117/MBUMN/2003 about Good Corporate
Governance implementation. The principal of privatization is depicted in figure 1.3. It consists of
transparency, independency, accountability, responsibility, and fairness.

Figure 1.3:Principles of privatization

Principal of Privatization

Transparency Independency Accountability Responsibility Fairness

Criteria of SOEs that can be privatized. As provided in article 76, SOEs that can be privatized
must at least meet the criteria; industry/business sector which are competitive, or industry/business
sectors which possess rapidly changing technology. Some of the assets or activities of the SOEs
which perform public service obligations should be done by state enterprises, and can be separated
for inclusion in the establishment of the company if necessary to be privatized.
The SOEs that can not be privatized. Based on article 77, SOEs that can not be privatized are; the
SOEs which based on the provisions of legislation only be managed by the state, the SOEs engaged
in the business sectors related to defense and national security, the SOEs in a particular sector
granted by the government with a special task to carry out certain activities related to public
interests, and the SOEs engaged in the business of natural resources that clearly based on the
provisions of legislation prohibited to perform privatization.

23
Share ownership: The share in ownership by foreign capital investment (PMA), PMA stands for
Penanaman Modal Asing (Foreign Direct investment), The PMA can be in the form of joint
venture, straight investment such as IEPSA, and 100% foreign ownership stipulated that within 15
years of commercial operation the company divest the shares to local companies at least of 5% is
ruled according to the government regulation No. 20/1994.
a. In general, a PMA company is established as a joint venture between foreign and Indonesian
partners. The partnership may involve legal entities (corporations) or individual persons. There is
no requirement on the minimum amount of investment (equity plus loan). The amount is for the
parties concerned to determine, based on their economies of scale and business considerations.
b. A PMA company may be established as a straight investment, or 100% foreign ownership. It is
required, that no later than after 15 years of commercial operation, the company starts to be
divested by selling some of its shares to Indonesian individual(s) and/or business entities. This is
to be accomplished through direct placement and/or indirectly through domestic stock exchange
provided that the Indonesian share is maintained at least 5%.
c. PMA companies in infrastructure projects such as ports, generation and transmission as well as
distribution of electricity for public use, telecommunications, shipping, airlines, portable water,
public railways and nuclear electric power generation should be established by way of strategic
alliances between foreign and Indonesian state-owned enterprise.
Prospective partners: Under the Presidential Decree No. 24/2001, article 9, the prerequisites of the
foreign partner can be determined based on strength of financial capability, largeness of marketing
network, expertise in the associated technology, and willingness and ability to educate human
resources
Methods of privatization: According to UU No. 19/2003 on article 78 and under the Presidential
Decree Kepres No. 24/2001 article 6, the methods of State-Owned Enterprise privatization can be of
selling the government’s share by Initial Public Offering (IPO), Equity Placement Strategic
Alliances, and Employee and Management Buyout (EMBO).
Privatization committee: The privatization team is ruled in accordance with UU No. 19/2003 on
article 79. It consists of a Chairman (Minister of Economic Affair Coordinator), a Vice
Chairman/Daily privatization chief (Minister of State-Owned Enterprise), members (Minister of
Financial Affair, Secretary of State, Minister in the field where SOE operates), and a Secretary
(Secretary of State-Owned Enterprise Minister).
The government team, headed by State–Owned Enterprise Minister provides the privatization
policy (UU No. 19, 2003 Article No. 81) which consists of determining which SOEs will be
privatized, deciding the method of privatization according to the characteristic of respective SOE,

24
determining the number of share to be sold to the foreign company, deciding the shares value, and
assessing the target value of privatization program.
The hierarchy of the ‘rule of the game’ to the privatization scheme is illustrated in figure 1.4.

Figure 1.4: Hierarchy of the privatization scheme

President Privatization team Ministry of SOE Privatization policy

Statutory of privatization: Under the Presidential Decree No. 24/2001, article 7, the prerequisites
of State-Owned Enterprise privatization are:
1. In case of initial public offering, the process should be in compliance with the Law in Stock
Exchange.
2. In case of equity placement strategic alliances, the process should be transparent
Figure 1.5 depicts the associated law of the SOE privatization:

Figure 1.5: Statutory foundation of privatization program

Law UU No. 19/2003, of State-Owned Enterprise

Statutory foundation of privatization program

UU No.19/2003

Law of Law entity and supported regulation of

privatization privatization

Primary format
Presidential decree
Kepres No. 7/2002

Privatization team Law of Law of Law of Law of

Perseroan anti- Stock investment
Terbatas monopoly Exchange
Law UU No. 9/1969
PP 12/1998 UU 8/1995 UU 5/1999 UU 1/1967
Scope and
Source: see of
classification text
SOE

Presidential decree
Kepres No. 24/2001
Method of privatization

25
As provided in figure 1.5, potential partners who intend to establish an international equity
placement strategic alliance in Indonesia should understand the privatization law in Indonesia,
which is ruled in accordance with the law UU No. 19/2003. The respective law consists of all
aspects considerations of privatization, mainly consists of methods of privatization, privatization
team, scope and classification of SOE to be privatized, and rule of the game of privatization.
Besides that, there are also supporting laws and regulations which need to be considered, such as
law of perseroan terbatas, law of anti monopoly, law of investment, and law of stock exchange.
Consultation on privatization: In accordance with UU No. 19/2003, article No. 82, the intention
to privatize the SOE should fulfill the following conditions.
1. Privatization should be preceded by the selection of prospective partners and based on the
criteria set by the government.
2. For the selected prospective partners that have fulfilled and conformed with the criteria and after
receiving the recommendation from the Ministry of Finance, thereafter should be socialized to
the public and consulted to the House of Representative.
Conflict of interest. Under article no. 84, each person and/or legal entities that have the potential
conflict of interest forbidden to engage in the process of privatization.
Information confidentiality. This is ruled under article no. 85. (1) The parties involved in
privatization programs and processes required to maintain confidentiality of information obtained
when the information is not yet open. (2) Violation of the provisions referred to in paragraph (1)
subject to sanctions in accordance with the provisions of legislation.

1.4 Research design

1.4.1 Problem definition

In Indonesia, the earlier experiences of the privatization of State-Owned Enterprises and Taken-
Over Banks have been problematic. For the selected form of international equity placement
strategic alliances, the government had difficulties in formatting and managing it. The objective of
the research is to gain insight into the privatization processes through IEPSAs in Indonesia. The
central research question of the research is defined as follows:
How did the privatization process through International Equity Placement
Strategic Alliance take place in Indonesia?

26
1.4.2 The alliance life cycle
Several authors argue that research on strategic alliances should focus on the different life cycle
phases at the firm level, see table 1.13. Pett & Dibrell (2000), Lei & Slocum (1992) and Holtbr ügge
(2004) emphasize the need to look at the formation and management phase. Niederkofler (1991)
highlights a need to focus on the management phase. Finally, Medcof (1997) stated that the
formation phase needs attention.

Table 1.13: The focus of attention upon the life cycle

No. Author Content Focus of attention
1. Pett & Dibrell (2001) If the process of formation and development of an alliance was Formation and
successfully completed by organizations they should also gain a Development
competitive advantage
2. Lei & Slocum (1992) Many firms do not understand the inherent complexities Formulation and
involves in formulating and implementing a strategic alliance Implementation
and simply seek to cut costs and thereby reduce their
commitment to investing in new product development and
manufacturing technologies
3. Niederkofler (1991) A major case for cooperative failure is managerial behavior in Management
nature, cooperation differs fundamentally from competition.
Whereas competitive processes are well understood and
practiced daily, the key success factors in cooperative processes
are widely ignored
4. Holtbrügge (2004) It is argued that the success of international strategic Formation and
cooperation depends on both situational conditions and Management
management conditions. While the situational conditions
determine the general usefulness of strategic cooperation in a
given industry, the implementation of efficient management
instruments may enhance the success of a particular firm
5. Medcof (1997) Although there are many reasons for alliance failures, many Formation
authors conclude that poor selection of alliance partners is
among the most important

Formation of strategic alliances

The formation of strategic alliance or what Pett and Dibrell (2001) stated in a exploratory stage is
the initial process of bringing together two or more autonomous organizations, and these units
attempt to fill gaps either in their technology, resources, or markets (Ring & Van de Ven, 1992).
Included in this process is the scanning of governmental regulations and ethical issues for both the
multinational and domestic organizations. Moreover, organizations should consider the role of
national culture in the process. A significant difference between national cultures based on the
countries of origin of the potential members of the alliance should signal planners to be aware of a
greater challenge than originally envisaged.
The companies seeking for an alliance partner have to check the compatibility of the prospective
partner’s strategic management with individual strategic needs which dictate the role of alliances in
a multinational company (Sierra, 1995). The role of strategic alliances within a firm’s strategic

27
framework depends on a number of factors. Company with abundant resources such as technology,
financial, R&D, and natural resources, has different motives and interest than that with fewer
resources. Relatively, company with advance technological and R&D background under the mature
product life cycle and stagnant market might seek alliances to company under the early stage of
product life cycle and with a growing market and consequently the growing market company will
seek alliance with company with advance technological and R&D background to support the market
needs. The international strategic alliances seek the mutual benefit, compatible motives and hence it
encourages the company’s strategic vision and mission, which aims to going global.
In the formation of international equity placement strategic alliance in Indonesia, the process is in
order to find the strategic match and stakeholder support between the host partner (Indonesian
company) and foreign company. In this phase, both prospective partners assess the complementary
know-how, resources, markets, strategic position and objective, economic condition. The
stakeholder of the Indonesian companies should be assured of the benefits of alliance; it consists of
top management, house of representative, ambient society labor union, and government.

Management of strategic alliances

Douma (1997), states in his theses that this phase focuses mainly on the implementation of strategic
planning agreed by both parties. The emphasis is how to fulfill the objective setting which has been
set in the strategic planning document, implementing with the appropriate strategic programming
and strategic budgeting. Human resource management, organizational arrangements, and
management control system are those that should be carefully considered in the management of
strategic alliances.
Teramoto et al. (1991), identify the six factors they judge to be most important for strengthening the
links between companies in an alliance, which focus on formation, success and management.
 The formation criterion is inevitably complementarity of resources
 The results criteria are to achieve tangible benefits on both sides through reciprocal trade, and to
experience early success to demonstrate the value of the alliance
 The management criterion consists of three factors:
- to identify an early target or objective for the alliance
- to develop a close relationship on a personal basis between the partners
- to communicate well through an effective boundary spanning function

28
1.4.3 Industry selection
The previous discussion in section 1.3.4 illustrated the spread of privatization and its methods in
Indonesia. In this research, three specific industries are selected to determine the process of
privatization through IEPSAs in Indonesia: banking, cement and telecommunications. The banking
industry drained the government budget for the recapitalization and liquidity bond as much as 41%
in 2001. The cement industry, where Semen Gresik formed an IEPSA with Cemex was the first
experience of IEPSA in Indonesia. The telecommunications industry, where Indosat was in the list
of IEPSA was considered as one of the biggest IEPSA experiences in Indonesia.

Banking industry
The crisis that hit the banking sector in Indonesia was the most serious compared to the banking
sector in other countries in the world in the late 20th centuries in terms of its immediate impact on
GDP country’s stock of debt the time when GDP fell by more than 13.1% (Pangestu, 2003). Figure
1.6 depicts the banking restructuring scheme in Indonesia. The government provided the bonds for
liquidity support and recapitalization program. In return, the government took over the ownership of
the troubled banks.

Figure 1.6: Banking restructuring scheme (adapted from Pangestu, 2003)

Bank of Indonesia
Provide liquidity
support (1997 – 1999) Issue repayment bonds
and blanket guarantee to Bank of Indonesia;
pay the interest to BI

Banks Under IBRA Transfer of all loan, Government (IBRA)

Frozen or Liquidated equity and shareholder
settlement to IBRA Collect loans from bank under
Bank (BBO, BBKU)
IBRA
Transfer category 5 Own equity in banks, in return of
Recapitalized Bank, Bank loan and some equity capital injection
Take Over (BTO) to IBRA Receive stakeholder settlements
Issue Recapitalization Bond to
Recapitalized and BTO Bank; pay
the interest payment, provide
government guarantee program

The government in association with Indonesian Banking Restructuring Agency (IBRA) negotiated
performance contracts and MOUs with the owners and management of the banks to be recapitalized
by taking ordinary stocks and allowing management control to the owners of the banks. The
summary of bank restructuring is provided in table 1.14.

29
 Table 1.14: Summary of bank restructuring as of 1999 (Adapted from Pangestu, 2003)
Banks Nr. of banks before Bank Restructuring Nr. of banks after
restructuring category process restructuring
A B C
State banks 4 merged into 1
7 - - 7 1 new bank (export) 5
All recapitalized
RDBs3 27 13 10 4 12 recapitalized 27
Private national 48 closed
banks 142 72 40 30 7 recapitalized 92
13 Bank Taken Over

Table 1.15 is the list of prominent recapitalized and taken over banks and their associated
ownership after the privatization as of 2004, ordered in accordance with the size of their assets.

Table 1.15: Prominent recapitalized and taken over bank and their ownership after
privatization as of 2004 (adapted from the bank websites)
Gov’t Private Public Foreign Total Asset Rank in
(Rp Trillion) Asset
Bank Central Asia 9.3 % 7.15 % 32.6 % 51 % 143.8 1
Bank Danamon 10% 24% 66 % 63 2
Bank International 29% 20% 51% 35.1 3
Indonesia
Bank Niaga 21.5 % 52.8 % 30.8 4
Bank Permata4 38% 62% 29.0 5

The issues in the banking privatization schemes are the tremendous restructuring capital needed in
comparing with the low provision of government purchased equity to the state’s cash, the anti-
nationalism protest against the privatization, the transparency issues that were considered to be
neglected by the government, and the fears from the employees of being laid-off.
Issues and problems in bank restructuring: Despite the progress in rehabilitation and
recapitalization of the banking system, there remain many challenges and problems (Pangestu,
2003). The banking sector remains dominated by state banks, all of which have been recapitalized,
but which remain weak, or banks taken over by the state. After the restructuring the state has
become dominant, either through state banks or because it has taken over or recapitalized private
banks. In fact, close to 85 percent of the total banking sector third-party liabilities are owned by the
Government with 13 BTOs, 80 percent of the seven recapitalized banks under IBRA, and the
remaining 4 state banks.

3
RDB = Regional Development Bank
4
Bank Permata is a merger of Bank Bali, Bank Universal, Bank Prima Express, Bank Arta Media, and Bank Patriot

30
The rest of the banking system is comprised mainly of the former large private banks which were
taken over, merged and recapitalized and now comprising basically of four banks: BCA, the merged
10 banks under Danamon, Bank Niaga and Bank Bali.
Many deadlines were missed, and the seriousness of implementation questioned, especially with
regard to the transparency of the debt restructuring of major private sector obligors and asset sales
under the Indonesian Bank Restructuring Agency. There have been cases where former Presidents
Habibie and Wahid intervened to provide for differential treatment for certain debtors and obligors.
The legal and court system have also been found lacking in their ability to enforce decisions on
corruption and bankruptcy, that even when decisions were made, there have been few actual
sanctions and bankruptcies. The lack of transparency and discretion has led the IMF to increasingly
micro-manage the LOI by creating oversight committees, independent committees and so on in an
attempt to overcome the lack of authority and independence of the IBRA and of ineffective court
systems. In one of the last LOIs, Corporate Governance guiding principles were introduced and all
past agreements are to be reviewed against these guidelines.
The role of privatization in the recapitalization of the banking sector: The privatization in
Indonesia can not be separated with the economic crises that rumbled from 1997 to 2002. In order
to heal the country’seconomic; it needed a lot of cash one of the means for bank restructurization as
depicted in figure 1.7. IMF provided the loan with the prerequisite of privatizing the state-owned
enterprises, which claimed to be inefficient and drained public fund. The privatization cash was also
transferred to the government for additional cash to bank restructurization and liquidity support by
bank Indonesia through providing the government bonds.

Figure 1.7: Privatization for the cash of bank restructurization and liquidity support
Privatization Sources of Government
1. Semen Gresik Bond
2. Indosat 1. Bank Indonesia
3. Banking sectors 2. Recapitalized banks
4. Others
Cash for
Provided with

Possessed by Government In return Coupon for

1. Equity 1. Bank restructurization

2. Assets of the Taken-over 2. Liquidity support
Banks (ex private)

31
Cement industry
The four biggest cement players in the world are: Lafarge (France), Holcim (Switzerland), Cemex
(Mexico), and Heidelberg Cement (Germany). Each of these four companies has already invested in
Indonesia by buying shares in Indonesia's cement companies, i.e. Semen Andalas, Semen Cibinong,
Semen Gresik, and Indocement. Part of the Semen Gresik shares of 25.33% has been purchased by
Cemex of Mexico since 1998. Heidelberger Zement of Germany took over the government shares at
PT. Indocement Tunggal Prakarsa Tbk. of 60.62%. Holderbank made acquisition of 100% PT.
Semen Cibinong Tbk. shares. Also, Lafarge of France, which merged with Blue Circle of British
occupied 72.42% shares of PT. Semen Andalas Indonesia. Forty percent of the world cement
market was occupied by 7 global cement companies, including Holderbank (9%), Lafarge (8%),
Cemex (6%), Heidelberger (6%), Taiheyo (4%), Italcement (4%), and Blue Circle (3%). All of
them possessed 577.4 million tones of all 1,480 million tones of the cement world demand.
Table 1.16 shows the list of cement producers in Indonesia in accordance with the amount of
production capacity. The four biggest cement producers have already made the alliances with
prominent world cement players.

Table 1.16: Cement industry scheme (adapted from each company’s website)
Company Government Private Public Foreign Capacity %
Domestic Mmt/year
Semen Gresik 51.01% 23.46% 25.53% Cemex Mexico 17
Indocement 13.03% 21.83% 65.14% Heidelberger Germany 15.5
Tunggal Perkasa 92.4
Semen Cibinong - - 22.67% 77.33% Holcim Swiss 10.5
Semen Andalas - - - 100% Lafarge France 1.2
Semen Baturaja 100% - - -
Semen Kupang 100% - - - 3.62 7.6
Semen Bosowa 100% - - -

Telecommunications industry
The main telecommunications players in Indonesia are PT. Telkom and PT. Indosat. Indosat is the
second largest telecommunications after PT. Telkom and focused on the satellite provider and
international connection. While, PT. Telkom focused on the fixed telephone line. However, at
present both companies compete each other in the cellular industry. Both companies have
undergone the international equity placement strategic alliance; PT. Indosat made an alliance with
Singapore Technology Telemedia (STT), while PT. Telkomsel (one of PT. Telkom subsidiaries)
made an alliance with Singapore Telecommunications (SingTel).
Singapore Technology Telemedia (STT) and Singapore Telecommunications (SingTel) are both the
subsidiaries of Temasek Holdings, which belong to Singaporean government. This fact generates

32
concerns of nationalists about transferring monopoly power from Indonesian government to
Singaporean government. Below is the diagram showing the detail of affiliation.

Figure 1.8: Diagram of Temasek Holdings (Adapted from Temasek website)

Temasek Holdings
(100% owned by Singaporean government)

100% 100%

Singapore Telecommunications Singapore Telecommunications PT. Telkom

Pte. Ltd. Ltd. (SingTel)

100% 35% 65%

Singapore Technologies PT. Telkomsel Indonesia

99%
ST. Telemedia Communication

100%
Indonesia Communication Ltd. Government of Indonesia Public

41.94% 15% 43.06%

PT. Indosat Indonesia

100% 100%
PT. Satelindo PT. IM3

1.4.4 Research questions

In the objective to address the central research question (How did the privatization process through
International Equity Placement Strategic Alliance take place in Indonesia?), the following Research
Questions were formulated.
Firstly, in order to reveal the steps and phases in the privatization through IEPSA of the cases in
banking, cement, and telecommunications industries, the Research Question 1: What were the
steps/phases in the privatization through IEPSAs in Indonesia at the firm level in the banking,
cement, and telecommunications industries and how were they formulated?
Secondly, to obtain the model consisting of factors and variables which influence the steps and
phases, the Research Question 2: Which factors and variables influenced these steps and phases?
Thirdly, to find the relationships between (among) the factors and variables, the Research Question
3: How were the relationships between (among) factors and variables was created?

33
1.4.5 Research contribution
This research is envisaged to provide insight for various people or organizations.
Management science: The results are aimed to contribute from the scientific point of view to the
knowledge of international equity placement strategic alliance, concerning definitions, models,
characteristics, mechanisms and benefits. The identified variables, factors, steps, and phases within
the models, and the identified the key success factors are expected to contribute to the knowledge of
IEPSA.
Foreign investors: The conceived result provides the foreign investors/companies a guideline to
expand the activities by purchasing Indonesian potential state-owned enterprises or taken-over
companies through international equity placement strategic alliance. The guidelines will describe
and elaborate the foreign investors/companies on the preparation process for building successful
international equity placement strategic alliances, which means the privatization of selling some
shares of the government in the State-Owned Enterprises and Taken-Over Banks to foreign
partners.
Indonesian companies: The intended results aim for Indonesian companies to provide insight to
prepare for the new atmospheres from the foreign investors by building international equity
placement strategic alliances in Indonesia. Changing the old paradigm that has been adhered for a
long time to the new paradigm proposed by the new owners, however this should be inevitably
followed and adopted by Indonesian companies to improve the company’s performance.
Indonesian government: The expected result of this research will gain insight for the government
that can contribute to make the appropriate preparation, and policy to Foreign Direct Investment
especially in international equity placement strategic alliance in Indonesia and/or the privatization
through selling shares to foreign investors/companies in accordance with Law UU No. 19/2003
article No. 78 point a.

1.5 Dissertation structure

The dissertation structure is provided in the following figure 1.9. In Chapter 1, the problem
background, objectives and scope, problem definition, research questions, research design and
methodology are treated. The overview of privatization and the connection between privatization
and international equity placement strategic alliance are also provided. Furthermore, in order to gain
insight of Indonesian characteristics where the research takes place, the description of Indonesian
characteristics related to international equity placement strategic alliance are presented in this
chapter.

34
The theoretical foundation to explore the main dimensions and variables particularly the
characteristics and management issues in the international equity placement strategic alliances is
presented in Chapter 2. The exploration is aimed to obtain the research framework to guide the data
collection.
The methodology of this dissertation is provided in Chapter 3. It consists of case study research,
case selection, data collection, data analysis, and operationalization of the conceptual framework.
The case studies of the IEPSA in Indonesia are presented in Chapter 4 to Chapter 9. The purpose is
to assess the accuracy and comprehensiveness of the research framework developed previously.
Besides that, it is aimed to know how the international equity placement strategic alliances were
constructed in Indonesia. The cases are split into state-owned enterprises and taken-over banks.
The observed findings are discussed in Chapter 10, containing cross-case analysis of the case
studies in the objective to provide more powerful explanations and also to know the degree of
successfulness of these cases studied.
The last Chapter 11 addresses the research questions, provides the conclusions, reflection, and
recommendations of developing international equity placement strategic alliances in Indonesia
along with proposed guidelines for further research.

35
 Figure 1.9: Dissertation structure

Chapter one: Research background

Chapter 1 provides the background information for the research. It
presents the topic background, research purpose and objectives and
research questions.

Chapter two: Literature review and research framework

development
Chapter 2 provides a literature review that explores the main
dimensions and variables. Based on this a conceptual research
framework is developed to guide the data collection

Chapter three: Methodology

Chapter 3 describes the methodological approach and
operationalization of the concepts in the conceptual research
framework.

Chapter four to nine: Case study description:

Chapter 4 to 9 describe analyses, and presents the finding of six cases
in individual manner to make meaningful of sense of data supplied by
participants.

Chapter ten: Cross-case analysis

Chapter 10 compares all cases by using a cross-case analysis to develop
more powerful explanations for the privatization process and its
outcomes across four cases.

Chapter eleven: Conclusions, reflections, and recommendations

Chapter 11 addresses the research questions, connects theory and
practice, presents reflections, gives recommendations, and proposes
guidelines for further research.

36
CHAPTER 2: FRAMEWORK DEVELOPMENT
A conceptual framework is developed in this chapter. This framework is developed to have a
systematic data collection. The attention is on the privatization process which consists of phases
with activities (discussed in section 2.1) and determining common and specific characteristics
(discussed in section 2.2). The results of the discussions are put together in a conceptual framework
in section 2.3.

2.1 Phases
In the life cycle of international strategic alliance several phases can be distinguished. Faulkner
(1995) and Lorange & Roos (1992) divide the phases into formation, management
(implementation), and evolution. Mulyowahyudi (2001) discerns them into formation, operation,
and termination. Furthermore, Segil (1996) divides the phases into start-up, hockeystick,
professional, mature and consolidating, sustaining or declining. Explanations of the phases can be
seen in table 2.1 (Segil, 1996).

Table 2.1: Alliance life-cycle stages and relevant activities

Start-up Hockey stick Professional Mature Sustaining/
Declining
Conception and Growth and Professionalizing of Maturing stage of Sustaining:
strategic achievement of the alliance activity alliance life and Conflict resolution,
development, initial growth or and metrics. restructuring of redefinition of
planning team success-related goals and success. Lawyers
development, milestones Adjust team changes milestones. play large and
internal signoff, and maturing active role.
creation of operating Potential
plan, launch and termination and Declining:
start up. Could also reorganizing of Alliance
be re-launch team members and termination or
composition complete
remediation

The following table 2.2 provides an overview of approaches towards the strategic alliance life cycle.

Table 2.2: The strategic alliance life cycle

No. Authors Phases
1. Faulkner (1995) Formation, Management, Evolution
2. Lorange & Roos (1993) Formation, Implementation, Evolution
3. Mulyowahyudi (2001) Formation, Operation, Termination
4. Segil (1996) Start-up, Hockeystick, Professional, Mature and Consolidating,
Declining

37
Segil’s (1996) ‘start-up’ can be viewed as similar to formation, while hockeystick, professional,
mature and consolidating’ is associated with management and evolution of the alliance, and
‘declining’ is related to its termination. Overall, based on the author’s information, the life cycle of
international strategic alliance can be divided into formation, operation, and termination phases.
The initial phase of international strategic alliance requires a thorough negotiation (Lorange &
Roos, 1992; Sierra, 1995), and also intensive analytical and political consideration (Lorange &
Roos, 1992; Sierra, 1995; Segil, 1996). This phase is the first determination of both negotiating
partners whether to continue or terminate the intention to form the strategic alliances (Lorange &
Roos, 1992). From the above analysis, it follows that the ‘formation’ phase in strategic alliance
should be logically separated into a ‘planning’ phase and ‘formation’ phase. The planning phase is
concerned with the activities of considering the alliance before the ‘go’ decision while the planning
phase is concerned with activities after the ‘go’ decision, see figure 2.1.

Figure 2.1: Planning and Formation phase of a strategic alliance

First Consideration More Thorough

Consideration

‘go or no go’ decision

Planning Phase Formation Phase

of IEPSA of IEPSA

Based on the previous discussion a scheme for an international equity placement can be divided into
four phases, see figure 2.2.

Figure 2.2: Life cycle of an international equity placement strategic alliance

Alliance Alliance Alliance Alliance

Planning Formation Operation Termination
(2.1.1) (2.1.2) (2.1.3) (2.1.4)

2.1.1 Alliance planning phase

In this phase, political considerations should be taken into account (Lorange & Roos, 1992). That
means ascertaining the benefits of the alliance in order to have support from internal and external

38
stakeholders. Therefore, gaining stakeholders support is also of prime importance from a political
perspective (Freeman, 1984). Furthermore, negotiation is crucial during the planning phase. This
can be either between the two (potential) partners or with the associated stakeholders (Freeman,
1984). What is essential for negotiations is a mutual understanding of the cultural differences,
characteristics, and management (Das & Teng, 1998; Arino, Ring, & de la Torre 2001; Pagani,
2003). Thus, whether the companies understand on cultural aspects is also important for the
planning phase.
The planning phase of the international equity placement does not depend solely on political
considerations but also analytical considerations. The primary activity in the planning phase is the
selection of a partner. This selection of a partner is a crucial requirement to obtain ultimate success
of a strategic alliance. According to Douma (1997), the strategic match between the potential
partners is the most important criteria for selecting a partner. Research has shown that if no such
strategic match exists between partners, and if there is no concrete prospect of improvement in the
strategic situation, then an alliance is not desirable (Douma, 1997). Additionally, the capacity,
complementarity, and strategic importance of the partners are also determined to be the important
characteristics that should be considered in the criteria of selecting the partners (Sierra, 1995;
Mulyowahyudi, 2001). Accordingly, from an analytical perspective, the determination of the
strategic match is of prime importance and the capacity, complementarity, and strategic importance
become a sub-part of this strategic match.

Stakeholder support
During the initial phase, it is important to ensure that major stakeholders are involved (Freeman,
1984). Stakeholder is defined as those groups without whose support the organization would cease
to exist (Freeman, 1984). The purpose of this political consideration is to ensure that the prominent
internal and external stakeholders will be able to realize the benefits from and support the alliances
(Lorange & Roos, 1992). Additionally, key members of the top management should be willing to
pursue the alliance in such a manner that they are not a threat for their power and careers (Lorange
& Roos, 1992). The CEOs may be hesitant if they perceive that the prospective alliance might
diminish their own discretionary power, division managers might fear becoming lost as a small part
of a large alliance, employees might fear restructuring, potential loss of jobs, or additional cultural
stresses. External stakeholders are also important to be considered otherwise they can resist or
prevent the forming of the alliance.
Since SOEs belong to the government, they should consult with the congress or representatives
before selling the shares (Moore, 1992; Basu, 1994). The government and representatives schedule

39
the intended SOEs, as well as discuss the criteria of prospective investors, the amount of shares to
be sold, the target revenue, and prepare the necessary regulatory supports. The house and
representative set up the privatization as the scheme of industry restructuring program. Notably, the
representatives demand the transparency process of privatization. The state of transparency will
influence the share price, the quality of partners, and finally determine the degree of success of
having an improved industry and macroeconomics. The ownership structure between foreign and
domestic partners in the privatization has been the focus of attentions of the house of representative
(Kikeri & Nellis, 2004).
Based upon literature including Basu (1994), Clarke et al. (1994), Kaufman and Siegelbaum (1997),
Kikeri and Nellis (2002, 2004), and Moore (1992), stakeholder support can be divided into: internal
organization support (internal) and society support (external). The following sections will explain
how stakeholder support is assessed based on these two types of support.

Internal organization support

The term internal organization relates to the labor union and management. The suspiciousness of
being laid off is the main reason why labor union protests and resists the privatization, especially in
the equity placement strategic alliances (Moore, 1992; Kikeri & Nellis, 2002, 2004). The form of
resistances can be: staking, demonstrating, questioning share price, transparency, protesting against
existing condition, and searching for political supports, with the reason of difficulty to find for
employment. The management of SOEs has been spoiled by the position of the state companies
(Moore, 1992; Kikeri & Nellis, 2002; Clarke, Cull, & Shirley, 2005). They are regarded to have
comfort zones. The companies are flooded with fund from the government which converted to
equity for the sake of social service. Despite unsatisfactory performance of the SOEs, they are not
blamed for having negative earning. The SOEs are regarded as state companies aim for providing
social service without having to mind of the profit. Privatization from the point of view of the
management tends to demise their power and position and threaten their existences. In addition to
that, issues of transparency and low share price in the privatization will ignite the opposition of
management (Kikeri & Nellis, 2004). Eventually, the management potentially resists the
privatization process.
The relationship between labor union and management in the organization in terms of perceptions
were researched by Angle and Perry (1986). They discovered that there are high correlation
between the perceptions of managers and their labor counterparts which indicated that labor and
management appeared to see ambient labor-management relationship climates in such the same way
(Angle & Perry, 1986: 45).

40
A labor union is defined as an association of workers formed for the purpose of advancing its
member’s interests in respect to wages, benefits, and working conditions (Merriam-Webster, 2003).
Through collective bargaining, unions act as mediators between employees and employers
regarding wages, benefits and other issues. Management is defined as the persons who have
authority to take charge of the divisions in the company (Merriam-Webster, 2003). The same with
the labor union, in the privatization, management is afraid of losing the power which is related with
the lost of wages, and benefits (Ramamurti, 2000).
In this phase, the terms of labor union and management support is internal organization support.
What is a foremost concern from internal organization support in the privatization process is
‘rationalization’ (Kikeri, Nellis, & Shirley, 1994). Rationalization is the laying off employees and
management for the sake of efficiency. It can lead to lower wages and benefits and lost jobs (Kikeri
et al., 1994). Wages and benefits are related to the company condition, associated with company
restructuring, prior to the privatization and the plan for privatization. These variables affect the
labor union’s support for the intended IEPSA. Based on this, internal organization support can
therefore be assessed by examining the company restructuring and the plan for privatization. The
relationship of company condition prior to privatization, and plan for privatization variables with
the stakeholder support is presented in figure 2.3.

Figure 2.3: Relationship of company condition prior to privatization, and plan for
privatization variables with the stakeholder support

Variables Sub-factor Factor

Company
restructuring
Internal Stakeholder
organization support
Plan for support
privatization

Company restructuring
The company condition prior to the IEPSA initiation plays a role in the internal organization
support. Restructurization, prior to the intended IEPSA help improve the existing condition of SOEs
both financially (which result in improving wages and benefits) as well as culturally which is equal
treatment among the employees. These types of improvements lead to the internal organization
support on the intended IEPSA (Kikeri & Nellis, 2002; Ramamurti, 2000). Governments may opt
for initiating an IEPSA as a result of the urgency to improve the SOE’s performance. However,

41
most of the governments prefer to restructure the SOEs before initiating the IEPSA based on the
expectation that this will improve the sale of its shares (Kikery & Nellis, 2002; Ramamurti, 2000).
Once restructuring has taken place, it is likely that the intended IEPSA will be supported by the
House of Representatives. Assessment of the company condition prior to the IEPSA initiation is
based on:
 If the company was restructured prior to the IEPSA initiation which has positively affected
the performance of the firm then the company restructuring has a positive influence on the
internal organization support.
 If prior restructuring did not take place or if poor performance continued, then company
restructuring has a negative influence on the internal organization support.

Plan for privatization

The privatization scheme, including IEPSA, usually occurs during a crisis which hampers the
economic conditions of the country (Ramamurti, 2000), i.e. the economy, including the raising
budget deficit and rate of employment. Privatization is aimed at reducing the budget deficit. Under
these circumstances, for most employees and management it is difficult to find alternative
employment. Thus, at that moment, rationalization has become a sensitive issue for employees and
thus also for the labor union. A guarantee that rationalization will not be applied in the intended
IEPSA will help eliminate the opposition of union (Kikeri & Nellis, 2002). In the plan for the
IEPSA, the partners should ensure that the business will not lay off people or even have a need for
extra people. This may come from multiple angles. For example, if the company is committed to
contribute to the development of industry this will translate in a need for more employees. If there
are lay-offs or if business remained steady the alliance will have to absorb the extra cost in case of
layoffs (Kikeri & Nellis, 2002: 27). Assessment of the plan for privatization (IEPSA) is therefore
based on:
 If the new owners do not guarantee employment then the plan for privatization negatively
influences internal organization support.
 If the new owners are committed to maintaining or growing employment then the plan for
privatization positively influences the internal organization support.

Society support
Society is defined as a voluntary association of individuals for common ends; especially an
organized group working together or periodically meeting because of common interests, beliefs, or
profession (Merriam-Webster, 2003).

42
In the cases of IEPSA, the majority of shares of SOE are owned by the government which is
controlled by house of representative. Based on Boycko, Shleifer, & Vishny (1995), societies have
also stakes in corporations. Consequently, the society has interests in changes of a government’s
ownership in corporations (Kikeri & Nellis, 2002). In the process of IEPSA, the government’s
shares are transferred to a foreign partner(s). One of the objectives of this is that the government
uses the incoming fund from this transaction to overcome budget deficits which will in turn affect
the wealth of society (Ramamurti, 2000). Therefore, a society is interested in knowing the share
price of the stock that is sold by the government (Ramamurti, 2000). Furthermore, for a society to
follow the government’s actions, transparency of this process is required. Lack of transparency
leads to allegations of corruption and provides ammunition to political and other opponents,
creating backlash from investors and the public at large, and threatens to halt privatization and
liberalizing reform in general. It can be concluded that the more transparent the process is the more
amount of incoming fund can be expected in the transaction as a result of higher share price (Kikeri
& Nellis, 2002; Rose-Ackerman, 1999). Based on this, society’s support can therefore be assessed
by looking at the change in ownership structure, the share price, and the transparency of the
privatization process. The relationship of change of ownership, share price, and transparency of the
privatization process variables with the stakeholder support is presented in figure 2.4.

Figure 2.4: Relationship of change of ownership, share price, and transparency of the
privatization process variables with the stakeholder support
Variables Sub-factor Factor

Change in ownership structure

Share Price Society Stakeholder

support support

Transparency of the privatization

process

Change in ownership structure

The ownership structure between government and foreign partner of the IEPSA is stipulated in
accordance with the agreement between government and house of representative (Megginson &
Netter, 2000). The agreement; permission from the representatives and amount of the shares sold, is
the legal structure of the intended IEPSA. The transparency assessments are provided by

43
triangulating the primary (by interviewing the society members) and secondary data. The secondary
data are those which describe the ownership structure between government and foreign partner of
the IEPSA which was permitted by the representatives (during the meeting between government
and representatives prior to the intended IEPSA). The society demands that the government
maintains its majority stakes in the corporation (Ramamurti, 2000). Large-scale privatization can
arise much popular opposition (from the society) since it may have an effect on an intangible
balance of power between the private and public sectors (Van de Walle, 1989). According to De
Castro and Uhlenbruck (1997), in a less-developed countries government favor for a majority
ownership to show that “assets are not being given away to foreigners”. Afterwards, the
government’s ownership can be reduced gradually (Ramamurti, 2000). Based on this:
 The change in ownership structure has a negative influence on society support if 1) actual
ownership structure after the initiation process of IEPSA deviates from the agreement
between government and representatives, and 2) if the government loses its majority stake
in the corporation.
 The change in ownership structure has a neutral influence on society support if one of the
following conditions occurs, either 1) actual ownership structure after the initiation process
of IEPSA deviates from the agreement between government and representatives, or 2) if the
government loses its majority stake in the corporation.
 The change of ownership structure has a positive influence on society support if ownership
structure in the IEPSA changed to 1) a new ownership structure that conforms to the
agreement and 2) the government maintains a majority stake.

Share price
The corporate valuation is necessary to determine the fair value of the company which intends to
form an IEPSA. The fair value determination of equity being offered is a necessary prerequisite for
the partners. The offering value below its fair value will lead to difficulty when dealing with
stakeholders. On the other hand, the offering value above its fair value will negatively affect the
willingness of potential partners to purchase. According to Damodaran (2002), there are three
methods of firm valuation, which are:
1. DCF Valuation, it estimates the value of an asset by calculating the present value of expected
future cash flows using Free Cash Flow to Equity (FCFE) and Economic Value Added (EVA)
(Damodaran, 2002: 11)

44
2. Relative Valuation, it estimates the value of an asset by looking at the pricing of 'comparable'
assets relative to a common variable like earnings, cash flows, book value or sales (Damodaran,
2002: 18)
3. Contingent Valuation, it uses option pricing models to measure the value of assets that share
option characteristic (Damodaran, 2002: 22)

The DCF valuation used the data of current book value and future cash flow as well as the added
value (Damodaran, 2002) while the relative valuation is based solely on pricing of comparable
assets without taking into consideration the future cash flow or added value (Damodaran, 2002).
Finally, the contingent valuation is appropriate for long-term equity options and trade stocks,
warrants, and project management valuation (Damodaran, 2002).
Ramamurti (2000) states that the selling price of the SOE in the privatization should take into
account the potential growth of market and industry in the future otherwise most of the SOEs
potentially sold with low value. The privatizations are mostly held during the downturn of
economic conditions which hampered not only the industry but also the capital market. Because of
the condition, the appropriate valuation (based on the already mentioned methods) is the DCF
valuation. The relative valuation is not viable since the comparable assets are still in the weak
conditions. The DCF valuation itself consists of Free Cash Flow to Equity (FCFE) and Economic
Value Added (EVA) valuations (Damodaran, 2002).
Based on the following definition (Damodaran, 2002):
Market value: the valuation of the firm which is undertaken based not only on the current
condition but also opportunity earning in the future (Damodaran, 2002).
Book value: the valuation of the firm which is based on current accounting value of the firm and
neglected the opportunity earning (Damodaran, 2002).
The economic crisis will potentially reduce the opportunity cash flow of the company, and increase
the cost of capital including cost of debt as well as cost of equity. The increase of raw materials will
affect to the increasing price of cost of goods sold. Ultimately, the offering prices of products and
services to the customers become more expensive. During the economic crisis, the consumers tend
to be more cautious of spending their money. So, not only the offering price becomes higher but
also the demands from customers become lower. The situation leads to the decreasing cash flow of
the company that further negatively correlates with the company’s valuation and offering prices.
When considering solely on the book value as the base of valuation and combined with the downfall
of economic condition (during which most IEPSAs took place), it will potentially result with low
selling price (Ramamurti, 2000). However, when the market value is used, which Damodaran

45
(2002) proposes using the DCF valuation, the valuation can be done with several stages; during the
economic crisis, after the economic crisis to normal condition, and steady state condition. This
valuation takes into account the current condition of the SOE but also the potential market condition
when the economic condition alleviates. The investors take into considerations not only current
condition of the investment, but also the potential gain that can be grasped in the future. The
valuation itself should be undertaken in accordance with the belief. Consequently, the market value
approach is more appropriate than the book value. Moreover, in practice Damodaran (2002)
suggests using DCF valuation during the economic instability than other valuation methods.

Discounted cash flow

According to discounted cash flow model the corporate value is the sum of all the cash flow within
the economic life. The formula of valuation based on DCF is (Damodaran, 2002):
t n
CFt
Value =  (1  r )
t 1
t

Where n is the economic life of the asset or investment (usually expressed in years), CFt is the
expected cash flow in period t, and r is the discount rate that reflects the perceived riskiness of the
cash flow.
First, Free cash flow of equity (FCFE) is defined as the cash available to equity holders after
investment. The corporate valuation using the free cash flow of equity (FCFE) can be obtained
using the following formula (Damodaran, 2002).
Free cash flow to equity = Net Income – (Capital expenditures – Depreciation) – (Change in non
cash working capital) + (New debt issued – Debt repayments).
The value of any corporation is the present value of the FCFE per year for the extraordinary growth
period plus the present value of the terminal price at the end of the period.
Value = PV of FCFE + PV of terminal price
t n
=  FCFE
t 1
t /(1  k e,hg ) t Pn /(1  k e,hg ) n

Where FCFEt = Free cash flow to equity in year t

Pn = Price at the end of the extraordinary growth period
ke = Cost of equity in high growth (hg) and stable growth (st) periods
The terminal price is generally calculated using the infinite growth rate model:
Pn  FCFE n1 /( k e, st  g n )

where gn = Growth rate after the terminal year forever

46
The FCFE method will be applied to evaluate the fair value of the cases in Indosat and Semen
Gresik.
Second, Residual income valuation is the valuation method using the concept of economic value
added, where the company is considered value added when the return on asset is above its weighted
average cost of capital. EVA can be obtained in the following formula (Young & O’Byrne, 2001):
EVA = (RONA – WACC) x invested capital
Where RONA = NOPAT ÷ net assets
WACC = Weighted average of cost of capital (cost of equity and cost of debt)
RONA = Return on Asset
NOPAT = Net Operating Profit After Tax
When RONA is greater than WACC, EVA is positive, and when RONA is less than WACC, EVA
is negative.
The market or fair value using this method can be obtained in the following formula:
Market value = Invested capital + accumulated present value of future EVA
 E j  rB j 1  NOPAT j  (WACC j xIC j 1 )
P o = B0 +  j 1 (1 r ) j
= IC0  
j 1 (1  WACC j ) j
 ( ROE j  r ) B j 1  ( RONA j  WACC j ) xIC j 1
P0  B0   = IC0 
j 1 (1  r ) j
j 1 (1 WACC j ) j

Where: P0 = Market value/fair value in year 0

B0 = Book value in year 0
Ej = Earning in year j
r = cost of capital
Bj-1 = Book value in year j-1
ROEj = Return on equity in year j
IC0 = Invested capital in year 0
ICj-1 = Invested capital in year j-1
Free cash flow of equity valuation is applied to evaluate the value of cases in Indosat and Semen
Gresik. While, the residual income valuation method is applied to the cases in Bank Central Asia,
Bank Niaga, Bank International Indonesia, and Bank Permata.
According to Malhotra (2003) the best alternative of share price is provided based on the fair value
of the company which takes into account not only the current condition but also the expected future
condition.
The validity of the measurement can be judged by having secondary data from different sources to
determine the book value and stock price of the company. The determination of company’s fair
value will be provided by calculating the free cash flow of the firm from the financial data (balance
sheets and income statements) of the intended IEPSA. The result of the company’s fair value

47
calculation is compared with the secondary data and primary data (from the interview of
respondents in the society members).
To determine the influence of share price on society’s support for the IEPSA, the actual price of
shares is compared with the fair value. The lower is the actual share price compared to the fair
value, the more negative influence does it contribute to the society support.
 If the actual share price is more than the fair value, then share price has a positive influence
on society support.
 If the actual share price is the same as the fair value, then share price has a neutral influence
on society support.
 If the actual price is below the fair value, then the share price has a negative influence on
society support.

Transparency of the privatization process

Putting transparency into place requires a host of measures. Speed and full transfer of assets,
without special privileges and concessions for insiders, is crucial, particularly in the case of
competitive enterprises (Kikeri & Nellis, 2002: 26). The most effective way is promoting
competition in the transaction process (Kikeri & Nellis, 2002). In general, the greater the openness
and competition in the selection process the greater the likelihood that transparency will be
achieved. Transparency assessments are provided by triangulating the primary (by interviewing the
society members) and secondary data.
Therefore, the influence of transparency on society support is determined by examining two
potential negative issues in the tendering process. These negative issues are 1) fixing of the share
price, and 2) bribing the ruling political party.
 If no negative issue occurred in the tendering process, then transparency has a positive
influence on society support.
 If negative issue(s) occurred then transparency has a negative influence on society support.

Conclusion of stakeholder support assessment

Based on the data findings in the internal organization support and society support, the assessment
of the stakeholder support on the IEPSA is undertaken through the following conditions.
o If there are positive influences on both internal organization support and society support
then there is a stakeholder support to the IEPSA.
o If there are negative influences on both internal organization support and society support
then there is disapproval from stakeholder to the IEPSA.

48
 o If there is one positive sub-factor and one negative sub-factor between internal organization
support and society support then there is a neutral stakeholder support to the IEPSA.
o If there are neutral influences on both internal organization support and society support then
there is a neutral stakeholder support to the IEPSA.

Strategic match
During the planning phase, the partners will search for potential partners that are in line with their
capability and resources, and provide benefit to their long-term strategic objectives. The potential
partners are those who form a match with the partner’s strategic objective and motivate themselves
to form the alliance. Medcof (1997: 721) states that there are several reasons of alliance failure, but
that many authors agree that poor selection is among the most important ones. This poor selection
will provide difficulties for partners to find the required strategic match. In contrast, a well-chosen
partner allows a synergy which may blossom into outcomes far beyond expectations (Medcof,
1997: 721). There are five criteria for selecting alliance partners, which consists of whether the
alliance has business strategy rationale that will lead to the strategic fitness; whether the prospective
partner capable of carrying out its role in the alliance; whether the prospective partners
operationally compatible, and whether the prospective partner committed to the alliance and its
objective and able to control arrangements for appropriate coordination (Medcof, 1997).
Niederkofler (1991) defines strategic match as follows: “Strategic match exists when the partners’
interest in a specific area overlap, and when each control part of the resources needed to pursue the
shared goals”. In order to create a successful strategic alliance both parties must have strategic
match that is reconcilable and this match must be quite explicitly stated and established early on
(Lorange & Roos, 1992). Moreover, Sierra (1995) and Medcof (1997) state that commitment
between partners is essential in order to obtain the strategic match. Sierra (1995) states that a lack of
strategic match is one of the reasons why the alliances terminate which consists of changes in
strategic objectives and focus, false expectations about partners’ capabilities, and inability to cope
with diverse management styles. Almost by definition the two parties will come to the table with
different strategic intents (Lorange & Roos, 1992: 28). They will seek different benefits from the
strategic alliance in relation to their respective strategic objectives. The two different strategic
intents must, however, be sufficiently compatible to leave room for cooperation (Lorange & Roos,
1992: 28). Faulkner (1995), points out that the fundamental issue in assessing the strategic match is
whether their joint value chain seems likely to achieve sustainable competitive advantage for the
partners, through the complementarity of their resource endowments and core competencies.

49
However, once the prospective partners have found that they complement each other than they
should also take into account the strategic importance of the partners (Douma, 1997).
Based on this discussion, in this research the strategic match is defined as:
“There is a strategic match when both partners find conformity of their respective strategic
importance and objectives after analyzing the prospective partner’s strategic objectives, position
and resources and provided that trust and commitment for cooperation is established”.
In the planning phase, the analytical consideration concerns the early assessment of the strategic
match between the prospective partners (Lorange & Roos, 1992; Faulkner, 1995; Yoshino &
Rangan, 1995). Niederkofler (1991) states the requirement of overlap of each other’s resources that
meet partners’ interests. Lorange & Roos (1992) emphasize complementarity and reconcilable of
resources and strategic position. Faulkner (1995) suggests that there should be complementarity of
resource endowments and core competencies. Both Sierra (1995) and Segil (1996) suggest a
compatibility of partners’ capabilities. Sierra (1995) adds commitment between the partners and
Segil (1996) also uses the term complementarity despite compatibility. Medcof (1997) differentiates
the strategic match into operation, business, and strategy which need to be synergized between
partners. Douma (1997) emphasizes that the strategy and organization of the partners should add
value to the alliance and there should be also strategic importance between partners which consist
of analysis of pressure on continuity, new chances in the market, pressure of time on alliance, and
alternative to cooperation.
All of the mentioned authors; Niederkofler (1991), Lorange & Roos (1992), Sierra (1995), Segil
(1996), Medcof (1997), Douma (1997) differentiate the strategic match factor into several sub
factors as presented in table 2.2. The strategic match factor can be differentiated into three sub-
factors; capacity, complementarity, and strategic importance. Capacity refers to the partner’s value
activities both in the primary activities; logistics, operations, marketing and sales, and service as
well as in the supporting activities; firm infrastructure, human resource management, technology
development, and procurement (Porter, 1998). It also refers to the partner’s strategy of planning and
implementing those value activities. The assessment of partner’s capacity can be differentiated into
country level, industry level, and country level (Basu, 1994; Ramamurti, 2004).
Macro consideration. It is defined as the assessment of partner’s outside firm and industry level
which is the country level. The scope of considerations in the country level is macro environment
and regulatory state and requirement (Basu, 1994; Ramamurti, 2004). The macro environment
consists of macroeconomic, benefits of alliance for economic development, and shares price (Basu,
1994; Ramamurti, 2004). The regulatory state and requirement comprises of transparency and donor
pressure. Basu (1994) and Ramamurti (2000) state that the indicators to be measured in

50
macroeconomic are Gross Domestic Product (GDP) growth, inflation rate, capital market index, and
interest rate. They also state that the indicators of benefits of alliance for economic development are
competitive industrial environment, and economic development. According to Kikeri and Nellis
(2002) and Damodaran (2002), the indicators to be assessed in the shares price is the comparison of
selling price with the share price in capital market and fair or fundamental value. Basu (1994),
states that the assessments in the regulatory state and requirement consist of transparency and donor
pressure. The indicators in transparency are the state of transparency in tendering process and sales
and purchase agreement (Kaufmann & Siegelbaum, 1997; Kikeri & Nellis, 2002). Bennell (1997),
states that the indicator in donor pressure assessment is the presence of donor organization which
supports the privatization.
Micro consideration. It is defined as the considerations of partner’s capacity upon the firm and
industry level. According to Mockler (1999), micro considerations of partner’s capacity consist of
market, alliance track record, product or service, technology, and financial performance.
The indicators of market are market share, and growth of market (Cravens& Piercy, 2006). The
alliance track record is one of the assessments in micro consideration. Its indicators consist of
partner’s experiences of forming strategic alliances and state of successfulness in performing
strategic alliances. Mockler (1999) states that the indicators of assessing the product or service
range of quality and innovativeness of product or service. Furthermore, the technology indicators
consist of technology of product or service and information technology (Mockler, 1999). Mockler
(1999) also provides indicators of assessment in financial position which are Return on Equity
(ROE), Return on Asset (ROA), asset number, growth of asset, and growth of revenue.
Complementarity refers to both partners’ capacities; whether they are overlapped, reconcilable,
compatible, and synergized that will potentially provide added value to the alliances. Finally, the
partner’s commitment is assessed in the strategic importance sub factor, which consist analysis of
pressure on continuity, new chances in the market, pressure of time on alliance, and alternative to
cooperation which conforms Douma (1997).

Table 2.3: The sub-factors of strategic match

Author Capacity Complementarity Strategic
Importance
Niederkofler (1991) Resources Partners’ interest -
overlap
Lorange & Roos Resource, strategic Reconcilable -
(1992) position Complement
Faulkner (1995) Resource endowments, Complementarity of -
core competencies resource endowments,
core competencies
Sierra (1995) Capability Compatibility Commitment
Segil (1996) Resource, strategy, Compatibility/Comple- -

51
 Author Capacity Complementarity Strategic
Importance
Organization mentarity
Medcof (1997) Operation, business, Synergy in operational, Commitment
strategy business, strategy
Douma (1997) Strategy, organization Added value Strategic
importance

Capacity: The capacities of the potential partners are of prime importance (Sierra, 1995; Lorange &
Roos, 1992; Mockler, 1999). According to Medcof (1997: 722), it is the criteria, which determines
whether an alliance is workable operationally and relates to whether the prospective partners have
the ability to carry out their roles in the alliance. According to Sierra (1995: 21), before seriously
approaching any prospective ally, the capacities of the targeted candidates should be subjected to a
rigorous test. The term ‘capabilities’ here refers to ‘capacities’ of the targeted partners. Sierra
(1995: 21) states that many alliance practitioners recommend establishing a team of experts to
undertake a feasibility study of each candidate. “It’s better to allow time during negotiations for
partners to get to know each other and to test and develop personal chemistry, especially through
reconciling anticipated areas of possible conflict” (Mockler, 1999: 88). The team should be
prepared to undertake a tough, critical examination of a potential partner. Consequently, the
complete examination of a potential partner consists of: examining the environmental conditions,
understanding the legal and regulatory environment, and finally examining the internal conditions.
Based on Ramamurti (2000), the analysis of partner’s capacity sub-factor can be differentiated into
macro and micro components. Basu (1994) and Ramamurti (2000) infer that the macroeconomic
analysis of the host country relates to the attractiveness of the macroeconomic conditions. The
micro components are at the level of the industry and firm. It can be differentiated into the
attractiveness of market, the alliance track record, the attractiveness of product or service, the
attractiveness of technology, and the attractiveness of financial performance (Hitt, Dacin, Levitas,
Arregle, & Borza, 2000).

Attractiveness of macroeconomic conditions

In the privatization, the economic distance between the country of foreign investor and the host
country matters (Tsang & Yip, 2007; Ghemawat, 2001). Economic distance was measured as the
difference, in U.S. Dollars, in the real per capita gross domestic product (GDP) between the foreign
country and a host country in the first year of an FDI. For a complementary reason, the economic
distance is necessary for partners. However, Tsang and Yip (2007) reveal that the higher the
economic distance would lead to the more hazard rates. Generally, countries that did not experience
economic crisis were slow to privatize the SOEs (e.g., Asian countries, such as China, India,

52
Indonesia, and Korea). Following the economic crisis, Indonesia and Korea came under pressure to
privatize SOEs to bolster their foreign exchange: reserves and satisfy IMF conditionality.
In the state of crisis, it is not possible for SOEs to seek help from the government to additional
financing that converted to government’s equity in the SOEs. The government simply run out of
cash and deteriorate with further budget deficit. Ramamurti (2000) states SOEs in troublesome
macroeconomic countries are more likely to be privatized than those in stable macroeconomic
countries. The privatization usually occurs when the economic condition is deteriorated
(Ramamurti, 2000). It also happens when the government needs to restructure the industry and
economic and the government simply run out of cash and deteriorate with further budget deficit
(Ramamurti, 2000). However, it takes time (Ramamurti, 2000). On the other hand, during
economic crises, governments are strapped for funds and want to get the highest possible price of
selling the SOEs directly to a private company or to a consortium of investors (Ramamurti, 2000;
Megginson, 2000).
Privatization agenda should have backward linkages as part of a wider economic reform package
(Basu, 1994). The government should revive fiscal discipline, destabilize the exchange rate in order
to revive trade discipline, and remove subsidies (Basu, 1994).
Attractiveness of macroeconomic conditions is determined by the gross domestic product (GDP)
growth and currency rate (Blanchard, 2010). GDP growth is the indicator of economic growth
(Blanchard, 2010). By definition, the currency rate is the price of one country's currencyexpressed
in another country's currency (Blanchard, 2010). Based on this, the relationship of GDP growth and
currency rate variables with the strategic match is presented in figure 2.5.

Figure 2.5: Relationship of GDP growth and currency rate variables with the strategic match

Variables Component Sub-factor Factor

GDP Growth

Attractiveness of
Strategic
Macroeconomic
Capacity Match
Conditions

Currency Rate

GDP growth
In the planning phase, one of the important assessments of the macroeconomic conditions is the
economic growth of the host country which can be measured by the GDP growth (Blanchard,

53
2000). Strategic alliance is a part of strategic planning of the company. According to Wheelen and
Hunger (2010), the standard of time horizon of analyzing country’s macroeconomic condition
including the GDP growth is three to five years period prior to the alliance. IEPSA is part of
cooperative strategy of the company’s business strategy and part of strategic management (Wheelen
& Hunger, 2010). Likewise, since the strategic management is planned within the three to five years
period then the time horizon of macroeconomic analysis is set within the same period. However,
looking into the nature of the alliance that it is destined to terminate (Porter, 1998) and considering
the rapid changes of business environment. Hence, the preferred time horizon of analysis in
capacity sub-factor (including the macroeconomic conditions) is three years. The assessment of
GDP growth is undertaken by the real interest rate. It is the difference between GDP growth and
inflation rate (reflects both the consumer’s price index and the interest rate in the country)
(Blanchard, 2010). Positive real interest rate leads to favorable macroeconomic conditions and vice
versa. Therefore, assessment of the attractiveness of macroeconomic conditions based on the GDP
growth analysis is undertaken in the following condition.
 If the GDP growth is above the inflation rate (positive real interest rate) within the last three
years then the GDP growth has a positive influence on the attractiveness of macroeconomic
conditions.
 If the GDP growth is the same as or below the inflation rate (negative or neutral real interest
rate) within the last three years then the GDP growth has a negative influence on the
attractiveness of macroeconomic conditions.
 If the GDP growth fluctuated above and below the inflation rate within the last three years
then the GDP growth has a neutral influence on the attractiveness of macroeconomic
conditions.

Currency rate
The currency rate is one of the important variables which determine the attractiveness of
macroeconomic conditions (Blanchard, 2010). In this research, it is the price of one U.S. Dollar
(US$) in one Indonesian Rupiah (IDR). The attractive currency rate is the one which is constant
within a period of time. The definition of constant is that the currency rate only fluctuates within a
range of maximum of 10% within the designated period. The domestic currency rate which
suddenly strengthen or weaken relative to US$ can be considered unattractive as the condition will
negatively influence the country’s balance of trade (Blanchard, 2010). For example, 20% raise of
currency rate will increase the price of exported products. On the other hand, 20% weakened
currency rate will decrease the price of imported products. Both conditions negatively influence the

54
country’s balance of trade, i.e. the industry should adjust to the impact of the currency rate
fluctuation. Therefore, assessment of the macroeconomic conditions based on the analysis of
currency rate can be attained in the following condition:
 If the currency rate of one US$ to IDR is constant or only fluctuated in the range of 10%
within the last three years then the currency rate has a positive influence on the
attractiveness of macroeconomic conditions.
 If the currency rate of one US$ to IDR is fluctuated from 10% to 20% within the last three
years then the currency rate has a neutral influence on the attractiveness of macroeconomic
conditions.
 If the currency rate of one US$ to IDR fluctuated (above 20% of fluctuation) within the last
three years then the currency rate has a negative influence on the attractiveness of
macroeconomic conditions.

Attractiveness of market
According to Hitt et al. (2000), Lorange and Roos (1992), and Mockler (1997), the market share
and growth of market are one of the important aspects in assessing the partner. In terms of market
share, the partner with attractive market share is the one which possessed one of the dominant
shares in the market (Cravens & Piercy, 2006). The growth of market can be considered attractive
when the life cycle of the market industry is in the phase of introductory or growth (Cravens &
Piercy, 2006). Otherwise, in the mature and declining phase of industry life cycle, the growth of
market can be considered unattractive (Cravens & Piercy, 2006). Based on this, the relationship of
market share and growth of market variables with the strategic match is presented in figure 2.6.

Figure 2.6: Relationship of market share and growth of market variables with the strategic
match

Variables Component Sub-factor Factor

Market Share
Attractiveness Capacity Strategic
of Market Match
Growth of Market

Market share
Referring to Cravens and Piercy (2006), assessment of attractiveness of market based on the
analysis of market share is presented in the following condition:

55
  If the market share is dominant reflected in the rank of market share which is among one
third of the top level domain of the players in the industry then the market share has a
positive influence on the attractiveness of market.
 If the market share is among one third of the median level domain of the players in the
industry then the market share has a neutral influence on the attractiveness of market.
 If the market share is among one third of the lowest level domain of the players in the
industry then the market share has a negative influence on the attractiveness of market.

Growth of market
In the context of developing countries where the industry is in the growth phase, then it is desirable
to form alliance with the firm whose growth of the market exceed 10% (Damodaran, 2003).
Therefore, assessment of attractiveness of market based on the analysis of growth of market is
presented in the following condition:
 If the percentage of growth of the industry is more than or equal with 10% then the growth
of market has a positive influence on the attractiveness of market.
 If the percentage of growth of the industry is less than 10% then the growth of market has a
negative influence on the attractiveness of market.

Alliance track record

According to Hitt et al. (2000) and Mockler (1997), in assessing the partner in terms of alliance
track record, one should analyze the partner’s experience and partner’s successfulness in
implementing the alliances as presented in figure 2.7.

Figure 2.7: Relationship of partner’s experience and partner’s successfulness variables with
the strategic match

Variables Component Sub-factor Factor

Partner’s experience

Strategic
Alliance track record Capacity Match
Partner’s
successfulness

Partner’s experience
Partner’s experience is related with forming the alliance’s experiences with both local and foreign
partner (Hitt et al., 2000; Mockler, 1997). Prospective partner who has experienced strategic

56
alliances especially with the foreign partners tended to have a positive influence on the alliance
track record (Hitt et al., 2000). Therefore, assessment of alliance track record based on the partner’s
experience in the strategic alliance is provided with the following conditions:
 If the partner has experienced strategic alliance both with local and foreign partners, then the
partner’s experience has a positive influence on the alliance track record.
 If the partner has experienced strategic alliance only with local partner, then the partner’s
experience has a neutral influence on the alliance track record.
 If the partner has experienced strategic alliance with both foreign and local partners while
another partner has not formed alliance or only with local partner then the partner’s
experience has a neutral influence on the alliance track record.
 If the partner hasn’t experienced any strategic alliances before, then the partner’s experience
has a negative influence on the alliance track record.

Partner’s successfulness
Referring to Hitt et al. (2000) and Mockler (1997) who stated that prospective partner who has
formed successful strategic alliances tends to form a successful alliance. Therefore, assessment of
alliance track record based on the analysis of partner’s successfulness in terms of experience in the
strategic alliance is provided with the following conditions:
 If the partner has experienced successful strategic alliances with the majority of partners,
then the partner’s successfulness has a positive influence on the alliance track record.
 If the partner has not formed any strategic alliances before, then the partner’s successfulness
has a neutral influence on the alliance track record.
 If the partner has experienced unsuccessful alliances with the majority of partners, then the
partner’s successfulness has a negative influence on the alliance track record.

Attractiveness of product or service

Technical capabilities are one of the priorities to be assessed by partners (Hitt et al., 2000).
Technical capabilities refer to attractiveness of product or service which is produced by the partner.
According to Mockler (1997), in assessing the partner in terms of attractiveness of product or
service, one should analyze the quality and innovativeness of product or service. The assessment is
taken based on the perception about the quality and innovativeness. The assessment can be made
based on the primary data, through interviewing customers and conducting due diligence to the site,
or based on secondary data which is provided by the previous reports. Referring to Hitt et al. (2000)

57
and Mockler (1997), the relationship of quality and innovativeness of product or service variables
with the strategic match is presented in figure 2.8.

Figure 2.8: Relationship of quality and innovativeness of product or service variables with the
strategic match

Variables Component Sub-factor Factor

Quality of product or
service
Attractiveness of Capacity Strategic
product or service Match
Innovativeness of
product or service

Quality of product or service

The quality of product or service can be considered as good when it exceeds customer’s
expectation. According to Garvin (1984), the dimension of quality of product include the following;
performance (the basic operating characteristics of a product, features, reliability (the probability
that a product will operate properly within an expected time frame), conformance (the degree to
which a product meets pre-established standards), durability (how long the product lasts),
serviceability (the ease of getting repairs, the speed of repairs, and the courtesy and competence of
the repair person), aesthetics (how a product looks, feels, smells, or, tastes), safety (assurance that
the customer will not suffer injury or harm from a product), and other perceptions (subjective
perceptions based on brand name, advertising, and the like). Related to the quality of service, Evans
and Lindsay (1996) states that the dimensions of service quality compose of; time and timeliness
(how long a customer must wait for service, and if it is completed on time), completeness (is
everything the customer asked for provided?), courtesy (how customers are treated by employees),
consistency (is the same level of service provided to each customer each time?), accessibility and
convenience (how easy it is to obtain the service), accuracy (is the service performed right every
time?), and responsiveness (how well the company reacts to unusual situations). Therefore, based
on the customer’s perception, due diligence, or secondary data on the quality of product or service,
assessment of the attractiveness of product or service is provided in accordance with the following
conditions:
 If the quality of product or service is good then it has a positive influence on the
attractiveness of product or service.

58
  If the quality of product or service is poor then it has a negative influence on the
attractiveness of product or service.

Innovativeness of product or service

Innovativeness is defined as the company’s proclivity towards the adoption of new technologies,
thus representing its ability to adapt to different opportunities (Kitchell, 1995). Innovativeness can
be regarded as good when it is able to adapt to different opportunities. Therefore, based on the
customer’s perception, due diligence, or secondary data on the innovativeness of products or
services, assessment of the attractiveness of product or service is provided in accordance with the
following conditions:
 If the partner’s innovativeness of product or service is adapting to different opportunities
then it has a positive influence on the attractiveness of product or service.
 If the product or service is not adapting to different opportunities then it has a negative
influence on the attractiveness of product or service.

Attractiveness of technology
According to Mockler (1997), the assessment of attractiveness of technology can be obtained based
on the analysis of technology of product or service and information technology. The former relates
with the assessment of technology on producing the product or service while the latter is about the
assessment of information technology which integrates the activities. Based on this, the relationship
of technology of product or service and information technology variables with the strategic match is
presented in figure 2.9.

Figure 2.9: Relationship of technology of product or service and information technology

variables with the strategic match

Variables Component Sub-factor Factor

Technology of
Product or service
Attractiveness of Capacity Strategic
technology Match
Information Technology

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Technology of product or service
Based on the customer’s perception, due diligence, or secondary data on the technology of product
or service and referring to Mockler (1997), assessment of the attractiveness of technology is
provided in accordance with the following conditions:
 If the technology of product or service is categorized as good in the industry then it has a
positive influence on the attractiveness of technology.
 If the technology of product or service is not categorized as good in the industry then it has a
negative influence on the attractiveness of technology.

Information technology
Partner’s information technology can be regarded as attractive when the value chain activities, from
primary activities to supporting activities have been integrated by the information technology
(Porter, 1998). Therefore, based on the customer’s perception, due diligence, or secondary data on
the information technology and referring to Mockler (1997) and Porter (1998), assessment of the
attractiveness of technology is provided in accordance with the following conditions:
 If the information technology has been integrated in the organization then the information
technology has a positive influence on the attractiveness of technology.
 If the information technology has not been integrated in the organization then the
information technology has a negative influence on the attractiveness of technology.

Attractiveness of financial performance

The analysis of partner’s attractiveness of financial performance is one of the priorities of any firms
which undertake the strategic alliance (Hitt et al., 2000). According to Mockler (1997), the
assessment of partner’s financial performance can be differentiated into analysis of partner’s
profitability and growth of revenue. Based on this, the relationship of profitability and growth of
revenue variables with the strategic match is presented in figure 2.10.

Figure 2.10: Relationship of profitability and growth of revenue variables with the strategic
match

Variables Component Sub-factor Factor

Profitability

Attractiveness of Capacity Strategic

Financial performance Match

Growth of Revenue

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Profitability
Profitability of the firm is measured by the firm’s Return on Asset (ROA) (Damodaran, 2003). The
partner can be determined as attractive when the ROA exceeds its Weighted Average Cost of
Capital (WACC) (Damodaran, 2003). Therefore, assessment of the attractiveness of financial
performance based on the analysis of profitability is provided with the following conditions:
 If the company’s ROA is more than or equal with the WACC then the profitability has a
positive influence on the attractiveness of financial performance.
 If the company’s ROA is less than the WACC then the profitability has a negative influence
on the attractiveness of financial performance.

Growth of revenue
Based on Damodaran (2003), in the context of developing country where the industry is still
growing, the attractive annual growth of revenue is the one which exceeds 10%. This growth is
needed in order to secure added value. When the growth is between 0% and 10%, the firm is still
considered as growing although it is not appropriate to secure added value (Damodaran, 2003).
Referring to Damodaran (2003), assessment of the attractiveness of financial performance based on
the analysis of growth of revenue is provided with the following conditions:
 If the growth of revenue is more than 10% then the growth of revenue has a positive
influence on the attractiveness of financial performance.
 If the growth of revenue is between 0% and 10% then the growth of revenue has a neural
influence on the attractiveness of financial performance.
 If the growth of revenue is below 0% then the growth of revenue has a negative influence to
the attractiveness of financial performance.

Capacity assessment
Overall, in terms of Capacity assessment, by compiling data findings in the components, assessment
of the capacity on the strategic match is undertaken through the following conditions.
o If there are positive influences on most of the components then the overall influence of
capacity on strategic match is positive.
o If there are majority of non-positive influences on the components then the overall influence
of capacity on strategic match is negative.
o If there are balanced positive and non-positive influences on the components then the
overall influence of capacity on strategic match is neutral.

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Complementarity: The fundamental issue in assessing a strategic match is whether the alliance
chain seems likely to achieve sustainable competitive advantage for the partners, through the
complementarity of their capacities (Sierra, 1995; Douma, 1997). If the combination of the partners’
skills and resources seems unlikely to achieve competitive advantage, then, irrespective of how the
alliance is set up, it is not desirable (Douma, 1997). Hitt et al. (2000) state that complementarity is
one of the assessment priorities that should be considered by partners. Lei and Slocum (1992) and
Park, Chen, and Gallagher (2002) infer that partners should be motivated by the differences in
resources which will result with enhancement of the strategic alliance’s capability. Douma (1997)
obtains that the complementarity of partner’s resources can be assessed by the complementarity
related to the attractiveness of market, strategy, and attractiveness of resources. Therefore, related to
the aforementioned components in the capacity sub-factor, the relationship of complementarity sub-
factor with the strategic match is presented in figure 2.11.

Figure 2.11: Relationship of complementarity sub-factor with the strategic match

Variables Sub-factor Factor

Complementarity related to
the attractiveness of market
Strategic
Complementarity related to
Complementarity Match
the strategy

Complementarity related to
the attractiveness of resources

Complementarity related to the attractiveness of market

In terms of market, the partners can be considered complementary each other when the foreign
partner’s market is in the state of maturity or declining and the domestic partner’s market is in the
introductory or growth period where the partners benefit each other (Cravens & Piercy, 2006;
Ireland, Hoskisson, & Hitt, 2011). Therefore, assessment of complementarity based on the
complementarity related to the attractiveness of market can be undertaken based on the following
condition:
 If the foreign partner’s market is in the state of maturity or declining and domestic partner’s
is either in introductory or growth period, then the complementarity related to the
attractiveness of market has a positive influence on the complementarity.
 If both partner’s markets are in the growth period, then the complementarity related to the
attractiveness of market has a neutral influence on the complementarity.

62
  If the foreign partner’s market is in the state of either introductory or growth and domestic
partner’s is in the state of maturity or declining, then the complementarity related to the
attractiveness of market has a negative influence on the complementarity.

Complementarity related to the strategy

The term strategy is focused on the corporate strategy ranging from the growth, stability,
retrenchment, and diversification (Wheelen & Hunger, 2010) which will be compared with the
strategy of the partners to assess its complementarity. The strategy can be considered
complementary when the foreign partner has a growth strategy and the domestic partner has either
turnaround or growth strategy (Ireland et al., 2010). Therefore, assessment of complementarity
based on the complementarity related to the strategy can be undertaken based on the following
condition:
 If the foreign partner has a growth strategy and the domestic partner has either turnaround or
growth strategy, then the complementarity related to the strategy has a positive influence on
the complementarity.
 If the foreign partner does not have a growth strategy regardless of the domestic partner’s
strategy, then the complementarity related to the strategy has a negative influence on the
complementarity.

Complementarity related to the attractiveness of resources

Broad in scope, resources cover a spectrum of individual, social, and organizational phenomena
(Lester, Hillman, Zardkoohi, & Cannella, 2008). There are two types of resources which are
tangible and intangible resources (Ireland et al., 2010). The four types of tangible resources are
financial, organizational, physical, and technological (see table 2.4). Three types of intangible
resources are human, innovation, and reputational (see table 2.5). Having compared types of
tangible and intangible resources with the reference to the capacity sub-factor and cultural
understanding factor, it is obtained that the complementarity of resources consists complementarity
related to the attractiveness of financial performance, product or service, and technology.
Complementarity related to the attractiveness of financial performance includes the ability of
partner’s financial resources reflected in the profit, i.e. ROA, and availability of partner in acquiring
cheap fund in securing the financial objective, i.e. increasing revenue and profitability (Ireland et
al., 2010). According to Hellriegel et al. (2001), the complementarity of organization resources
between partners can be acquired by the good trust and commitment reflected in the cultural
understanding factor in the context of IEPSA. Referring to Ireland, et al. (2010), the product or

63
service is the main physical resources of the partner. As mentioned by Mockler (1997), the
attractiveness of product or service consists of quality and innovativeness of product or service
(discussed in the capacity sub-factor). Eventually, technology is one of the resources within the
tangible resources. Based on Mockler (1997), attractiveness of technology consists of technology of
product or service and information technology (discussed in the capacity sub-factor).

Table 2.4: Tangible resources

No. Tangible Resources Referred to the capacity sub-factor and cultural
understanding factor
1. Financial Resources Attractiveness of financial Performance
2. Organization Resources The discussion about complementarity of
organizational resources are presented in the
cultural understanding factor
3. Physical Resources Attractiveness of product or service (in the quality
of product or service variable)
4. Technological Resources Attractiveness of technology

In terms of intangible resources, the complementarity related to human resources can be tackled by
the good trust and commitment between partners (Das & Teng, 1998) as has been analyzed in the
cultural understanding factor. Moreover, analysis of innovation resources and reputational resources
are presented in the innovativeness of product or service and alliance track record section sections
within the capacity sub-factor.

Table 2.5: Intangible resources

No. Intangible Resources Referred to the capacity sub-factor and cultural
understanding factor
1. Human Resources The discussion about complementarity of human
resources are presented in the cultural understanding
factor
2. Innovation Resources Attractiveness of product or service (in the
innovativeness of product or service variable)
3. Reputational Resources The discussion about reputational resources are
presented in the capacity sub-factor (in the alliance
track record)

Complementarity related to the attractiveness of financial performance: Based on Hitt et al. (2010),
the assessment of complementarity related to the attractiveness of resources based on
complementarity related to the attractiveness of financial performance is presented in the following
conditions:
 If the partners benefit each other from the financial performance in terms of securing its
financial objective (increasing revenue and profitability), then the condition has a positive
influence on the complementarity related to the attractiveness of resources.

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  If the partners can not benefit each other from the financial performance in terms of securing
its financial objective (increasing revenue and profitability), then the condition has a
negative influence on the complementarity related to the attractiveness of resources.

Complementarity related to the attractiveness of product or service: Referring to Ireland et al.

(2010) and Mockler (1997), the assessment of complementarity related to the attractiveness of
resources based on the complementarity related to the attractiveness of product or service is
presented in the following conditions:
 If the partners benefit from the product or service in terms of quality and innovativeness,
then the condition has a positive influence on the complementarity related to the
attractiveness of resources.
 If the partners benefit from the product or service in terms of one of quality and
innovativeness, then the condition has a neutral influence on the complementarity related to
the attractiveness of resources.
 If the partners can not benefit from the product or service in terms of quality and
innovativeness, then the condition has a negative influence on the complementarity related
to the attractiveness of resources.

Complementarity related to the attractiveness of technology: Based on Mockler (1997), the

assessment of complementarity related to attractiveness of resources based on the complementarity
related to the attractiveness of technology is presented in the following conditions:
 If the partners benefit from the technology of product or service and information technology,
then the condition has a positive influence on the complementarity related to the
attractiveness of resources.
 If the partners benefit from the technology of product or service and information technology,
then the condition has a neutral influence on the complementarity related to the
attractiveness of resources.
 If the partners can not benefit from the technology of product and service and information
technology, then the condition has a negative influence on the complementarity related to
the attractiveness of resources.

Conclusion of complementarity related to the attractiveness of resources: The conclusion of

complementarity related to the attractiveness of resources is provided after having analyzed the

65
preceding complementarity related to the attractiveness of financial performance, product or
service, and technology. The complementarity is presented in the following conditions:
 If the partners find complementarity related to the attractiveness of resources based on
complementarity related to the attractiveness of financial performance, product or service,
and technology then the condition has a positive influence on the complementarity.
 If the partners find complementarity related to the resources based on majority of
complementarity related to the attractiveness of financial performance, product or service,
and technology then the condition has a neutral influence on the complementarity.
 If the partners find no complementarity related to the resources based on majority of
complementarity related to attractiveness of financial performance, product or service, and
technology then the condition has a negative influence on the complementarity.
 If the partners find no complementarity related to the resources based on complementarity
related to the attractiveness of product or service, technology, and financial performance,
then the condition has a negative influence on the complementarity.

Strategic importance: It can be inferred from Douma, Bilderbeek, Idenburg, and Looise (2000: 584)
that the strategic match between the partners is useless unless partners view the alliance as
strategically importance to them which can be referred as ‘strategic importance’. It consists of
pressure on continuity, new chances in the market, pressure of time on alliance, and alternative to
cooperation. Related to new chances in the market, it has been analyzed in this research within the
capacity sub-factor in the attractiveness of market. Hence, taking the finding of Douma et al. (2000)
and adjusting to the developed model in the research, the relationship of the variables with the
strategic importance is presented in figure 2.12.

Figure 2.12: Relationship of strategic importance sub-factor

with the strategic match

Variables Sub-factor Factor

Pressure on continuity

Strategic
Pressure of time on alliance Strategic Importance Match

Alternative to cooperation

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Pressure on continuity
It is the degree of eagerness to continue for alliance intention (Douma, 1997). The degree of
pressure on continuity can be considered high when the partners commit to continue for alliance
intention despite having oppositions from the stakeholders and threats in the industrial environment
(Douma, 1997). Commitment to continue from the partners are presented by the top management or
directors (in this dissertation government also participates) to the stakeholders that they are
committed to continue the alliance in order to obtain the common objectives (Douma, 1997).
Referring to Douma (1997), assessment of strategic importance based on the analysis of pressure on
continuity is undertaken in the following condition:
 If both partners commit to continue for the alliance intention then the pressure on continuity
has a positive influence on the strategic importance.
 If only one partner or none of the partners commit to continue for the alliance intention then
the pressure on continuity has a negative influence on the strategic importance.

Pressure of time on alliance

Cooperation can generate time advantages with respect to autonomous development and/or
takeover, and be important for these reasons (Douma, 1997). Referring to Douma (1997),
assessment of the strategic importance based on the analysis of pressure of time on alliance is
undertaken in the following condition:
 If both partners feel the pressure of time on alliance, and be important for these reasons then
the pressure of time on alliance has a positive influence on the strategic importance.
 If only one partner or none of the partners feel the pressure of time on alliance, and be
important for these reasons then the pressure of time on alliance has a negative influence on
the strategic importance.

Alternative to cooperation
The need to cooperate is determined by the degree to which a company has alternatives for other
alliances (Douma, 1997). Referring to Douma (1997), assessment of the strategic importance based
on the analysis of alternative to cooperation is undertaken in the following condition:
 If both partners have no alternative for other alliance in the host country then the alternative
to cooperation has a positive influence on the strategic importance.
 If both partners have alternative(s) for other alliance(s) in the host country then the
alternative to cooperation has a negative influence on the strategic importance.

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Overall, based on the data findings in the sub-factors, the assessment of the capacity on the IEPSA
is undertaken through the following conditions.
o If there are positive influences on at least two sub-factors (among capacity,
complementarity, and strategic importance) then there is a strategic match in the IEPSA.
o If there is one positive influence and two neutral influences (among capacity,
complementarity, and strategic importance) then there is a strategic match in the IEPSA.
o If there are negative influences on at least two sub-factors (among capacity,
complementarity, and strategic importance) then there is no strategic match in the IEPSA.
o If there is one positive influence, one negative influence, and one neutral influence on the
sub-factors (among capacity, complementarity, and strategic importance) then there is a
neutral strategic match in the IEPSA.
o If there are neutral influences on all sub-factors (capacity, complementarity, and strategic
importance) then there is a neutral strategic match in the IEPSA.

Cultural understanding
It is not important that the cultures of the partners are similar (Faulkner, 1995). If this was a
requirement then few alliances would succeed. Cultural congruence between companies is
extremely infrequent, especially in international strategic alliances (Faulkner, 1995). Nevertheless,
an approach of understanding of cultural differences, and willingness to compromise in the event of
cultural problems, may well be critical to alliance effectiveness (Faulkner, 1995). According to
Mohr and Spekman (1994), more successful partnerships exhibit higher levels of trust, a willingness
to coordinate activities, and the ability to convey a sense of commitment to the relationship. The
study of Mohr & Spekman (1994: 148) suggests that trust, the willingness to coordinate activities,
and the ability to convey a sense of commitment to the relationship are keys. Effort must be
dedicated to the formation and implementation of management strategies that promote and
encourage the continued growth and maintenance of the partnership. The effort should be able to
improve the trust level of the alliance. Faulkner (1995) provides contribution that partners are able
to alleviate cultural incompatibility through understanding of cultural differences and willingness to
compromise in the face of cultural problems. According to him mutual trust and commitment will
enhance the cultural understanding between partners. Mockler (1999) states the compatibility in
culture is one that should be considered besides the compatibility in strategic and operations. While
Sierra (1995) states that the compatibility of partners can be discerned into tangible and intangible
features. Culture is one of the tangible features that should be considered while trust and
commitment are the intangible features. She points out that trust and commitment between partners

68
enable to deal with compatibility problems and focus to the future. According to Cullen, Johnson,
and Sakano (2000) without a continuous investment in and building of commitment and trust,
differences in partner companies in conjunction with cultural differences can greatly inhibit the
alliance’s durability and its success. Based on Mohr & Spekman (1994), Faulkner (1995), Sierra
(1995), Mockler (1999), and Cullen, Johnson, & Sakano (2000), it can be concluded although there
exist cultural differences between partners, as long as trust exists there will be a state of cultural
compatibility between partners. The relationship between trust and commitment was researched by
Cullen, Johnson, & Sakano (2000). They find that once established the trust dimensions appear to
contribute significantly to the development of commitment. So that, based on Mohr & Spekman
(1994), Faulkner (1995), Sierra (1995), and Cullen, Johnson, & Sakano (2000) the order of gaining
cultural compatibility is; trust, commitment, and cultural understanding. Although the already
mentioned authors have researched cultural compatibility, trust, commitment, and cultural
understanding of strategic alliance, there is still lack of definition of cultural compatibility. The
definition of cultural understanding is: the state of understanding of cultural differences by
willingness to compromise in the event of cultural problems through successfully exhibiting high
levels of trust in order to convey a sense of commitment to the relationship. If the alliance is
intended to be long term, cultural attitudes relating to trust and commitment are likely to be vital
ingredients in the alliance’s success (Faulkner, 1995). It deals with a flexible attitude to cultural
differences, an eagerness to learn from a partner that has different procedures, and a strong
commitment and mutual trust between the partners (Faulkner 1995). From the above discussion,
cultural understanding can be divided into three components, see figure 2.13.

Figure 2.13: Cultural understanding of strategic alliance

Cultural Understanding

Trust Commitment

Trust
Boon and Holmes (1991: 194) defines trust as positive expectations about another’s motives with
respect to oneself in situations entailing risk. Trust which results from mutual awareness, equity
norms, and deterrence-based trust (arising from reputational concerns) creates ‘self-enforcing’
safeguards in an exchange relationship and can substitute for contractual safeguards (Bradach &

69
Eccles, 1989; Powell, 1990). As a result, where there is trust, appropriation concerns are likely to be
mitigated, and organizations may choose not to rely on detailed contracts to ensure predictability
(Gulati. 1998: 303). Trust can be developed when attempting to bridge cultural boundaries and
during the negotiation process (Mockler, 2001).
There is a correlation between trust and control. According to Goold and Quinn (1990: 54), trust is
a prime prerequisite of effective control, because the implementation of control mechanisms
requires a certain level of trust. Trust is one of the factors that lead to confidence in the alliance
(Das & Teng, 1998). Another factor is control, however trust can provide control to the alliance that
will induce increasing the confidence level (Beamish, 1988; Sohn, 1994). The management control
system in the model can be enhanced with good conditions of trust and commitment in the alliance.
The relationship of trust and control in order to develop alliance confidence level is depicted in
figure 2.14.

Figure 2.14: Trust and control in strategic alliance

Trust building

Trust Level
Risk taking
Equity preservation
Communication
Interfere adaptation

Confidence in
partner cooperation
Control
mechanisms
Control Level
Goal setting
Structural
specifications
Cultural blending

Adapted from Das and Teng, 1998

Bhatt (2000) states that when there is more trust in the partner’s organization perceived competence
(competence trust) will result in higher intent to acquire knowledge from that organization and thus
will positively affect the amount of knowledge transfer.
High level of trust, according to Das and Teng (1998) will create high commitment between
partners. Commitment is a similar factor to trust (Faulkner, 1995), in that it is vital to alliance
effectiveness. According to Medcof (1997: 724), commitment can also stem from analysis of
partner’s selection criteria, namely pragmatic commitment. An alliance without commitment and
trust from the board downwards may soon diminish in its performance and importance to the
partner companies.

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Items that should be followed to acquire trust from both partners consist of risk taking,
communication, equity preservation, and inter-firm adaptation (Das & Teng, 1998) with the
emphasis on the share of communication. Based on this, the relationship of share of
communication, trust, with cultural understanding is presented in figure 2.15.

Figure 2.15: Relationship of share of communication, trust, with cultural understanding

Variable Component Factor

Share of Cultural
communication Trust understanding

Share of communication
Through IEPSA, partners have taken the risk by pledging the equity preservation. According to
Segil (1996), IEPSA has the highest risk in terms of strategic alliance’s classification. However, the
risk can be managed by inter-firm adaptation enhanced with intensive share of communication to
the entire organization (Das & Teng, 1998). Thus, trust in the IEPSA can be assessed in accordance
with the following condition.
 If the alliance intensively shares communication to the entire organization then the share of
communication has a positive influence on the trust.
 If the alliance does not intensively share communication to the entire organization then the
share of communication has a negative influence on the trust.

Commitment
There are two forms of commitment which are attitudinal and calculative commitments (Cullen et
al., 2000). In the attitudinal commitment (Cullen et al., 2000: 226), the alliance assumes a position
of status and importance; the partners are willing to nurture the alliance. For a relationship to
continue there must be a positive benefit/cost analysis for the partners. Managers must see a
potential for returns and/or a need to avoid switching costs. This is the rational and economic side
of commitment. It is called calculative commitment (Cullen et al., 2000: 225-226). In the planning
phase since the benefits or returns are unknown, then the calculative commitment is not considered.
Based on this, the relationship of nurture the alliance, commitment, with cultural understanding is
presented in figure 2.16.

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 Figure 2.16: Relationship of nurture the alliance, commitment, with cultural understanding
Variable Component Factor

Nurture the alliance Cultural

Commitment understanding

Nurture the alliance

Nurture the alliance relates to the passion of both partners to achieve the objectives (Henry, 2011).
As discussed earlier, it enhances the commitment of the partners. The condition will support the
bases of the alliance implementation. Therefore, assessment of the commitment is provided in
accordance with the following condition.
 If partners are willing to nurture the alliance then it has a positive influence on the
commitment.
 In the cases when one or both partners are not willing to nurture the alliance then it has a
negative influence on the commitment.

The following figure depicts the planning phase of an international equity placement strategic
alliance.

Figure 2.17: Planning phase of international equity placement strategic alliance

PLANNING PHASE
POLITICAL

Stakeholder Support
FORMATION PHASE
CONSIDERATIONS

Cultural
Understanding
ANALYTICAL

Strategic Match

2.1.2 Alliance formation phase

This phase follows the ‘go’ decision of the previous planning phase. In this phase, the political
perspec
tive relates to internal support (Lorange & Roos, 1992) while the analytical perspective is on the
strategic planning (Lorange & Roos, 1992; Segil, 1996). The partners spend considerable time and

72
effort in building communication and disseminating the strategic planning to the organization
(Sierra, 1995; Segil, 1996).

Internal organization support

In this stage, it is required to consider political aspects as well for the development of the strategic
planning, i.e. ensuring that the organization becomes committed to and enthusiastic about the
alliance (Lorange & Roos, 1992; Sierra, 1995; Segil, 1996). Lorange and Roos (1992: 41) consider
that at this stage there are key questions raised: has the intended alliance been sufficiently explained
and clearly motivated throughout the organization? Has it been presented with sufficient detail to
ensure that everyone sees the tasks ahead and can focus on them as an opportunity? Has it been
plausibly documented how combinations of activities are to be executed so that job security issues
are addressed, and so that the strategic will not be seen as a threat?
This research did not include all the key questions from Lorange & Roos (1992), such as: Are
relevant specialists motivated to carry out their specific tasks in a cooperative mode? Do the
operational staffs have sufficient complementary styles to simplify their working contacts between
the partner organizations? The reasons are that these questions have been embedded in the first two
key questions. The question about relevant specialist has been accommodated in the question of
explaining and motivating the organization. The second question about operational staffs’
complementarity has been embedded in the question of presenting sufficient details that everyone
sees the tasks ahead.
Segil (1996) states that the alliances are doomed to failure without having active participation of the
managers in the implementation plan. She mentions that the company should obtain internal
approval particularly in the cases where the life cycle of parent partner’s company before forming
the alliance is either in mature or consolidating stage. This confirms with the object of investigation
in the research (SOEs and BTOs) which are in the stage of consolidation after being suffered from
the economic downturn and restructured by the government. According to Segil (1996), the
company should check with lots of people before feeling comfortable in going forward. According
to Lorange & Roos (1992), in order for the entire organization to be prepared for during the
alliance’s implementation, everyone must be sold on the concept relatively early on. The internal
support issue concerns, above all, managers in various operational functions, who might be
particularly actively involved in participating in the strategic alliance (Lorange & Roos, 1992: 41).
Segil (1996) and Lorange & Roos (1992) concur that in the implementation plan of strategic
planning everyone must be involved and contribute to the successfulness of strategic alliance
implementation. They consist of employee and managers of the alliance.

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In other words, internal organization support can be enhanced by providing certainty to the internal
organization that they participate in the implementation of the strategic planning (Lorange & Roos,
1992). Based on this, the relationship of participation in the implementation of strategic planning
with internal organization support is presented in figure 2.18.

Figure 2.18: Relationship of participation in the implementation of strategic planning with

internal organization support

Variable Factor

Participation in the Internal organization

implementation of support
strategic planning

Participation in the implementation of strategic planning

In the phase, the directors and top management should ensure that the strategic planning is
supported by internal organization and they become aware, committed to, enthusiastic, and
implement the strategic planning (Lorange & Roos, 1992). Therefore, assessment of the internal
organization support is undertaken based on the following condition.
 If the new owners involve all internal organization to participate in the implementation of
strategic planning then the condition has a positive influence on the internal organization
support.
 If the new owners do not involve all internal organization to participate in the
implementation of strategic planning then the condition has a negative influence on the
internal organization support.

Strategic plan
Strategic plan is the process of deciding on the programs that the organization will undertake and on
the approximate amount of resources that will be allocated to each program over the next several
years (Anthony & Govindarajan, 2006). The strategy that is developed should contain corporate,
business, and functional strategy (Wheelen & Hunger, 2010). The strategic plan should be agreed
upon by both partners and supported by internal stakeholders (Lorange & Roos, 1992). One of the
core goals when drafting a strategic plan is to develop it in a way easily translatable into action
plans (Anthony & Govindarajan, 2006). To make it translatable, it should consist of commitment,
employment, and socialization (Kikeri & Nellis, 2004; Lorange & Roos, 1992). Commitment
relates with the alliance’s contribution while employment and socialization are the variables which

74
support the implementation of strategic alliance (Kikeri & Nellis, 2004; Lorange & Roos, 1992).
Those variables are related each other where commitment is the variable for strategic planning in
order to trigger the internal organizational support (as have been discussed in the preceding section)
is presented in figure 2.19.

Figure 2.19: Relationship of commitment with internal organization support

Variable Factor

Commitment Strategic plan

Commitment
According to Kikeri and Nellis (2004), the strategic alliance should consist of commitment to the
alliance and the industry. Based on this, assessment of strategic planning is presented in the
following condition.
 If the content of strategic alliance SPA consists of commitment to the alliance and industry
then it has a positive influence on the strategic planning.
 If the content of strategic alliance SPA consists only one of the commitments to the alliance
and industry then it has a neutral influence on the strategic planning.
 If the content of strategic alliance SPA consists none of commitment to the alliance and
industry then it has a negative influence on the strategic planning.

Figure 2.20 depicts the formation phase of international equity placement strategic alliance, which
also includes the cultural understanding already discussed above.

Figure 2.20: Formation phase of international equity placement strategic alliance

FORMATION PHASE
POLITICAL

Internal Support
OPERATION PHASE
CONSIDERATIONS

PLANNING PHASE

Cultural
Understanding
ANALYTICAL

Strategic Plan

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2.1.3 Alliance operation phase
After both parties have reached agreement to sign the contract, the next phase is the operation phase
which deals with operating the international strategic alliances so that the stated objectives will be
achieved. Significant characteristics during this phase are Human Resource Management,
Organizational Arrangements, and Management Control Systems (Foster, 1996; Tipuric, 1996,
Hellriegel, Slocum, & Woodman, 2001; Mulyowahyudi, 2001). In the operation phase there are
mixed of considerations between analytical and political in terms of factors that should be
undertaken (Lorange & Roos, 1992); human resource management, organization arrangement,
management control system, and cultural understanding. In this phase, the activities are filled with
interaction between partners, socialization, and implementation of the program to alliance’s
organization. The analytical consideration is related with analyzing and determining the optimal
factors within the phase while political consideration is related with interaction, persuasion, and
socialization between the partners and the entire organization so that all the elements implement the
programs.

Human resource management

Human resource management is one of the factors in the operation phase that should be considered
by the management of international strategic alliance (Lorange & Roos, 1992). Human resource
management considerations play a pivotal role in the development of strategic alliances. “Without
the development of human resources and core competencies as a strategic resource within a
strategic alliance, it will be difficult to secure the long-term strategic future of the cooperative
effort, even though financial resources and returns might be adequate for now” (Lorange & Roos,
1992: 150). The success of a strategic alliance is determined by individuals, and choosing people
for key positions (Lorange & Roos, 1992). Since an IEPSA is a form of alliance this must apply to
IEPSA as well.
The kinds of people who can successfully support the strategic alliance are people who can
collaborate (Hamel & Heene, 1994; Littler & Leverick, 1995; Medcof, 1997). Collaborative people
show strong cooperative and assertive behaviors (Hellriegel et al., 2001). It is the win-win approach
to interpersonal conflict handling, which can be illustrated as in figure 2.21.

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 Figure 2.21: Interpersonal conflict handling style (adapted from Hellriegel et al., 2001)
Assertive Forcing COLLABORATING

Concern for Self Compromising

Avoiding Accommodating

Unassertive Uncooperative Concern for Others Cooperative

A person who uses a collaborative approach desires to maximize joint results (Hellriegel et al.,
2001). He or she tends to:
 Extend the capability of learning (Doz, 1996)
 Be cooperative and see conflict as natural (Mohr & Spekman, 1994)
 Exhibit trust, candor, and communication with others (Mohr & Spekman, 1994)
 Commit to the objective setting (Das & Teng, 1998)

The persons associated with collaborative people are those that should beinvented in the
implementation of strategic alliance through its human resource management. Therefore, the
relationship of collaborative people and human resource management is presented in figure 2.22.

Figure 2.22: Relationship of collaborative people and human resource management

Variable Factor
Factor
Human resource
Collaborative people management

Collaborative people
According to Hellriegel et al. (2001), collaborative people who possess high degree of both concern
for others and concern for self have the characteristics of learning capability, cooperation and
conflict resolution, trust, candor, communication, and commitment to the objective setting. Based
on this, assessment of the human resource management is undertaken based on the following
condition.
 If the alliance creates people with high degree of both concern for others and concern for
self then the condition has a positive influence on the human resource management
 If the alliance does not create people with high degree of both concern for others and
concern for self then the condition has a negative influence on the human resource
management

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Organizational arrangement
Organizational arrangement is one of the factors that should be regarded (Foster, 1996). In the
organizational arrangement factor, the alliance should set up flattened organization, decentralization
of decision making, and have improvement orientation (Bleeke & Ernst, 1991; Callahan & Mac
Kenzie, 1999; Cohen & Levinthal, 1990; Inkpen, 1996; Lei & Slocum, 1992; Senge, 1992; Nti &
Kumar, 2000). By having set up the variables together with the existence of collaborative people,
responsiveness and flexibility of the organization can be achieved (Hellriegel et al., 2001) as well as
improvement orientation how the alliance commits to improving its skills and capabilities (Senge,
1992; Cohen & Levinthal, 1990; Inkpen, 1996; Nti & Kumar, 2000). It relates with the alliance’s
adjustment to the changes in environment. It is the ability of an organization to respond quickly in
appropriate manner to mitigate negative threats or capitalize on positive opportunities (Konsynski,
Bray, & Thomas, 2007). Therefore, the relationship of flattened organization, and decentralization
of decision making with organizational arrangement is presented in figure 2.23.

Figure 2.23: Relationship of flattened organization, and

decentralization of decision making with organizational arrangement

Variables Factor

Flattened organization

Organizational
Arrangement

Decentralization of decision making

Flattened organization
By definition, it is an organizational structure in which most middle-management levels and their
functions have been reduced, thus bringing the top management in directcontact with the employees
(Foster, 1996; Tipuric, 1996). According to the definition, it can be inferred that the more direct
contact of employees with the top management, the more flattened is the organization and vice
versa. Thus, assessment of the organizational arrangement based on the analysis of flattened
organization is presented in the following condition.
 If top management is considered frequently having direct contact with the employees then
flattened organization has a positive influence on the organizational arrangement.
 If top management is considered rarely having direct contact with the employees then
flattened organization has a neutral influence on the organizational arrangement.

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  If top management is considered never having direct contact with the employees then
flattened organization has a negative influence on the organizational arrangement.

Decentralization of decision making

It relates with how the decision making is made in the alliance, whether the alliance can make its
own decision or whether it is born by headquarters (Daniels & Radebaugh, 2001). Therefore,
assessment of the organizational arrangement based on the analysis of decentralization of decision
making is presented in the following condition.
 If the alliance makes its own decision making out of the headquarter then the
decentralization of decision making has a positive influence on the organizational
arrangement.
 If the alliance makes its own decision making in the headquarter out of the strategic alliance
then the decentralization of decision making has a negative influence on the organizational
arrangement.

Management control system

Another factor of international strategic alliance in the operation phase is the optimal use of
Management Control System to ensure that the strategic alliance achieves its objectives.
Management control is defined as the process by which managers influence other members of the
organization to implement the organization’s strategies (Anthony & Govindarajan, 2006).
Management control systems are tools to aid management for steering an organization toward its
strategic objectives and competitive advantage (Anthony & Govindarajan, 2006). In the
management control system factor, the alliance should set up and improve its planning, control
structure, and control process (Anthony & Govindarajan, 2006; Bradach & Eccles, 1989; Das, 1989,
1993; Flamholtz, Das, & Tsui, 1985; Geringer & Hebert, 1989; Goold & Quinn, 1990; Simons,
1991).

Figure 2.24: Management control system (adapted from Anthony and Govindarajan, 2006)

Planning
Sub-system

Control Control
Structure Process

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In accordance with Anthony & Govindarajan (2006), the ingredients of a management control
system consist of planning (vision, goals and objectives, strategies and policies), control structure
(responsibility centers, organizational set-up, performance measures, reward and punishment
system, information system) and control process (programming, budgeting, evaluation, feedback,
reporting, and compensation).
Based on this, the relationship of planning, control structure, control process, with management
control system is presented in figure 2.25.

Figure 2.25: Relationship of planning, control structure, control process, with management
control system
Variables Factor

Planning

Control structure Management

Control System

Control process

Planning
In the formation phase the alliance has already set up the strategic planning, thus, the variable in
this phase relates with how regular the alliance conduct its planning based on the strategic planning
(Anthony & Govindarajan, 2006). Based on this, assessment of the management control system
based on the analysis of planning is presented in the following condition.
 If the alliance commits to conduct its planning regularly then the planning has a positive
influence on the management control system.
 If the alliance does not commit to conduct its planning regularly then the planning has a negative
influence on the management control system.

Control structure
The variable relates with whether the alliance has set up the structure of control system (Anthony &
Govindarajan, 2006). Therefore, assessment of the management control system based on the
analysis of control structure is presented in the following condition.
 If the alliance has set up structure of control system then the control structure has a positive
influence on the management control system.

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 If the alliance has not set up structure of control system then the control structure has a negative
influence on the management control system.

Control process
It relates with the process feedback on performances in the aim to achieve strategic objectives and
competitive advantage of a corporation (Anthony & Govindarajan, 2006). Therefore, assessment of
the management control system based on the analysis of control process is presented in the
following condition.
 If the alliance has conducted process feedback on performances then the control process has a
positive influence on the management control system.
 If the alliance has not conducted process feedback on performances then the control process has
a negative influence on the management control system.

Overall, Figure 2.26 depicts the operational phase model in the international equity placement
strategic alliance.

Figure 2.26: Operational phase of strategic alliance

OPERATION PHASE
ANALYTICAL & POLITICAL

TERMINATION PHASE
FORMATION PHASE

Human Resource Management

CONSIDERATIONS

Cultural
Understanding

Organization Arrangement

Management Control System

Evolved cultural understanding

The cultural understanding between or among partners can evolve in the operation phase from the
results in the planning and formation phase.
The trust level between the partners can evolve over time (Arino, de la Torre, & Ring, 2001). This
evolution of trust between partners can occur not only because of initial conditions but also because
of the subsequent experiences that exist within the life cycle of the alliance. Resilient trust is
associated with high levels of relational quality. There are four elements of relational quality, which
are the initial conditions, after the negotiation process, the experiences of each other after the

81
alliance operates, and each partner’s behaviors outside the alliance. They can be summarized in
table 2.6.
In the operation phase the components and variables are almost similar with the cultural
understanding in the preceding phases. Only in the commitment component has its additional
variable (besides attitudinal commitment) which is calculative commitment (Cullen et al., 2000).
According to Cullen et al. (2000), calculative commitment is the commitment which is rooted from
the performance of the alliance. Therefore, the relationship of performance of the alliance,
commitment, with cultural understanding is presented in figure 2.27.

Figure 2.27: Relationship of performance of the alliance, trust, commitment, with cultural
understanding

Variable Component Factor

Share of
communication Trust

Cultural
understanding

Performance of the
alliance Commitment

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 Table 2.6: The evolutionary of trust in alliance phases life cycle
Planning Phase Formation Phase Management Phase
 The trust derived from the partner’s  Collectively, the elements of trust that  The interpretation of these experiences is a complex, multi-
inherent characteristics derived in the planning phase can build up or dimensional problem that is a function of the number, frequency,
tap as they adapt to future challenges and gravity of their interactions, the difference between actual
 It may derive from institutional context and expected outcomes, the nature of any transgressions, the
within which the alliance exists  A critical determinant of future levels of intentions or motivations attributed to a partner’s behavior, and
relational quality between the partner is their any advance warning and/or post facto explanation of its actions
 It may also derive from any prior experience with each other’s behavior as the by the partner
experiences that may have had with each alliance develops
other  As the quality of the relational improves, the potential for
positive conflict resolution increases, which in turn enhances the
 The initial reservoir of comfort and partners’ views of each other’s trustworthiness
confidence may be enhanced or
diminished through the negotiation  The reverse, possible condemning the venture to failure unless
process remedies are undertaken
Adapted from Arino, de la Torre, and Ring, 2001

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Performance of the alliance
The performance which supports the commitment in the operation phase relates with the financial
performance of the alliance (Cullen et al., 2000). In measuring the performance, it should relate
with how the operation of the alliance can add value to the entity (Damodaran, 2003). The alliance
can be regarded as adding the value when the ROA is more than WACC (Damodaran, 2003). Based
on this, assessment of the commitment based on the analysis of performance of the alliance is
undertaken in accordance with the following condition.
 If the company’s ROA is more than or equal with the WACC then it has a positive influence
on the commitment.
 If the company’s ROA is less than the WACC then it has a negative influence on the
commitment.

2.1.4 Alliance termination phase

One critic of strategic alliances is Michael Porter. Porter (1998) shows both positive and negative
views to the termination of strategic alliances. His message is about being cautious that alliances
should be well-prepared otherwise it will destine to terminate. He viewed that broad alliances,
covering many activities and markets, tend to stunt a company’s own development. According to
Porter (1998: 339), they inhibit or relieve the sense of urgency about building the brand or
developing the firm’s own products. The best alliances are often transitional devices, assisting a
firm to build on its strengths and to learn. In the long run, the partners may go their separate ways or
upgrade the alliance to a full merger. A firm cannot rely on a partner for assets crucial to its
competitive advantage. Mockler (1999) agrees with Porter’s statement, however, he believes that
the alliance should not underscore the termination otherwise it will indeed terminate.
The probability of termination should be planned for when formulating an alliance (Mockler, 1999).
However, he does not want the partners underscore and overstate it in the initiation phase. It can be
unwise to overemphasize termination conditions, however, the alliance agreement should, at a
minimum, outline the principles and general terms guiding any termination (Mockler, 1999). “The
termination may be specified as part of the original strategy or it may be caused by outside political
circumstances (such as wars), changing partner needs (as when mergers or acquisitions occur),
inefficient management, changing economic conditions, or by ill-conceived initial planning”
(Mockler, 1999: 190).
Companies must face the challenge of terminating an alliance. According to Kanter (1994), there
are a number of reasons of ending the strategic alliance. First, a partner may be suitable for one
purpose and not another. Managers or other venture participants may be needed for more urgent

84
tasks. Second, shifts in business conditions or strategy can mean that a particular relationship no
longer fits as well as it once did. However, whatever the reasons, ending a strategic alliance
properly is difficult to do and requires much skill and diplomacy where partners should be fully
informed and treated with integrity. If they are not, future relationships will be jeopardized,
especially in Asian countries, where business and government leaders have long memories (Kanter,
1994).
Based on the above literatures (Kanter, 1994; Sierra, 1995; Porter, 1998; Mockler, 1999), it can be
identified that there are internal and external drivers that can lead the strategic alliance into the
termination phase as presented in the following figure 2.28. Internal driver is the forces from the
internal organization that lead alliance into termination. External driver is the forces from outside
organization that lead alliance into termination.

Figure 2.28: Termination phase of strategic alliance

TERMINATION PHASE
POLITICAL
OPERATION PHASE

CONSIDERATIONS

External Drivers
- Political circumstances
ANALYTICAL

Internal Drivers
- Shift in business conditions
- Changes in strategic objectives - Changing economic conditions
- False expectations
- Changes in corporate leadership

.
Strategic objectives
The alliance will be terminated after firms acquire the kind of resources they need from their
partners (Das & Teng, 2000). Alliance termination can also reflect satisfaction of a partner's
strategic objectives (Reuer & Zollo, 2005). Several authors (Gomes-Casseres, 1987; Gulati, 1998;
Saxton, 1997) warn not to equal alliance termination with failure. Alliances that have reached their
strategic objective might be terminated and still be considered a success.

Expectancy
The alliance will also be terminated once partners realize that counterpart does not have market they
required, and has lack of synergy they seek in the initiation of the alliance (Kanter, 1994; Mockler,
1999). The expected synergy can be in the form of product or service, technology, and financial
performance.

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Corporate leadership
Change in corporate leadership can lead the alliances into termination (Das & Teng, 2010). It can
lead to diverse management styles and may run the alliance into trouble if there is a lack of
interfirm trust (Das & Teng, 2000).

External environment
The external environment that can lead the alliance into termination can be in the form of political
circumstances, shift in business conditions, and changing in economic conditions (Kanter, 1989;
Das & Teng, 2000).

Table 2.7: Variables in termination phase and the driving forces

No. Variable Driving Force
1. Strategic objectives Change in strategic objectives
2. Expectancy False expectations
3. Corporate leadership Change in corporate leadership
4. External environment Political circumstances, shift in business
conditions, and changing in economic conditions

2.2 Common and specific characteristics

Due to the sharing of equity in the alliance, participation of stakeholders over the intention of
alliance is important. This is so because changes in the equity’s portion will affect the stakeholders’
reaction to the alliance. In this research, where the focus is on SOEs, the influence of stakeholders is
even more imminent.
As mentioned earlier, IEPSA is one of the forms of privatization. The definition of privatization in
broad terms is the transfer of ownership and/or control of state-owned organizations to private
investor (Heracleous, 1999). The process structure of privatization is similar with that of IEPSA
particularly SOE as the subject of investigation. It is the selling some parts of government’s shares
to the foreign company. Hence, the foreign company takes ownership in the SOE and together with
the government become the new owner of the company. The process of selling the government’s
shares in the SOEs should take into consideration the stakeholder (Freeman, 1984).
The stakeholder of SOE consists of government (Moore, 1992; Ramamurti, 2000; Megginson,
2000), house of representative (Moore, 1992), politician (Moore, 1992; Boycko, Shleifer, &
Vishny, 1996), top management (Moore, 1992), labor union (Moore, 1992; Boycko et al., 1996;
Ramamurti, 2000), and ambient society (Moore, 1992; Ramamurti, 2000).
Donor organization such as Work Bank played an important role in the SOEs such as the case of
Sub Saharan Africa (SSA) privatization (Bennell, 1997) which can be named with the term ‘Donor
Pressure’. During the 1980s most governments in SSA openly opposed the sale of SOEs which

86
clearly prevented the widespread adoption of viable privatization programs. Only a handful of
governments in SSA committed to the privatization and the rests tended to play lip service to the
World Bank. During the 1990s however, political constraints have become less critical in many, and
instead the sale ability of SOEs and the mode of privatization are increasingly the major concerns.
The reasons are that, as more governments were more dependent on the donor funding so that the
term privatization became common. Second, significant political liberalization has created
additional political space in order to begin or revamp privatization programs. Third, the financial
state of SOEs has continued to deteriorate the budget deficit besides attempts to restructure SOEs
using performance and management contracts with existing managements have not been successful.
Finally, with the key macroeconomic reforms implemented in most countries in SSA under the
supervision of World Bank which in 1996 alone, lending for public sector reform projects in SSA
countries increased over five times, from US$ 117 million in 1995 to US$ 654 million. In the
economic and political reforms, World Bank focuses on private sector development. It has become
increasingly aware of the critical need to develop the private sector in order to ensure high and
sustainable economic growth in the future, given the general failure of these macroeconomic
reforms to resolve the economic crisis in SSA. Consequently, much greater pressure is now being
applied on governments to privatize rapidly all types of SOEs, both large and small, with the World
Bank now actively encouraging governments to sell SOEs rather than opt for non-asset types of
privatization.
International Monetary Fund (IMF) entered the scene as the central player during the midst of Asian
economic crisis, as countries in the region struggled to deal with the effects of stalled currency.
Particularly in the growing inability of private sector to service its short-term, unhedged dollar
denominated debt (Robison & Rosser, 1998). At the time, Indonesia lacked the reserves to meet its
short-term obligations and called in the IMF. Malaysia did not seek for help, while the Philippines
was already in an IMF program when the crisis began (Feldstein, 1998). During the crisis, IMF
provided rescue packages of US$ 17.2 billion to Thailand, US$ 43 billion to Indonesia and US$ 57
billion to Korea made the program the largest bail-out in history, surpassing the US$ 48 billion
package offered to Mexico in 1995 (Robison & Rosser, 1998). All of these countries clearly needed
to shrink their current account deficits by increasing exports and reducing imports (Feldstein, 1998:
2). These countries required reductions in public and private consumption and investment where.
IMF provided its remedy consisting of a variant of the traditional IMF medicine tailored specifically
to each country some combination of reduced government spending, higher taxes, and tighter credit
(Feldstein, 1998).

87
The IMF's role in Thailand and Indonesia went far beyond the role that it played in Latin America,
where instead of relying on private banks and serving primarily as a monitor of performance, the
IMF took the lead in providing credit (Feldstein, 1998). In exchange, it had imposed programs
requiring governments to reform their financial institutions and to make substantial changes in their
economic structures and political behavior (Feldstein, 1998). The conditions imposed on Thailand
and Indonesia were more like the comprehensive reforms imposed on Russia, including the recent
emphasis on reducing Russian corruption, than like the macroeconomic changes that were required
in Latin America. In Indonesia, in exchange for a US$ 40 billion package (more than 25 percent of
Indonesia's GDP), the IMF insisted on a Letter of Intents (LOI) which consisted of long list of
reforms, specifying in minute detail such things as the price of gasoline and the manner of selling
plywood. The government has also been told to end the country's widespread corruption and curtail
the special business privileges used to enrich President Soeharto's family and the political allies that
maintain his regime (Feldstein, 1998).
In the privatization, the economic distance between the country of foreign investor and the host
country matters (Tsang & Yip, 2007; Ghemawat, 2001). The higher the economic distance would
lead to the more hazard rates (Tsang & Yip, 2007). Consequently, the host country’s economic
condition should be in a good condition to avoid high economic distance between the partner’s
countries of origin and it is part of the important subject to analyze. The government as the owner
of the SOEs should take into consideration to the economic condition. However, the privatization
usually takes place when the economic condition is getting worse (Ramamurti, 2000), and when the
government needs privatization to restructure the industry and economic and yet donor pressure
seems imminent to urge government to privatize the industries (Ramamurti, 2000). Since
privatization occurs in many countries at a time of macroeconomic crisis, governments want to
privatize quickly to turn around their economies, but breaking up SOEs vertically or horizontally
and redefining regulations take time (Ramamurti, 2000). Especially during economic crises,
governments are strapped for funds and want to get the highest possible price for their SOEs when
they sell SOEs directly to a private company or to a consortium of investors (Ramamurti, 2000;
Megginson, 2000). Furthermore, the economic condition will influence the valuation of the selling
price to the foreign company. So that when the economic conditions is bad the government will
suffer an opportunity revenue lose from the low selling price of the SOE being privatized when the
valuation does not take into account future cash flow (Damodaran, 2008). The selling price of the
company is related to the share price. In terms of share price, the greater the number of bidders, the
more competitive the offering prices from the bidders that lead to the higher the price paid to the
owner (government) (Kikeri & Nellis, 2004). This situation brings about the higher the level of

88
public acceptance and satisfaction (Kikeri & Nellis, 2004). In addition, many are concerned that the
often perceived corruption and lack of transparency in privatization transactions have minimized
gains (of share price) and increased broader problems of governance (Kikeri & Nellis, 2004). In
terms of macro consideration, it has been applied without proper regard to a country’s economic
and social conditions, often at the behest of external actors (donor pressure) (Kikeri & Nellis, 2004).
Another consideration is about the existence of regulatory framework (Kikeri & Nellis, 2004) when
competitive markets and regulatory frameworks are not sufficiently developed to support
privatization, it is not surprising that privatization is blamed when general economic conditions fail
to improve.
The government should consult with the house of representative for gaining agreement to privatize
the SOE (Moore, 1992). Otherwise, it can be considered as not transparent (Basu, 1994). On the
other hand, the house of representative demanded the government to conduct transparent process of
privatization by socializing the privatization to the stakeholder. In addition, by selling the
government’s shares in the SOEs, politician will have opportunity to blow the probable of not
transparent conducts as a motivation to increase reputation (Moore, 1992; Kaufmann &
Siegelbaum, 1997), management might feel threatened of losing power (Moore, 1992; Kikeri &
Nellis, 2002), labor union might confused of losing the job (Moore, 1992; Kikeri & Nellis, 2002),
and ambient society might have the hegemony of nationality and oppose the un-nationalized
conduct especially when conducted un-transparently (Moore, 1992; Kaufmann & Siegelbaum,
1997; Kikeri & Nellis, 2002).
The translation of control rights into corrupt side payments is facilitated by secrecy and a lack of
transparency (Kaufmann & Siegelbaum, 1997: 9). It provides ammunition to political and other
opponents, creates backlash from investors and the public at large, and threatens to halt
privatization and liberalizing reform in general (Kikeri & Nellis, 2002: 25). As a result, the public
came to oppose privatization, associating it with corruption and wealth for a chose few (Kikeri &
Nellis, 2002: 26).
In the transparency issues, three types of information are potentially important (Kaufmann &
Siegelbaum, 1997). Firstly, process of information which provides the “rules of the game” to public.
It has made so dramatically reduced the ability of corrupt officials to collect rents through
permitting exceptions and violations of legal standards (Kaufmann & Siegelbaum, 1997: 9). The
second important type of information pertains to the valuation (share price) of enterprises being
privatized (Kaufmann & Siegelbaum, 1997: 9). The third type is the availability of information on
the results of privatization transaction (Kaufmann & Siegelbaum, 1997: 9)

89
Putting transparency into place requires a host of measures. Speed and full transfer of assets,
without special privileges and concessions for insiders, is crucial, particularly in the case of
competitive enterprises (Kikeri & Nellis, 2002: 26). Evidence from Mexico, Bulgaria, South Africa
and elsewhere indicates that, once a firm is slated for privatization, delays in completing the
transaction lead to a decline in operations, asset stripping, and a lower sales price (La Porta &
Lopez-de-Silanes, 1997). Ultimately, few buyers may participate and, rather than liquidating such
firms which is the right technical approach but politically unpalatable, special clandestine deals
might need to be negotiated, increasing the chances for in transparencies (Kikeri & Nellis, 2002).
On the other hand, selling firms with the lack of efforts to enhance competition and regulation and
transparency as well as protection of consumers against the threat of remaining monopoly power,
can be extremely expensive (Kikeri & Nellis, 2002). The general rule should be to move swiftly on
the privatization of firms operating in competitive or potentially competitive markets, but get the
market structure right in privatizing infrastructure firms (Kikeri & Nellis, 2002: 26).
An effective institutional framework is needed, however planning for it has been considered easier
than implementing it (Guislain, 1997). It needs a minimal bureaucracy, direct access to and support
of the highest political authorities, and adequate resources and flexibility to hire the many and
expensive private resources needed to prepare and complete the sale (Guislain, 1997). In
undertaking independent, market-based asset valuations, independent financial advisors and
qualified experts are required to ensure that prices are realistic, fair and politically defensible
(Kikeri & Nellis, 2002).
In order to obtain transparency, one of the most effective ways is through promoting competition in
the transaction process, in the objective to yield the maximum economic and financial benefits.
Clearly defined competitive bidding procedures for calling, evaluating, and awarding offers are
important, including the public opening of bids (in Bolivia, this was done on national television)
(Kikeri & Nellis, 2002: 26). In general, the greater the openness and competition in the selection
process the greater the likelihood that transparency will be achieved and the higher the price paid
(Kikeri & Nellis, 2002: 27).
Kaufmann and Siegelbaum (1996), in their work on transition economies, argue that although there
have been an increasing number of corruptions in the privatization program, the privatization itself
is not the cause of corruption. Different privatization approaches have affected the incidence of
corruption, depending on the scope of control rights over economic activity retained by politicians
and bureaucrats. Privatization itself is a way to address corruption, the development of a legal and
institutional framework is needed to limit the ability of insiders to self-deal (Kikeri & Nellis, 2002).

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All in all, from the above sections, it can be concluded that when compared with other types of
strategic alliance with its common characteristics (defined as the characteristics that possessed by
any other types of strategic alliance), IEPSA has its specific characteristics. The specific
characteristics are those that should be more emphasized than other types of strategic alliance or are
non-existence. It composes of share price, donor pressure, transparency, and stakeholder support
(internal and external).

2.3 Conceptual framework

Based on the information and discussion presented above, it can be concluded that the IEPSA
contains four phases: planning, formation, operation, and termination. Each of these phases contains
important activities which can be separated into a main emphasis based on analytical considerations
versus political considerations. Several factors and variables influence the outcomes of each phase.
These variables can be separated into common characteristics that play a role in alliances and
specific characteristics that play a role in IEPSAs. This leads to the overall conceptual model as
presented in figure 2.29 and table 2.8.

Figure 2.29: Conceptual framework for International Equity Placement

Strategic Alliance
TERMINATION
PLANNING PHASE FORMATION PHASE OPERATION PHASE PHASE
Internal
POLITICAL

POLITICAL

Stakeholder Support Organization Human Resource

Support Management
ANALYTICAL & POLITICAL

EXTERNAL DRIVER
CONSIDERATIONS

OUTPUT

Cultural Cultural
Understanding Understandng
INTERNAL DRIVER
ANALYTICAL

ANALYTICAL

Organizational Arrangement

Strategic Match Strategic Plan Management Control System

‘go or no go’ decision upon partner selection until the announcement

of winning bidder in the tendering of government’s shares

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 Table 2.8: Factors for International Equity Placement Strategic Alliance
Phase Factor/Variable Characteristics
Planning - Stakeholder support Common characteristics:
- Strategic match -The characteristics of IEPSA are the main considerations of forming the alliances consisting of
Capacity political and analytical considerations that both (all of) partners should mind of
 Macro Consideration
-The planning phase consists of strategic match and stakeholder support including cultural
o GDP growth and Inflation rate
understanding. The variables of strategic match are capacity, complementarity, and strategic
o Currency rate
importance, while those of stakeholder supports consists of internal organization, society, and
 Micro Consideration house of representative
o Market
o Alliance track record Specific characteristics:
o Product or service -Share price, transparency, donor pressure, and stakeholder support
o Technology
o Financial performance
Complementarity

(Evolved) Cultural understanding

 Complementarity of strategy
 Complementarity of product or
service
 Complementarity of technology
 Complementarity of financial
performance

- Strategic importance
 Pressures on continuity
 Pressures of time on alliance
 Alternative to cooperation
Formation - Internal support Common characteristics:
- Strategic Plan -The characteristics of IEPSA in the formation phase consist of setting up strategic plan and finding
internal organization support which are the managers and employees as well as dealing with
cultural understanding

Specific characteristics:
- Stakeholder in terms of internal organization support

Operation - Human Resource Management Common characteristics

- Organizational Arrangement -For operation phase, the characteristics of IEPSA are the implementation and operation of human

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Phase Factor/Variable Characteristics
- Management Control System resource management, organizational arrangement, and management control system and evolved
cultural understanding.

Specific characteristics:
- Stakeholder support
Termination - Internal driver Common characteristics
- External driver - The characteristics of IEPSA in the internal driver of termination phase consists of changes in
strategic objectives and focus, changes in corporate leadership, false expectations about partner’s
capabilities, lack of synergy, Inability to cope with diverse management styles and cultures, and
unrealized market expectations
- The characteristics of IEPSA in the external driver of termination phase consists of shift in
business conditions, political circumstances, and changing economic conditions

Specific characteristics
- Share Price

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94
CHAPTER 3: METHODOLOGY
In this chapter the methodology is discussed. The selected methodology was the case study
methodology. The reasons for selecting this methodology are explained in section 3.1. Section 3.2
deals with a main criticism of case studies, i.e. limited external validity, and the tactics used in the
research to counter this criticism. Section 3.3 focuses on construct validity and reliability. Both are
dealt with during the data collection phase. Section 3.4 explains tactics for dealing with internal
validity. In section 3.5, the operationalization of the concepts from the conceptual model in chapter
2 is discussed. In section 3.6, the assessment of the factors, sub-factors, and components is
presented.

3.1 Case study research

The development over time of international equity placement strategic alliances is complex.
Studying this type of complex situation with a quantitative approach could be inferior to a
qualitative approach because a quantitative research approach is more fixed whereas a qualitative
approach allows flexibility and is therefore more useful for dealing with complex situations
(Gummeson, 1991; Silverman, 2000: 1; Yin, 2003). Qualitative research approaches are often
associated with a case study approach. A case study can be defined as an empirical inquiry that (i)
investigates a contemporary phenomenon within its real-life content, especially when (ii) the
boundaries between phenomenon and context are not clearly defined (Yin, 2003: 13).
The appropriateness of applying a case study approach versus other research approaches relates to
the type of research question (Yin, 2003: 5). In general, “what” questions may either be exploratory
(in which case of any strategy can be used) or about prevalence (in which surveys or the analysis of
archival records would be favored). “How” and “why” questions are likely to favor the use of case
studies, experiments, or histories. In terms of the form of the research question, as explained in the
first chapter, the central research question is: How did the privatization process through IEPSAs
take place in Indonesia? This type of “how” question makes the case study approach a suitable
research method. There are four scientific criteria for case studies: external validity, construct
validity, internal validity and reliability. Tactics for each will be discussed in sections 3.2, 3.3, and
3.4.

3.2 External validity

One of the disadvantages of a case study approach is the limited external validity of the results (Yin,
2003). Case studies have been criticized for being too situation specific, and therefore not

95
appropriate for generalization (Dubois & Gadde, 2002). Although Yin (2003) provides some
reasons for conducting single-case studies, the preference is for a study to contain multiple cases
which helps with external validity. This leads to two types of decisions: the number of cases to
include in the study, and the criteria for selecting cases.

3.2.1 Number of cases

Eisenhardt (1989) and Perry (1998) discuss the number of cases that should be included in a
research project. The key question is how many cases should be undertaken in a study in order to
develop a generalizable theory? According to Malhotra (2006), a minimum of 30 cases is
considered enough to find the normal distribution of the generalizable findings. However, this
number of cases would probably lead to a lot of repetitive findings (Yin, 2003). Also, one of
advantages of a case study approach is the potential for collecting in-depth data (Voss et al., 2002;
Yin, 2003). The right balance should therefore be obtained between having fewer cases with more
in-depth information versus adding more cases for generalization purposes. Generally, this balance
occurs when learning new things in additional cases diminishes, i.e. saturation takes place. Perry
(1998: 793) states that four to six cases form a reasonable minimum and that ten to fifteen cases are
the absolute maximum number of cases. Eisenhardt (1989: 545) states that while there is no ideal
number of cases, a number between 4 to 10 cases usually works well. In this research, six cases
were selected. This number conforms to both Perry’s (1998) and Eisenhardt’s (1989) view on the
number of cases that is acceptable.

3.2.2 Case selection criteria

According to Voss et al. (2002: 203) and Yin (2003: 47) cases in a multiple case study must be
selected so that they either a) predict similar results for all cases (“literal replication”) or b) produce
contrary results but for predictable reasons (“theoretical replication”). The replication logic is
considered a tactic to improve external validity (Yin, 2003). Similarly, Eisenhardt (1989: 537)
argues for theoretical sampling in case studies. According to her, the cases may be chosen to
replicate previous cases or extend emergent theory, or they may be chosen to fill theoretical
categories and provide examples of polar types.
Ramamurti (2000: 530) proposes that SOEs that were once privately owned (BTOs) or are still
partially privately owned are more likely to be privatized than SOEs that are wholly state owned or
that were created afresh by the state as statutory public corporations. The process of privatization
may thus be different for firms that were SOEs from the beginning versus BTOs. The replication
logic is therefore applied with this difference in mind. For theoretical replication both categories of

96
cases are included while for literal replication several cases for each category are included. Indosat
and Semen Gresik were selected as companies which were SOE from the start while Bank Niaga,
Bank Permata, Bank International Indonesia, and Bank Central Asia were selected because they
were once privately owned, i.e. BTO. This differentiation tactic conforms to the aforementioned
case selection and replication criteria.

3.3 Construct validity and reliability

Construct validity and reliability are both addressed during the data collection phase. The
operationalized conceptual framework provides guidance on the type of data that should be
collected. During data collection, several things can be done to improve construct validity and
reliability (Yin, 2003). This includes using multiple sources of evidence (so that triangulation can
take place) as well as using a case study protocol. The latter also helps with establishing a chain of
evidence and with the development of a case study database.

3.3.1 Multiple sources of evidence

The use of multiple sources of evidence such as interviews, observations and document analysis is
suggested as a tactic to improve construct validity (Yin, 2003). This was applied in the research
study. For observations, direct observation was used. Direct observation is a method of data
collection in which the situation of interest is watched and the relevant facts, actions and behaviors
are recorded during the site visit. For the interview part, multiple respondents were used in each of
the cases. Perry (1998: 794) suggests that a Ph.D. research study should have at least three
interviews per case study organization. This suggestion was followed. Using multiple respondents
from different levels in an organization reduces the risk of bias 5. Respondents were differentiated
based on whether they were internal to the IEPSA or whether they were external to the IEPSA
(knowledgeable outside party) leading to four different categories of respondents.
Top management: high ranking executives who translate the policy (formulated by the board-of-
directors) into goals, objectives, and strategies, and projects a shared-vision of the future. Top-
management makes decisions that affect everyone in the organization, and is held entirely
responsible for the success or failure of the enterprise. Top-management contains
chairman/chairwoman, chief executive officer, managing director, president, executive directors,
and executive vice-presidents.

5
For triangulation purposes, different respondents have to answer the same set of questions. This was followed with the
exception of questions about the macro environment. These were only posed to top-management and outside parties as
these were the only groups with sufficient knowledge to answer these questions. It was also triangulated with secondary
data and data from observation.

97
Line or middle management: managers who head specific departments (such as accounting,
marketing, production) or business units, or who serve as project managers in flat organizations.
They are responsible for implementing the top management'spolicies and plans and typically have
two management levels below them.
Employee: A person who is hired to provide services to a company on a regular basis in exchange
for compensation and who does not provide these services as part of an independent business.
Knowledgeable outside party: An individual or other entity who is not a direct party to the
alliance, but who somehow has an interest in or is affected by the alliance. For example; a specific
industry group, consultant or society, representatives, and deputy ministry of SOE.

3.3.2 Case respondents

Data were gathered from the sites by the help of accessible elite informants in each of the six cases.
There were two elite informants in all cases. Data collection by case is provided next to illustrate
where data was collected.
Indosat: Seven people were interviewed: director, top management (one respondent is in Vice
President (VP) position), manager (one respondent is in Assistant Vice President (AVP) position),
employees, and deputy of SOE and telecommunications consultant. The SOE key person and
telecommunications consultants were from outside the alliance, so that the findings and analysis
were not dependent solely on the internal organization. These respondents provided for example
data concerning the prerequisites of government to the intended alliance especially about
commitment for national development. During the initial phases of IEPSA, the telecommunication
consultants along with the labor union protested the intention of privatization in public through
demonstration and strikes.
Secondary data on the opinion of prominent people about IEPSA was also collected. The secondary
data related to opinions about Indosat from the Director of Indosat, the SOE Minister, former head
of House of Representative, Telecommunications analyst, and Indonesian Telecommunications
Watch. The data were furthermore supplemented by using other secondary data such as annual
reports, financial reports, and observations so that triangulation could take place. Table 3.1 depicts
the data gathering scheme.

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 Table 3.1: Indosat data gathering scheme
Position Interview Observation Document (Secondary data)
Top - Director (1) Strikes of Indosat’s union -4 annual reports
management - Vice President of against the privatization on -11 articles
Strategic Planning (1) capitol street in Jakarta (in -2 meeting minutes of IEPSA
front of headquarter of process
Indosat) (1) -30 other documents
Middle - Assistant Vice
management President of Marketing
(1)
Employees - Employee (2)
Knowledgeable - Deputy Ministry of
outside party SOE (1)
- Telecommunications
consultant (1)

Semen Gresik: Six people were interviewed. They were the director, managers, employees, and a
member of representative. The observer was from outside the company, and was knowledgeable on
the cement industry from a society perspective. Secondary data was gathered related to the opinions
of prominent people such as the SOE minister, CEO of Cemex, VP of Cemex, CEO of Semen
Gresik, Societies, Head of IBRA. The data gathering scheme is provided in table 3.2.

Table 3.2: Semen Gresik data gathering scheme

Position Interview Observation Document
(Secondary data)
Top Director (1) -The stakes of labor union, - 4 annual reports
management local government, and society - 9 articles
flooded the capitol street of
Jakarta in the beginning
phases of IEPSA
-Within 7 years of IEPSA,
there was giant banner on the
wall of headquarter protesting
Cemex of pushing the
government to exercise its put
option with Indonesian flag
ahead of it
(2)
Middle -Manager of Q & A
management -Manager of Human
Resource (2)
Employees Employee (2)
Knowledgeable Member of
outside party representative (1)

Bank Niaga: For this case, six people were interviewed. These were: general manager of strategic
planner, manager of general affairs, employees, and consultant of banking industry. Secondary data
included the opinions of prominent people such as from the House of Representatives. The data
gathering scheme is provided in table 3.3.

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 Table 3.3: Bank Niaga data gathering scheme
Position Interview Observation Document
(Secondary data)
Top management -Vice President of - - 4 annual reports
Strategic Planner (1) - 3 articles
Middle Assistant Vice President
management of General Affair (1)
Employees Employee (2)
Knowledgeable - Consultant of banking
outside party industry (2)

Bank Permata: Five people were interviewed, i.e. the government representatives, director,
employee, and vice director of Asset Management Company (PPA). Secondary data included
opinions from prominent people such as the CEO of Bank Permata and the Director of Asset
Management Company. The data gathering scheme is provided in table 3.4.

Table 3.4: Bank Permata data gathering scheme

Position Interview Observation Document
(Secondary data)
Top management -Government - - 4 annual reports
representative (2) - 2 articles
-Director (1)
Middle management -
Employees Employee (1)
Knowledgeable Vice President of
outside party PPA(1)

Bank International Indonesia: Four people were interviewed: independent representative,

director, and consultant of banking industries. Because of limited access, the data from employees
were gathered in the form of secondary data. Secondary data also included opinions from prominent
people about the alliance (for example the Commissioner, Societies, and the Head of Commission
for the supervision of business competition (KPPU). This provided data about market, and industry
attractiveness; one of the variables in the planning phase. Other sources included annual reports,
financial reports and observations, see table 3.5.

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 Table 3.5: Bank International Indonesia data gathering scheme
Position Interview Observation Document
(Secondary data)
Top management -Independent -The stakes from -4 annual reports
representative (1) union were -2 articles
-Director (1) frequent before the
IEPSA aspired for
equal treatment
between the
ethnicity (1)
Middle -
management
Employees -
Knowledgeable -Consultant of
outside party banking industry (2)

Bank Central Asia: For this case, seven people were interviewed. These were interviews with a
government representative in the alliance, managers, employees, and consultant of banking
industries. Secondary data included opinions about the alliance from prominent people such as: the
CEO of Farallon (The secondary data from CEO of Farallon aims to confirm the data findings of
foreign partner in terms of commitment to the alliance, and issues of employment), Minister of
SOE, Minister of Manpower and Transmigration (It aims to confirm the requirement of the host
company’s part in terms of issues of employment), Head of Labor Union, and Head of IBRA (It
aims to confirm the requirement of the host company’s part in terms of employment, commitment,
long-term relationship). The data gathering scheme is provided in table 3.6.

Table 3.6: Bank Central Asia data gathering scheme

Position Interview Observation Document
(Secondary data)
Top management Government -The stakes of labor -4 annual reports
representative (1) union and society -4 articles
flooded the capitol
street of Jakarta in the
beginning phases of
IEPSA (1)
Middle management Manager of
Marketing (2)
Employees Employees (2)
Knowledgeable Consultant of banking
outside party industry (2)

Table 3.7 provides an overview of the data that was collected overall from the different sources.

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 Table 3.7: Collected data
Data Number
of data points
Semi-structured interviews 34
E-mails from the international equity placement alliance processes 20
Meeting minutes from the international equity placement alliance processes 2
Business plans, draft and final alliance contracts 24
Other working documents from the international equity placement alliance 60
processes
Annual reports 24

3.3.3 Case protocol

Using a case study protocol is a suggested strategy to improve the reliability of case study research
(Yin, 2003). This advice was followed in the research and a main part of the protocol dealt with
interviews. The characteristics of the issues in the research as well as the complexity of the topic
made face-to-face a preferred choice of interview method for this study. Furthermore, personal
interviews allow an opportunity for feedback and discussion, and it makes is possible to elucidate
and elaborate on questions (Zigmund, 1997: 221-222).
A potential risk with face-to-face interviews is that the interviewer can influence the responses.
According to e.g. Lehman et al. (1998: 193), the interviewer’s opinions may influence the way in
which he poses questions or the interviewer may interpret answers incorrectly because of selective
perception. The interviewee may also answer questions in the way he or she thinks the interviewer
wants to have them answered. To mitigate these risks, the respondents were assured of anonymity.
A tape recorder was used to capture information accurately and to avoid misinterpretations. Perry
(1998: 791) finds that a case study interview should always start with open questions which intend
to capture the experience of the interviewee. These questions avoid leading the interviewees’
answers to a certain direction. This can be followed by more probing questions which form a major
part of the prepared interview protocol (Yin, 2003). This open-ended vs. probe questions tactic was
used in this study.

3.4 Internal validity

The internal validity is mainly addressed during data analysis (Yin, 2003). The data analysis
approach fits with the three research steps: exploration, explanation, and validation (Kerssens-van
Drongelen, 2001). A general overview of the data analysis process of this study is presented in
figure 3.1.

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 Figure 3.1: Data analysis framework

Within case analysis Cross-case analysis

DATA
Documents Research Framework
Interviews
Observations
Determine key characteristics
of each case by providing Make cross-case
case matrix explorative matrix
Extract relevant data

Case Description Case description Explain the

Explains and Explains and finding of cross-
comments on the comments on the case analysis
relevant data relevant data

Double-checked data
Iteration analysis Development of theoretical model

Multiple sources of data were compiled from the cases (Rowley, 2002; Yin, 2003) but only relevant
data were extracted as suggested by Kerssens-van Drongelen (2001). In accordance with Eisenhardt
(1989) associated characteristics of cases were determined in a cross-case matrix. In summary, the
following steps were taken to collect and analyze the data:
a. Gather the information based on interview
b. Gather the observation data
c. Gather the secondary data; documentation
d. Combine a, b and c and look for patterns and explanations
e. Compare across cases and draw overall conclusions

3.5 Operationalization of the conceptual framework

A critical element of the research design is the operationalization of the constructs. Measurements
of constructs in each case relate to measurements at different stages in the alliance life cycle
including planning phase (3.5.1), formation phase (3.5.2), operation phase (3.5.3), and termination
phase (3.5.4). To distinguish levels of influences four types of terminology are used in this
discussion: factor, sub-factor, component, and variable. Factor is defined as aconstituent that brings
about certain effects or results; it is composed of sub-factors, components, and variables. Sub-
factors are a main part within a factor and sub-factors consist of several variables. A component is
the term used when variables can be differentiated into groups. The measurement of the constructs

103
used is in accordance with figure 3.2. In the following discussion, they are treated by phase of the
strategic alliance.

3.5.1 Planning phase

Three factors were identified in the previous chapter that influences the planning phase. These are:
stakeholder support, strategic match, and cultural understanding.

3.5.1.1 Stakeholder support: The first main concept for the planning phase is stakeholder support.
In order to receive stakeholder support early in the planning phase of the IEPSA, the prospective
partners should keep informing the stakeholders about the intention to form the IEPSA, and the
benefits of the alliance that might occur to them. Table 3.8 shows the operationalization of the
concept of stakeholder support.

Table 3.8: Operationalization of stakeholder support concept

Factor Sub-factor Variable
Stakeholder support Internal organization - Company restructurization
support - Plan for privatization

Society support - Change in ownership structure

- Share price
- Transparency of the privatization process

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 Figure 3.2: Conceptual framework

TERMINATION
PLANNING PHASE 2.1.1 FORMATION PHASE 2.1.2 OPERATION PHASE 2.1.3 PHASE 2.1.4

Human Resource
POLITICAL

POLITICAL
Stakeholder Support Internal Organization
Support Management

ANALYTICAL & POLITICAL

EXTERNAL DRIVER
CONSIDERATIONS

OUTPUT
Evolved
Cultural Cultural
Understanding Understanding

INTERNAL DRIVER
ANALYTICAL

ANALYTICAL
Organizational Arrangement

Strategic Match Strategic Plan

Management Control System

‘go or no go’ decision upon partner selection until the announcement

of winning bidder in the tendering of government’s shares

105
3.5.1.2 Strategic match: Table 3.9 illustrates the operationalization of the concept of strategic
match. As presented in Chapter 2, the strategic match factor of a strategic alliance consists of
capacity, complementarity, and strategic importance sub-factors (Douma, 1997; Faulkner, 1995;
Lorange & Roos, 1992; Medcof, 1997; Niederkofler, 1991; Segil, 1996; Sierra, 1995).

Table 3.9: Operationalization of the strategic match concept

Factor Sub-factor Component Variable
Strategic Capacity Attractiveness of - GDP growth
match macroeconomic conditions - Currency rate

Attractiveness of market - Market share

- Growth of market

Alliance track record - Partner’s experience

- Partner’s successfulness

Attractiveness of product or - Quality of product or service

service - Innovativeness of product or
service

Attractiveness of technology - Technology of product or service

- Information technology

Attractiveness of financial - Profitability

performance - Growth of revenue

Complementarity - Complementarity related to the

attractiveness of market
- Complementarity related to the
strategy
- Complementarity related to the
attractiveness of resources

Strategic - Pressure on continuity

Importance - Pressure of time on alliance
- Alternative to cooperation

3.5.1.3 Cultural understanding: The last main concept in the planning phase is cultural
understanding. According to Faulkner (1995), cultural congruence between companies is extremely
infrequent, especially in international strategic alliances. However, an approach of understanding of
cultural differences, and willingness to compromise in the event of cultural problems, may well be
critical to alliance effectiveness (Faulkner, 1995). Therefore, as presented in table 3.10, components
that were measured to assess cultural understanding are trust and commitment (Mohr & Spekman,
1994) with the variables; share of communication (Das & Teng, 1998) and commitment (Cullen,
Johnson, & Sakano, 2000).

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 Table 3.10: Operationalization of cultural understanding concept
Factor Component Variable
Cultural understanding Trust - Share of communication

Commitment - Nurture the alliance

3.5.2 Formation phase

There are three main concepts that need to be measured in the formation phase: internal
organization support, strategic planning, and cultural understanding (Lorange & Roos, 1992). The
last was already discussed above so the discussion below relates to the operationalization of internal
organization support and strategic planning.

Table 3.11: Operationalization of formation phase

Factor Variable
Internal organization support - Participation in the implementation of
strategic planning

Strategic planning - Commitment

3.5.3 Operation phase

Aside from measuring cultural understanding, which was treated the same with that in the earlier
two phases, three additional measurements in this phase relate to human resource management,
organizational arrangement, and management control system. Note that according to the literature
study, cultural understanding between the partners should exist in all phases of the strategic
alliance. The cultural understanding between the partners is a key determination of a successful
strategic alliance. When comparing the result of cultural understanding in the earlier phases
(planning and formation phase) with that in the operation phase there could be a change in the
outcome (Lorange & Roos, 1992). This term is called the evolved cultural understanding.
Therefore, factor, component, and variable in the operation phase is provided and presented in table
3.12.

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 Table 3.12: Operationalization of operation phase
Factor Component Variable
Human Resource Management - Collaborative people

Organizational Arrangement - Flattened organization

- Decentralization of decision
making

Management Control System - Planning

- Control structure
- Control process

Evolved cultural understanding Trust - Share of communication

Commitment - Nurture the alliance
- Performance of the alliance

3.5.4 Termination phase

Based on Kanter (1989), Sierra (1995), Porter (1998), Mockler (1999), the factors of alliances
termination can be divided into internal and external drivers. As have been discussed in chapter 2,
the factor and the accompanying variables in the termination phase are presented in table 3.13.

Table 3.13: Operationalization of variables in the termination phase

Factor Variable
Internal Driver - Strategic objectives
- Expectancy
- Corporate leadership

External Driver - External environment

3.6 Assessment of the factors, sub-factors, and components

The assessment of the factors, sub-factors, and components were undertaken based on the following
method:
 For the factors, sub-factors, and components with one predecessor, the assessment is
determined by the assessment of the predecessor
 For the factors, sub-factors, and components with two predecessors, i.e. internal
organization support is determined by two variables, i.e. company restructuring and plan for
privatization. Each of these variables has equal weight and can be positive or negative. For
the overall assessment of internal organization support the two influences are added together
leading to a five-point scale for internal organization support ranging from negative (-), a bit
negative (-,+/- ≈ -), neutral (+/-) a bit positive (+,+/- ≈ +) and positive (+).
‘A bit negative’ and ‘a bit positive’ assessments are rounded to negative and positive
assessments with notes and explanations.

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 For the factors, sub-factors, and components with three predecessors, i.e. strategic
importance sub-factor is determined by three variables, i.e. pressure on continuity, pressure
of time on alliance, and alternative to cooperation. Each of these variables has equal weight
and can be positive or negative. For the overall assessment of strategic importance the three
influences are added together leading to a seven-point scale for strategic importance ranging
from very negative (-), negative (-,-,+/- ≈ -), a bit negative (-,-,+ ≈ -), neutral (+/-), a bit
positive (+,+,- ≈ +), positive (+,+,+/- ≈ +), and very positive (+).
‘A negative’,‘a bit negative’, as well as ‘a bit positive’, and ‘positive’ assessments are
rounded to negative and positive assessments with notes and explanations.
An example of the assessment on factors, sub-factors, and component with three
predecessors is strategic match assessment. Based on the data findings in the sub-factors, the
assessment of the strategic match in the IEPSA is undertaken through the following
conditions.
o If there are positive influences on at least two sub-factors (among capacity,
complementarity, and strategic importance) then there is a strategic match in the
IEPSA.
o If there is one positive influence and two neutral influences (among capacity,
complementarity, and strategic importance) then there is a strategic match in the
IEPSA.
o If there are negative influences on at least two sub-factors (among capacity,
complementarity, and strategic importance) then there is no strategic match in the
IEPSA.
o If there is one positive influence, one negative influence, and one neutral influence on
the sub-factors (among capacity, complementarity, and strategic importance) then
there is a neutral strategic match in the IEPSA.
o If there are neutral influences on all sub-factors (capacity, complementarity, and
strategic importance) then there is a neutral strategic match in the IEPSA.
 For the factors, sub-factors, and components with more than three predecessors than the
assessment is based on the following condition: If there are positive influences on most of
the predecessors then the overall influence is positive; if there are majority of negative
influences on the predecessors then the overall influence is negative; if there are balanced
positive and negative influences on the predecessors then the overall influence in neutral;
and if there are all neutral influences on the predecessors then the overall influence is
neutral.

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3.7 Conclusion
In this chapter, the research methodology was discussed. The approach chosen is the case study
approach which fits with the type of research that is being conducted, i.e. an exploration of how
alliances are formed and managed over time. This was followed by a discussion of tactics to deal
with four scientific criteria for case studies as well as on the operationalization of the conceptual
framework.

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CHAPTER 4: CASE STUDY OF INDOSAT
In this chapter, the case study of Indosat is presented. Section 4.1 describes the chronology of the
case while section 4.2 presents the analysis of the case study based on the framework and model
gathered in chapter 3 with the factors of each of the life cycle in the sub-sections. Section 4.3
provides insights gathered from section 4.1. Finally, in section 4.4 the answers to the three research
questions are provided.

4.1 Description of Indosat

PT. Indonesian Satellite Tbk. (Indosat) was established in 1967 as a Foreign Capital Company, ITT,
from the United States, and started operations in 1969. In 1980 Indosat became a State-Owned
Enterprise (SOE), wholly owned by the Government of Indonesia. On October 19, 1994 Indosat's
shares began being traded on the Indonesia Stock Exchange and the New York Stock Exchange. By
2000 (Danareka Sekuritas, 2000), Indosat was Indonesia’s second state telecommunications
company. In 2002 prior to the alliance, Indosat provided cellular services, international
telecommunications services and satellite services for broadcasting service providers. Indosat
(partially) controlled two cellular subsidiary companies; PT Satelit Palapa Indonesia (Satelindo) and
PT Indosat Multi Media Mobile (IM3) and possessed a 32.9% market share in the Indonesian
cellular market. It was behind the market leader, PT. Telkom Tbk. (Telkom) which controlled 47%
of the cellular market in Indonesia through its subsidiary PT. Telkomsel (Telkomsel).
In September 2002, as a part of telecommunications deregulation, and in anticipation of a large
cellular demand, the government of Indonesia initiated a process to offer Indosat shares to investors
to form an IEPSA. This process contained several phases which will be discussed. First a
description of the telecommunications industry before the intended IEPSA is provided in section
4.1.1. Then, the IEPSA initiation, which lasts until a Sales and Purchase Agreement (SPA) was
reached, will be described in 4.1.2. The Indosat IEPSA was initiated in September 2002 and lasted
until December 2002. The partners in the IEPSA formulated a strategic plan until March 2003
(4.1.3) and implemented this strategy (4.1.4) until the IEPSA was terminated in June 2008 (4.1.5).

4.1.1 Telecommunications industry before the intended IEPSA

Prior to the privatization process some of the telecommunications companies were jointly owned by
the market leaders, i.e. PT. Satelindo (Satelindo) and PT Telkomsel (Telkomsel).
Satelindo was formed in 1993 and obtained a license for International Direct Dialing (IDD),
providing phone services, and for exclusive tenure over communications satellites (Danareksa

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Sekuritas, 2000). In 1994, Satelindo introduced mobile phone service and operated as a Global
System for Mobile Communications (GSM) operator. It was the first GSM operator in Indonesia to
issue prepaid cards and postpaid Matrix Mentari. Until 2000, Satelindo was a joint venture with
several partners.

Table 4.1: Ownership structure of Satelindo until 2000

Partner Percentage stake
Bimagraha Telekomindo (Bimagraha) 45%
Detemobil Mobilfund GmbH Deutsche 25%
Telekom (of Germany)
Telkom 22.5%
Indosat 7.5%

Telkomsel was set up on May 26, 1995, as a provider of telecommunications service. It was the first
operator in Asia to provide pre-paid card services. Until 2000 Telkomsel was also a joint venture
with several partners.

Table 4.2: Ownership structure of Telkomsel until 2000

Partner Percentage stake
Telkom 42.5%
Indosat 35%
PTT Telecom BV (Netherlands) 17.28%
PT Setdco Megacell Asia 5.22%

Tables 4.1 and 4.2 illustrate that there was cross-ownership between Indosat and Telkom.
In 2002, telecommunications in Indonesia was at the turning point of the reform process. It was
instigated by the introduction of Telecommunications Act No. 36/1999. The new law renounced the
inefficiencies borne by the old Telecommunications Act No. 3/1989 such as cross-ownership
between two major telecommunications companies, exclusive position of SOE telecommunications
compared with the private companies, confinement of industry where local telecommunication
handled by Telkom while international telecommunications were assigned to Indosat and Satelindo,
and the requirement to form a joint venture with local companies (Indosat and Telkom) to enter the
Indonesian market. The new law heralded the need for competition, an independent regulatory
body, an equitable interconnection scheme and a cost-based tariff mechanism (Danareksa Sekuritas,
2000).
The passage of the new telecommunications law was expected to spawn a new era in Indonesia’s
telecommunications industry, a period in which the improvement in efficiency, economies of scope,
economies of scale and subscriber growth would be the main story (Danareksa Sekuritas, 2000).
Within the new law, the government forbade practices of monopoly in the industry as regulated by

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Act No. 5/1999 concerning the prohibition of the practice of monopoly and unfair competition. In
implementing the law, government set up a Commission for the supervision of business competition
(Komisi Pengawas Persaingan Usaha/KPPU). KPPU was an independent authority established to
supervise the implementation of the Act concerning the Prohibition of Monopolistic Practices and
Unfair Business Competition. Being independent from the influence and control of the Government
and other parties, the KPPU’s duties included drafting implementing regulations, conducting
examinations of any party alleged to have violated Act No. 5/1999, issuing binding decisions, and
imposing legal sanction(s) on any violator of the law. It reports directly to the President and the
People’s Representative assembly (DPR). The Commission's duty to oversee the act was
implemented in terms of:
- Prohibited agreements, i.e. enter into agreements with other parties to jointly control the
production and/or marketing of goods and/or services which may lead to monopolistic
practices and/or unfair business competition as price fixing agreements, price discrimination,
boycotts, closed agreement, oligopoly, predatory pricing, division of territory, cartel, and
agreements with foreign parties that may lead to unfair competition.
- Prohibited activities, namely; control of production and/or marketing through supply
arrangements, market regulation practices that can lead to monopoly and/or unfair business
competition.
- Dominant position, the business is abusing its dominant position to restrict the market,
consumer rights obstruct, or impede other business entrepreneurs.
With the new law in place, full competitions were initiated as the government withdrew the right of
exclusivity granted to the two government-owned companies, i.e. Indosat and Telkom. Indosat’s
monopoly on international services (SLI) and Telkom’s monopoly on local and long distance
services (SLJJ) were terminated. In addition, the government endorsed a policy to ensure that there
would be a minimum of two full network and service providers (duopoly) in the market. This was
considered to be a transition step towards full competition.
With their exclusivity rights terminated, combined with the endorsement of the duopoly market
policy, the two companies became full fixed network and service providers (FNSP).

Table 4.3: Comparisons between the old and new law of telecommunications
No. Item Old Law New Law
1. Players in the fixed-line Cooperation between Private sector, state-owned
telephone market organizing bodies and private companies, regional government-
sector owned companies and
cooperatives
2. The structure of fixed- Monopoly and duopoly as Competition
line telephone market highlighted in the exclusive

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 rights
3. Players in the mobile Cooperation between Private sector, state-owned
telephone market organizing bodies and private companies, regional government-
sector owned companies and
cooperatives
4. The structure of mobile Competition Competition
telephone market
5. Tariff Determined by the Determined by market mechanism
government through demand- through cost-based approach
based pricing approach
6. Supply of fixed-line By the government through By the private sector and
telephone networks organizing bodies cooperatives that seeks for a
balance in the supply and demand
7. Technology Circuit-switched networks Fixed and mobile
for voice communications telecommunications networks for
and second generation of multimedia communications;
mobile cellular networks flexible for the inception of
technology innovations

On April 3, 2001, as a follow-up of the Ministerial Decree 72/1999 about elimination of cross-
ownership, Indosat and Telkom agreed to eliminate the cross-ownership both at Telkomsel and
Satelindo accordingly. In this agreement, Indosat received the 22.5% share in Satelindo from
Telkom, while Telkom received the 35% share of Indosat in Telkomsel. Furthermore, Indosat
acquired Bimagraha’s share as well as Detemobil’s share making Satelindo a 100% subsidiary of
Indosat by June 2002. Also, in the end of 2001, Telkom acquired the share owned by PTT Telecom
BV of Netherlands as well as the share from Setdco Megacell Asia making Telkomsel a 100%
subsidiary of Telkom.
Thus, some restructuring had taken place before the IEPSA was announced.

4.1.2 The IEPSA initiation: September to December 2002

The reason to establish an IEPSA was a Letter of Intent between the government of Indonesia and
the IMF that Indosat was one of the SOEs to be planned for privatization. The objective was to help
the Indonesian economy out of the crisis through privatization of SOEs.

Bidding process
On September 19, 2002 fourteen companies were approached, i.e. pre-qualified, by Ministry of
State-Owned Enterprises, Indosat, Danareksa, and Credit Suisse First Boston for the privatization of
Indosat (Danareksa Sekuritas, 2000)

Table 4.4: Pre-qualified investors of Indosat’s IEPSA

No. Investor Country
1. Across Asia Multimedia Cayman Island
2. AIS Fund Management Hongkong
3. Asia Telecommunications Thailand

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 No. Investor Country
4. China Network Communications Group Corp. China
5. EssarTeleholding India
6. Gilbert Global Equity Partner United States
7. Hi-Tech International Group Saudi Arabia
8. JP Morgan Asia Partner Singapore
9. Newbridge Capital Canada
10. Singapore Technology Telemedia (STT) Singapore
11. Telecom Ventura Group United States
12. Telecom Malaysia Malaysia
13. Telstra Corp. Australia
14. Usaha Tegas/DesaMahir Malaysia

Although the identities were not revealed, on November 7, 2002, eight investors submitted
preliminary bids after conducting due diligence. The due diligence is an examination aiming to
make an acquisition decision via the principles of valuation and shareholder value analysis (Luis,
2010). It is essential that the concepts of valuations (shareholder value analysis) be linked into a due
diligence process (Luis, 2010). Thus, six of the pre-qualified investors withdrew from the
privatization process. Three of these provided their rationales. Telstra Corp. withdrew on 25
October 2002 in letter to the Ministry of State-Owned Enterprise. JP Morgan Asia Partner withdrew
on November 5, 2002 and China Network Communications Group Corp. on November 6, 2002. All
three parties cited as the main reasons that the due diligence period from September to October
2002 was too tight, and the occurrence of the unprecedented moment which was a Bali Bombing
incident. This incident occurred on October 12, 2002 in the tourist district of Kuta on the Indonesian
island of Bali. The attack was claimed as the deadliest act of terrorism in the history of Indonesia,
killing 202 people, (including 88 Australians, 38 Indonesians, 24 United Kingdom, 7 United States,
and other European and Asian countries). A further 240 people were injured. Telstra Corp. also
cited remaining regulatory uncertainty as a reason for withdrawal. Regardless of this unprecedented
moment and motivated by reducing the budget deficit of the year that was near the deadline;
government proceeded to initiate the IEPSA.
To evaluate and analyze the eight bids, four evaluation teams consisting of representatives from
Ministry of State-Owned Enterprises, Indosat, Danareksa, and Credit Suisse First Boston (CSFB)
were formed. As presented in table 4.5 (Batubara, 2003), the evaluation team was composed of the
following teams: Conforming bid, Pricing Team, Strategic Commitment, and Funding. The scores
from the evaluation teams were collated and entered into a final scoring system resulting in a
weighted average score for each preliminary bid.

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 Table 4.5: The evaluation team and its task
No. Team Task
1. Conforming bid Ensuring that the bids conforms the procedure letter
2. Pricing Ranking the preliminary bids based on cash offer price
3. Strategic Commitment Ranking the preliminary bids based on the strategic
commitment to Indosat
4. Funding Assessing the funding capability of the prequalified
investors based on the preliminary bids

Input scoring of the investor’s evaluation was composed of three assessments; Financial Support,
Price, and Commitment to Indosat’s Strategy. Weights of the assessments scoring were set as the
following (Batubara, 2003):
1. Financial Support (50%): Strong (100%), Medium (50%), Weak (0%)
2. Price (25%): Rank 1-12, 1-Highest, 12-Lowest
3. Commitment to Indosat’s Strategy (25%): Rank 1-12, 1-Highest, 12-Lowest
Based on the above assessments, STT and Telecom Malaysia were the first and second rank
bidders. Both bidders possessed the highest commitment to Indosat’s strategy, and strong financial
support. In terms of price, STT was the second rank, and Telekom Malaysia was fourth behind the
first rank Hi-Tech International. But, Hi-Tech International was considered low rank by the
evaluation team in terms of financial support. The assessment is presented in table 4.6 (Batubara,
2003).

Table 4.6: The assessments of the big three investors

No. Investor Financial Support Price Commitment
1. STT Strong 2nd 1st
2. Telecom Malaysia Strong 4th 2nd
3. Hi-Tech International Weak 1st 3rd

STT, a Singaporean SOE under Temasek Holdings, was declared as the winner to form a SPA in
December 2002. STT had formed several strategic alliances with multinational telecommunications
companies, such as StarHub, Equinix, Global Crossing, and Tele Choice and the results had been
successful. STT’s excellent track record in forming the strategic alliances was proven by its good
performance of the alliances. In addition, it was another victory for Temasek Holdings. Previously,
Singtel which was another Temasek Holding had acquired a 35% share of Telkomsel.
Lee Theng Kiat, President and Chief Executive Officer (CEO) of STT stated that “with our sound
solid performance and experience, this investment would alter the telecommunications industrial
map and service standards in Indonesia to become more competitive and customer focus oriented”
(Indosat, 2002). In other words, there existed a fit in objectives between the partners. He implied
that the intended IEPSA guaranteed employment through the development of business and support

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the revival of industry. He also announced that the investment could be supported by the financial
capability and technological expertise of STT. As a result, there was a security of employment.
The SPA consisted of commitment of STT to the alliance in terms of:
1. Enhancing the performance of Indosat
2. Transferring technology and expertise to Indosat
2. Participating to support a conducive telecommunications industry
Figure 4.1 presents the new ownership structure of Indosat. Although the proportion of shares sold
was not in accordance with the parliament requirement that the local partners had majority stakes in
the alliance, but the desire for the IEPSA was stronger and so it was approved.

Figure 4.1: Ownership structure of Indosat after IEPSA

Indonesia Singapore
Public: 35% Government: 65% Temasek: 100%

Indosat
STT Singapore

Indonesia
Public: 43.06% Gov’t: 15% STT: 41.94%

Indosat

The alliance partners

Indosat was considered as one of the leading telecommunications companies in terms of product
and service quality. Indosat’s products ranged from fixed line telecommunications, cellular services,
multimedia, to data communication and internet (MIDI) solutions, and others. Several years prior to
the alliance, Indosat focused only on the International Direct Dialing (IDD).
At the time of the alliance, the ranges of products of Indosat were the same as those of STT which
consisted of wireless telephony, and global internet protocol (IP). The products and its services
offered were based on different opportunities in the market. At the time of the alliance initiation
Indosat focused not only on the call but also on short text messaging to accommodate the market
demand. STT did not focus on the fixed line telecommunications. It was a company that was aimed
to create value by investing in and managing information-communications businesses. STT’s group
of companies provided a full range of information, communications, and entertainment services
over fixed line, mobile and the Internet.
Target markets of Indosat were the medium to high-income customers. Subscribers mostly
originated from these segments of customers. Due to the economic crisis, the number of cellular
subscribers in the low segment did not increase considerably (Indosat, 2002). However, as the
economy improved it was expected that medium to low-income segment would be the fastest

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growing segment (Indosat, 2002). Cellular infrastructures were not well developed, i.e. the voice
quality and coverage were not clear and widely extant (Danareksa Sekuritas, 2000).
STT’s market in Singapore was mature, indicated by number of subscribers which had reached the
70% of its 4.5 million inhabitants (Danareksa Sekuritas, 2000).

Technology
The state of technology of both partners was categorized as leading in their respective domestic
market (Danareksa Sekuritas, 2000). Indosat had already integrated and made use of Information
Technology (IT) to communicate, disseminate data, and operate its value chain activities. Indosat’s
products and services technology was considered as one of the best in Indonesia and it supported by
wide coverage of Base Transceiver Station (BTS) all over the country (Danareksa Sekuritas, 2000).

Capital need
With a goal of increasing the number of customers and to become more competitive, Indosat needed
financing from STT which had anattractive bond rate of AA (Indosat, 2002). Furthermore, Indosat
also expected to reduce cost, maximize revenue, and increase market share (Indosat, 2002). For the
third quarter in 2002, Indosat’s revenue increased to Rp 4.91 trillion with a sales growth of 30%,
compared to the previous period (Rp 4.02 trillion). However, depreciation expenses6 went up by
76% from Rp 717.8 billion to Rp 1.26 trillion. Therefore, the profit went from Rp 1.45 trillion in
2001 to Rp 435.5 billion in 2002, a decrease of 64%.
STT was in a saturated domestic market. The CEO of STT said “Basically, we are committed to and
will invest for long in Indonesia” (Indosat, 2002). This is due to the fact that abundant of
opportunities existed in the Indonesian telecommunications market. When compared with the
teledensity index7 of Singapore which was 70%, the index in Indonesia was a mere 3%.

Strategies
Both partners had a corporate growth strategy where Indosat’s strategy was to grow especially in
the cellular business and STT preferred to look for developing market in implementing its growth
strategy.
The domestic partner intended to take advantage of the potential cellular market development
although its financing capability and technological expertise were not able to support it. The foreign
partner searched for a new vast developing cellular market outside the already mature domestic

6
The income statement account which contains a portion of the cost of plant and equipment that is being matched to the
time.
7
The number of cellular line telephones in use for every 100 individuals living within an area.

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market. Both partners treated the alliance as an important opportunity to grasp for the sake of their
existences.
Indosat was an important strategic partner for STT to invest in and object of entry to Indonesian
telecommunications market. STT was a good partner with financing capability, and technological
expertise which would help increase the Indosat’s market share. However, there were alternatives to
cooperation for both partners, meaning several prominent telecommunications companies existed in
Indonesia, such as Excelcomindo and Telkomsel and in the region such as Telekom Malaysia,
Telstra of Australia, etc. could be alternatives to cooperation. On December 15, 2002, government
of Indonesia and STT reached a SPA.

The economic environment and share price

In 2002, the Indonesian macroeconomic condition had improved compared to three years earlier
when the Asian economic crisis hampered the country. This was reflected by GDP Growth of 0.2%
in 1999, 3.5% in 2000, and 5.0% in 2001, as well as fluctuating exchange rates of Rupiah to U.S.
Dollar by as much as 47%, from Rp 7,085 in 1999, Rp 9,595 in 2000, and Rp 10,400 in 2001.
However, the inflation rate was still high. It was 20.32% in 1999, 4.52% in 2000, and 12.02% in
2001. The Index of the Jakarta Stock Exchange in 2002 was 425. It had bounced back from 392 in
2001 and 416 in 2000.
The cellular industry was thriving, overtaking the fixed lines market that initially was the
dominantmode of telecommunications in Indonesia. By the end of 2002, the number of subscribers
increased from 5.9 million in 2001 to reach 10.1 million as presented in table 4.7 (Danareksa
Sekuritas, 2000). In terms of market share, Indosat can be categorized as one of the dominant
cellular companies.

Table 4.7: Number of subscribers (Danareksa Sekuritas, 2000)

Service Operator 2000 2001 2002
Telkomsel 1,587,300 3,252,032 4,760,609
Satelindo 1,055,306 1,500,000 2,992,383
Excelcomindo 767,250 900,000 1,768,226
Metrosel 62,391 72,928 108,814
Komselindo 74,868 39,255 54,407
Telesera 7,556 10,012 17,682
Mobisel 14,037 9,579 10,881
IM3 - 150,000 337,323
Natrindo - - 85,691
Total Subscribers 3,568,708 5,933,806 10,136,017

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The trend of share price development seven months prior to the establishment of the alliance is
presented in table 4.8. From the table, it can be obtained that: seven months before the SPA, the
price of Indosat’s share in the stock exchange had decreased by 30% from 12,600 to 8,500.

Table 4.8: The downturn of Indosat’s share six months before IEPSA
No. Month Share Price Situation
1. June 2002 Rp 12,600 The government announced the selling of
some shares to form an IEPSA
2. July 2002 Rp 10,500 The price decreased further and
3. August 2002 Rp 9,500 plummeted in Rp 8,500
4. September 2002 Rp 8,500
5. October 2002 Rp 7,500 Bali bombing incident
6. November 2002 Rp 8,500 The price pulled back after the bombing
7. December 2002 Rp 8,500 The month of SPA

In October 2002, Indosat’s share price on the Jakarta Stock Exchange was about 40% below the
share price paid by STT which was Rp 12,950 per share (Rais, 2003). In fact, it was much lower
than the fair value price of Rp 43,105 per share as presented in table 4.9. The reason for comparing
the price with the fair value of the company is to take the current as well as the future into account
(Malhotra, 2003). This was in line with Leon Chic’s, regional analyst at ING Groep NV, statement
that “Telecom services companies in Indonesia are undervalued making them as one of the most
attractive markets in Asia” (Rais, 2003). Moreover, one of Goldman Sach’s financial consultants of
STT in Indosat stated that “Our offer of Rp 12.950 per share was actually cheap in accordance with
EBITDA multiplier. Indosat’s share was three times the cash flow, although other
telecommunication companies in Asia could reach the valuation of as much as five to seven times”.
So that, Indonesian government earned cash from transaction to reduce the budget deficit which
was high compared with the share price in the bourse but actually low share price when confronted
with the value of similar telecommunications companies in Asia.

Table 4.9: Comparison between selling share price and fair value of Indosat
No. Item Selling price Fair Value
1. Value per share Rp 12,950 Rp 43,105
2. Amount of 41.94 % share of equity Rp 5.62 trillion Rp 18.77 trillion

Problem with transparency during initiation

There were issues of transparency which can be traced by revealing the identity of financial
advisors and underwriters, announcement of offering price, and the existence of a Special Purpose
Vehicle (SPV8).

8
It is a legal entity created to fulfill specific objective of forming the IEPSA

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During the initiation of the privatization there were two important issues. The first was the planning
of the IEPSA. The second was the possibility of issuing additional shares to raise equity offerings in
the stock exchange. They occurred simultaneously although the issuing of additional shares was
turned down. With regard to these two issues, the government hired Danareksa and Credit Suisse
First Boston (CSFB) as the financial advisor and underwriter whereas Indosat appointed Mandiri
Sekuritas and Merrill Lynch as its financial advisors. A question concerning transparency arose
because this situation could lead to ‘fixing or cornering the price’ between the price in the SPA and
stock exchange price. Also, CSFB did not have a license to operate in Indonesia. Furthermore, it
was revealed that CSFB offered Nusantara Capital Management (a company established just 1.5
years earlier) a project to seek out investors for buying the government’s shares in Indosat. Yet,
Nusantara Capital did not have a license from Badan Pengawas Pasar Modal/Bapepam (the Capital
Market and Financial Institution Supervisory Board) as a broker, underwriter, and investment
advisor (Rais, 2003).
Second, the SPA was announced on a non-business day, i.e. a Sunday, and the government did not
announce the offering price of Telekom Malaysia (Rais, 2003). Nevertheless, it was expected that
the growth potential of Indosat should be reflected in a higher value. However, comparing the fair
or fundamental value with the bidding price, raised suspicions with regard to transparency of the
bidders (Telekom Malaysia and STT Singapore). Both offered much lower prices. Furthermore,
allegedly related to the upcoming national election, it was suspected that the ruling political party in
the government had received a percentage of Indosat’s incoming fund. The data sources of
transparency problem were obtained by Batubara (2003) from the report of Ministry of State-
Owned Enterprise on the scheme of funds received from the alliance. It is presented in table 4.10.

Table 4.10: The scheme of transaction cost of Indosat’s IEPSA

No. The transactional fund received Amount in US $
1. Received fund from the SPA, selling 41.94% 627,353,886
of the government’s shares in Indosat
2. Retained fund until changes in the statute 25,000,000
3. Transactional expenses 18,939,988
- Financial consultant expense
- Law consultant expense
- Notary expense
- Road show expense
- Crossing expense
- Escrow agent expense
- Out of pocket expense
4. Fund transferred to the government account 583,413,898

The transactional expenses were a little over 3% of the amount of the funds received. General
practice was that the proportion of financial consultant expenses accounts for 1.5% to 2%. In recent

121
years, financial consultant expenses have decreased to 1% while other expenses except the law
consultant expert were considered insignificant. Based on this, it can be estimated that the
transactional expenses should have been no more than US$ 12 million. The question raised by the
society concerning the transactional expenses was “where had that part of fund worth of US$ 6
million been gone” (Rais, 2003). The situation raised suspicions that part of the funds was
transferred to a certain political party (since the SPA was near to the upcoming national election).
Third, the foreign party in the SPA agreement was not STT, but a Mauritius-based special purpose
vehicle company called Indonesia Communication Limited (ICL) as presented in figure 4.2. The
entities of ‘other investors’ behind ICL were unclear. Due to these transparency issues and also due
to concerns about opposition from stakeholders, the representative of directors from STT was
domiciled in a separate office from Indosat’s headquarter for several months. The purpose was to
conceal themselves from the threat of stakeholder opposition.
Although there were transparency issues in the process of the IEPSA initiation, the partners (STT
and government of Indonesia) never communicated to the stakeholders to clarify such issues.
Communication was important since it could clarify the issues which led to opposition raised by the
stakeholders inside the company. As such, part of managements and employees raised the
transparency issues such as performing on street protests and conducted strikes opposing the
intended IEPSAs. This situation influenced negatively to the degree of internal relationship 9.

Figure 4.2: The parties involved in the SPA: intended and fact
INTENDED FACT

STT

STT
STT
Public: 43.06% Communication Other investors
Limited
Government: 15%

Indonesia
Communication
Indosat Limited

Public: 43.06%

Government: 15%

Indosat

4.1.3 Setting up the IEPSA: January to March 2003

In January 2003, after the SPA had been signed the partners worked on formulating a strategic plan
together. Both partners pledged to implement the strategic plan and to prevent employee
downsizing by growing the alliance.
9
It is the degree of engagement among employees, managers, and owners which can be shown by sharing of
information and feeling of empathy.

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The strategy was initiated by the board of directors of Indosat (see table 4.11), consisting of five
directors from Indonesia and four from directors from Singapore.

Table 4.11: Board of Directors of Indosat

No. Name Position Nationality
1. Widya Purnama President Director Indonesia
2. Ng Eng Ho Deputy President Director Singapore
3. Hasnul Husaimi Director of Cellular Marketing Indonesia
4. Wityasmoro Sih Handayanto Director of Infrastructure Indonesia
5. Emil Soedarmo Director of Fixed Communications Indonesia
6. Junino Jahja Director Mutimedia Indonesia
7. Joseph Chan Lam Seng Director of Network Integration Singapore
8. Nicholas Tan Kok Peng Director of Finance Singapore
9. Raymond Tan Kim Meng Director of Business Development Singapore

The new vision and mission was developed by the President Director assisted by the Deputy of
President Director and discussed with other Directors. The vision of Indosat was to be the provider
of choice for information and communication solutions. The mission was to provide and develop
innovative and quality products, services and solutions, which offered the best value to the
customers. In terms of strategic formulation, it was initiated by the Director of Business
Development in formulating strategy; corporate and competitive aligned with the new vision and
mission. The functional strategies along with the assigned activities were developed based on the
discussions among directors. These functional strategies were aligned with the corporate and the
competitive strategies of Indosat. The developed strategies and activities were reported and
consulted to the Commissioners consisting of two Indonesian and four Singaporean as in table 4.12.

Table 4.12: Board of Commissioners of Indosat

No. Name Position Nationality
1. Peter Seah Liam Huat President Commissioner Singapore
2. Lee Theng Kiat Commissioner Singapore
3. Sio Tat Hiang Commissioner Singapore
4. Sum Soon Lim Commissioner Singapore
5. Roes Aryawijaya Commissioner Indonesia
6. Umar Rusdi Commissioner Indonesia

The regular planning was differentiated into five-year, annual, and monthly plans with coverage at
the level of the individual, the division and the corporation. The strategies and the supporting
activities are presented in table 4.13.

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 Table 4.13: Strategy components of Indosat in 2002
No. Strategy Description
components
1. Vision To be the provider of choice for information and communication solutions
2. Mission • To provide and develop innovative and quality products, services and
solutions which offer the best value to our customers.
• To grow shareholder value continuously.
• To provide better quality of life to the stakeholders.
3. Corporate Growth strategy to anticipate the growing number of cellular subscribers which
Strategy in the last decade had surpassed the number of fixed telecommunications.
4. Competitive Provide the integrated premium products and services in cellular business, IDD
strategy business, and MIDI business.
5. Functional • Integrate and develop cellular services to pursue growing cellular business
strategy opportunities in Indonesia.
• Maintain IDD business and deploy fixed access network selectively in
prospective domestic markets.
• Nurture MIDI business growth.
6. Activities • Improve and increase the cellular products
• Provide premium IDD services
• Increase Broadband Data Communication products
• Increase Multimedia & Internet products
• Synergize product and service
• Provide service excellence
• Build strong branding

The alliance planned to increase the number of Base Transceiver Station (BTS) as much 1,000 units
annually. It was aimed to improve the profitability, increase quality, acquire more customers, and
increase the market share. The alliance positioned the IDD 001 service strategically for the high-end
corporate market segment, while also targeting middle and retail IDD market segments with
Satelindo’s IDD 008 service and Voice on Internet Protocol (VoIP) GlobalSave 17001 service.
Indosat planned to nurture the steady growth of MIDI services, the second largest growing revenue
base after cellular.
During this time period, the sharing of communication was not intensified and the partners never
communicated information to the stakeholders. Also, from Indosat’s viewpoint, issues such as the
threat of losing jobs, the transparency of the alliance planning process, and the existence of a special
purpose vehicle (Rais, 2003) persisted. There were managers and employees who opposed the
alliance initiation. They were exiled and not included in the implementation of strategic plan and
subsequently were offered to follow a retirement program.

4.1.4 Running the IEPSA: April 2003 to May 2008

Human resources
When the strategic plan was implemented, the alliance committed to enhance its human resources
through training and people development programs. The programs were generated with the goal to
create people who were concerned not just for themselves but also for others. It covered topics such

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as integrity, cooperation, excellence, partnership, and customer focus. The alliance provided 7
training days per employee or about 3% of total working days. Two years after the initiation of the
alliance, it had organized 252 in-house training sessions and 314 external training programs. It had
invested a total of Rp 15.8 billion. Human resource management through developing collaborative
people had contributed to the successfulness of planning and control structure performance in the
management control system factor according to the vice president of strategic planning.
The CEO of Indosat, Ng Eng Ho from STT, regularly declared a long-term commitment to the
alliance and employees. Communication and direct contact between employees and top
management occurred frequently. In the IEPSA, all decision making was accomplished within the
alliance and away from STT’s headquarter. Furthermore, the alliance decentralized and empowered
the organization with the objective to stay close to and be responsive to the customers. The alliance
developed this new operating model by transforming and expanding the roles of the regions to
become more independent and responsive to market development.

Management of the alliance

The alliance set up control mechanisms to support the achievement of its vision and mission. An
audit and remuneration committee was developed to assist the board of commissioners with the
execution of their duties. Each committee had a written charter outlining its duties and
responsibilities. This was approved by the board of commissioners, therefore, can be considered as
having a positive influence on the management control system. The alliance regularly conducted
planning which had a positive influence on the management control system.
Each division was assigned responsibilities to ensure that the alliance objectives could be achieved.
The divisions were also in charge of the control process. The control process was not only based on
the divisional performance but it cascaded down to the individual level. In the broader scope of the
corporation, the audit committee conducted audits on the divisional performances within the
alliance. The findings of these audits were reported to the remuneration committee. This committee
determined the appropriate rewards and punishments. This process aligned the corporate objectives
of the alliance with the organizational objectives. This contributed to an improved cultural
understanding between partners which consequently led to taking of more risk by providing full
commitment to each other.
Indosat determined that it was necessary to providean integrated, one-stop excellent service to the
customers. It aspired to be able to better anticipate and deliver per the customers’ requirements and
provide faster control to the alliance. Therefore, in November 2003 the IEPSA merged the two

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subsidiaries IM3 and Satelindo into the corporation. This created a challenge to bring together three
different organizations with different cultures and policies.

Trust
Stakeholders support had improved in such a way that there existed an increased mutual
commitment between the partners. In the earlier phases, problems with stakeholder support had
negatively influenced the successfulness of the alliance. However, in this operation phase, both
partners improved the conditions by sharing information and socializing programs, enhancing
human resource management, and aligning the objectives.

Performance of the alliance

After the IEPSA’s in 2002, there had been a remarkable growth in the Indonesian
telecommunications industry. There was a soaring increase of subscribers in Indonesia from 10.1
million in 2002 to 80.8 million in 2007. The accompanying penetration rate was 2% in 2001 to 36%
in 2007. In big cities such as Jakarta, the penetration rate was 100%. The number of cellular
subscribers in Indonesia is presented in figure 4.3.

Figure 4.3: The number of cellular subscribers in Indonesia

200 90
180
180 80
160 70
140
116 60
Subsrcibers

Penetration

120
50
100
Year of IEPSA initiation 80.8 40
80
61.8
30
60 43.4
40 27.9 20
17.1
20 5.2 10.1 10
0 0
2001 2002 2003 2004 2005 2006 2007 2008 2009

Million of subscribers Penetration (%)

Indosat had become the telecommunications service provider in Indonesia offering the widest range
of integrated services including Cellular, Fixed Telecommunication and MIDI (Annual Report of
Indosat, 2008). Indosat was committed to nurturing growth in its business by maintaining and

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improving its market position through network expansion, continuous product and service
innovation as well as improvements in distribution networks.
In order to increase the call quality and reliability, Indosat had increased the number of BTS from
2,736 units in 2002 to 7,666 units in 2007. The number of Indosat’s subscribers increased from 3.3
million in 2002 to 24.5 million in 2007. However, the market share declined from 2002 to 2007.
It had been a pioneer and leader in two important areas for the future; Data and Wireless
Broadband. On the Data front, it led the field in Indonesia's BlackBerry market. It continued to
provide more value-added services to customers namely I-GPS and I-Stock which could only be
downloaded by BlackBerry customers (Annual Report of Indosat, 2008). In terms of Wireless
Broadband, in 2007, it had become the first operator in Indonesia to offer pre-paid services through
its subsidiary IM2. It was one of the hottest consumer broadband products on the market (Annual
Report of Indosat, 2008).
Indosat had invested around US$ 200 million in the new Palapa-D satellite project to further
improve the network coverage and reliability.
In terms of profit and ROE, they increased significantly from 2002 to 2007. The cellular’s revenue
comprised 77% of the total revenue of Indosat, while MIDI’s and Fixed telecommunication’s
revenue comprised of 13% and 10%.
The indicators and performance of Indosat in 2002 and 2007 are presented in table 4.14.

Table 4.14: Indicators and performances of Indosat in 2002 and 2007

No. Indicator 2002 2007
1. Number of subscribers 3.3 million 24.5 million
2. Market share 32.9% 30.3%
3. Profit Rp 336 billion Rp 2.04 trillion
4. ROE 3.17% 12.34%
5. Cellular revenue Rp 3.27 trillion Rp 12.8 trillion
6. MIDI revenue Rp 1.26 trillion Rp 2.17 trillion
7. Fixed telecommunication revenue Rp 2.14 trillion Rp 1.57 trillion
8. Number of BTS 2,736 units 7,666 units

4.1.5 Closing of the IEPSA: June 2008

The IEPSA was terminated in June 2008 when Komisi Pengawas Persaingan Usaha/KPPU
(Commission for the Supervision of Business Competition), at the Central Jakarta District Court,
sued Temasek Holding consisting of STT and Singtel for monopolistic practices and unfair business
competition. The court decided that Temasek Holding had violated Article 27 letter (a) of Act No. 5
Year 1999. Temasek was ordered to pay a fine of Rp 15 billion to the state treasury. In addition, it
had to give up the ownership in Indosat or Telkomsel by releasing shares in one of those companies
or to reduce its stock to less than 50% in Telkomsel and Indosat within 12 months.

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As presented in figure 4.4, Temasek through its subsidiaries had 35% of shares with voting right in
Telkomsel, the right to nominate directors and commissioner, and the authority to determine
company policy direction especially in terms of budget approval by capital expenditure committee
and the ability to veto the decision of the Annual General Meeting of shareholders in the case of an
amendment, buy back shares, merger, consolidation, acquisition, dissolution and liquidation of the
company.
The same thing happened also to Indosat, Temasek had 41.94% of shares with voting rights in
Indosat, the right to nominate directors and commissioners and authority to determine company
policy direction of Indosat. Other shareholders were government of 15% and the public at 43.06%.
Publicly traded shares in the equity markets of Indonesia and the United States was in the state of
ever-changing ownership and overall it was almost impossible to act together. Therefore, Temasek
was an active controller in Telkomsel and Indosat. Thus, Temasek through its subsidiaries had
dominant control in Telkomsel and Indosat which was against the law.

Figure 4.4: Ownership of Temasek Holding Limited

Temasek Holdings
Limited

100% 54.15%

Singapore Singapore
Technologies Telecommunications
Telemedia Pte Ltd Ltd

100%

STT Communication Ltd

100%

Indonesia
Singapore Telecom
Communication
Mobile Pte Ltd
Limited

41,94% 35%

Indosat Telkomsel

On June 6, 2008, Temasek opted to sell its stake in Indosat to Qatar Telecom (Qtel) which was
worth US$ 1.8 billion. The reason why Temasek chose Indosat to be abandoned than Telkomsel
was the failure to meet synergy to increase market share. From 2002 to 2007, the market share of
Indosat plunged from 32.9% to 30.3% while Telkomsel’s increased from 50.47% to 51.14%.
Considering the situation, STT thought it was better to leave the alliance provided that they had
acquired capital gain when compared with the initial price in the SPA as much as 300%. The Qtel
Group is a leading international communications company, with a headquarters in Doha, Qatar. It
has a significant presence in the Middle East and North Africa region and Southeast Asia, and has a
consolidated customer base of 83 million as of December 2011. Currently, it operates a portfolio of
brands including Qtel, Indosat, Asiacell, Wataniya, Nawras, Nedjma and Tunisiana.

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4.2 Analysis
In this section, the model from chapter three is applied to ‘evaluate’ the Indosat IEPSA. The
description provided in section 4.1 is similar to the phases identified in chapter three. It can
therefore be concluded that the life cycle of the IEPSA is in accordance with the theory described in
the previous chapter differentiated into a planning, formation, operation, and termination phase.

Table 4.15: Time and duration of each phase

No. Phase Time Duration
1. Planning September to December 2002 4 months
2. Formation January 2003 to March 2003 3 months
3. Operation April 2003 to May 2008 62 months
4. Termination June 2008 1 month

This section provides an analysis of the presence/importance of the factors from the model, i.e.
stakeholder support (4.2.1), strategic match (4.2.2), cultural understanding (4.2.3), internal
organization support (4.2.4), strategic planning (4.2.5), human resource management (4.2.6),
organizational arrangement (4.2.7), management control system (4.2.8), evolved cultural
understanding (4.2.9), internal driver (4.2.10), and external driver (4.2.11).

4.2.1 Stakeholder support

Internal organization support: although both partners had a plan for the privatization, no
restructuring took place. Thus, internal organization support was neutral.
Society support: there was a change in the ownership structure, i.e. the government gave up its
majority stake which potentially induced protest on the side of society since it eliminated the
dominant ownership of government in the alliance. The share price had a negative influence, i.e.
the price paid for shares was below the fair value, and there was a lack of transparency. Thus,
society support was negative.
Based on this, it can be concluded that stakeholder support for the alliance during the planning
phase of the IEPSA was negative. Lack of stakeholder support was also evidenced by a national-
wide strike such as from Indonesian Telecommunications Watch, and members of Representatives
on December 27, 2002. An overview is provided in table 4.16.

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 Table 4.16: Relationships for the stakeholder support factor
No. Variable Sub-Factor Factor
1. Company restructuring (-) Internal organization
Plan for privatization (+) support (+/-)
Stakeholder
2. Change in ownership structure (-) Society support (-)
support (-)
Share price (-)
Transparency of the privatization process (-)

4.2.2 Strategic match

Attractiveness of macro-economic conditions: The last three years of GDP growths were below its
inflation rates within the same period. The exchange rates of Rupiah to U.S. Dollar fluctuated by
as much as 47%. Thus, GDP growth and currency rate were negative.
Attractiveness of market: the market share of Indosat was 32.9% and ranked 2 in the top ten cellular
providers in Indonesia. In terms of growth of market, it was almost 100% from 2001 to 2002.
Based on this, market share and growth of market were positive.
Alliance track record: both partners had experienced successful strategic alliances with local as well
as foreign partners. Thus, the alliance track record was positive.
Attractiveness of product or service: the quality of product and service were good and Indosat was
innovative in adapting products or services to different market opportunities. Thus, the
attractiveness of product or service was positive.
Attractiveness of technology: The state of technology of Indosat was categorized as leading in
domestic market (Danareksa Sekuritas, 2000). Indosat had already integrated and made use of
Information Technology (IT) to communicate, disseminate data, and operate its value chain
activities. Based on this, technology of product or service and information technology were
positive.
Attractiveness of financial performance: the ROE was less than WACC while growth of sales
exceeded 10%. Thus, attractiveness of financial performance was neutral.
Capacity: the combination of the six components discussed above leads to the conclusion that the
capacity had a positive influence on the strategic match.

Complementarity related to the attractiveness of the market: since the foreign partner’s market was
in the state of maturity while domestic partner’s was in a growth period it can be concluded that
this was positive for complementarity.
Complementarity related to the strategy: since both partners were following a growth strategy, it
can be concluded that this was positive for complementarity.
Complementarity related to the attractiveness of resources: the domestic partner benefited from the
technological expertise of the foreign partner. This was especially in the cellular and internet

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 telecommunications services. Furthermore, Indosat was able to obtain low cost financing through
highly rated STT’s bond. In return, through achieving this opportunity the IEPSA would provide
dividend for the foreign partner. It can be concluded that the complementarity of the
attractiveness of resources was positive.
Complementarity: the combination of the three influencing variables discussed above leads to the
conclusion that complementarity had a positive influence on the strategic match.
Pressure on continuity: both partners showed commitment to continue the alliance. Thus, pressure
on continuity was positive.
Pressure of time on alliance: Both partners treated the alliance as an important opportunity to grasp
for the sake of their existences. Thus, pressure of time of alliance was positive
Alternative to cooperation: both partners had other alternatives to forming IEPSA. Thus, the
alternative to cooperation can be considered negative.
Strategic importance: the combination of the three influencing variables discussed above leads to
the conclusion that strategic importance had a positive influence on the strategic match.
Based on this, it can be concluded that the strategic match of the two partners in the alliance during
the planning phase of the IEPSA was positive. An overview is provided in table 4.17.

Table 4.17: Relationships for the strategic match factor

No. Variable Component Sub-Factor Factor
1. GDP growth (-) Attractiveness of Capacity (+)
Currency rate (-) Macroeconomic
situation (-)
2. Market share (+) Attractiveness of market
Growth of market (+) (+)
3. Partner’s experience (+) Alliance track record (+)
Partner’s successfulness (+)
4. Quality of product or service Attractiveness of product
(+) or service (+)
Innovativeness of product or
service (+)
5. Technology of product or Attractiveness of
Strategic
service (+) technology (+)
match (+)
Information technology (+)
6. Profitability (-) Attractiveness of
Growth of revenue (-) financial performance (-)
7. Complementarity related to the
attractiveness of market (+)
Complementarity related to the Complementarity (+)
strategy (+)
Complementarity related to the
attractiveness of resources (+)
8. Pressure on continuity (+) Strategic importance
Pressure of time on alliance (+) (+)
Alternative to cooperation (-)

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4.2.3 Cultural understanding
Share of communication: in the planning phase of the alliance, the share of communication between
the partners and stakeholders was infrequent. Thus, the share of communication was negative.
Nurture of the alliance: the partners were willing to nurture the alliance by developing, supporting,
and enhancing the performance. Thus, this variable was positive.
Based on one negative and one positive influencing variable, it can be concluded that the cultural
understanding in the alliance during the planning phase of the IEPSA was neutral. An overview is
provided in table 4.18.

Table 4.18: Relationship in cultural understanding factor

No. Variable Component Factor
1. Share of communication (-) Trust (-)
Cultural understanding (+/-)
2. Nurture the alliance (+) Commitment (+)

4.2.4 Internal organization support

Participation in the implementation of strategic planning: People who participated in the strategic
planning were provided with the Employee Stock Ownership Plan (ESOP). In contrast, people
who were thought to have opposed the alliance initiation were exiled and not included in the
planning. Although these people were not laid off, they were in effect jobless and unlisted from
the ESOP, and later offered to follow a retirement program. Both partners tried to gain labor
union support through frequent socialization and dialogue. The new owners only included those
people who were proponents of the alliance in the implementation of strategic planning. Thus,
the internal organization support was neutral since part of the internal organization support the
alliance and part of it opposed the alliance.

Table 4.19: Relationships for the internal organization support factor

Variable Factor
Participation in the implementation of Internal organization support (+/-)
strategic planning (+/-)

4.2.5 Strategic planning

Commitment: In terms of strategic planning, there was a positive influence from the commitment of
both partners. The alliance committed to increase the number of BTS, improve the profitability,
increase quality, acquire more customers, and increase the market share.

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 Table 4.20: Relationships for the strategic planning factor
Variable Factor
Commitment (+) Strategic planning (+)

4.2.6 Human resource management

Collaborative people: the alliance committed to build its human resources through training and
people development programs. They organized hundreds of in-house training sessions, external
training programs, and provided 3% of total working days for people development. Thus, human
resource management was a positive factor during the operation phase.

Table 4.21: Relationships for the human resource management factor

Variable Factor
Collaborative people (+) Human resource management (+)

4.2.7 Organizational arrangement

Flattened organization: the organization structure was flattened by absorbing the subsidiaries into
the corporate office. Furthermore, top management was considered having frequent direct
contact with the employees. Thus, the flattened organization was positive.
Decentralization of decision making: the alliance decentralized its decision making to the regional
area. Thus, the decentralization of decision making was positive.
Based on two positive influencing variables it can be concluded that the organizational arrangement
during the operation phase of the IEPSA was positive. An overview is provided in table 4.22.

Table 4.22: Relationships for the organizational arrangement factor

No. Variable Factor
1. Flattened organization (+) Organizational
2. Decentralization of decision making (+) arrangement (+)

4.2.8 Management control system

Planning: Each division committed to ensure that the alliance objectives could be achieved. Thus,
the planning was positive.
Control structure: The audit committee conducted process feedback on performance by auditing on
the divisional performances within the alliance. The findings of these audits were reported to the
remuneration committee. Thus, control process was positive.
Control process: The control process was not only based on the divisional performance but it
cascaded down to the individual level. This process aligned the corporate objectives of the
alliance with the organizational objectives. Thus, the control process was positive.

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Based on three positive influencing variables it can be concluded that the management control
system during the operating phase of the IEPSA was positive. An overview is provided in table
4.23.

Table 4.23: Relationships for the management control system factor

No. Variable Factor
1. Planning (+)
2. Control structure (+) Management control system (+)
3. Control process (+)

4.2.9 Evolved cultural understanding

Trust: sharing of communication between partners to the organization was frequent. Thus, share of
communication was positive.
Commitment: both partners nurtured the alliance which resulted in a high performance of the
alliance especially on increasing the number of subscribers and profits. Thus, nurturing of the
alliance was positive during the operating phase. With profit of Rp 2.04 trillion, the ROA of
6.47% was below the WACC of 13%. Thus, performance of the alliance was negative.
Based on the combination of the two components discussed above it can be concluded that the
evolved cultural understanding factor during the operating phase of the IEPSA was positive. An
overview is provided in table 4.24.

Table 4.24: Relationships for the evolved cultural understanding factor

No. Variable Component Factor
1. Share of communication (+) Trust (+)
2. Nurture the alliance (+) Cultural understanding (+)
Commitment (+/-)
3. Performance of the alliance (-)

4.2.10 Internal driver

Strategic objectives: The partners in the alliance were able to achieve its objective of performances.
Thus, it is not the cause of termination.
Expectancy: The partners in the alliance were able to achieve its expectancy. Thus, it is not the
cause of terminations.
Corporate leadership: There was no change in corporate leadership. Thus, change in corporate
leadership was not the cause of the termination of the alliance.
All in all, in terms of internal driver, the strategic objectives, expectancy, and corporate leadership
were not the variables which cause the alliance into termination.

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 Table 4.25: Relationships for the Internal driver factor
No. Variable Factor
1. Strategic objectives (+)
2. Expectancy (+) Internal driver (+)
3. Corporate leadership (+)

4.2.11 External driver

External environment: there was a change in the environment related with the advent of regulation
on monopolistic practices and unfair business competition which forbid practice of monopoly
undertaken by the company within one holding company (STT Singapore and Singtel under
Temasek Holding which occupied 41.94% share in Indosat and 35% in Telkomsel). Thus, it was
the cause of the alliance termination.
Based on this the external driver was the cause of the alliance termination.

Table 4.26: Relationships for the external driver factor

No. Variable Factor
1. External environment (-) External driver (-)

4.3 Additional insights

Based on description provided in section 4.1, there are a few additional insights that can be
provided concerning with stakeholder support (4.3.1), internal organization support (4.3.2), and
internal driver (4.3.3). These additional insights are aimed to present additional perspectives and
information about the IEPSA that was not covered in section 4.2 (analysis based on the model
established in Chapter 3).

4.3.1 Insights on the stakeholder support

In Indosat, despite existence of plan for privatization but there was no restructurization in the
IEPSA.
Government’s plan to privatize Indosat influenced negatively to the degree of internal relationship
since due to the plan a number of managers and employees opposed the intention to alliance which
they considered unnecessary for a profitable SOE such as Indosat.
Motivation of budget deficit reduction in this privatization was supported from the fact that
government urged to establish the IEPSA in the mid of December 2002 (on Sunday) or when the
end of year was approaching. Altogether with both the occurrence of unprecedented moment of Bali
Bombing in October 2002 and affected share price in the bourse which furthermore had influenced
negatively to the share price of Indosat in the SPA.

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All in all, both low degree of internal relationship and low share price influenced the transparency
of the privatization process which afterwards influenced to the absence of the stakeholder support
on the IEPSA.

Figure 4.5: Stakeholder support – adjusted

Plan for
privatization

+
+
Unprecedented
Reducing of moment
budget deficit
Opposition from Share price
a number of in the
managers or bourse
employees
-
-
- +

Internal organization support

Share price
Degree of
internal
relationship

+
+
Society support

Transparency of the
privatization process

Stakeholder support

4.3.2 Insights on the internal organization support

Both prospective partners had guaranteed on employment. But, new owners actually rationalize
managers and employees who opposed the IEPSA. They were offered with the retirement program
to leave the alliance. As such, this situation created negative impact to the alliance since
rationalization was actually happened in the IEPSA. So that, despite occurrence of fit in objective
between partners, the issue of rationalization had influenced negatively to the participation of

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management and employees in the implementation of strategic plan. Subsequently, the situation
affected negatively to the existence of internal support.

Figure 4.6: Internal support - adjusted

Guarantee on Fit in objective

employment

+ +

Participation in the
implementation of
strategic plan

Internal organization
support

4.3.3 Insights on the internal driver

The termination was derived by the IEPSA’s failure to meet synergy such as transferring know-
how, technology, and fund. It was indicated by the reduced market share which related with
inability to achieve its strategic objectives and expectancy in the IEPSA. This situation influenced
to the internal driver of the IEPSA termination.

Figure 4.7: Internal driver - adjusted

Failure to meet
synergy

- -

Strategic Expectancy
objectives

+
+
Internal driver

4.4 Conclusions
In this chapter the Indosat case was described and the model from chapter three was applied to
measure the factors that played a role for the IEPSA.

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First research question: what were the phases in the IEPSA?
The four identified phases in the literature, i.e. planning phase (4 months), formation phase (3
months), operation phase (62 months), and termination phase (1 month), could all be identified for
the Indosat case. Thus, the phases followed the model.
Second research question: what were the factors in the IEPSA?
During the planning phase, the IEPSA faced challenging conditions, i.e. stakeholder support was
negative, and cultural understanding was neutral while the strategic match was positive. Thus, from
an analytical perspective the IEPSA could be considered attractive but from a political perspective it
was lacking support. The lack of stakeholder support was quite problematic caused by a lack of
communication of both partners to the stakeholder regarding the future objective of the alliance.
During the formation phase, the situation improved slightly. Internal organization support and
cultural understanding were neutral whereas the strategic planning was positive. Thus, similar to the
first phase, from an analytical perspective the IEPSA was desirable but from a political perspective
there were some challenges. Nevertheless, support for the IEPSA was improving.
During the operation phase, the IEPSA’s situation became quite positive. All of the factors were
positive indicating that from both an analytical as well as a political perspective, the IEPSA was
doing well. The situation was much improved by the enhanced cultural understanding and
communication. There was more frequent sharing of communication. At least once a month both
partners appeared in public to motivate and share its commitment to the organization.
It is quite possible that the improvement of the IEPSA was simply something that needed time. The
first two phases of the IEPSA took from September 2002 until March 2003, i.e. less than one year.
It may be that it takes time, e.g. a year, to gain sufficient support from stakeholders and internally in
the organization.
With positive factors in the operation phase, it might have come a little as a surprise that the IEPSA
was terminated. However, the reason for the IEPSA’s demise wasn’t the performance of it but was
caused by legal issues.

Third research question: what were the relationships between factors?

Several relationships between the factors in the model were observed:
 Stakeholder support influence on cultural understanding. In the initial phases, partners seldom
communicated with the stakeholder since issues about downsizing, share price, and
transparency were important to them. Although both partners were committed to the alliance,
their lack of communication had a negative influence on creating trust, i.e. on the cultural
understanding.

138
 Cultural understanding influence on internal organization support. When the strategy was
implemented, management split into two groups, those who opposed the alliance and those who
supported the alliance. People who were thought to have opposed the alliance initiation were
exiled and unlisted in the implementation of strategic planning. The overall result was neutral
internal organization support.
 Internal organization support influence on strategic planning. Those who participated in the
implementation of strategy were committed to increasing the number of BTS up to 1,000 per
year, and to improve the financial performance by utilizing all people in organization and
preventing rationalization stated in the strategic planning. This aided the internal organization
support which in turn brought positive influence on the strategic planning factor of the alliance.
 Human resource management influence on management control system. By being committed to
the objective setting, Indosat created collaborative people. Moreover, the alliance had identified
new corporate values that covered integrity, cooperation, excellence, partnership, and focus on
customers. According to the vice president of strategic planning, human resource management
through collaborative people had contributed to the successfulness of planning and the control
structure performance in the management control system factor.
 Organizational arrangement influence on management control system. The organizational
arrangement, especially the decentralization of decision making and the merging of its
subsidiaries (IM3 and Satelindo) into Indosat contributed to the successfulness of the planning
and control structure in the management control system factor. By merging, Indosat had
brought together three different organizations with different cultures and policies, which
provided more efficiency for Indosat in terms of providing service to customers and at the same
time controlling the entities.
 Management control system influence on evolved cultural understanding. The effective
management control system was characterized by a shared vision and mission, synergy among
all layers within organization, and alignment of interests of employees with the ones of
shareholders. This enabled the alliance to achieve superior performance. According to the vice
president of Indosat, this superior performance enhanced the commitment between the partners
and thus it increased the evolving cultural understanding between partners.
Summary of factors relationship based on the case is presented in table 4.27.

Table 4.27: Relationship of factors based on the Indosat case

No. Influencing factor Influenced factor
1. Stakeholder support Cultural understanding
2. Cultural understanding Internal organization support

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 No. Influencing factor Influenced factor
3. Internal organization support Strategic Planning
4. Human resource management Management control system
5. Organizational arrangement Management control system
6. Management control system Evolved cultural understanding

Additional insights:
A few additional insights gathered concerning with stakeholder support, internal support, and
internal driver were revealed:
 Government’s plan to privatize Indosat influenced negatively to the degree of internal
relationship since a number of managers and employees opposed the intended alliance.
Motivation of budget deficit reduction in this privatization was supported from the fact that
government urged to establish the IEPSA in the mid of December 2002 (on Sunday) or when
the end of year was approaching. Altogether, both the occurrence of unprecedented moment of
Bali Bombing in October 2002 and affected share price in the bourse had influenced negatively
to the share price of Indosat in the SPA.
All in all, both low degree of internal relationship and low share price influenced the
transparency of the privatization process which afterwards influenced to the absence of the
stakeholder support on the IEPSA.
 Both prospective partners had guaranteed on employment. But, new owners actually
rationalized managers and employees who opposed the IEPSA. They were offered with the
retirement program to leave the alliance. As such, this situation created negative impact to the
alliance since rationalization was actually happened in the IEPSA. So that, despite occurrence of
fit in objective between partners, the issue of rationalization had influenced negatively to the
participation of management and employees in the implementation of strategic plan.
Subsequently, the situation affected negatively to the existence of internal support.
 The termination was derived by the IEPSA’s failure to meet synergy such as transferring know-
how, technology, and fund. It was indicated by the reduced market share which related with
inability to achieve its strategic objectives and expectancy in the IEPSA. This situation
influenced to the internal driver of the IEPSA termination.

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CHAPTER 5: CASE STUDY OF SEMEN GRESIK
In this chapter, the case study of Semen Gresik is presented. Section 5.1 describes the chronology of
the case while section 5.2 presents the analysis of the case study based on the framework and model
gathered in chapter 3 with the factors of each of the life cycle phases in the sub-sections. Section 5.3
provides insights gathered from section 5.1. Finally in section 5.4 the answers to the three research
questions are provided.

5.1 Description of Semen Gresik

Semen Gresik was an Indonesian State-Owned Enterprise cement company established in 1957. It
owned two subsidiaries, Semen Padang and Semen Tonasa, which were merged into Semen Gresik
in 1995. The group’s annual production capacity was 18.2 million metric tons of cement, as
compared to the country’s total output of 45 million tons. On July 8, 1991 Semen Gresik listed on
Jakarta and Surabaya Stock Exchange. It was the first state enterprise going public by selling 40
million shares to the public.
The IEPSA at Semen Gresik was conducted as a result of a Letter of intent (LoI) between the
government of Indonesia and IMF. One of the clauses in the LoI was that the government was
required to accelerate privatization and take decisive action to restructure or close poor-performing
enterprises. This included Semen Gresik. The privatization process contained several steps. First a
description of the cement industry before the intended IEPSA is provided in section 5.1.1. The
IEPSA initiation, which lasted until a SPA was reached, will be described in 5.1.2. The Semen
Gresik IEPSA was initiated in May 1998 and lasted until August 1998. The partners formulated a
strategic plan until December 1998 (5.1.3) and implemented this strategy (5.1.4) until the IEPSA
was terminated in July 2006 (5.1.5).

5.1.1 Cement industry before the intended IEPSA

In mid-1997, economic situation in Southeast Asia was in a state of crisis. It began with the decline
of Thailand's currency against the U.S. Dollar and followed by a decline in other currencies in Asia.
In Indonesia, the Rupiah against the U.S. Dollar depreciated sharply from about Rp 2,500 per U.S.
Dollar, reaching Rp 17,000 per U.S. Dollar and after that it fluctuated sharply during the year.
According to the IMF, the prolonged economic crisis in Indonesia was due to procrastination of the
government in requesting IMF help after the Rupiah had been significantly depreciated (Tarmidi,
1999). The main idea of the IMF recovery strategy was to restore confidence in the currency by
making it more attractive (Tarmidi, 1999).

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The first IMF assistance program was signed on October 31, 1997. The recommended programs for
economic reforms covered restructuring of four areas: the financial sector, fiscal policy, monetary
policy, and structural adjustment. The strategies of implementation were aimed at stabilizing the
Rupiah at a level appropriate to the economic power of Indonesia, strengthening and accelerating
the restructuring of the banking system, strengthening the implementation of structural reforms to
build an efficient and competitive economy, develop a framework to address the debt problems of
private enterprise, and returning trade spending to normal circumstances so that exports would
bounce back. Seven additional appendices were related to the monetary policy and interest rates,
banking sector development, government budgetary support for the weak, SOE reform and
privatization, structural reform, private debt restructuring bankruptcy law and judicial reform.
In line with the memorandum, Semen Gresik, a Gresik-based cement company was one of the
targets for SOE reformation and privatization.
During the economic crisis, demand of cement in Indonesia fell to 45% of the installed capacity.
Dominant players in the industry were Semen Gresik and Indocement Tunggal Perkasa. The market
shares of the companies in the cement industry in Indonesia are presented in table 5.1 (Silalahi,
1998).

Table 5.1: Market share of cement industry (Silalahi, 1998)

No. Company Market share
1. Semen Gresik 43%
2. Indocement Tunggal Perkasa 34%
3. Semen Cibinong 13.6%
4. Semen Andalas Indonesia 4.3%
5. Semen Baturaja 2.6%
6. Semen Basowa Maros 1.9%
7. Semen Kupang 0.6%

Demand was highest in the housing segment which represented 68% of the customers. Besides that,
this segment also had the highest growth. In contrast, construction was the most declining segment
as a direct result of the economic crisis. Table 5.2 provides an overview of cement consumption per
segment.

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 Table 5.2: Cement consumption per segment 1997 – 1998 (Silalahi, 1998)
Cement 1997 1998
Users
000 % 000 %
Ton Ton
Housing 14,877 54.2 12,978 68,0
Construct. 4,748 17.3 410 2,1
Others 4,446 16.2 4,638 24,3
Ready Mix 3,376 12.3 1,094 5,5
Total 27,447 100 19,075 100

5.1.2 The IEPSA initiation: May to August 1998

The reason for the IEPSA was a Letter of Intent between the Government of Indonesia and the IMF
that Semen Gresik was one of the SOEs to be planned for privatization. The objective was to help
the Government of Indonesia relieve from the economic crisis through one of the means the
privatization of SOEs.

Bidding process
The privatization process was initiated on May 5, 1998 when the Ministry of State-Owned
Enterprises invited three of the world’s largest cement manufacturers: Holderbank (Switzerland),
Heidelberger (Germany), and Cemex (Mexico) to bid. At that time, the ministry offered a 35%
share in Semen Gresik of which it held 65.01% and the public held the remaining 34.99%.

Table 5.3: Invited investors of Semen Gresik’s IEPSA

No Investor Country
1. Holderbank Switzerland
2. Heidelberger Germany
3. Cemex Mexico

One week after the announcement, Heidelberger withdrew thus leaving only Cemex and
Holderbank to pursue the allotted two-week period of due diligence.
Four evaluation criteria were established consisting of pricing, financial, social, and environmental.

Table 5.4: The evaluation team and its task on the first stage of bidding
No. Team Task
1. Pricing Evaluating the offered price
2. Financial Assessing the financial capability
3. Social Evaluating the term about employment guarantees
4. Environment Evaluating the term about stakeholder relations

The former president of Indonesia, Soeharto, stepped down on May 21, 1998 and afterwards
crowned Habibie as the new president. This situation ignited political instability in Indonesia where

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people had inclination to have freedom of expression which was considered constrained during the
era of Soeharto.
On June 19, both Cemex and Holderbank filed their bids for the 207.6 million shares. Although
price was not the only criteria, there was quite a difference in the bids. The Cemex bid was much
higher (US$ 1.38/share or US$ 287 million) than the bidding price of Holderbank which was US$
0.96/share or US$ 200 million. Cemex became the winner at this stage and therefore was eligible to
enter into a provisional sales agreement with the government. However, Holderbank was allowed to
submit bids in a second stage to improve upon the Cemex’s offer. Cemex was then given the right
to match the better offer in order to win the bid.In the second stage, Holderbank refused to submit a
bid. Therefore, Cemex was automatically announced as the winner.
At this time there were protests of stakeholders who feared the downsizing of employees as a
potential result of the privatization. The protests were held in Gresik, Padang, Tonasa, and there
were also events in Jakarta in front of the office of the Ministry of SOEs. The protest affected the
government’s intention to sell a 35% share in the SOE. In an announcement on August 20, Cemex
was informed by the Indonesian government that its first-round bid would have to be changed. The
main change was that a maximum of 14% of shares would be sold by the government to Cemex at
this time. Cemex agreed with this provided that the government would additionally allow that
roughly 11.53% of public shares would be purchased by Cemex. Furthermore, that within three
years the government would sell another 25.47% shares to Cemex so that Cemex would become the
majority owner with 51% of the shares. Absence of assurance of the bidding offered disappointed
Cemex and afterwards influenced negatively to the share of communication between partners and
nurture of the alliance.

Table 5.5: The scheme plan of Semen Gresik ownership

Owner Share before Initial plan Revised plan Revised plan
IEPSA first 3 years after 3 years
Government 65.01 30.01 51.01 25.54
Public 34.99 34.99 23.46 23.46
Cemex - 35.00 25.53 51.00
Total 100.00 100.00 100.00 100.00

The content of the SPA consisted of commitment of Cemex in terms of:

1. Enhancing the performance of Semen Gresik
2. Participating to improve cement industry
3. Not laying off the employees,
It also composed of commitment of the government to exercise its put option to selling 25.47%
shares within three years.

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Four directors of Cemex were placed on the board of directors. The ownership structure of the
alliance is presented in figure 5.1.

Figure 5.1: Shares and ownership of Semen Gresik after IEPSA

Mexico

Cemex

North America South America,

Europe, Asia,
Indonesia Africa
Central America,
Caribbean
Public: 23.46% Government: 51.01% Cemex Indonesia: 25.53%

14% of shares was obtained

through the selling of the
government’s shares while
Semen Gresik additional 11.53% was
obtained through immediately
bought the public shares in
the stock exchange

Semen Padang Semen Tonasa

Semen Gresik is a group of cement manufacturers consists of Semen Gresik headquarter, two
subsidiaries; Semen Padang and Semen Tonasa, and separated cement plants in Gresik, Padang, and
Tonasa as presented in figure 5.1. Semen Padang was incorporated in 1910 under the name NV
Maatschappij Nederlandsch Indische Portland Cement (NV NIPCM) which was the first cement
plant in Indonesia. It is located in Padang, West Sumatera. In 1958, the company was nationalized
by the government of the Republic of Indonesia from the Dutch government. During this period, the
company experienced a renaissance through a rehabilitation process and the development of the
plant's capacity. Furthermore the company transformed its technology development capacity from a
wet to dry process and the plants Indarung II, III, and IV were built.
Semen Tonasa was incorporated in 1968. It is located at Biringere, Pangkep, South Celebes. The
company is a strategic cement producer to supply cement in the East Indonesian region. The
company produced Portland Cement type I, II, V, Masonry Cement, and Fly Ash Cement. The
market covered mainly Celebes, as well as Kalimantan, Nusa Tenggara, Bali, and other East
Indonesian regions. The company also exported to several countries particularly Asia, Africa,
Europe and Australia. To support its market, the company operated packing plants in its market
region, namely: Ujung Pandang, Bitung, Samarinda, Banjarmasin, Bali, Ambon and Palu.
In 1995, the government transferred its shares in Semen Padang and Semen Tonasa to Semen
Gresik so that they became the subsidiaries of Semen Gresik.

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The alliance partners
Semen Gresik was a profitable SOE in Indonesia. Semen Gresik’s profit in 1996 was Rp 217 billion
and in 1997 it was Rp 185 billion. It was one of a few SOEs such as Telkom and Indosat which was
profitable during the economic crisis. However, this profit was not attractive compared to the assets
worth of Rp 4.8 trillion. In other words, although it was profitable it was considered as poor in
performance.
Semen Gresik sold several products:
1. Portland Cement Type I. Also known as Ordinary Portland Cement (OPC), a hydraulic cement
widely used for general construction, such as building construction that requires no special
requirements, such as: building, residential, high-rise buildings, bridges, runways and roads
2. Portland Cement Type II. Also known as the cement that has resistance to sulphate and heat of
hydration medium. For example, it is used for building on the seafront, marshland, docks,
irrigation channels, and mass concrete dam.
3. Portland Cement Type III. All types of cement developed to meet the needs of the building that
require high initial compressive strength after casting process done and requires completion as
quickly as possible. For example, is used for building roads, properties, and high rise of the
airport.
4. Portland Cement Type V. This type of cement used for construction of buildings on land/water
containing high sulfate and is perfect for batching plant, construction of the water, bridges,
tunnels, ports and nuclear power plants.
5. Special Blended Cement (SBC). Cement specially created for the construction of mega projects
and was suitable for buildings in the sea water.
6. Portland Pozzolan Cement (PPC). Hydraulic cement is made by grinding the slag, gypsum and
pozzolan material. Used for public buildings and buildings required sulfate resistance and
moderate heat of hydration. For example, bridges, highways, housing, docks, mass concrete,
dams, irrigation and the foundation platefull.
Semen Gresik’s marketing and distribution covered the Indonesia areas of Java, Sumatra, and
Sulawesi. It had strategically located plants in Sumatra, Java and Sulawesi supported by thousands
of distributors, sub-distributors and shops. This enabled Semen Gresik to supply the needs of
cement across the country. In addition to domestic sales, Semen Gresik also exported its products to
several countries including Singapore, Malaysia, Korea, Vietnam, Taiwan, Hong Kong, Cambodia,
Bangladesh, Yemen, Norfolk USA, Australia, Canary Island, Mauritius, Nigeria, Mozambique,
Gambia, Benin and Madagascar. The production capacity of the group of Semen Gresik ranges
from Semen Gresik’s Plant, Semen Padang’s Plant, and Semen Tonasa’s Plant is as the following.

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1. Semen Gresik. Semen Gresik had four manufacturing plants with an installed capacity of 8.5
million tons of cement per year, located in Tuban, East Java. The city of Gresik has two ports,
namely: a special port Semen Gresik in Tuban and a port in Gresik. The Semen Gresik plant is in
the village of Tuban Sumber Arum, Kerek district.
2. Semen Padang. Semen Padang had four cement plants with installed capacity of 6.2 million tons
of cement per year located in Indarung, West Sumatra. Cement field has 5 packing cements,
namely: Teluk Bayur, Belawan, Batam, Tanjung Priok, and Ciwandan.
3. Semen Tonasa. Semen Tonasa has three cement plants, installed capacity of 3.48 million tons of
cement per year, located in Pangkep, South Sulawesi. Semen Tonasa has seven packing cement,
namely: Biringkasi, Makassar, Samarinda, Banjarmasin, Bitung, Palu, Ambon, Celukan Bawang,
Bali.

Cemex was founded with the opening of Cementos Hidalgo, in 1906. Cementos Portland Monterrey
began operations in 1920, and in 1931, the two companies merged, becoming Cementos Mexicanos,
now Cemex. In the 1960s, Cemex grew significantly when it acquired several more plants
throughout Mexico. In 1976, the company went public on the Mexican stock exchange, and that
same year, became the largest cement producer in Mexico with the purchase of three plants from
Cementos Guadalajara. In 1982, the company made significant progress in overseas markets,
doubling its exports. Further acquisitions of Mexican cement companies were made in 1987 and
1989, making Cemex one of the ten largest cement companies in the world. In 1998 Cemex was the
world's third largest building materials suppliers and cement producers with approximately 65
million tons of capacity. Cemex had operations extending throughout the world, with production
facilities spanning in North America, the Caribbean, South America, Europe, Asia, and Africa.
Cemex operated cement plants in 15 countries, owned production or distribution facilities in a total
of 30, and traded cement in more than 60. Cemex had the highest amount of profits and cash flow in
the cement industry (Ghemawat, 2004) as presented in table 5.6.

Table 5.6: Data on global cement companies in 1998 (Ghemawat, 2004)

No. Company Holderbank Lafarge Cemex Heidelberger Italcementi Blue
Circle
1. Sales (US$ m) 7,618 10,552 4,828 6,404 3,414 3,604
2. Profit (US$ m) 1,066 1,766 1,436 645 511 466
3. Cash Flow (US$ m) 144 511 862 487 200 (294)
4. Capacity (m tons) 140 107 85 71 55 45
5. Number of countries 53 38 15 33 14 14

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Cemex provided IT based customer-focused solutions within the value chain of Cemex connecting
the supplier, operation, marketing and sales with the customer which had grown to more than 2,100
points of sales across Mexico. This provided distributors and customers with convenient access to
information of products and services. Furthermore, Cemex offered a wide array of construction
products and services which were complementary to cement. Cemex’s global market and customer
distribution ranged from America, Asia, and Africa.

Technology
Semen Gresik had technology to produce good standard products, namely: OPC, PPC, and white
cement. Semen Gresik was the largest cement company in Indonesia. Because its existing capacity
used the latest technology it was regarded as the most efficient. Approximately 30% of Semen
Gresik’s capacity was installed between 1996 and 1997.
The high quality and performance concrete cement products of Cemex were supported by its
standardization of system through proprietary information technology which leveraged the
collective knowledge of the people and raised the standard of customer satisfaction and employee
productivity. But, Cemex also established system to be able to adapt to the local market needs
through maximizing the operating efficiency and agility, pioneering superior customer service,
logistics, and fulfillment practices, realizing cost efficiencies, and streamlining the internal
processes.

Capital need
At the time of alliance initiation, the production of cement in Indonesia was only 45% of the
installed capacity of 42 million tons. However, the partners were confident that as the economy
recovered, an increase of its installed capacity would be necessary to anticipate the increasing
demand. The capital needed to increase the production capacity was expected by the government to
come from the foreign partner. One of the benefits for Semen Gresik of forming the IEPSA was that
it would be able to obtain low cost financing from Cemex with the rate of Ba3 according to
Moody’s. Through market penetration the alliance would provide dividend for Cemex. Sharing
resources with Cemex was expected to improve efficiency and profitability at Semen Gresik. Also,
the alliance planned to increase its production capacity to gain more revenue from the Indonesian
market.

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Strategies
Semen Gresik was following a growth strategy while improving its operational efficiency. This was
in anticipation of the impact of economic crises. Cemex’s corporate strategy was a growth strategy
with a focus on value and cash flow creation. Cemex’s strategy was to grow through acquisition.
The mission was “delivering good results in bad times”. Cemex’s growth strategy was implemented
through international strategic alliances so that the company was able to be one of the five biggest
cement producers in the world. South-East Asia was the only potential market where Cemex had
not yet acquired another company. Expanding into Asia was therefore in line with Cemex’s overall
growth strategy. Another, financial, reason was given by Cemex’s CEO Lorenzo Zambarano,
"Before the crisis, cement companies in Asia were worth about US$ 500 per ton of capacity. But
now, after the crisis, the value of cement firms in Asia dropped to only US$ 100 per ton of
capacity" (Crawford, 1997). Fit in objective occurred between the two partners, Semen Gresik was
an important strategic partner for Cemex to invest in and as a means to gain entry to the South East
Asian region.

The economic environment and share price

Asia’s economic crisis 1997-1998 affected Indonesia more than any other countries. It was the time
when the previous president Soeharto resigned after 32 years of presidency. It was also the time
called as reformation, when the democracy era began and people had more freedom to express their
opinions. Like its neighbors, Indonesia saw sharp currency depreciation, equity and asset markets
collapsing, corporate bankruptcies, bank failures, and a massive increase in public debt. The
Indonesian economy deteriorated. For example, the gross domestic product (GDP) grew by 7.82%
in 1996, then reduced to growth of 4.7% in 1997 and it declined by 13% in 1998 (Bank of
Indonesia, 1998). The inflation rate was 8.01% in 1996, 6.22% in 1997, and soared to 57.6% in
1998. In terms of currency rate, this fluctuated; from Rp 2,345 per US$ in 1996, Rp 3,625 in 1997,
to Rp 8,025 in 1998.
As presented in table 5.7, the share price of Semen Gresik went from Rp 5,125 in July 1997, to Rp
2,575 in November 1997. This was the time when government’s floating of Rupiah against the U.S.
Dollar was futile and finally seeked for IMF’s assistantship to revitalize the economy. The share
price then went back up to Rp 11,450 in July 1998.

Table 5.7: Share price of Semen Gresik from June 1997 to July 1998
No. Price Month Situation
1. Rp 5,125 July 1997 Start of economic crisis
2. Rp 3,000 August 1997 Government anticipated the depreciation of its currency

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 No. Price Month Situation
3. Rp 3,200 September 1997 by floating Rupiah against U.S. Dollar
4. Rp 3,500 October 1997
Since the economic conditions deteriorated, the
5. Rp 2,575 November 1997 government sent a letter requesting IMF assistantship
The government and IMF agreed upon a package of
6. Rp 3,225 December 1997 loans to revitalize the economy
Letter of Intent between IMF and the government over
7. Rp 4,300 January 1998 the package of loans
8. Rp 5,475 February 1998
9. Rp 6,400 March 1998 The government began to restructure the economy
10. Rp 5,400 April 1998
The government sent invitation letters to prominent
cement producers for the partial divestment of Semen
11. Rp 6,050 May 1998 Gresik
The offering bids were submitted to the divestment
12. Rp 8,400 June 1998 team
13. Rp 11,450 July 1998 Cemex became the winner
The foreign partner’s proportion of ownership was
14. Rp 7,575 August 1998 changed from 35% to 14%

The selling price of the government’s shares for as much as US$ 1.38 was considered as premium
compared with the market price of Semen Gresik shares of US$ 0.80 with the rate of Rp 14,500 per
US$10. The fair or fundamental value of Semen Gresik shows that the share price should have been
US$ 1.16 with the rate of Rp 14,500 or equal to US$ 1.87 based on the stabilized rate during the
year which was Rp 9,000 per US$. The stabilized rate is the condition when the rate was less
fluctuated (between Rp 8,500 to 9,00011 occurred in the last quarter of the year) than the fluctuation
in the first three quarters of the year (between Rp 6,500 to Rp 14,500).

Table 5.8: Comparison value of equity per share

Item 1 US $ = Rp 14,500
SG stock price per share Rp 11,450 or $ 0.80

Fair Value per share Rp 16,862 or $ 1.16

Based on FCF valuation
Cemex purchased SG share $ 1.38
Cemex offered price per share premium over fair
value based on 1 US$ = Rp 14,500 $ 0.22 ($1.38 - $1.16)
Cemex offered price per share premium over stock
price $ 0.53 ($1.38 - $0.80)
Benefits of Cemex per share SG because of IDR
depreciation over US $ $ 0.49 ($1.87 - $1.38)

10
Or equal to US$ 0.45 with the rate of Rp 6,500. The rate difference reflects the volatility of the currency within the
year between Rp 6,500 to Rp 14,500 per US$.
11
It used Rp 9,000 as the stabilized rate since it was the most depreciated Rupiah against US$ during the least
fluctuated Rupiah in the last quarter of the year.

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Cemex spent US$ 220 million to acquire 25.53% shares in Semen Gresik with 18.2 million tons of
capacity. This is equal to US$ 47 per ton capacity. This is much cheaper than the US$ 100 per ton
capacity which is the standard normal value of a cement manufacturer (Crawford, 1997). This
situation was due to the unfavorable economic situation in Indonesia reflected in the low share price
of the companies in the bourse (including Semen Gresik) and coupled with the government’s
intention to reduce budget deficit by privatizing Semen Gresik through IEPSA.
Problem with transparency during initiation
In May 1998, a number of prominent bankers were quoted in the press as questioning both the
transparency of the IEPSA process and the ethics of the process. At the center of the controversy
was the situation that the investment banking firm-Goldman Sachs represented both the potential
buyer (Cemex) and the seller (Government of Indonesia). The controversy reached its zenith when
Goldman Sachs resigned as Cemex’s advisor due to the mounting the pressure from the society on
the issue of transparency. Later on, the advisers were changed so that Cemex had Jardine Flemming
and the government of Indonesia had Bahana Sekuritas and Danareksa Sekuritas as the advisers.
According to the assistant of the Minister of State Enterprises, “We didn’t think there was anything
illegal in what Goldman Sachs was doing. The bank simply wanted to avoid further public debate
over its role”.
Another transparency issue happened on June 22, after the first round of bidding ended, I Putu Gede
Ary Suta (Ary Suta), chief of Indonesia Capital Market Supervisory Agency (Bapepam), announced
that a probe into suspected insider trading in Gresik shares was about to be initiated. The reason for
this was that from June 3 until June 17, the price of Gresik shares had risen 57%, while many other
Indonesian stocks were declining in value. On June 19, the day the secret bids were submitted,
Gresik shares closed above Rp 8,700. Over 62 million shares had been traded, the highest volume
so far that year. Ary Suta stated thatif insider trading had occurred then “it would be the biggest
scandal in the history of the stock market”. Six local brokers were named as initial suspects. Among
them were the three governmental advising firms involved in the Gresik sale. These were Jardine
Fleming Nusantara and the two state-controlled houses Danareksa Securities and Bahana Securities.
Because Soeharto was no longer president of Indonesia, it seemed that this might actually lead to
punishment. Bapepam investigated more than 100 parties, and statedthat it did not findany culpable
insiders. Eventually, despite the allegation of insider trading, Bapepam and the ministry were not
able to prove it. No one from the ministry or among its advisers was fired, and the Gresik sale
continued to the second round. It was public knowledge that Gresik was for sale and that the winner
would buy additional shares on the open market to boost the 14% stake available from the state to a
25.53% of ownership. Nevertheless, this issue remained a controversy in the divestment of Semen

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Gresik. This situation led to the low degree of internal relationship which was indicated by on street
protests and strikes by employees, managers, and labor union to the intended IEPSA raising the
transparency issues.

5.1.3 Setting up the IEPSA: September to December 1998

The strategy was initiated by the board of directors of Semen Gresik (see table 5.9) which consisted
of four directors from Indonesia and two directors from Mexico.

Table 5.9: Board of Directors of Semen Gresik

No Name Position Nationality
1. Satriyo President Director Indonesia
2. Francisco Noriega Vice President Director Mexico
3. Cholil Hasan Director of Finance Indonesia
4. Endah Dwi Astuti Director of Research and Development Indonesia
5. Hasan Baraja Director of Marketing Indonesia
6. D. Armando Martinez Gallegos Director of Production Mexico

The new vision and mission were developed by the President Director assisted by the Vice
President Director and it was discussed with other Directors. The Directors of Production and
Marketing initiated the strategic plan. Subsequently, the complete documents of strategic planning
were prepared by both partners. The functional strategies along with the assigned activities were
developed based on discussions among directors. These functional strategies were aligned with the
corporate and the competitive strategies as well as with the vision and mission of Semen Gresik.
The developed strategies and activities were reported to, and discussed with, the Board of
Commissioners. It consisted of three Indonesians and two Mexicans as in table 5.10.

Table 5.10: Board of Commissioners of Semen Gresik

No. Name Position Representation Nationality
1. Zaenal Arifin President Commissioner Government Indonesia
2. Jose Luis Saenz de Vice President Commissioner Cemex Mexico
Miera Alonso
3. Tjuk Kasturi Sukiadi Commissioner Government Indonesia
4. Gofar Suwarno Commissioner Government Indonesia
5. Ignacio Ortiz Commissioner Cemex Mexico

The overall strategy contained long-term strategy, business plan, functional strategies, and benefits
for the nation.

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 Table 5.11: Strategy components of Semen Gresik in 1998
No. Strategy components Description
1. Vision • To create a harmonious relationship between the company and
the community
• To develop small-scale business establishments and
cooperativeness in order to have good resistance, independence
and competitive advantages as well as to create more
employment opportunities through professional management
2. Mission • To maintain sustainability of living environment and help to
improve the quality of community life including education,
health and welfare
• To create development patterns for small medium scale business
establishments and cooperatives, whether or not their business
lines are related to Semen Gresik through financing and
continuous fostering programs by prioritizing the aspects of
distribution, independency, professionalism, and ethics
3. Corporate Strategy Growth strategy while improving operational efficiency
4. Competitive strategy Provide premium products and services to customers efficiently
with the support of its large installed capacity and widespread
distribution channel
5. Functional • Improve the quality of products and services through transfer of
Strategy technology
• Increase the installed capacity to anticipate increasing demands
in the future
• Increase market share by penetrating the existing market by
knowing the customer wants and needs
6. Activities • Transfer of technology from Cemex to Semen Gresik to produce
and enhance the quality of products and services
• Improve efficiency and gain market share by increasing installed
capacity
• Conduct market research to penetrate the existing market
blended with the support of technology from Cemex
• Enhance the relationship and trust of distribution channel by
sharing vision, objective, and information between the producer,
wholesale, and retailer

Despite fit in objective between the two partners, there was a lack of commitment to maintaining
employment or not downsizing the employees on the side of Cemex. The director of Cemex viewed
that the economic crisis negatively affected the business. Therefore, no guarantee on employment
could be made that the same level of employment would be maintained. This had made most
employees nervous. Furthermore, management, employees, and society had a mindset that Semen
Gresik was one of the best SOEs because it was profitable. Thus, they felt that it was unnecessary
for the government to divest its shares to the foreign investors. These conditions induced labor
union to oppose the alliance by having frequent strikes. As such, despite fit in objective but due to
the non-existence guarantee on employment, employees and the head of labor union, most of the
management and employees did not commit to participate in the implementation of the strategic
plan.

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5.1.4 Running the IEPSA: January 1999 to June 2006
Human resources
Semen Gresik was committed to enhance the employees’ capabilities and to provide opportunities
for learning. The human resource department had set up a standard of competence for every
working position to ensure the achievement of superior performance. Each employee’s capability
was determined by an assessment team and compared with the standard of competence. Any gap
between the standard of competence and the employee’s capability resulted in training programs
oriented on reducing employee weaknesses. Out of approximately 2,000 employees, 30 employees
were sent to domestic or international universities to pursue a master degree. The scope of
competence assessment included management and technical skills. For managerial aspects, the team
collaborated with the University of Indonesia. For technical skills the team collaborated with the
University of Gadjah Mada.
According to the head of labor union the working climate inside the company was conducive for
local employees but not between local and foreign partners. First, the cultural value of Semen
Gresik was mainly based on the Islamic religion12. During religious events the representatives of
Cemex often appeared in public to participate in the events and to show that they cared. Second, in
terms of the board of directors meetings, the two Mexican directors who were representing Cemex
seldom attended the meetings. They delegated the task to local people and were less aware about
the details of the company operations. This led to concerns from the local partner about Cemex’s
commitment to transfer expertise as promised at the initiation of alliance.

Management of the alliance

There were no significant changes in the span of control in the organization. The Cemex
representatives delegated its decision making to domestic directors and staffs.
However, there was a perception problem with commitment between the partners. Both partners
wanted to grow the alliance but they wanted to achieve this in different ways. Cemex wanted to
increase the ownership share and inject capital. The domestic partner wanted to grow while
maintaining the same ownership share. The employees were committed to corporate objective
setting. Semen Gresik had set up the Promises system (Production Management Information
System) and Key Performance Indicator (KPI). This was shared with all of the departments through
intranet. This communicated the objectives that should be achieved and it served to create synergy
between departments.
12
Gresik is a city that stands on the coast of East Java. In the past Gresik was a haven of Arab traders. It is one of the
cities where Islam in Indonesia was originated. Islam was brought by a merchant named Siti Fatimah Binti Maimun.
Gresik is also known as madrasah city, due to the predominantly Islamic boarding schools and the vast amount of
mosques in the town. Also in Gresik, five out of nine of Wali Songo (Nine Messengers of God in Java) were buried.

154
One of the control structures in the alliance was the audit committee. This was developed by the
board of commissioners. The purpose was to improve the quality of financial statements, create a
climate of discipline and control, improve the effectiveness of internal and external audit functions,
and to identify matters that required the attention of the Board of Commissioners.

Trust
During this time period, there were still problems with the trust environment between the foreign
partner and the domestic partner. This was rooted from the unclear SPA. According to aninterview
with the director (former secretary general of labor union), “Our relationship between the Mexican
and Indonesian people is quite alright, as long as they do not push to increase the shares into
majority ownership”. In 2004, Mexican directors were dismissed from the board of directors
meeting, because Cemex urged the government to increase Cemex’s share to become the majority
owner and by building a new cement plant. Moreover, in terms of sharing communication, although
the foreign partners seldom appeared in the organization, the communication was deemed better
than in the beginning of the alliance. For example, during Islamic events in the region, a Cemex
representative appeared in public and wore local ethnic custom. Despite the problems, the
performance of the alliance improved and commitment between the two parties partially improved.
The implementation of strategic planning happened during the reformation era when people were
free to express their opinion. The subsidiaries of Semen Gresik; Semen Padang and Semen Tonasa,
took this opportunity to demand a spin-off from the group. The demand of spin-off was caused by
ethnic differences among the three locations of Semen Gresik, i.e. Gresik, Padang and Tonasa.
When the three cement companies were merged there was some reluctance at the Padang and
Tonasa subsidiaries that Gresik became the location of the headquarters. However, at that time,
under President Soeharto’s rule, people were afraid to publicly oppose this. The demand of the spin-
off was triggered by the emergence of a more democratic era as well as by the selling of Semen
Gresik to Cemex. In order to avoid a spin-off, the alliance encouraged rotation of its key employees
within the group. For example the CEO of Semen Gresik had previously been the CEO of Semen
Padang (subsidiary), the Finance Director of Semen Padang was previously the Head of Accounting
at Semen Gresik, and one of the Directors of Semen Tonasa had previously held a staff position at
Semen Gresik. This rotation system diminished the problem of a spin-off.
The government was supposed to exercise its put option, i.e. selling additional shares to Cemex, in
late 2001 aimed at raising cash to help finance the 2001 state budget deficit. This brought protests
from various groups including politicians and informal leaders in West Sumatra and South Celebes,
respectively the home base of PT Semen Padang and PT Semen Tonasa. These protests forced the

155
government to delay the sale. In January 2002, thousands of employees of Semen Gresik held a
massive strike in Gresik, Padang, and Tonasa to force the government to abandon its plans to sell an
additional 25.47% stake in the company to Cemex. The strike involved almost all employees in
both the production and administration divisions. Because of these actions, the government did not
exercise its put option. Cemex remained with a 25.53% of ownership.

Performance of the alliance

Seven years after forming the alliance, the number of assets had grown by 52% to Rp 7.3 trillion.
This was accompanied by increasing profits, ROE, and ROA, see table 5.12. However, with
increasing overall demand in Indonesia and with unchanged production capacity, the market share
went slightly down to 40% in 2005.

Table 5.12: Indicators and performances of Semen Gresik in 1998 and 2005
No. Indicator 1998 2005
1. Assets Rp 4.8 trillion Rp 7.3 trillion
2. Market share 43% 40%
3. Total Capacity 18.2 million tons 18.2 million tons
4. Profit Rp 185 billion Rp 1.02 trillion
5. ROE 8% 22.8%
6. ROA 4% 14%

5.1.5 Closing of the IEPSA: July 2006

From the beginning of the alliance, the alliance was faced with protests and strikes. Labor union,
politicians, and society considered that the IEPSA failed to meet synergy of both partners’ resources
and activities. They opposed the alliance in particularwith regard to the government’s intention to
increasing Cemex’s share to 51%. Eventually, the government did not exercise its put option. In
turn, Cemex issued a violation of contract breach to the International Centre for Settlement of
Investment Disputes (ICSID) in Washington D.C. in the United States. Cemex sued the government
for failing to keep its promise to exercise its put option so that Cemex would have become the
owner of a 51% stake in Semen Gresik.
Nevertheless, Cemex did not continue to sue Indonesian government through ICSID but opted to
terminate its alliance in Semen Gresik. On July 27, 2006, Cemex announced that it had sold shares
amounting to 24.9% of Semen Gresik to PT Rajawali Corporation13. This was a holding company
backed up by Indonesian tycoon Peter Sondakh, via Blue Valley Holdings Pte. with a value of US$
337 million. PT Rajawali Corporation was founded in 1984. It is one of the largest conglomerates in

13
Thus the new structure became: Government 51.01%, PT Rajawali Corp. 24.9%, Public 23.46% and Cemex 0.63% of
the shares.

156
Indonesia. Cemex contained 0.63% of the shares, for it aspired to return to Indonesia as soon as the
condition ameliorates.

5.2 Analysis
In this section, the model from chapter three is applied to ‘evaluate’ the Semen Gresik IEPSA. The
description provided in section 5.1 is similar to the phases identified in chapter three. It can
therefore be concluded that the life cycle of the IEPSA is in accordance with the theory described in
the previous chapter differentiated into a planning, formation, operation, and termination phase.

Table 5.13: Time and duration of each phase

No. Phase Time Duration
1. Planning May to August 1998 4 months
2. Formation September to December 1998 4 months
3. Operation January 1999 to June 2006 90 months
4. Termination July 2006 1 month

This section provides an analysis of the presence/importance of the factors from the model, i.e.
stakeholder support (5.2.1), strategic match (5.2.2), cultural understanding (5.2.3), internal
organization support (5.2.4), strategic planning (5.2.5), human resource management (5.2.6),
organizational arrangement (5.2.7), management control system (5.2.8), evolved cultural
understanding (5.2.9), internal driver (5.2.10), and external driver (5.2.11).

5.2.1 Stakeholder support

Internal organization support: there was no prior company restructurization in Semen Gresik and
the government did not have a plan for the privatization prior to the LoI with the IMF. Thus,
internal organization support was negative.
Society support: there was a change in the ownership structure, i.e. the government gave up its
minority stake. According to De Castro and Uhlenbruck (1997), in less developed countries
majority government ownership is favored to show that ‘assets are not being given away to
foreigners’. Society demands that the government maintains its majority stakes in the corporation
(Ramamurti, 2000). Thus, giving up only a minority share had a positive influence. The share
price had a negative influence, i.e. the price paid for shares was below the fair value and there
was lack of transparency. Thus, society support was negative.
Based on this, it can be concluded that stakeholder support for the alliance during the planning
phase of the IEPSA was negative. Lack of stakeholder support was also evidenced by the strikes
and protests that took place. An overview is provided in table 5.14.

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 Table 5.14: Relationships for the stakeholder support factor
No. Variable Sub-Factor Factor
1. Company restructuring (-) Internal organization
Plan for privatization (-) support (-)
Stakeholder
2. Change in ownership structure (+) Society support (-)
support (-)
Share price (-)
Transparency of the privatization process (-)

5.2.2 Strategic match

Attractiveness of macro-economic conditions: In the last three years, GDP growth was below the
inflation rates. The exchange rates of Rupiah to U.S. Dollar fluctuated by more than 300%. Thus,
GDP growth and currency rate were negative.
Attractiveness of market: the market share of Semen Gresik was 43% and ranked first among the
cement producers in Indonesia. In terms of growth of market, it declined below its installed
capacity from 1997 to 1998 due to the decreasing demand as an effect of economic crisis. Based
on this, market share and growth of market were positive and negative respectively.
Alliance track record: Semen Gresik had no previous experience with an equity placement strategic
alliance, but Cemex had several successful previous alliances with multinational cement
companies in America, Asia, and Africa. Thus, partner’s experience and partner’s successfulness
were neutral and positive respectively.
Attractiveness of product or service: the quality of product and service were good and Semen
Gresik used the latest technology and standard to maintain and improve its quality. Thus, the
attractiveness of product or service was positive.
Attractiveness of technology: The existing capacity of Semen Gresik used the latest technology was
regarded as the most efficient. Approximately 30% of Semen Gresik’s capacity was installed
between 1996 and 1997. Based on this, technology of product or service and information
technology were positive.
Attractiveness of financial performance: the ROA was 7% less than WACC while growth of sales
and demand declined. Thus, attractiveness of financial performance was negative.
Capacity: the combination of the six components discussed above leads to the conclusion that the
capacity had a positive influence on the strategic match.
Complementarity related to the attractiveness of the market: As the economy was expected to
recover, in the future it was predicted that there would be scarcity of cement due to large amount
of demand. Upon this prospect, Cemex intended to adapt to the requirement of local needs.
Combining the resources of both companies would allow market penetration of this growth
market and the alliance would provide dividend for both partners. This was positive for
complementarity.

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Complementarity related to the strategy: although both partners were following a growth strategy,
but the global strategy of Cemex which imposed on standardization could lead to neutral
complementarity.
Complementarity related to the attractiveness of resources: Cemex had the latest standardized
technology and information technology which maximized the operating efficiency and also
intended to adapt to local requirement. Furthermore, Semen Gresik was able to obtain low cost
financing from Cemex with the rate of Ba3 according to Moody’s. It can be concluded that the
complementarity of the attractiveness of resources was positive.
Complementarity: the combination of the three influencing variables discussed above leads to the
conclusion that complementarity had a positive influence on the strategic match.

Pressure on continuity: the CEO of Cemex and the government of Indonesia were committed to
continue the alliance despite having opposition from the stakeholders. Thus, pressure on
continuity was positive according to Cemex and the government of Indonesia under the LoI with
IMF.
Pressure of time on alliance: Both partners felt the pressure of time on alliance. Cemex felt the
pressure to expand its capacity to South Asian Region via Indonesia and Semen Gresik felt the
urgency to increase its operational efficiency. Thus, pressure of time of alliance was positive
Alternative to cooperation: both partners had other alternatives to forming IEPSA. Thus, the
alternative to cooperation can be considered negative.
Strategic importance: the combination of the three influencing variables discussed above leads to
the conclusion that strategic importance had a positive influence on the strategic match.
Based on this, it can be concluded that the strategic match of the two partners in the alliance during
the planning phase of the IEPSA was positive. An overview is provided in table 5.15.

Table 5.15: Relationships for the strategic match factor

No. Variable Component Sub-Factor Factor
1. GDP growth (-) Attractiveness of Capacity (+)
Currency rate (-) Macroeconomic
situation (-)
2. Market share (+) Attractiveness of market
Growth of market (-) (+/-)
3. Partner’s experience (+/-) Alliance track record (+)
Partner’s successfulness (+) Strategic
4. Quality of product or service Attractiveness of product match (+)
(+) or service (+)
Innovativeness of product or
service (+)
5. Technology of product or Attractiveness of
service (+) technology (+)
Information technology (+)

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 No. Variable Component Sub-Factor Factor
6. Profitability (-) Attractiveness of
Growth of revenue (-) financial performance (-)
7. Complementarity related to the
attractiveness of market (+)
Complementarity related to the Complementarity (+)
strategy (+/-)
Complementarity related to the
attractiveness of resources (+)
8. Pressure on continuity (+) Strategic importance (+)
Pressure of time on alliance (+)
Alternative to cooperation (-)

5.2.3 Cultural understanding

Share of communication: The alliance seldom shared communication with the stakeholders so that
issues of job security and transparency were not resolved. Thus, share of communication was
negative.
Nurture of the alliance: In the case, Cemex was willing to nurture and care for the alliance by
developing, supporting, and enhancing the performance but the domestic side was not
committed. Thus, nurture of the alliance was neutral.
Based on one negative and one neutral influencing variable it can be concluded that the cultural
understanding in the alliance during the planning phase of the IEPSA was negative. An overview
is provided in table 5.16.

Table 5.16: Relationship for the cultural understanding factor

No. Variable Component Factor
1. Share of communication (-) Trust (-)
Cultural understanding (-)
2. Nurture the alliance (+/-) Commitment (+/-)

5.2.4 Internal organization support

Participation in the implementation of strategic planning: most of the management and employees
did not commit to participate in the implementation of strategic planning in particular with them
who were threatened by the existence of the alliance due to the lack of fit in the partners’
objective and obscure guarantee of employment. Thus, the internal organization support was
negative.

Table 5.17: Relationships for the internal organization support factor

Variable Factor
Participation in the implementation of Internal organization support (-)
strategic planning (-)

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5.2.5 Strategic plan
Commitment: in terms of strategic plan, there was a positive influence from the commitment of
both partners who made the strategic plan. The alliance was committed to improve the quality of
products and services through transfer of technology, increasing the installed capacity to
anticipate increasing demands in the future, and by increasing the market share by penetrating
the existing market through knowing the customers’ wants and needs.
Table 5.18: Relationships for the strategic planning factor
Variable Factor
Commitment (+) Strategic plan (+)

5.2.6 Human resource management

Collaborative people: the alliance enhanced the existence of collaborative people in the organization
by providing intensive training to the employees; this led to a positive influence on the human
resource management in the alliance. Thus, human resource management was a positive factor
during the operation phase.

Table 5.19: Relationships for the human resource management factor

Variable Factor
Collaborative people (+) Human resource management (+)

5.2.7 Organizational arrangement

Flattened organization: there was no change in terms of organizational layer. However, top
management from the local people was considered having frequent direct contact with the
employees. Thus, the flattened organization was neutral.
Decentralization of decision making: The decision making was decentralized to the subsidiaries of
the IEPSA and the alliance empowered the divisions to perform decision making in the aim to
achieve the objectives. Thus, the decentralization of decision making was positive.
Based on one neutral and one positive influencing variable it can be concluded that the
organizational arrangement during the operation phase of the IEPSA was positive. An overview is
provided in table 5.20.

Table 5.20: Relationships for the organizational arrangement factor

No. Variable Factor
1. Flattened organization (+/-) Organizational
2. Decentralization of decision making (+) arrangement (+)

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5.2.8 Management control system
Planning: Each division committed to ensure that the alliance objectives could be achieved. Thus,
the planning was positive.
Control structure: The audit committee conducted process feedback on performance by auditing on
the divisional performances within the alliance. The findings of these audits were reported to the
board of directors. Thus, control process was positive.
Control process: The control process was not only based on the divisional performance but it
cascaded down to the individual level. This process aligned the corporate objectives of the
alliance with the organizational objectives. Thus, the control process was positive.
Based on three positive variables it can be concluded that the management control system during
the operating phase of the IEPSA was positive. An overview is provided in table 5.21.

Table 5.21: Relationships for the management control system factor

No. Variable Factor
1. Planning (+)
2. Control structure (+) Management control system (+)
3. Control process (+)

5.2.9 Evolved cultural understanding

Trust: sharing of communication between partners to the organization was infrequent. Thus, sharing
of communication was negative.
Commitment: both partners were not eager to nurture the alliance indicated of failing to increase the
alliance’s installed capacity. Thus, nurturing of the alliance was negative during the operating
phase. With profit of Rp 1.02 trillion, the ROA of 14% was more that the WACC of 13%. Thus,
performance of the alliance was positive.
Although the performance of the alliance improved, nurture and care of the alliance is considered
neutral due to unclear SPA where the objective of Cemex could not be fulfilled (this made the
foreign partner doubt the sustainability of the alliance) and the local partner was unwilling to
exercise put option in such a way that Cemex would become the majority shareholder. The
condition brought to a negative influence on the trust and neutral influence on the commitment
between the partners. From the overall assessment of trust and commitment variables, the condition
had a negative influence on the cultural understanding between the partners. An overview is
provided in table 5.22.

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 Table 5.22: Relationships for the evolved cultural understanding factor
No Variable Component Factor
1. Share of communication (-) Trust (-)
2. Nurture the alliance (-) Cultural understanding (-)
Commitment (+/-)
3. Performance of the alliance (+)

5.2.10 Internal driver

Strategic objectives: The partners in the alliance were not able to achieve its objective to increasing
the installed capacity or in other words there was no assurance of the bidding offer to be
persisted by partners. Besides that, the foreign partners failed to prove that its resources met
complementarity or synergy with the company’s resources.
Expectancy: The partners were not able to penetrate to the market they required, and had lack of
synergy they seek in the initiation of the alliance especially in terms of technology and resources.
Corporate leadership: Changes in corporate leadership was not the cause of the termination of the
alliance since there was no change in corporate leadership.
Based on this, the internal driver was the cause of termination especially derived from the strategic
objectives and expectancy variables.

Table 5.23: Relationships for the Internal driver factor

No. Variable Factor
1. Strategic objectives (-)
2. Expectancy(-) Internal driver (-)
3. Corporate leadership (+)

5.2.11 External driver

External environment: There were no changes in political circumstances, shifting in business
conditions, and changing in economic conditions during the operations of the alliance.
Based on this, external driver was not the cause of termination of the alliance.
Table 5.24: Relationships for the external driver factor
No. Variable Factor
1. External environment (+) External driver (+)

5.3 Additional insights

Based on description provided in section 5.1, there are a few additional insights that can be
provided concerning with stakeholder support (5.3.1), strategic match (5.3.2), cultural
understanding (5.3.3), internal support (5.3.4), evolved cultural understanding (5.3.5), and internal
driver (5.3.6). These additional insights are aimed to present additional perspectives and

163
information about the IEPSA that was not covered in section 5.2 (analysis based on the model
established in Chapter 3).

5.3.1 Insights on stakeholder support

The government planned privatization of Semen Gresik following the IMF assistance program to
restructure the economy which was signed on October 31, 1997. Subsequently, this plan was also
motivated by the government to obtain cash inflow one of the means to reduce the budget deficit on
expenditure. However, there was no restructurization in Semen Gresik prior to the IEPSA.
Actually, having planned for privatization influenced negatively to the degree of internal
relationship in Semen Gresik since due to the obscure and abruptly plan some of the management
and employees opposed to the intention to alliance mainly on the issues of employment.
Altogether, motivation of reducing budget deficit in particular in the midst of economic crisis in
1998 and the affected share price in the bourse influenced negatively to the share price of Semen
Gresik in the SPA.
Eventually, both low degree of internal relationship and share price influenced to the lack of
transparency in the privatization process. This afterwards affected to the absence of the stakeholder
support.

164
 Figure 5.2: Stakeholder support – adjusted

Plan for
privatization

+ +

Opposition from Share price

a number of Reducing of in the
managers or budget deficit bourse
employees

- - +

Internal organization support

Share price
Degree of internal
relationship

+ +

Society support

Transparency of the
privatization process

Stakeholder support

5.3.2 Insights on the strategic match

During the initiation of the IEPSA, Cemex promised to establish standardization of system in
accordance with its global standard to enhance complementarity with Semen Gresik related to the
attractiveness of resources. Adaptation to local needs and requirement was also aimed to be
established by Cemex to acquire the complementarity related to the attractiveness of Indonesian
market. These were in an effort of the foreign partner to enhance the strategic match between the
partners.

165
 Figure 5.3: Strategic match - adjusted

Adaptation to local Standardization of

needs system

+ +
+

Complementarity Complementarity Complementarity related

related to the related to the to the attractiveness of
attractiveness of market strategy resources

GDP Currency Market Growth Partner’s Partner’s Quality of Innovativeness Technology of Information
growth rate share of experience successfulness product or of product or product or technology
market service service service

+ + + + + + + + + +

Attractiveness of Attractiveness of Alliance track Attractiveness of Attractiveness of Amount of the

+
macroeconomic market record product or technology companies in
conditions service certain industry
to form IEPSA
+

-
+ Pressure on Pressure of time on Alternative to
continuity alliance cooperation

+ + +
Capacity Complementarity Strategic importance

+ + +
Strategic match

166
5.3.3 Insights on the cultural understanding
In the alliance, absence on the assurance of bidding offered influenced negatively to the share of
communication between partners and nurture of the alliance. Since, this disappointed and
demotivated Cemex to share the communication and nurture the alliance.
These, subsequently, influenced negatively to the trust and commitment in the IEPSA.

Figure 5.4: Cultural understanding - adjusted

Assurance of bidding
offered

+ +

Share of Nurture the alliance

communication

+ +

Trust Commitment

+ +

Cultural understanding

5.3.4 Insights on the internal organization support

Despite fit in objective declared by the partners in the initiation phase, non-existence of guarantee
on employment from Cemex created anxiety to the internal stakeholder particularly during the
midst of economic crisis in 1998. It influenced negatively to the lack participation in the
implementation of strategic plan which was shown in the strikes and on the street protests in Gresik
and Jakarta after the SPA.

167
 Figure 5.5: Internal support - adjusted

Guarantee on Fit in objective

employment

+ +

Participation in the
implementation of
strategic plan

Internal organization
support

5.3.5 Insights on the evolved cultural understanding

Unclear SPA14, influenced negatively to the nurture of the alliance. After seven years of the
initiation, both partners faced with unclear implementation of SPA which had affected negatively to
the nurture of the alliance and share of communication. This, in turn, influenced negatively to the
lack of trust and commitment in the IEPSA.

Figure 5.6: Evolved cultural understanding - adjusted

Unclear SPA

- -

Share of Nurture the

communication alliance

+ +

Trust Commitment

+ +

Evolved cultural
understanding

14
Government’s reluctance to sell the remaining shares to Cemex in such a way that Cemex would become majority
shareholder with 51% shares as well as stakeholder’s reluctance to increase the production capacity since it would dilute
the government’s shares.

168
5.3.6 Insights on the internal driver
Failure to meet synergy15 as promised in the SPA and indicated by the reduced market share related
with strategic objective and expectancy influenced to the internal drive of the IEPSA termination in
2006.

Figure 5.7: Internal driver - adjusted

Failure to meet
synergy

- -

Strategic Expectancy Corporate

objectives leadership

- - -

Internal driver

5.4 Conclusions
In this chapter the Semen Gresik case was described and the model from chapter three was applied
to measure the factors that played a role for the IEPSA.
First research question: what were the phases in the IEPSA?
The four identified phases in the literature, i.e. planning phase (4 months), formation phase (4
months), operation phase (90 months), and termination phase (1 month), could all be identified for
the Semen Gresik case. Thus, the phases followed the model.
Second research question: what were the factors in the IEPSA?
During the planning phase, the IEPSA faced challenging conditions, i.e. stakeholder support was
negative and the cultural understanding was also negative while the strategic match was positive.
Thus, from an analytical perspective the IEPSA could be considered attractive but from a political
perspective it was lacking support. The lack of stakeholder support was quite problematic and was
caused by a lack of company restructuring, absence of a plan for privatization, low share price
compared with the fair value, and a lack of transparency of the privatization process.
During the formation phase, the situation remained unchanged. Internal organization support and
cultural understanding were negative whereas the strategic planning was positive. Thus, similar to
the first phase, from an analytical perspective the IEPSA was desirable but from a political
perspective there were challenges.

15
Synergy on resources (know-how, technology, human resource, finance) and activities

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During the operation phase, the IEPSA’s situation became quite positive. Human resource
management, the organizational arrangement and the management control system were all positive
although the cultural understanding remained negative. This follows from how well the IEPSA was
doing. Although the cultural understanding improved somewhat through more frequent sharing of
communication and because the foreign partner was more active in local events, there were still
issues with the absence of representatives of Cemex at board of director meetings
It is quite possible that the improvement of the IEPSA was simply something that needed time. The
first two phases of the IEPSA took from May 1998 until December 1998, i.e. less than one year. It
may be that it takes time, e.g. a year, to gain sufficient support from stakeholders and internally in
the organization.
However, the partners were not able to achieve the initial objectives which were increasing the
installed capacity and number of shares. This was problem that had not been resolved during seven
years of the alliance and ultimately caused the termination of the alliance.
Third research question: what were the relationships between factors?
Several relationships between the factors in the model were observed:
 Stakeholder support influence on cultural understanding. There was a lack of communication
and socialization upon the intended IEPSA from both partners to the stakeholder especially
about security of employment. This lack of communication provided negative influences on the
trust between partners which later negatively affected the cultural understanding.
 Cultural understanding influence on internal organization support. Lack of cultural
understanding rooted from lack of communication provided negative influences on the
eagerness of internal organization to be part of the alliance.
 Internal organization support influence on strategic planning. After Cemex was declared as the
winning bidder, the opposition from internal organization still frequently occurred in the form of
protests and strikes. This lack of internal organization support had a negative influence on the
implementation of strategic planning
 Human resource management influence on management control system. Enhanced human
resource management by providing standard in all working positions, intensive training and
educational programs had contributed to the achievement of better performance of the IEPSA.
As such, by having collaborative people, this positively influenced the management control
system of the alliance.
 Organizational arrangement influence on management control system. Decentralization of
decision making to the subsidiaries; Semen Padang and Semen Tonasa had contributed to better

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 control of the head office over the performance of subsidiaries. Thus, this positively influenced
the management control system of the alliance.
Summary of factors relationship based on the case is presented in table 5.25.

Table 5.25: Relationship of factors based on the Semen Gresik case

No. Influencing factor Influenced factor
1. Stakeholder support Cultural understanding
2. Cultural understanding Internal organization support
3. Internal organization support Strategic Planning
4. Human resource management Management control system
5. Organizational arrangement Management control system
6. Management control system Evolved cultural understanding

Additional insights:
A few additional insights which consist of with stakeholder support, strategic match, cultural
understanding, internal support, evolved cultural understanding, and internal driver were obtained.
 The government planned privatization of Semen Gresik following the IMF assistance program
to restructure the economy which was signed on October 31, 1997. Subsequently, this plan was
also motivated by the government to obtain cash inflow one of the means to reduce the budget
deficit on expenditure. However, there was no restructurization in Semen Gresik prior to the
IEPSA.
Actually, having planned for privatization influenced negatively to the degree of internal
relationship in Semen Gresik since due to the obscure and abruptly plan some of the
management and employees opposed to the intention to alliance mainly on the issues of
employment.
Altogether, motivation of reducing budget deficit in particular in the midst of economic crisis in
1998 and the affected share price in the bourse influenced negatively to the share price of
Semen Gresik in the SPA.
Both low degree of internal relationship and share price influenced to the lack of transparency in
the privatization process. This afterwards affected to the absence of the stakeholder support.
 Cemex promised to establish standardization of system in accordance with its global standard to
enhance complementarity with Semen Gresik related to the attractiveness of resources.
Adaptation to local needs and requirement was also aimed to be established by Cemex to
acquire the complementarity related to the attractiveness of Indonesian market. These were in an
effort of the foreign partner to enhance the strategic match between the partners.
 Absence on the assurance of bidding offer influenced negatively to the share of communication
between partners and nurture of the alliance. Since, this disappointed and demotivated Cemex to

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 share the communication and nurture the alliance. These, subsequently, influenced negatively to
the trust and commitment in the IEPSA.
 Despite fit in objective declared by the partners in the initiation phase, non-existence of
guarantee on employment from Cemex created anxiety to the internal stakeholder particularly
during the midst of economic crisis in 1998. It influenced negatively to the lack participation in
the implementation of strategic plan which was shown in the strikes and on the street protests in
Gresik and Jakarta after the SPA.
 Unclear SPA, influenced negatively to the nurture of the alliance. After seven years of the
initiation, both partners faced with unclear implementation of SPA which had affected
negatively to the nurture of the alliance and share of communication. This, in turn, influenced
negatively to the lack of trust and commitment in the IEPSA.
 Failure to meet synergy as promised in the SPA and indicated by the reduced market share
related with strategic objective and expectancy influenced to the internal drive of the IEPSA
termination in 2006.

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CHAPTER 6: CASE STUDY OF BANK NIAGA
In this chapter, the case study of Bank Niaga is presented. Section 6.1 describes the case study with
chronology of the case while section 6.2 presents the analysis of the case study based on the
framework and model gathered in chapter 3 with the factors of each of the life cycle in the sub-
sections. Section 6.3 provides insights gathered from section 6.1. Finally, in section 6.4 the answers
to the three research questions are provided.

6.1 Description of Bank Niaga

Bank Niaga was established in 1955. It was listed on Jakarta Stock Exchange in 1989. It was
considered as one of the best private banks with good performance. In 2000, it was one of several
previously private banks that were taken over by the government. This was called Bank Taken Over
(BTO). Bank Niaga was restructured by the government. After the restructurization16 period from
2000 to 2001, the bank had improved performance. In 2002, it was divested through an IEPSA
together with Bank Central Asia (BCA)’s IEPSA. At the time of alliance initiation, Bank Niaga was
the ninth largest bank in Indonesia in terms of assets.
In this section, a description of the banking industry before the intended IEPSA is provided in 6.1.1.
The IEPSA initiation,which lasts until a SPA is reached, will be described in 6.1.2. The Bank Niaga
IEPSA was initiated in February 2002 and lasted until November 2002. The partners in the IEPSA
formulated a strategic plan until December 2002 (6.1.3) and implemented this strategy (6.1.4) until
the IEPSA was terminated in April 2005 (6.1.5).

6.1.1 Banking industry before the intended IEPSA

The 1998 economic crisis with a declining Rupiah against the U.S. Dollar directly impacted the
business sector. In 1998, 50% of the business sector was financed by borrowing in U.S. Dollars.
Typically this borrowing was not hedged from exchange rate volatility so that the amount of the
debt grew and even exceeded the value of its equity (Bank of Indonesia, 1998). This caused the
business sector to have difficulty in paying their obligations to the banks and the banks faced a
credit crunch (Bank of Indonesia, 1998). Depreciation of the Rupiah against the U.S. Dollar had a
direct impact on the quality of bank lending, especially in terms of the Legal Lending Limit so that
the banks in addition to having difficulty in terms of capital also experienced liquidity problems
(Bank of Indonesia, 1998).

16
It refers to the government’s intervention in the bank by injecting the restructurization bond due to the bank’s poor
performance and thus acquired ownership (proportionate with the amount of bond). Furthermore, the government
conducted the restructurization/revitalization of its assets; finance, human resources, and organization structure.

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During the crisis in January 1998, the Rupiah depreciated from Rp 2,500 per U.S. Dollar to Rp
16,000 per U.S. Dollar. Because of this, the U.S. Dollar was preferred and people tended to
withdraw their Rupiah deposits from banks and purchase U.S. Dollars. This left banks with liquidity
problems. To prevent the purchase of U.S. Dollars on a large scale and maintain liquidity in the
banking sector, the Bank of Indonesia (BI) and the government raised deposit interest rates to up to
60% (Bank of Indonesia, 1998).
A consequence of increasing the deposit interest rates up to 60% was that in order to maintain a
positive spread between the deposit rate and the loan rate, the banks also increased the loan rate to
the business sector to 70%. This triggered an increase in non-performing business loans in the
banking sector which led to a decline in performance of national banking industry.
The monetary crisis that triggered the banking crisis led to the national economic crisis marked by
the decline of a number of indicators of Indonesia's economy to a very low point. Indonesia's
economic growth fell sharply to reach -13% in 1998. Most companies had difficulties and needed to
be restructured. Inflation also increased from 20% to 60% in 1998. The national economic crisis
pushed the government to take immediate steps for recovery.

Figure 6.1: Economic Crisis (IBRA, 2004)

Monetary Crisis Banking Crisis

Rate of Rupiah  16 banks liquidated in 1997
depreciated against  52 banks frozen (stop operating) in
US$ from Rp 2,500 1998/1999
to Rp 15,000 –  Banking system crisis: Banking
17,000 collapse led to low trust of society in
banking industry
 Rate of interest increased from the
average of 20% to 60%

Economic Crisis
 Negative GDP growth of 13% in 1998
 Increased inflation rate from 20% to 60%
 Companies were in the abyss amounting to 250,000 big and
small companies with average of 20%

With the declining performance of the banking industry, the government and BI conducted
liquidation of 16 banks at the end of 1997. This liquidation caused a crisis of public confidence in
banks which led to a large scale withdrawal of public funds from the national banking system. By
the start of 1999 the national banking performance had not improved, so that the government
recapitalized banks. In order to do this, the government developed the Indonesian Banking

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Restructuring Agency (IBRA). IBRA was part of a series of strategic policies in response to the
banking and economic crisis and was part of the rescue measures and restructuring. The objective
was to support the government guarantee program and the restructuring of the banking sector,
including the restructuring of corporate debt.
IBRA has the following vision and mission:
1. Vision: Building a powerful government agencies in supporting Indonesia's economic recovery
2. Mission: Supporting the recovery of the economy through the banking sector restructuring,
corporate debt restructuring, and optimizing return state money to reduce the burden on the
government budget.

According to Law 10/1998 on Banking and PP 17/1999 on IBRA, the main focus of the IBRA is as
the following:
1. Guarantee of Commercial Banks Liabilities
In addition to administering the guarantee program, IBRA strived to extend the maturities of
liabilities of commercial banks, both against foreign creditors through participation in exchange
offer and trade finance and to domestic creditors.
2. Restructuring and Bank Restructuring
Banking sector restructuring program was conducted with other government agencies; Ministry
of Finance, Ministry of SOE, and Coordinating Minister for the Economy by dividing banks into
three groups, namely a ‘healthy bank’ included in the recapitalization program, ‘viable banks’
defined as bank under restructurization by BI and taken over to be managed by IBRA (called
bank taken over or BTO), and ‘unviable banks’ declared as no potential banks called as Bank
Beku Operasi and Bank Beku Kegiatan Usaha (BBO and BBKU).
3. Corporate and Bank’s Debt and Asset Restructuring
This was done through restructuring or foreclosure/liquidation of assets.
4. Settlement of Bank Shareholder Liabilities
This policy applied to bank BBO/BBKU and BTO which were handed over to IBRA in which
the former controlling shareholders have obligations to the bank in connection with a violation of
the Lending Limit Liability (LLL).
5. Asset Sales and Refund State
To maximize the potential return of state’s money and reduce the burden on the government
budget, IBRA executed divestitures and asset sales program. Based on the source of acquisition,
the assets IBRA divided into 3 groups as follows:
a. Banks under IBRA control,

175
 b. Loan portfolio and assets of the restructured companies whose some or all of the shares
controlled by IBRA, and
c. Assets and liabilities of the former controlling shareholders of banks BTO, BBO and BBKU
under IBRA control.

The basic principles adopted by IBRA in implementing strategic and operational tasks are as the
following:
- Principle of Justice: in carrying out the duties of closing of the bank, settling third-party claims,
valuating of assets, IBRA applied the principle of fairness in every process including the
allocation of losses and respect existing rights while protecting the interests of the government.
- Transparency: the objective is to maintain the support of the public and the integrity of IBRA.
- Accountability: is the principle of how IBRA used its obligation and duties according to the
underlying statutory mandate and reported the results to stakeholders in a professional manner.
- Maximization financial value of the assets under their control. It was recognized that the current
cash flow was more valuable than the cash flow in the future. Therefore, the sale of assets was
undertaken as soon as possible without damaging the value of assets and taking into account
existing market potential.
- Giving priority to the interests of Indonesia. In the difficult economic conditions, IBRA preferred
alternatives that had the least negative effect on the provision of employment and social welfare.

To promote Good Corporate Governance and transparency as well as monitoring the performance
of IBRA, the government established the Implementation Monitoring Committee Task or the
Oversight Committee (OC). OC was formed based on the Coordinating Minister for Economy
Decree No.KEP.02/K.KKSK/08/2000 dated on August 7, 2000, with the tasks below:
1. Enforcing corporate governance and transparency in the IBRA including policy compliance.
2. Monitoring the performance of IBRA especially concerning strategic fields.
3. Providing a recommendation either requested or unsolicited and to the IBRA
The OC consisted of nine members who were selected from independent professionals and were
required to have integrity and commitment in carrying out a given task. OC members were
proposed by the Financial Sector Policy Committee/Komite Kebijakan Sektor Keuangan (KKSK).
The Minister of Finance determined the Chairman and Members of the OC.
The implementation of the recapitalization of private banks was regulated by the Decree of Minister
of Finance and Governor of BI No. 53/KMK.017/1999 and 31/12/KEP/GBI 1999, which stated that
the recapitalization will be made only to banks that have passed the selection. Selection of the banks

176
was undertaken in stages by three committees, namely the Technical Committee, Evaluation
Committee, and the Policy Committee. Each committee consisted of a team of IBRA, BI, and the
Ministry of Finance.
The selection was assisted by banking consultants with international reputation, including three
main evaluation criteria, namely:
 Financial evaluation
Evaluation of the financial position of the bank was undertaken using very strict international
standards to determine eligibility to participate in a bank recapitalization program. Banks that
had a Capital Adequacy Ratio (CAR) above 4% were classified as Category A. They were
allowed to continue operation without government interference. Banks that had CAR between
4% to negative 25% were called Bank Category B. Banks that had CAR below negative 25%
were called Bank Category C. Banks that were not able to raise the CAR up to negative 25%
would be frozen in operation.
 Business prospects evaluation
After evaluation of the financial position, the selection process was followed by an evaluation of
the business prospects with respect to corporate value.
 Fit and proper evaluation
The evaluation included the ability and integrity of management and controlling shareholders.
The results of this fit and proper test were to determine the feasibility of management and the
bank's controlling shareholders to participate in the recapitalization of the bank concerned.
Based on the evaluation, the resolution of these banks was as following:
 Bank Category B (viable banks) whose shareholders were willing to participate for a minimum
of 20% of the recapitalization expense by December 31, 1998 was included in the restructuring
and recapitalization of private banks (Recapitalization Bank).
 Bank Category B, but whose shareholders were not willing to participate in the recapitalization
expense. They were taken over by the government (BTO).
 Operations were frozen of banks in Bank Category B which did not pass further evaluation
criteria (non-viable banks). Except for a few banks whose depositor's account number exceeded
80,000, which were taken over by the government (BTO).

In 1999, IBRA initiated recapitalization of Bank Niaga. On May 31, 2000, the bank was then taken
over as a BTO since the previous owner was not able to participate in 20% of the recapitalization

177
expense. Total recapitalization bonds17 issued were worth Rp 9.5 trillion. It was obtained after
having approval from the House of Representatives, Commission IX, in a hearing held on March 30
and May 25, 2000. This decision was based on the consideration that the cost of recapitalization
was cheaper than the cost of liquidation. Having injected Bank Niaga with the recapitalization bond,
the government through IBRA, controlled a 97.2% stake in Bank Niaga.

Table 6.1: Cost of recapitalization and government’s shares at Bank Niaga

(IBRA, 2004)
Total Cost of Cost of Cost of Shares of
Recapitalization Recapitalization Government
Recapitalization From From Investor After
Government Recapitalization
Rp Trillion Rp Trillion Rp Trillion %
9.651 9.463 0.188 97.2%18

After being taken over by the government in 2000 and following the restructurization Bank Niaga
improved its performance as presented in table 6.2. By the end of 2001, Bank Niaga posted a net
profit of Rp 203.3 billion.

Table 6.2: Key Financial Indicators of Bank Niaga

Financial Position 31/12/1999 31/12/2000 31/12/2001
(in Rp Trillion)
Total Asset 6.65 18.70 22.98
Total Deposit 12.58 14.44 17.28
Total Equity (8.42) 1.10 1.22
Total Loans 6.12 6.30 7.94
Net Profit (Loss) (5.60) 0.64 0.20
Recap Bond - 9.34 8.40
Key Ratios (%)
CAR19 (122.61) 21.34 16.58
ROA (59.22) 0.52 0.37
ROE n.a. (1.77) 20.62
LDR20 48,67 43.66 45.96

17
Recapitalization bonds are bonds issued by the government in connection with the Bank Recapitalization Program. Total recapitalization bond was
Rp 431 trillion or equivalent to US$ 43 billion.
There are three main categories of banks participate in the program which are:
a) Commercial banks, including PT. Bank Lippo Tbk., PT. Bank International Indonesia Tbk., PT. Bank Bali Tbk., PT. Cooperative Commercial
Bank Indonesia, PT. Bank Universal Tbk., PT. Bank Prima Express, PT. Bank Arta Media, PT. Patriot Bank, PT. Bank Central Asia, PT. Bank
Danamon Indonesia Tbk., PT. Bank Tiara Asia Tbk., PT. PDFCI Bank Tbk. and PT. Bank Niaga Tbk;
b) State-owned banks, including PT. Bank Negara Indonesia (Persero) Tbk., PT. Bank Rakyat Indonesia Tbk., PT. Bank Tabungan Negara Tbk., and
PT. Bank Mandiri;
c) Regional Development Bank, among others BPD Daerah Istimewa Aceh, BPD Sumatera Utara, BPD Bengkulu, BPD Lampung, BPD Daerah
Khusus Ibukota Jakarta, BPD Jawa Tengah, BPD Jawa Timur, BPD Kalimantan Barat, BPD Sulawesi Utara, BPD Maluku, BPD Nusa Tenggara
Barat and BPD Nusa Tenggara Timur.
18
The proportion of public ownership which amounted to Rp 0.278 trillion was 2.8% of the total shares after the recapitalization. During the
recapitalization, the government acquired the cost of ownership from the investor (the previous owner of Bank Niaga) which was worth Rp 0.188
trillion since the investor was not able to pay the cost of recapitalization up to 20% of the total. Hence, afterwards the total cost of recapitalization
from the government was Rp 9.651 or 97.2% from the division of total cost of restructurization with total equity (9.651/[9.651+0.278]).
19
Capital Adequacy Ratio. Defined as the ratio of bank's capital to its risk assets. Minimum requirement of Bank
Indonesia is 8%

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 Financial Position 31/12/1999 31/12/2000 31/12/2001
(in Rp Trillion)
NIM21 (15.70) (1.15) 0.84
NPL22 73.84 29.82 8.28
IBRA Ownership - 97.15 97.20

In 2002, the market expansions of the banking industry were focused on industrial, trading, and
services sectors. The loans from those sectors from commercial banksrepresented more than 90% of
the total loans provided. There was a shift in loans from the corporate to the consumer segment
since consumer segment inherently had less risk than the corporate because of the spread among a
larger number of debtors. A list of prominent banks is presented in table 6.3.

Table 6.3: Top banks in Indonesia (2002)

Rank Bank Gov’t Private Public Foreign Total Asset
of Asset (Rp Trillion)
1. Bank Mandiri 69.19 % - 30.81 % - 251.6
2. Bank Central Asia 8.56 % 5.2 % 35.24 % 51 % 143.8
3. Bank BNI 99.11 % - 0.89 % - 125
4. Bank BRI 58.93 % - 41.07 % - 86.3
5. Bank Danamon 76% - 24% - 46.9
6. Bank International 93.7% - 6.3% - 32.8
Indonesia
7. Bank BTN 100 % - - - 27.1
8. Bank Lippo 100% - - - 25.2
9. Bank Niaga 97.2% 2.8% - 23.11
Adapted from each bank’s annual report

6.1.2 The IEPSA initiation: February to October 2002

The reason behind the establishment of the IEPSA was a Letter of Intent between the government of
Indonesia and the IMF which was signed in 1998. The objective was to help the Indonesian
economy out of the crisis through having privatization plan, restructuring, and divestment of the
taken over banks (BTOs) including Bank Niaga.

Bidding process
The privatization process began in February 2002 after the restructurization when the government
sent a letter (through a mass media announcement) to prospective partners explaining its intention

20
Loan to Deposit Ratio. Commonly used statistic for assessing a bank's liquidity by dividing the banks total loans with
its total deposits
21
Net Interest Margin. Percentage difference between the interest income produced by a bank's earning assets (loans
and investments) and its major expense-interest paid to its depositors. The net difference between interest earned and
interest paid is a key measure of bank profitability
22
Non Performing Loan. It is percentage of a loan where the borrower has failed to make the agreed upon scheduled
payments based on the loan agreement

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to sell 51% of its stake. To determine the winning partner, IBRA undertook an evaluation in two
stages based on the recommendation from Financial and Legal Advisors.
Preliminary bids were received from four companies: PT. Bank Victoria International Tbk, Batavia
Investment Management Limited, ANZ Banking Group Limited, and Commerce Asset-Holding
Berhad. IBRA with the assigned financial consultants (PT Trimegah Sekuritas) and law consultants
(Kartini Mulyadi) undertook the first evaluation stage to determine a shortlist of bidders which
would be eligible to participate in the second stage.
In the preliminary bid, the offering price from the investors was non-binding so that the focus
evaluation of the first step was to seek for the quality of investors.
In order to evaluate the investors, there was an Evaluation and Strategic Commitment Team with
the specified tasks provided in table 6.4.

Table 6.4: The evaluation team and its task on the first stage of bidding
No. Team Task
1. Evaluation Screening investors based on experiences on
strategic alliances, financial capability.
2. Strategic commitment Analyzing the commitment to the alliance and
development of banking industry in Indonesia

The selection criteria to determine the shortlist of bidders consisted of the following:
1. Financial institution experience : 40 maximum point
2. Non binding bid price : 20 maximum point
3. Financial condition : 15 maximum point
4. Merger & Acquisition experience : 5 maximum point
5. Procedural compliance : 5 maximum point
6. Commitment to national interest : 5 maximum point
7. Ability to close : 5 maximum point
8. Terms of buying : 5 maximum point

Three bidders were selected for a shortlist as presented in table 6.5. The fourth company, PT. Bank
Victoria International Tbk, was not shortlisted because it did not provide the assigned preliminary
bid document.

Table 6.5: Shortlisted investors of Bank Niaga’s IEPSA

No. Investor Country
1. Batavia Investment Management Limited Indonesia
2. ANZ Banking Group Limited New Zealand
3. Commerce Asset-Holding Berhad (CAHB) Malaysia

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Afterwards, the shortlisted bidders underwent the following process:
 Due diligence process
 Final bid submission sales and purchase agreement (SPA), escrow agreement23, and bid bond24
 Submission of fit and proper test document of final bidders from IBRA to Bank of Indonesia
 Fit and Proper Test Conducted by Bank of Indonesia
 Winners determination
 Announcement
 Closure of transaction

During the second stage of the bidding process, the government set up teams for Fit and Proper,
Evaluating Bid, and Evaluating SPA.

Table 6.6: The evaluation team and its task on the second stage of bidding
No. Team Task
1. Fit and Proper Conducting the Fit and Proper Test
2. Evaluating Bid Evaluating the final bid consisting of
technical aspects, business plan, and price
3. Evaluating SPA Evaluating the term in the SPA

The purpose of the second stage was to evaluate the final bid document using the following test
criteria:
 Final bid submission; sales and purchase agreement (SPA), escrow agreement, and bid bond
 Fit and Proper Test document
 Bank or Financial institution or if the investor was consortium, the consortium should be led by
the bank or financial institution having majority voting rights
 The prospective investors were not parties who were forbidden to buy back the share of Bank
Niaga as regulated by KKSK no. Kep.03/K.KKSK/11/2000 on November 10, 2010.
The comparative test criteria for the Final Bidders passing the second stage were as the following:
1. Bid Price : 45 maximum point
2. Quality of Bidder : 30 maximum point
3. Terms and Condition within SPA : 20 maximum point
4. Business Plan : 5 maximum point
Only the investors fulfilling the test criteria were evaluated to the Fit and Proper Test Pass from the
Bank of Indonesia.

23
Document issued by a bank to certify that the securities or other assets listed in it are on deposit with the bank.
24
Documents required to be submitted in response to an invitation to bid. These include the prescribed bid form,
drawings, specifications, time lines, charts, price breakdowns, etc.

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At this stage it was revealed that Batavia Investment Limited did not submit the fit and proper test
document and bid bond so it was removed from the process leaving ANZ and CAHB.
On June 30, 2002, CAHB was declared as the winner. Its bidding share price of Rp 22.5 was more
than what ANZ offered and the results of the fit and proper test were passed by the Bank of
Indonesia. The government urged CAHB to increase its bidding price to Rp 26.5 which was agreed
by CAHB. Although the price was higher than the book value of Bank Niaga (which was Rp 18 per
share), it was below its market price (Rp 100 per share). The lower bidding price compared with the
market price had led to prolonged discussions between the Government and People’s
Representative Assembly which temporarily suspended the process of divestment.
The prolonged discussions between Government and People’s Representative Assembly about the
relatively much lower bidding price than the market price was solved after the head of Oversight
Committee (OC) of Bank Niaga’s IEPSA, Gunarni Suworo, explained to President Megawati that
1.48 PBV was within the range of normal price of banking privatization in South East Asia. The
high market price (Rp 100 or 6 PBV) occurred due to the illiquid or limited Bank Niaga’s shares
(which were only 2.8%) in the bourse or stock exchange which did not reflect its performance. As
such, there was no transparency issue in the initiation of the IEPSA.
Eventually, on November 11, 2012 government and parliament had come to a consensus that the
winner CAHB could provide the SPA to legitimate its existence in Bank Niaga. The SPA consisted
of the commitments of CAHB in terms of:
1. Enhancing and improving the performance of Bank Niaga, and
2. Participating in the improvement of Indonesian Banking Industry
3. Facilitating 4 directors from CAHB and 3 directors from the government including independent
consultant
4. CAHB was able to withdraw from the IEPSA in the event that a loss occurred of more than 20%
of Bank Niaga’s equity

While the divestment process through the IEPSA was on-going, the government was also selling
18.22% of its shares on the stock exchange from July 8 to September 11, 2002. After the
completion of these sales and the IEPSA, the government had sold 51% of shares to CAHB and
18.22% of shares to public in the stock exchange. Hence, the government's shares declined from
97.2% to 27.98%. The Public's shares increased from 2.8% to 21.02% and CAHB possessed
ownership of 51%. This ownership structure is presented in figure 6.2.

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 Figure 6.2: Ownership structure of Bank Niaga after IEPSA

Indonesia Malaysia
Public: 2.8% Government: 97.2%

Bank Niaga
CAHB

Indonesia
Public: 21.02% Gov’t: 27.98% CAHB: 51%

Bank Niaga

The alliance partners

Bank Niaga was the 9th largest bank in Indonesia by amount of assets (Annual Report Bank Niaga,
2002). It had a distribution network of 149 branches and kiosks predominantly in the main
commercial centers in Indonesia. It received awards in the area of service quality from 1996 to 2001
from Info Bank (2001). Bank Niaga was also a recipient of the best practitioner of corporate
governance award from the Jakarta Stock Exchange in 2001 (Info Bank, 2001). Bank Niaga had
never formed alliances with foreign partners. It had twice experienced a major shift in ownership
(the prospective alliance with CAHB was the third experience for Bank Niaga of changing major
ownership). Until 1972 the bank belonged to an Indonesian businessman, Soedarpo Sastrosatomo
and later due to financial difficulty it was sold to Julius Tahija, also an Indonesian businessman,
until the economic crisis in 1997. Before the crisis, it was known as the bank which focused on
providing loans to the corporate segment. However, recently the bank shifted its focus on consumer
and commercial segments. In 2002, the provision of loans from Bank Niaga included corporate,
consumer, and commercial lending. The bank was known by its high degree of internal relationship
between employees and management which was intensified by the prior restructurization.
The Commerce Group of Companies was a leading financial conglomerate in Malaysia's rapidly
growing financial system. It was Malaysia’s second largest financial services provider and one of
Southeast Asia’s leading universal banking groups. Headquartered in Kuala Lumpur, its key
regional offices were located in Singapore and Thailand. At the helm was CAHB listed in the
financial section of the Kuala Lumpur Stock Exchange (KLSE). CAHB was a diversified
investment and management holding company with interests in commercial banking, merchant
banking, stock broking, offshore banking, finance company, discount house, leasing, factoring,
futures broking fund management, unit trust management, venture capital and life insurance. CAHB
had engaged with international alliances in Singapore, Hong Kong, Tokyo, London, and Mauritius.

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Technology
Information Technology (IT) wasa key resource. CAHB owned sophisticated IT to reach and
service the customers. Bank Niaga had a Directorate of Operation and Information Technology
(DO-IT). E-banking of Bank Niaga was regarded as one of the banks that provided the most
complete range of products and services through telephone, TV set, internet, and cellular phone.
CAHB had IT technology in the segment of consumer banking services across its main operating
markets in Malaysia, Indonesia, Singapore, and Thailand. It also had expertise in the wholesale
banking services which comprised of two divisions: Investment Banking and Corporate Banking,
Treasury & Markets.

Capital need
Both partners were committed to increase assets to twice as much as the present value in 2002.
Furthermore, in case of inadequate CAR, CAHB was willing to increase the equity. This
commitment was reflected in the bank’s vision which was to become the fifth largest bank in terms
of asset number in Indonesia in 2007.
In 2002, Bank Niaga’s total assets were Rp 23.11 trillion, with a CAR of 12.72%. Total loans issued
were Rp 8.9 trillion, with total third party deposits of Rp 19.25 trillion, LDR was 46.27%, and NPL
of 7.63%. The LDR and NPL ratios were regarded as one of the best performers among others.
CAHB was committed to form a long-term alliance with Bank Niaga and willing to inject additional
capital to Bank Niaga wherever necessary. In terms of financial capability, CAHB was the second
largest financial services group in Malaysia, and seventh largest company by market capitalization
on Kuala Lumpur Stock Exchange (KLSE). The assets were about US$ 25 billion, the CAR was
13.7%, the LDR was 85%, and NPL was 5%.
The alliance intended to invest heavily in IT technology. To contribute to the bank’s Vision 2007
three specific units were intended to establish, a Programme Management Office tasked with
monitoring progress and effectiveness of all IT projects, an R&D team working closely with
business units and other IT end-users and an IT Relations Unit to improve understanding of, and
communications with users throughout the bank.

Strategies
Bank Niaga had a vision for 2007 to become a top-five bank in the Indonesian banking industry
with a focus on retail, medium and large enterprises. CAHB was committed to achieve the vision
through shared resources and promised to inject capital. In other words, there was a fit in objective
between the two partners.

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Both prospective partners were following a growth strategy. CAHB used its traditional game name
‘congkak’25 to describe its strategy.
Bank Niaga needed the alliance to reach its vision for 2007. CAHB was in pressure of expanding to
other potential markets. Indonesia’s market was still growing, thus, a lot of opportunities existed in
the market according to Peter Benyamin Stock, the President Commissioner (Annual Report of
Bank Niaga, 2002). CAHB was committed to form a long-term alliance with Bank Niaga and was
willing to inject additional capital to Bank Niaga wherever necessary. However, especially for
CAHB there were other alternatives for forming an alliance since there were several banks in
Indonesia, such as BCA, Permata, and Bank International Indonesia (BII).

The economic environment and share price

Indonesian GDP growth was 0.2% in 1999, 3.5% in 2000, and 5.0% in 2001 with exchange rate
fluctuations of the Rupiah to the U.S. Dollar from Rp 7,085 in 1999, Rp 9,595 in 2000, to Rp
10,400 in 2001. Inflation rates were still high (20.32% in 1999, 4.52% in 2000, and 12.02% in
2001). These macroeconomic data were the bases of the government’s motivation to privatize Bank
Niaga one of the means to reducing budget deficit.
CAHB purchased the government shares at Bank Niaga by 1.48 times the Price to Book Value
(PBV) or equal to Rp 26.5 per share. It was 48% higher than the book value of Bank Niaga which
was Rp 18, but was much lower that its current share price at Jakarta Stock Exchange which was Rp
100 as presented in table 6.7. The total shares purchased were 39.9 billion or equal with Rp 1.057
trillion (US$ 123 million).

Table 6.7: Share price of Bank Niaga from February to June 2002
No. Month Share Price Situation
The government sent teaser letter to
1. February 2002 Rp 50
prospective partners
The market reacted positively to the
2. March 2002 Rp 55
intention of forming the alliance
3. April 2002 Rp 60 Prospective partners conducted due
4. May 2002 Rp 75 diligence
5. June 2002 Rp 100 The month of SPA

As presented in table 6.8, the selling price of Bank Niaga to CAHB as much as 1.48 PBV with the
total revenue to the government of Rp 1.1 trillion was considered as below its fair value which was

25
Congkak is a game for two. It consists of a board which has several 'houses' and 'storehouses'. The objective of the
game is to gather as many congkak seeds into the 'storehouses' on the player's side. It is a game which is played during
one’s free time and is normally played by women, and was especially liked by the youths. The game, whose gameplay
is similar to mancala, is commonly played in (Indonesia (Borneo), Singapore, Malaysia, and Philippines).

185
worth of 1.57 PBV. The reason for comparing the price with the fair value of the company is that it
takes the current as well as the future into accounts not only the current condition but also the
expected future condition (Malhotra, 2003).

Table 6.8: Comparison between selling share price and fair value of Bank Niaga
No. Item Selling Price Fair Value
1. Price to Book Value 1.48 1.57
2. Amount of 51 % share of equity Rp 1.1 trillion Rp 1.2 trillion

6.1.3 Setting up the IEPSA: December 2002

The strategy was initiated by the board of directors of Bank Niaga (see table 6.9), which consisted
of four directors from Indonesia and three directors from Malaysia.

Table 6.9: Board of Directors of Bank Niaga

No. Name Position Nationality
1. Peter B. Stok President Director Malaysia
2. Hashemi Albakri Vice President Director Malaysia
3. C. Heru Budiargo Director of Compliance & Risk Management Indonesia
4. Tay Un Soo Director of Finance & Corporate Planning Malaysia
5. Daniel James Rompas Director of Business Banking Indonesia
6. V. Catherinawati Hadiman Director of Corporate Banking Indonesia
7. Andi Mohammad Hatta Director of Information Technology and System Indonesia

The new vision and mission was developed by the President Director assisted by the Vice President
Director and discussed with other Directors.
The strategic plan was derived from the existence of informal meeting on strategy formulation
during a prolonged planning phase. The alliance set up its strategic planning in such a way that 1)
CAHB was not allowed to leave the alliance within three years, 2) improving human resource
quality, and 3) extension of new technology. Both partners set up a joint vision and determined
challenging objectives which were: becoming the fifth bank in Indonesia in terms of amount of
assets, doubling the number of assets, and being the leading bank in commercial, consumer, and
retail segments.
In terms of strategic formulation, it was initiated by the Director of Finance & Corporate Banking.
The functional strategies along with the assigned activities were developed based on discussions
among directors. These functional strategies were aligned with the corporate and the competitive
strategies as well as with the vision and mission of the bank. The developed strategies and activities
were reported and consulted to the Commissioners consisting of four Indonesian and four
Malaysian as in table 6.10.

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 Table 6.10: Board of Commissioners of Bank Niaga
No. Name Position Nationality
1. Rozali bin Mohammad Ali President Commissioner Malaysia
2. Gunarni Soeworo Commissioner Indonesia
3. Sigid Moerkandjono Commissioner Indonesia
4. Datuk Hamzah bin Bakar Commissioner Malaysia
5. Dato’ Halim bin Muhamat Commissioner Malaysia
6. Umar Rusli Commissioner Indonesia
7. Ananda Barata Commissioner Indonesia
8. Roslan A. Ghaffar Commissioner Malaysia

The strategies and the supporting activities are presented in table 6.11.

Table 6.11: Strategy components of Bank Niaga in 2002

No. Strategy components Description
1. Vision To become a top 5 bank in Indonesia in 2007.
2. Mission • To endeavor to develop a leading retail banking which
committed to provide high quality products and services as
well as added value to stakeholders
• To provide high quality services based on risk management
and support of financial resources, effective technology, and
support of integrity of the employees
Corporate strategy Growth strategy to anticipate the growing number of banking
3. market in the attainment of becoming the top 5 bank in
Indonesia
4. Competitive strategy Provide premium products and services in commercial,
consumer, and retail segments with a sufficient size and
economic of scale in operations to ensure efficiency and attain
market share
5. Functional • Concentrate on being customer centric by clearly defining
Strategy market segments and the fulfillment of clearly defined
customer needs
• Ensure that everything right at the transaction hub, centering
retail banking strategy around the customer and keeping the
distribution system balances and cost effective
• Pursue an information-based strategy, ensuring the engineer
use of technology and channels to ensure the customer gain
access to date information, consistently, easily, and reliably
6. Activities • A clear focus in each business
• Expand delivery channels in line with segment focus
• Rapidly expand sales and relationship management
• Upgrade risk management to support rapid loan growth
• Adapt operations and support functions to efficiently serve an
expanding business

The vision, mission, objectives, and strategic planning were communicated to the stakeholders. All
managers and employees participated and supported the strategic planning due to fit in objectives to
achieve vision 2007 and coupled with the existence of guarantee on employment.

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6.1.4 Running the IEPSA: January 2003 to March 2005
Human Resources
In the implementation of its strategic planning, the alliance committed to extend the capabilities of
the employees. The alliance set up training centers and a Learning and Management Group. The
trainings were facilitated to extend the optimum potential value of every employee. It had a nine-
month training program in order to extend employees capability in understanding the banking
industry, where employees from different educational backgrounds took up the training. Employees
could follow on the job training in Malaysia to learn about the capabilities of the Malaysian partner.
The alliance provided an annual climate survey to all departments to estimate the working climate.
In order to align the alliance’s objectives and employees’, all employees were provided with
Employee Stock Ownership Program (ESOP), in accordance with the level.

Management of the alliance

In order to enhance the responsiveness and flexibility, the alliance set up a matrix organization26,
for example the Business Unit only focused on business itself and not disturbed by supporting
activities. The supporting activities within Business Unit were handled by a separate entity. The
hierarchy and span of control in any of the group remained. It was no higher than four layers while
any wider scope of the group was no higher than six layers. The geographic areas were able to make
decisions, especially if the loan fell below a certain value.
In order to support the vision, several control programs were developed. It ranged from general
meeting of shareholders, remuneration, audit committee, and risk management. These control
attributes were the instruments of feedback to the commissioners, Board of Directors, top
management, and management. It complied with the Bank of Indonesia regulation which was
intended to anticipate the occurrence of past mistake. In order to effectively plan and control the
implementation of strategic planning, a corporate planning had been set up. Monitoring of
performance and targets had been tightened by building a better understanding of transaction costs
and advancing IT architecture that was easily accommodating a move upscale. To assure the
alignment of strategies and effective implementation, the alliance had developed measuring overall
strategic performance through a Performance Management System (PMS) with the help of IT. The
performance management system was a tool to implement strategy. It was a useful tool to
communicate the alliance goals and objectives, reinforce individual accountability for meeting those
goals, and to track individual and alliance performance results.
26
This organizational type assigns each worker two bosses in two different hierarchies. One hierarchy is "functional"
and assures that each type of expert in the organization is well-trained, and measured by a boss who is super-expert in
the same field. The other direction is "executive" and tries to get projects completed using the experts. Projects might be
organized by products, regions, customer types, or some other schema.

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Trust
The trust and commitment variables between partners during the operation phase improved
compared to the beginning phases of alliance. The directors always communicated and
disseminated the new vision to become the fifth biggest bank in Indonesia in terms of asset size in
2007 to all the organizations. Hence, employees were set to focus on achieving contributions to
acquire the goals. The actual achievement by 2007 was that the bank ranked 6th in terms of assets,
that means it had moved up three positions from its initial 9th rank in 2002.

Performance of the alliance

The year 2004 was a record year for Bank Niaga. As presented in table 6.12, the net income grew
41% to Rp 660 billion. At the time, Bank Niaga was the eighth largest bank in Indonesia in terms of
assets. The bank had expanded low cost funding by 28% and loan growth was exceptional
especially in the consumer segment which grew 90%. The contributions from Consumer and Small
and Medium Enterprise (SME) businesses had reached a level of the bank’s goal of being a force in
retail banking (Annual Report of Bank Niaga, 2004). The bank had expanded into 45 branches, a
larger ATM network, cutting-edge products, and 900 new staff members. The alliance managed the
bank’s capital efficiency by increasing the ROE to 43.77%, and was among the highest ROE banks.

Table 6.12: Indicators and performances of Bank Niaga in 2002 and 2004
No. Indicator 2002 2004
1. Number of asset 23.11 trillion 30.8 trillion
2. Third party deposits 17.9 trillion 24.7 trillion
3. Profit Rp 141 billion Rp 660 billion
4. ROE 12.22% 43.77%
5. ROA 0.61% 2.76%
6. LDR 60.23% 85.28%
7. NPL 6.16% 3.18%
8. CAR 12.72% 10.29%
9. NIM 2.33% 5.36%

6.1.5 Closing of the IEPSA: April 2005

The divestment of government’s shares in Bank Niaga through the stock exchange was conducted
gradually in July to September 2002 (18.22% of shares), September 2003 (3.225% of shares), and
February 2004 (3.225% of shares). By April 2005, the remaining government’s shares in Bank
Niaga as much as 21.53% were sold to the stock exchange where CAHB bought additional 1.6% of
the shares. The sales of these shares were intended to release the ownership function of government
in Bank Niaga due to the government policy to leave the bank once it had achieved superior
performance. Following this, the government had no longer any stake in Bank Niaga and performed
only its full function as a regulator. After the last divestment, Bank Niaga’s ownership was

189
dominated by CAHB with the ownership of 52.6%, the foreign partner bought additional 1.6% in
the stock exchange, while the public owned 47.4% of Bank Niaga’s ownership in the bourse.

6.2 Analysis
In this section, the model from chapter three is applied to ‘evaluate’ the Bank Niaga IEPSA. The
description provided in section 6.1 is similar to the phases identified in chapter three. It can
therefore be concluded that the life cycle of the IEPSA is in accordance with the theory described in
the previous chapter differentiated into a planning, formation, operation, and termination phase.

Table 6.13: Time and duration of each phase

No. Phase Time Duration
1. Planning February to November 2002 10 months
2. Formation December 2002 1 month
3. Operation January 2003 to March 2005 27 months
4. Termination April 2005 1 month

This section provides an analysis of the presence/importance of the factors from the model, i.e.
stakeholder support (6.2.1), strategic match (6.2.2), cultural understanding (6.2.3), internal
organization support (6.2.4), strategic planning (6.2.5), human resource management (6.2.6),
organizational arrangement (6.2.7), management control system (6.2.8), evolved cultural
understanding (6.2.9), internal driver (6.2.10), and external driver (6.2.11).

6.2.1 Stakeholder support

Internal organization support: Bank Niaga had prior restructurization and the government had
already planned for Bank Niaga’s privatization before the intended IEPSA which was permitted
by the representative. Thus, internal organization support was positive.
Society support: there was a change in the ownership structure, i.e. the government gave up its
majority stake. Share price deviated less than 10% from its fair value, thus the share price had a
positive influence. The process of IEPSA planning was transparent. Thus, society support was
positive.
Based on this, it can be concluded that stakeholder support for the alliance during the planning
phase of the IEPSA was positive. Practically, there was no opposition from top management upon
the shift of ownership. Lack of opposition stemmed from the characteristics of Bank Niaga’s
organization for it was a stand-alone company whose ownership did not belong to any of the
conglomerate groups which was common to other BTOs. This unique characteristic brought about
tight relationship between the management and employees so that any information was smoothly

190
conveyed from the management to employees to create transparency such as about the privatization
process. An overview of stakeholder support is provided in table 6.14.

Table 6.14: Relationships for the stakeholder support factor

No. Variable Sub-Factor Factor
1. Company restructuring (+) Internal organization
Plan for privatization (+) support (+)
Stakeholder
2. Change in ownership structure (-) Society support (+)
support (+)
Share price (+)
Transparency of the privatization process (+)

6.2.2 Strategic match

Attractiveness of macro-economic conditions: The last three years data show that inflation rate
exceeded the GDP growth. The exchange rates of Rupiah to U.S. Dollar fluctuated by as much as
47%. Thus, GDP growth and currency rate were negative.
Attractiveness of market: the market share of Bank Niaga was ranked 9 in the top banking industry
in Indonesia. Growth of market was more than 10% from 2001 to 2002. Based on this, market
share and growth of market were negative and positive respectively. Thus, the attractiveness of
market was neutral.
Alliance track record: Bank Niaga had never formed alliances with foreign partners. CAHB had
engaged with international alliances in Singapore, Hong Kong, Tokyo, London, and Mauritius
with successful results. Thus, the alliance track record was neutral.
Attractiveness of product or service: the quality of product and service were good and Bank Niaga
was innovative in adapting products or services to the shifting of market requirement from the
corporate segment to consumer and commercial segments. Thus, the attractiveness of product or
service was positive.
Attractiveness of technology: E-banking of Bank Niaga was regarded as one of the banks that
provided the most complete range of products and services. The information technology had
been integrated in the organization. Thus, attractiveness of technology was positive.
Attractiveness of financial performance: the ROA of 0.61% was less than WACC of 17% while
growth of sales exceeded 10%. Thus, attractiveness of financial performance was neutral.
Capacity: the combination of the six components discussed above leads to the conclusion that the
capacity had a positive influence on the strategic match.

Complementarity related to the attractiveness of the market: since the foreign partner’s market was
in the state of growing to maturity while domestic partner’s was in a growth period it can be
concluded that this was positive for complementarity.

191
Complementarity related to the strategy: since both partners were following a growth strategy, it
can be concluded that this was positive for complementarity.
Complementarity related to the attractiveness of resources: Both partners were able to gain benefits
from each other products and services. In terms of technology, there was a plan to have transfer
of technology by providing training for Bank Niaga’s employee to Malaysia especially about
information technology. CAHB declared that they committed to inject additional capital to Bank
Niaga wherever necessary. It can be concluded that the complementarity of the attractiveness of
resources was positive.
Complementarity: the combination of the three variables discussed above leads to the conclusion
that complementarity had a positive influence on the strategic match.
Pressure on continuity: both partners showed commitment to continue the alliance as reflected in
the SPA. Thus, pressure on continuity was positive.
Pressure of time on alliance: Both partners treated the alliance as an important opportunity to grasp
for the sake of their existences. Thus, pressure of time of alliance was positive
Alternative to cooperation: both partners had other alternatives to forming IEPSA. CAHB had
alternatives with other BTOs such as Bank Danamon and Bank International Indonesia (BII).
Bank Niaga had alternatives to form alliance besides CAHB. Thus, the alternative to cooperation
can be considered negative.
Strategic importance: the combination of the three variables discussed above leads to the conclusion
that strategic importance had a positive influence on the strategic match.
Based on this, it can be concluded that the strategic match of the two partners in the alliance during
the planning phase of the IEPSA was positive. An overview is provided in table 6.15.

Table 6.15: Relationships for the strategic match factor

No. Variable Component Sub-Factor Factor
1. GDP growth (-) Attractiveness of Capacity (+)
Currency rate (-) Macroeconomic situation (-)
2. Market share (-) Attractiveness of market
Growth of market (+) (+/-)
3. Partner’s experience (+/-) Alliance track record (+)
Partner’s successfulness (+)
4. Quality of product or service Attractiveness of product or
(+) service (+)
Strategic
Innovativeness of product or
match (+)
service (+)
5. Technology of product or Attractiveness of technology
service (+) (+)
Information technology (+)
6. Profitability (-) Attractiveness of financial
Growth of revenue (+) performance (+/-)
7. Complementarity related to the
attractiveness of market (+)

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 No. Variable Component Sub-Factor Factor
Complementarity related to the Complementarity
strategy (+) (+)
Complementarity related to the
attractiveness of resources (+)
8. Pressure on continuity (+) Strategic
Pressure of time on alliance (+) importance (+)
Alternative to cooperation (-)

6.2.3 Cultural understanding

Share of communication: in the planning phase of the alliance, the share of communication between
the partners and stakeholders was frequent. Thus, the share of communication was positive.
Nurture of the alliance: the partners were willing to nurture the alliance by developing, supporting,
and enhancing the performance. Thus, this variable was positive.
Based on positive variable it can be concluded that the cultural understanding in the alliance during
the planning phase of the IEPSA was positive. An overview is provided in table 6.16.

Table 6.16: Relationship in cultural understanding factor

No. Variable Component Factor
1. Share of communication (+) Trust (+)
Cultural understanding (+)
2. Nurture the alliance (+) Commitment (+)

6.2.4 Internal organization support

The entire stakeholder in the organizations ofthe alliance participated in the implementation of
strategic planning. The objectives in 2007 were socialized to the stakeholder in the internal
organization. Thus, the internal organization support was positive.

Table 6.17: Relationships for the internal organization support factor

Variable Factor
Participation in the implementation of Internal organization support (+)
strategic planning (+)

6.2.5 Strategic plan

The established strategic planning consisted of a commitment to lock up the share within a long
period of time, improvement human resource quality, and extension of the new technology.

Table 6.18: Relationships for the strategic planning factor

Variable Factor
Commitment (+) Strategic plan (+)

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6.2.6 Human resource management
In the aim to build collaborative people having the characteristics of learning capability,
cooperation and conflict resolution, trust, candor, communication, and commitment to the objective
setting, thealliance established training centers and Learning and Management Group. The trainings
were facilitated to extend the optimum potential value of every employee. This reflects a strong
commitment of the alliance to continuously develop employee's potential and competency as
optimal as it could, through variety of training, learning and development programs. Each program
was aimed to improve employee's quality so they were able to play significant role in a competitive
banking industry.
There were two main objectives considered as the focus of training and learning activities, which
are:
 Improving Intellectual Capital in achieving CIMB Niaga's competitive advantage
 Developing a learning organization
The alliance provided annual climate survey to all departments to estimate the working climate. To
align the alliance’s objectives and employees’, all employees were provided with Employee Stock
Ownership Program (ESOP). Thus, the collaborative people variable was positive.

Table 6.19: Relationships for the human resource management factor

Variable Factor
Collaborative people (+) Human resource management (+)

6.2.7 Organizational arrangement

Flattened organization: The alliance had no activities related to flatten the hierarchy of the
organization. Thus, the flattened organization was neutral.
Decentralization of decision making: the alliance decentralized its decision making to the regional
area. Thus, the decentralization of decision making was positive.
Based on one neutral and one positive variable it can be concluded that the organizational
arrangement during the operation phase of the IEPSA was positive. An overview of the factor and
the accompanying variables is provided in table 6.20.

Table 6.20: Relationships for the organizational arrangement factor

No. Variable Factor
1. Flattened organization (+/-) Organizational
2. Decentralization of decision making (+) arrangement (+)

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6.2.8 Management control system
Planning: Each division committed to ensure that the alliance objectives could be achieved. Thus,
the planning was positive.
Control structure: The audit committee conducted process feedback on performance by auditing on
the divisional performances within the alliance. The findings were reported to the remuneration
committee. Thus, control process was positive.
Control process: The control process was not only focused on the divisional performance but it
cascaded and deployed to the individual level. This process aligned the corporate objectives of
the alliance with the organizational objectives. Thus, the control process was positive.
Based on three positive variables it can be concluded that the management control system during
the operating phase of the IEPSA was positive. An overview is provided in table 6.21.

Table 6.21: Relationships for the management control system factor

No. Variable Factor
1. Planning (+)
2. Control structure (+) Management control system (+)
3. Control process (+)

6.2.9 Evolved cultural understanding

Trust: sharing of communication between partners to the organization was frequent. Thus, share of
communication was positive.
Commitment: both partners nurtured the alliance which resulted in a high performance of the
alliance especially on achieving its vision 2007. Thus, nurture of the alliance was positive. With
the profit soared to Rp 660 billion, the performance exceeded its cost of capital of 14%. Thus,
performance of the alliance was positive.
Based on the above two components which consist of three positive variables it can be concluded
that the evolved cultural understanding factor during the operating phase of the IEPSA was positive.
An overview is provided in table 6.22.

Table 6.22: Relationships for the evolved cultural understanding factor

No Variable Component Factor
1. Share of communication (+) Trust (+)
2. Nurture the alliance (+) Cultural understanding (+)
Commitment (+)
Performance of the alliance (+)

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6.2.10 Internal driver
Strategic objectives: The government partners thought that the objectives of improving performance
of the alliance had been fulfilled so that it was not necessary to remain in the alliance. Due to this
condition, the variable was the cause of the alliance termination.
Expectancy: The alliance actually improved its performance so that missed of expectancy was not
the cause of the termination of the alliance.
Corporate leadership: There were no changes in corporate leadership so that it was not the cause of
the termination of the alliance.
xThus, in terms of internal driver out of three variables, strategic objectives variable was the cause
of the alliance into termination.

Table 6.23: Relationships for the internal driver factor

No. Variable Factor
1. Strategic objectives (-)
2. Expectancy(+) Internal driver (-)
3. Corporate leadership (+)

6.2.11 External driver

External environment: there were no changes in the external environment regarding the regulations
and politics so that external environment was not the cause of the alliance termination.
Based on this the external driver was not the cause of the alliance termination.
Table 6.24: Relationships for the external driver factor
No. Variable Factor
1. External environment (+) External driver (+)

6.3 Additional insights

Based on description provided in section 6.1, there are a few additional insights that can be
provided concerning with stakeholder support (6.3.1), internal organization support (6.3.2), and
management control system (6.3.3). These additional insights are aimed to present additional
perspectives and information about the IEPSA that was not covered in section 6.2 (analysis based
on the model established in Chapter 3).

6.3.1 Insights on the stakeholder support

In the year 2000, government acquired Bank Niaga as one of the BTOs and planned for its
privatization through IEPSA. In order to revive the bank and secure a successful privatization, the
government restructured the bank prior to privatization until it improved the performance prior to

196
the IEPSA. The existence of company restructuring had influenced positively to the degree of
internal relationship.
Motivation of budget deficit reduction in 2002 when the GDP growth was 4.5% and inflation rate of
11.88% affected negatively to the share price since the government seemed to hastily divest the
bank. However, there was existence of high share price in the bourse (as the benchmarked price)
due to the limited amount of shares in the bourse influenced positively to the share price of Bank
Niaga.
As such, government decided of not following the high share price in the bourse but deciding the
share price in accordance with the fair value of the bank which was below the share price in the
bourse.
Having both high degree of internal relationship and appropriate value of share price influenced the
transparency of the privatization process which afterwards influenced to the presence of stakeholder
support.

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 Figure 6.3: Stakeholder support – adjusted

Plan for
privatization

+ +

Company Share price Limited

restructuring Reducing of in the shares in the
budget deficit bourse bourse

+
- + -

Internal organization support

Share price
Degree of
internal
relationship

+ +

Society support
Transparency of the
privatization process

+
Stakeholder support

6.3.2 Insights on the internal organization support

The new owners guaranteed the internal organization stakeholder on the employment. Therefore,
there were no lay-offs to be undertaken. Coupled with the existence of fit in objective to achieve
vision 2007 (became 5th ranked in terms of asset number), the situation in the planning phase
motivated internal stakeholder to participate in the implementation of strategic plan in such a way
they were secured and enthusiastic with the IEPSA. This situation influenced positively to the
internal support.

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 Figure 6.4: Internal organization support - adjusted

Guarantee on Fit in objective

employment

+ +
Participation in the
implementation of
strategic plan

Internal organization
support

6.3.3 Insights on the strategic plan

Existence of informal meeting on strategy formulation between the two partners during prolonged
discussion (from June 30 to November 11, 2012) on whether to continue the IEPSA, had
encourgaed the commitment which in turn affect to the successful strategic plan. This occurred
since actually the strategic plan was established within a longer period of time (5.5 months
compared to normally 1-2 months) and commitment had already been acquired during the period to
enhance the successful strategic plan.

Figure 6.5: Strategic plan - adjusted

Existence of informal
meeting on strategy
formulation

Commitment

Strategic plan

6.3.4 Insights on the management control system

Control structure established by the new owners was in compliance with Bank of Indonesia
regulation. Likewise, it was set up in a purpose to anticipate and avoid the occurrence of past
mistakes when during the economic crisis, the banking collapsed due to the non-existence of Good

199
Corporate Governance. All in all, planning, control structure, and control process which were in
accordance with the Good Corporate Governance influenced positively to the successful
management control system of the IEPSA.

Figure 6.6: Management control system - adjusted

Anticipation of the
past mistake

Planning Control structure Control process

+ + +

Management control
system

6.4 Conclusions
In this chapter, the Bank Niaga case was described and model from chapter three was applied to
measure the factors that played a role for the IEPSA.
First research question: what were the phases in the IEPSA?
The four identified phases in the literature, i.e. planning phase (10 months), formation phase (1
month), operation phase (27 months), and termination phase (1 month), could all be identified for
the Bank Niaga case. Thus, the phases followed the model.
Second research question: what were the factors in the IEPSA?
During the planning phase, the IEPSA faced these conditions, i.e. stakeholder support, cultural
understanding and strategic match were all positive. Thus, from both an analytical and political
perspective the IEPSA could be considered attractive.
During the formation phase, the situation can also be considered positive. Positive influences on
internal organization support and strategic planning were supported by positive participation in the
implementation of strategic planning and positive commitment of both partners. Thus, similar to the
first phase, from both analytical and political perspectives the IEPSA was desirable.
During the operation phase, the IEPSA’s situation can also be considered positive. All of the factors
in the analytical perspectives and cultural understanding were positive indicating the IEPSA was
doing well in the operations and relationship. Positive influences on human resource management,
organizational arrangement, and management control system were supported by positive related
variables except neutral flattened organization.

200
It is quite possible that the first two phases of the IEPSA took less than one year because of the
positive political and analytical situation.
With positive factor in the operation phase and positive factor in the evolved cultural understanding,
it was a surprise that the IEPSA was terminated. But actually, it was due to the fulfilled strategic
objectives by the local partner.
Third research question: what were the relationships between factors?
Several relationships between the factors in the model were observed:
 Stakeholder support influence on cultural understanding. The communication and socialization
of the intended IEPSA was intensive to the stakeholder and was accelerated by a good
relationship between management and employee in the alliance. This intensive communication
and socialization was vital to express partners’ commitment to the alliance and variable which
positively influenced trust between partners.
 Cultural understanding influence on internal organization support. Positive influence on trust
and commitment in the alliance had ensured the participation of the internal organization in the
implementation of strategic planning, therefore, enhancing the internal organization support.
There were no oppositions from the internal organization to the IEPSA.
 Internal organization support influence on strategic planning. Participation of internal
organization support had supported the successful implementation of strategic planning.
 Human resource management influence on management control system. The alliance enhanced
the quality of human resources by providing training inside and outside the alliance, especially
to the foreign partner’s office in Malaysia, and aligned interest between the IEPSA and
employee by establishing ESOP program. Therefore, it helped implement the control process of
the IEPSA and thus supported the management control system.
 Organizational arrangement influence on management control system. The alliance enhanced
the organizational arrangement by delegating and thus increased the speed of decision making
to the regional branches. Therefore, it helped implement the control process of the IEPSA and
thus supported the management control system.
 Management control system on evolved cultural understanding. Positive management control
system in the alliance had improved the performance of the alliance and thus together with the
commitment and intensive communication to the stakeholder had influenced positively to the
evolved cultural understanding in the alliance.
Summary of factors relationship based on the case is presented in table 6.25.

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 Table 6.25: Relationship of factors based on the Bank Niaga case
No. Influencing factor Influenced factor
1. Stakeholder support Cultural understanding
2. Cultural understanding Internal organization support
3. Internal organization support Strategic Planning
4. Human resource management Management control system
5. Organizational arrangement Management control system
6. Management control system Evolved cultural understanding

Additional insights:
There are a few additional insights gathered concerning with stakeholder support, internal
organization support, strategic plan, and management control system:
 In the year 2000, government acquired Bank Niaga as one of the BTOs and planned for its
privatization through IEPSA. In order to revive the bank and secure a successful privatization,
the government restructured the bank until it improved the performance prior to the IEPSA. The
existence of company restructuring had influenced positively to the degree of internal
relationship.
Motivation of budget deficit reduction in 2002 when the GDP growth was 4.5% and inflation
rate of 11.88% affected negatively to the share price since the government seemed to hastily
divest the bank. However, there was existence of high share price in the bourse (as the
benchmarked price) due to the limited amount of shares in the bourse influenced positively to
the share price of Bank Niaga.
As such, government decided of not following the high share price in the bourse but deciding
the share price in accordance with the fair value of the bank which was below the share price in
the bourse.
Having both high degree of internal relationship and appropriate value of share price influenced
the transparency of the privatization process which afterwards influenced to the presence of
stakeholder support.
 The new owners guaranteed the internal organization stakeholder on the employment. Coupled
with the existence of fit in objective to achieve vision 2007 (became 5th ranked in terms of asset
number), the situation in the planning phase motivated internal stakeholder to participate in the
implementation of strategic plan in such a way they were secured and enthusiastic with the
IEPSA. This situation influenced positively to the internal support.
 Existence of informal meeting on strategy formulation between the two partners during
prolonged discussion (from June 30 to November 11, 2012) on whether to continue the IEPSA
influenced positively to the commitment which in turn affect to the successful strategic plan.
This occurred since actually the strategic plan was established within a longer period of time

202
 (5.5 months compared to normally 1-2 months) and commitment had already been acquired
during the period to enhance the successful strategic plan.
 Control structure established by the new owners was in compliance with Bank of Indonesia
regulation. It was set up in a purpose to anticipate and avoid the occurrence of past mistakes
when during the economic crisis, the banking collapsed due to the non-existence of Good
Corporate Governance. All in all, planning, control structure, and control process which were in
accordance with the Good Corporate Governance influenced positively to the successful
management control system of the IEPSA.

203
204
CHAPTER 7: CASE STUDY OF BANK PERMATA
In this chapter, the case study of Bank Permata is presented. Section 7.1 describes the chronology of
the case while section 7.2 presents the analysis of the case study based on the framework and model
gathered in chapter 3 with the factors of each of the life cycle phases in the sub-sections. Section 7.3
provides insight gathered from section 7.1. Finally, in section 7.4 the answers to the three research
questions are provided.

7.1 Description of Bank Permata

Bank Permata was astate-owned bank which emerged as a result of the merger of five BTOs which
were under the supervision of the State-Owned Asset Management Company/Perusahaan
Pengelola Aset (PPA27). The bank was composed of Bank Bali Tbk., Bank Universal Tbk., Bank
Prima Express, Bank Artamedia, and Bank Patriot.
The five BTOs had different backgrounds. Bank Bali Tbk. was established in 1954 as a commercial
bank. In 1990 the bank sold 15 million shares through the Jakarta Stock Exchange (JSX). Bank
Universal Tbk. was established in 1990 as a merger of Bank Development Credit Bank Asia and
Universal. In 1997, Bank Universal listed on the JSX by selling 25 million shares to public
investment. Bank Prima Express was founded in 1956 as Bank Tani Nasional. In 1990, it was
renamed to Bank Prima Express. Bank Artamedia was founded in 1990 as a commercial bank. It
was given the status of a foreign bank in 1995. Bank Patriot was established in 1958 as a
commercial bank. All the banks were owned by Indonesian conglomerates as presented in table 7.1.

Table 7.1: Owner of the banks merged as Bank Permata

No. Name of Bank Year of Previous Owner
Establishment
1. Bank Bali Tbk. 1954 Djaja Ramli
2. Bank Universal Tbk. 1990 Astra Group
3. Bank Prima Express 1956 Wibowo Ngaserin
4. Bank Artamedia 1990 Gramedia and Kalbe Farma Group
5. Bank Patriot 1958 Patriot Group

27
PPA was established by the government on February 27, 2004 under Government Regulation No. 10 of 2004 to manage the assets
of the IBRA.
The purposes and objectives of PPA are as the following:
 managing ex-IBRA assets
 restructuring and/or revitalizing of State Owned Enterprises
 conducting investment activities
 managing SOE’s assets

205
In the merger, Bank Bali Tbk. was determined as the platform bank and all four other banks merged
into the platform bank. The platform bank was the bank whose activities and standards became the
foundations and bases for the other banks.
The government conducted the merger of thefive banks due to the impact of economic crisis which
began in 1998 that hampered the banks. This was part of the government’s decision from November
22, 2001, to restructure. The merger process was commenced with the signature of Memorandum of
Understanding among the Five Banks and IBRA on May 20, 2002. It was issued effectively on
September 30, 2002 following the proposition of the Bank Indonesia and the Ministry of Justice and
Human Rights Affair.
A description of the banking industry before the intended IEPSA is provided in section 7.1.1. The
IEPSA initiation will be described in 7.1.2. The Bank Permata IEPSA was initiation process lasted
from July 2004 until November 2004. The partners in the IEPSA formulated a strategic plan until
March 2005 (7.1.3) and implemented this strategy (7.1.4) until the IEPSA was terminated in
September 2006 (7.1.5).

7.1.1 Banking industry before the intended IEPSA

In 1999, Bank Bali Tbk. was included in the list of banks to be recapitalized and restructured with
funds from the government amounting to Rp 5.36 trillion. Capital of the bank was minus Rp 1.47
trillion, CAR of minus 16.96%, and LDR of 53.01%.
Bank Universal Tbk. received recapitalization funds of Rp 4.1 trillion consisted of Rp 310 billion
with fixed interest rate of 12% and 14% respectively due in 2004 and 2009, and Rp 3.8 trillion with
interest rate of about 13.06% to 23.33% with time of maturity in 2002 and 2009. The capital of the
Bank Universal amounted to Rp 1.35 trillion with assets of Rp 9.92 trillion, CAR 13.87% and LDR
44.61%.
Bank Artamedia was included in the list of banks to be recapitalized with an injection of funds
amounting to Rp 130 billion. The scheme of the funds was composed of Rp 22 billion with an
interest rate of 12% and 14% and Rp 108 billion based on interest rate of Bank Indonesia notes. The
capital of the bank was Rp 95.7 million with assets of Rp 705 million, CAR 13.59%, and LDR
38.83%.
Bank Prima Express received funds amounting to Rp 533.4 billion which consisted of Rp 47 billion
with an interest rate of 12% and 14% which matured in 2004 and 2009. The rest, Rp 486.4 billion,
had an interest rate of 13.06% to 23.33% with time of maturity in 2002 and 2009. The capital of the
bank was Rp 121.7 million, with assets of Rp 1.8 billion, CAR 6.87%, and LDR 34.02%.

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Bank Patriot received funds of Rp 52 billion, including Rp 4 billion with a fixed interest rate of
12% and 14% with time of maturity in 2004 and 2009. The rest, Rp 48 billion, carried an annual
interest rate of 13.06% to 23.33% with the time of maturity in 2002 and 2009. The capital of the
bank was Rp 11.3 billion, with assets of Rp 232 billion, CAR of 4.87%, and LDR 17.19%.
After the merger, in October 2002, the government injected Bank Permata with the fund as much as
Rp 4.6 trillion, bringing the government’s ownership of 96.6% with the rests owned by public
(3.4%). These money flows are summarized in table 7.2.

Table 7.2: Cost of recapitalization and government’s shares at Bank Permata (IBRA, 2004)
Bank Total Cost of Cost of Cost of Shares of
Recapitalization Recapitalization Government
Recapitalization From From Investor After
Government Recapitalization
Rp Trillion Rp Trillion Rp Trillion %
Bank Bali 5.356 5.314 0.042 98%
Bank Universal 5.063 4.098 0.965 79%
Bank Artamedia 0.165 0.130 0.035 35%
Bank Prima Express 0.584 0.531 0.053 89%
Bank Patriot 0.062 0.052 0.0010 62%
Bank Permata 4.600 4.600 0 96.6%

In May 2002, the five banks signed an agreement. The merger became legally effective in
September 2002 with the approval from the Bank of Indonesia and the Minister of Justice. By
placing a capital of Rp 4.6 trillion consisting of cash amounting to Rp 2.8 trillion and Rp 1.8 trillion
of bonds with fixed interest rate, the government had 96.6% of Bank Permata and public ownership
held the remaining 3.4% of stakes.
Bank Artamedia, which was assigned as the pilot project, completed the integration from its
previous entity to Bank Bali as the platform bank of Bank Permata in October 2002. This was
followed by Bank Prima Express, Bank Universal and Bank Patriot in the next month until the
merger was completed in late 2002.
The newly merged bank, Bank Permata, had the following financial characteristics. Based on the
financial statements in 2002, Bank Permata had a capital of Rp 1.16 trillion, assets valued of Rp
28.03 trillion and outstanding loans of Rp 7.19 trillion with a CAR of 10.4% (above the 8%
minimum level set by the central bank), and 40.5% of LDR. A year after the merger, Bank Permata
reported a profit of Rp 503 billion. At the time, Bank Permata had 328 branches throughout
Indonesia.

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 Table 7.3: Key Financial Indicators of Bank Permata
Financial Position 31/12/2002 31/12/2003
(in Rp trillion)
Total Asset 28.03 28.98
Total Deposit 21.89 23.79
Total Equity 1.16 1.71
Total Loans 7.19 9.69
Net Profit (Loss) (0.81) 0.53
Recap Bond 11.69 10.25
Key Ratios (%)
CAR 10.40 10.78
ROA (4.75) 1.88
ROE (153.50) 62.59
LDR 40.50 41.13
NIM 2.40 4.38
NPL 27.20 11.00
IBRA Ownership 96.6 96.6

In 2004, Bank Permata was the seventh top-bank in Indonesia in terms of number of assets as
presented in table 7.4.

Table 7.4: The top banks in Indonesia (2004)

Rank Bank Government Private Public Foreign Total Asset
Asset (Rp Trillion)
1. Bank Mandiri 69.19 % - 30.81 % - 248.16
2. Bank Central Asia 8.56 % 5.20 % 35.24 % 51 % 131.05
3. Bank BNI 99.11 % - 0.89 % - 136.5
4. Bank BRI 58.93 % - 41.07 % - 101.7
5. Bank Danamon 25% - 24% 51% 58.8
6. Bank International 22.5% - 26.3% 51.2% 35.8
Indonesia
7. Bank Permata 96.6% - 3.4% - 31.8
8. Bank Niaga 21.53% - 27.47% 51% 30.8
9. Bank BTN 100 % - - - 25.6

7.1.2 The IEPSA initiation: July to November 2004

The reason to establish an IEPSA was a Letter of Intent between the government of Indonesia and
the IMF. The objective was to help the Indonesian economy out of the crisis by restructuring the
banking industry by having prior privatization plan, restructurization, and afterwards the divestment
of the taken over banks which included Bank Niaga (chapter six), Bank International Indonesia
(chapter eight), Bank Central Asia (chapter nine), as well as Bank Permata28.

28
Note that there is a different time period for Bank Permata compared to Bank Niaga. This is due to how they were
affected by the economic crisis. Bank Niaga was affected in 1999 and Bank Bali (as the Platform Bank of Bank
Permata) was affected in 2001. Therefore, the time of IEPSA initiation was also different

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Bidding process
The process was initiated by having a mass-media announcement in which the government
announced its intention to sell its shares in Bank Permata in July 2004. Following the
announcement, there were 22 investors that expressed their intentions to participate to PPA.
In order to evaluate the investors, PPA set up the Evaluation and Strategic Commitment Team to
determine a shortlist of bidders. As shown in table 7.5 this primarily related to expected quality and
commitment.

Table 7.5: The evaluation team and its task on the first stage of bidding
No. Team Task
1. Evaluation Screening investors based on experiences on strategic alliances,
financial capability.
In case of consortium, it should be led by a commercial bank
2. Strategic commitment Analyzing the commitment to the alliance and development of
banking industry in Indonesia

Thus, the first stage of the bidding process was related to determining the quality and commitment
of bidders which had expressed their interest to participate in the process. This evaluation was
determined based on the experiences with strategic alliances, financial capability, and how
commitment was expressed. The bidders submitted PPA with documents which included strategic
alliance experiences, financial performance, bid price, and an expression of their commitment to the
alliance.
At the end of this first stage, eight shortlisted bidders prevailed as presented in table 7.6. The bid
price that they had submitted became the minimum value for the final bid offer in the second stage.

Table 7.6: Shortlisted investors of Bank Permata’s IEPSA

No. Investor Country
1. Bank Mandiri and Bank Buana Consortium Indonesia
2. Maybank Malaysia
3. Commerce Asset Malaysia
4. Standard Chartered Consortium England, Indonesia
5. Bank Panin Indonesia
6. Barclay-Bank Danamon England, Indonesia
7. Bank Rakyat Indonesia Indonesia
8. United Overseas Bank Singapore

Next, the shortlisted bidders carried outa due diligence process from August to September 2012.
After this the second stage, i.e. a bidding process, took place to determine the preferred bidder.
Having completed the due diligence, the bidders submitted to the PPA more detailed documents on
Price, Technical Aspects, Business Plan, Fit and Proper Test documents, and SPA terms.

209
For this stage the PPA set up the Evaluating Bid and SPA team as well as Fit and Proper Test Team
with the specified tasks provided in table 7.7. The Evaluating Bid and SPA team assessed the
technical aspects, prices, and terms in SPA offered by the bidders. They are composed of PPA and
the independent evaluator. The Fit and Proper Test team was Bank of Indonesia which assessed the
capability of the bidders.

Table 7.7: The evaluation team and its task on the second stage of bidding
No. Team Task
1. Evaluating Bid Evaluating the final bid consisting of technical aspects, business plan,
and floor price29
2. Evaluating SPA Evaluating the terms in the SPA
3. Fit and Proper Conducting the Fit and Proper Test

After evaluating the documents and SPA terms, the PPA concluded that Standard Chartered
Consortium (Stanchart Consortium) was the preferred bidder30. The Stanchart Consortium was
composed of Standard Chartered Bank (Stanchart) and Astra International Indonesia (Astra),
English and Indonesian companies. The consortium was subject to the process of the Fit and Proper
Test which was conducted by Bank of Indonesia. The Stanchart Consortium passed the test. As
such, PPA announced as the final result that Stanchart Consortium was the winning bidder.
On November 11, 2004 the Government of Indonesia announced that they had sold 51% of the
shares in Bank Permata to the Stanchart Consortium. The SPA was signed on that date between
PPA as a proxy of the Ministry of Finance of the Republic of Indonesia which owned the bank’s
share with the Stanchart Consortium. Of the remaining shares, 45.6% were owned by government
via PPA and the rests (3.4%) were owned by the public. The terms of SPA consisted of:
1. Commitment of Stanchart Consortium to improve and enhance the performance of Bank Permata
2. Commitment to support the banking industry in Indonesia
3. Commitment to refrain from selling the shares of Bank Permata within three years after the SPA
Ownership structure of the alliance is provided in figure 7.1.

29
It is the lowest share pricethat shares can be sold at
30
This means that other bidders were for the time being dismissed. However, if Stancart Consortium failed the Fit and
Proper Test, then PPA would ask another (second ranked) bidder to increase the price to Stanchart’s bid and would
request of the Bank of Indonesia to examine documents for another Fit and Proper Test.

210
 Figure 7.1: Ownership structure of Bank Permata after IEPSA

UK INDONESIA
Standard Astra
Chatered International
Bank

50% 50 %

Consortium of Standard Chartered Bank

and
Astra International
INDONESIA
Government Public Consortium of Stanchart and Astra

45.6% 3.4% 51%

Bank Permata

The process was considered by the stakeholder (house of representatives and society) as transparent
since there were no issues on the share price and internal organization of Bank Permata seemed to
support the IEPSA which was solidified by the prior restructurization plan.

The alliance partners

Bank Permata’s competitive advantage was its loans for small and medium enterprises, commercial,
and retail segments which had become a vibrant force in the retail banking segment. This
contributed to the increased profit of Rp 558.1 billion. As of December 2004, the bank’s CAR was
11.48% which was a slight improvement from 10.8% in 2003, and above Bank Indonesia’s
requirement of 8%. Aside from CAR, the profitability ratios were also positive. Net interest margin
(NIM) rose from 4.4% to 5.8%, while ROA and ROE were 2.3% and 42.7% respectively as of
December 31, 2004.
In terms of innovativeness, Bank Permata had developed business activities which were responsive
to increasing market demand. It had re-mapped activities ranging from new business strategies
composed of nine operational aspects, it relocated branches to more strategic locations, and it
formed a center of national operations that supported integrated administrative and operations
activities of the bank all over Indonesia. Nine operational aspects were distinguished: Customer,
Customer Relationship Management, Brand, Distribution Channel, Service, Product, Human
Resource Management, Risk Management, and Acquisition.
The Stanchart Consortium served consumer wholesale banking customers (Annual Report of
Stanchart, 2004). Standard Chartered had alliances in Africa, America, United Kingdom, Middle
East, South Asia, Hong Kong, and Singapore. Both partners’ services were consistent with the trend

211
of banking industry in Indonesia which had shifted the target loan from corporate to consumer
banking after the crises. The local partner of the Stanchart Consortium, Astra, was one of
Indonesia's largest diversified conglomerates in Indonesia. Over the years Astra had grown and
become the largest automotive distributor and producer in Indonesia partnering with Japanese
automakers such as Toyota, Daihatsu and Isuzu. Astra had expanded its business lines not only in
automotive related businesses and had six core businesses: Automotive, Financial Services, Heavy
Equipment, Agribusiness, Information Technology and Infrastructure. A number of strategic
alliances with leading global players in various industries had been established.

Technology
Bank Permata had a competitive advantage in banking technology inherited from the merger with
Bank Bali (Annual Report of Bank Permata, 2003). Bank Permata used one of the leading banking
system technologies enabling the bank to implement banking platforms which were compatible with
other system in banking industries as well as non-banking institution (Annual Report of Bank
Permata, 2003). On this unique feature rested not only the capability to expand delivery channels to
non-banking institution whenever required but also to support the bank’s operations in compliance
with risk management as it connected all activities within the bank’s value chain. Bank Permata’s
electronic banking was one of the most comprehensive in Indonesia consisting of mobile banking,
call centers, debit cards, internet banking, and electronic payment services. Standard Chartered, as
one of the biggest banks in the world provided the uses of advanced technology to secure and safe
way of banking from anywhere. It had sophisticated information technology connecting 33,000
people in over 550 locations serving 56 countries and territories across Asia Pacific region, South
Asia, Middle East, Africa, United Kingdom and Americas (Annual Report of Stanchart, 2004).

Capital need
In 2004, the financial performance of Bank Permata had improved compared to that before the
merger. After a loss of Rp 808 billion in 2002, it posted net profits of Rp 558 billion and Rp 623
billion in 2003 and 2004, respectively. Nevertheless, Bank Permata required capital to grow to
achieve its vision to be an outstanding and professional financial service provider that built deep
relationships with customers and delivers consistently compelling customer experiences.
Growth in banking loan markets in Indonesia during 2004 was among the highest in the Asia
Pacific region. Thailand had the highest growth of over 200 percent, Indonesia at the next order
with figures of 150 percent compared with the previous year with Taiwan as the third order with
about 130 percent expansion (Bank of Indonesia, 2004). This high growth was attributed by the

212
increasing customer confidence index reflected by improving customer expectation index and
stabilized economic condition; increasing GDP and decreasing interest rate (Bank of Indonesia,
2004).

Strategies
Bank Permata’s vision was to be an outstanding and professional financial service provider that
builds deep relationships with customers and delivers consistently compelling customer
experiences. Bank Permata set its focus on the SME, commercial, and retail banking segments and
became a vibrant force in the retail banking market in Indonesia especially with the arrival of the
new shareholders (Annual Report of Bank Permata, 2004).
The strategic intent of the Stanchart Consortium was to be the world’s best international bank,
leading the way in Asia, Africa and the Middle East and to be the market leader in the growing
Indonesian automotive industry.
Healing from the economic crisis, Indonesia’s banking industry was developing with a lot of
opportunities in the market. Stanchart Consortium believed in the Indonesian economic
development, especially its potential market. It was committed to form a long-term alliance with
Bank Permata and was willing to inject additional capital into Bank Permata.

The economic environment and share price

Since the Asian crises in the 1990s, 2004 was the best year in terms of the macro economy for
Indonesia. GDP growth was 5.1%, an increase from 3.69% in 2002 and 4.1% in 2003. The growth
was driven by consumption, especially private consumption supported by unsecured loans provided
by banks and multi finance companies as interest rates continued to decrease (Annual Report Bank
Permata, 2004). Rupiah strengthened and was relatively stable over the year at Rp 9,290 per US$, a
decrease in value from 8,940 in 2002 and 8,465 in 2003 with the fluctuation ranged from 5% to 9%.
Inflation rate was 6.1%, it was lower than 11.46% in 2002 and slightly higher than that of the 2003
which was 5.83%.
By the time of SPA, there was intention of the government to reduce the budget deficit. At the time,
share price in the bourse was high and the government set the floor price of the estimated 3 PBV.
As the winning declared with the selling price of 3.18 PBV (based upon the financial report in
December 2003), Government of Indonesia earned Rp 2.77 trillion and therefore gained Rp 0.75
trillion above the fair value of Rp 2.02 trillion. This IEPSA was historically the best price among
IEPSAs in Indonesia.

213
 Table 7.8: Share price of Bank Permata from July to November 2004
No. Month Share Price Situation
1. July 2004 Rp 900 Invitation to prospective partners
2. August 2004 Rp 950 Due diligence
3. September 2004 Rp 950 Due diligence
The SPA was signed between
4. October 2004 Rp 970 government and new partner
5. November 2004 Rp 1,200 Announcement of the new owner

Table 7.9: Comparison between selling share price and fair value of Bank Permata
No. Item Selling Price Fair Value
1. Price to Book Value 3.18 2.31
2. Amount of 51 % share of equity Rp 2.77 trillion Rp 2.02 trillion

7.1.3 Setting up the IEPSA: December 2004 to March 2005

The strategy formulation was initiated by the board of directors of Bank Permata (see table 7.10)
which consisted of eight directors from Indonesia and two directors from England.

Table 7.10: Board of Directors of Bank Permata

No Name Position Nationality
1. Agus D.W. Martowardojo President Director Indonesia
2. J. Georgino Godong Managing Director Indonesia
3. Ongki W. Dana Director of Wholesale Banking Indonesia
4. Elvyn G. Masassya Director of Compliance Indonesia
5. Daryl Morton Director of Investment English
6. Mahdi Syahbuddin Director of Operations Indonesia
7. Iman A. Zahiruddin Director of Retail banking Indonesia
8. Julius Aslan Director of Human Resource Indonesia
9. Hans Theikuhl. Director of Finance English
10. Andrew Hanubrata Director of Commercial Banking Indonesia

The new vision and mission was developed by the President Director assisted by the Managing
Director and discussed with the other Directors. In terms of strategy formulation, it was initiated by
the Director of Operations, Retail Banking, Commercial Banking, Wholesale Banking, and Human
Resources. The functional strategies along with the assigned activities were developed based on the
discussions among directors. These functional strategies were aligned with the corporate and the
competitive strategies as well as with the vision and mission of Bank Permata. The developed
strategies and activities were reported to the Board of Commissioners which consisted of seven
Indonesian and three English representatives as in table 7.11. Three of the Indonesian
representatives were independents in accordance with the Bank of Indonesia’s requirement that
Indonesian Banks have independent commissioners. Three other representatives were from the
government representing the ownership in Bank Permata.

214
 Table 7.11: Board of Commissioners of Bank Permata
No. Name Position Representation Nationality
1. Mulia P. Nasution President Commissioner Government Indonesia
2. Rachmat Saptaman Commissioner Government Indonesia
3. Lukita Dinarsyah Tuwo Commissioner Government Indonesia
4. Mark Hansen Commissioner Stanchart English
Consortium
5. Vincent Plant Commissioner Stanchart English
Consortium
6. Brian Keelan Commissioner Stanchart English
Consortium
7. Gunawan Geniusahardja Commissioner Stanchart Indonesia
Consortium
8. Tirta Hidayat Commissioner Independent Indonesia
9. Deswandhy Agusman Commissioner Independent Indonesia
10. Chandra Purnama Commissioner Independent Indonesia

The strategic planning was set up as presented in table 7.12. It was based on organic development,
implementation of Good Corporate Governance, a lock-in of the Stanchart Consortium (the
consortium was not allowed to sell its shares for three years), improvement of human resource
quality, and to have an extension of the technology in particular in the IT (Annual Report of Bank
Permata, 2004). The bank’s long-term plan was to (Annual Report of Bank Permata, 2004):
1. Focus on Small and Medium Enterprises (SME) and consumer segments.
 SME business: Maintain the SME segment and selectively replicate the value chain
model in 2-3 key industries with priority on export oriented sectors.
 Consumer: Expand the consumer portfolio by continuing aggressive growth in mortgage
and car loans and also invest for growth in credit card business.
2. Increase fee based income through cross selling of appropriate products.
 Appropriate investment products and bank assurance products for retail consumers.
 Trade finance products for SME customers and FX in existing customer base.
 Regularly launched innovative bundled products to improve cross selling.
3. Improve operational efficiency
 Increase the low cost funding ratio, optimize the branch network and improve employee
productivity through appropriate initiatives such as training and performance incentive
programs.
4. Continue to strengthen key capabilities
 Enhance the SME and Branch Sales Model, strengthen risk management capabilities and
continue to develop and retain human capital
 Establish a data warehouse for knowledge based management to be able to generate
credit and sales analytics and micro segmentation of the portfolio.

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 Table 7.12: Strategy components of Bank Permata in 2004
No. Strategy Description
components
1. Vision To be an outstanding and professional financial service provider that builds
deep relationships with customers and delivers consistent compelling
customer experiences.
2. Mission • To conduct our business prudently and sustainably in order to create
optimum value
• To provide our customers with high quality products and services with
integrity and professionalism
• To equip our employees with the required skills as well as reward their
excellent performances
• To serve our customers with high quality products and services and strive to
become a role model in the best practice of Good Corporate Governance in
banking industry
3. Corporate Growth strategy by expanding possibilities for better services and embarking
Strategy on a number of product developments that solidify prominent position in the
growing retail banking market in Indonesia
4. Competitive Friendly and personalized services to enhance position as the leading retail
strategy bank in Indonesia that provides ultimate customer experience in banking
services. Focus on Small and Medium Enterprises (SME) and consumer
segments.
5. Functional • Increase fee based income through cross selling and appropriate products.
Strategy • Improveoperational efficiency
• Continue to strengthen key capabilities
6. Activities • SME business: Maintain SME segment and selectively replicate value chain
model in 2 to 3 key industries prioritized in export oriented sectors.
• Consumer: Expand consumer portfolio by persistent aggressive growth in
mortgage and auto loans and also invest in growing credit card business.
• Appropriate investment and bank assurance products for retail consumers.
• Provide trade finance products for SME customers and foreign exchange for
existing customer.
• Regularly launch innovative bundled products to improve cross selling.
• Increase low cost funding ratio optimized branch network and improve
employee productivity through appropriate initiatives such as training and
performance incentive program.
• Enhance SME and Branch Sales Model, strengthen risk management
capabilities and continued to develop and retaining human capital
• Establish data warehouse as the bases of analysis to generate loanfor micro
segment.

The arrival of new shareholders, Stanchart Consortium, was aimed to solidify Bank Permata by
synergizing resources and activities. The fit in objective occurred as the commitment of the new
shareholders was reflected in the strategic direction that they would like to see Bank Permata
improve in 2005. This had an emphasis on internal consolidation to strengthen the infrastructure in
support of long-term objectives and thus guarantee on employment was provided. Internal
consolidation was reflected in activities which support the bank’s functional strategy with the aim
of providing outstanding and professional financial service. This included activities related to
corporate governance, risk management, information technology, and personnel development of a
number of business units which were strategic to the bank’s long-term growth such as treasury,

216
international banking, retail banking, and transactional banking to increase fee-based income. The
alliance was also aimed to solidify its leadership in automotive banking.
The management and the employees supported the implementation of strategic planning. According
to the commissioner “Prior restructurization and merger seemed to prepare both management and
employees to the intended IEPSA that had been set up by the government”.

7.1.4 Running the IEPSA: April 2005 to August 2006

Human resources
In April 2005, as the implementation of strategic planning initiated, the new owner of Bank Permata
declared that rationalization was not the priority of the alliance. However, in fact, from January to
March 2006, the alliance implemented a rationalization program and provided attractive pension
packages to those who chose early retirement.
Bank Permata launched the Permata Assessment Center (PAC) which was considered one of the
most comprehensive assessment centers in Indonesia in terms of IT, Human Resources, and
facilities. Along with the launch of PAC, the alliance had set up eight behavior rules derived from
the five core values of Trust, Integrity, Service, Excellence and Professionalism. Trust was founded
upon goodwill, honesty and reliability. Integrity was associated with decent norms of conduct and
behavior acceptable to the company, community and the principles of Good Corporate Governance.
Service was equated by a performance or delivery that meets or exceeds the expectations of
stakeholders. Excellence should be an ingrained quality in every Bank Permata Bankers not to
accept anything less than the best. Professionalism was doing one’s job with competence,
responsibility and accountability. Moreover, the alliance had facilitated a new collective labor
agreement, which was effective for a two-year period. The goal was a more amicable and
harmonious relationship between management and labor union. The agreement set up guidelines
between employers and employees in understanding the rights and obligations.

Trust
Directors of Bank Permata enhanced the trust level through frequent socialization of vision to
become the best retail bank in Indonesia. When the performance is compared to that before the bank
was divested, it shows that performance was relatively stagnant as indicated with decreasing profits
from Rp 623 billion to Rp 295 billion and increasing NPL from 1.6% to 3.3%.

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Management of the alliance
To pursue its objective to get closer to retail consumers especially in the remote area, the bank had
made alliances with regional Banks. In the automotive retail segments Bank Permata set up the
alliances with automotive industries like Daihatsu, Isuzu, Nissan, Suzuki, Honda, Hyundai,
Chevrolet, Mercedez, and BMW. In the remote area, geographical business units communicated
each other by forming matrix organizations, i.e. Bank Permata divided its operational areas into
four regions. Each business region had its own focus and emphasis which were tailored to the
specific needs and characteristics of the market. The branches within the region cooperated with
one another and the headquarter in Jakarta provided the financial resources and human resource
management to the region
There were no significant changes in the organization hierarchy of Bank Permata since forming a
strategic alliance with Standard Chartered and Astra International. The alliance provided branches
with authority in finding customers, while the main office monitored the compliance and risk
management of customer through the IT system. Based on this, the condition had a positive
influence on the organizational arrangement of the alliance.
The regular planning consisted of annual strategic planning, long-term planning, and budget
planning. Moreover, in order to align all the business units to the objective setting, the alliance had
implemented the Balanced Scorecard (BSC). The BSC system provided measurable business targets
and achievement parameters of financial performance, customer satisfaction, internal business
processes and personal learning curve, which served as the basis for employee performance
appraisal at Bank Permata. In the area of management of control system, the alliance provided
rewards to the people in all levels of the organization based on merits in accordance with the
achievement of key performance indicators.
The vision of the alliance was to become an outstanding and professional financial service provider,
with the mission of building deep relationships with customers and delivers consistently compelling
customer experiences by creating optimum value for customers and employees. Several control
mechanisms had been developed in order to support the management control system. This ranged
from general meetings of shareholders, an audit committee, a remuneration committee, and an
executive committee In assisting the Board of Commissioners, the Audit Committee monitored and
reviewed the management and control aspects of Permata Bank, provided independent professional
opinion on the report and other information submitted by the Board of Directors to the Board of
Commissioners, and identified other important issues requiring the attention of the Board of
Commissioners. The Remuneration Committee was responsible for evaluating the performance of
the Board of Commissioners and the Board of Directors to determine the appropriate amount of

218
remuneration with respect to their duties and responsibilities, and monitoring the process or
execution thereof. Executive committees are under the coordination of the Board of Directors, and
are established to help the Board of Directors in the execution of specific duties and responsibilities
of the Board of Directors. These committees comprise the Risk Management Committee, the Asset
Liability Committee (ALCO), the Human Resources Committee and the Information and
Technology Committee.
The control attributes provided in the previous statements were the instruments for feedback to the
commissioners, BOD, top management, and management, not only in compliance with the Bank
Indonesia regulation. The bank had developed a Corporate Compliance Group which reported to
Compliance Director and ensured that the Bank was in full compliance with all government codes
and regulatory structures. Improvements in operational oversight had also been bolstered by the
continuing evolvement of the bank’s risk management system that was set towards Basel II31
compliance. Advocates of Basel II believed that such an international standard could help protect
the international financial system from the types of problems that might arise should a major bank
or a series of banks collapse. Basel II attempted to accomplish this by setting up risk and capital
management requirements designed to ensure that a bank has adequate capital for the risk the bank
exposes itself to through its lending and investment practices. It complied with the Bank of
Indonesia regulation as anticipation to avoid the occurrence of past mistake.

Performance of the alliance

Based on the data from Bank of Indonesia, the outstanding loans of Bank Permata increased 7% to
Rp 23.8 trillion. It was considered low when compared with the average national growth of 25%.
To maintain its high profitability, Bank Permata only increased 10% of third party deposits to Rp
28.6 trillion in anticipating the high interest in 2006. Nevertheless, the asset increased by 18.9% to
Rp 37.8 trillion.
With 70% of loan provided to SMEs and 30% to consumers had resulted with the LDR of 83.1%
which was above the average banking industry of 61%.
All in all, performance of the alliance in 2006 was not satisfactory. One way of concluding this was
by comparing the performance of the alliance in 2006 with that before the alliance in 2004. In 2004,
with third party deposits of Rp 26 trillion the bank was able to achieve a profit of Rp 623 billion,
with a ROE of 42.7% and NPL of 1.6%. In 2006, as operational expenses soared, the bank had only
a profit of Rp 295 billion, a ROE of 14.3% and a NPL of 3.3% (see table 7.13). This situation was
due to the opportunistic behavior of the foreign partners (Stanchart and Astra) which aimed to buy

31
Basel II is the second of the Basel Accords (now extended and effectively superseded by Basel III), which included
recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision.

219
additional shares from the government so that in September 2006 this consortium owned 89% of the
bank’s shares buy burdening the cost. Therefore, the benchmarked price in the bourse was
deliberately weakened to make them attractive for the consortium to buy additional shares.

Table 7.13: Indicators and performances of Bank Permata in 2004 and 2006
No. Indicator 2004 2006
1. Amount of assets 31.8 trillion 37.8 trillion
2. Third party deposits 26.0 trillion 28.6 trillion
3. Profit Rp 623 billion Rp 295 billion
4. ROE 42.7% 14.3%
5. ROA 2.3% 1.22%
6. LDR 57.2% 83.1%
7. NPL 1.6% 3.3%
8. CAR 11.48% 14.4%
9. NIM 5.8% 5.91%

7.1.5 Closing of the IEPSA: September 2006

With regard to the satisfactory performance of the alliance, on September 4, 2006, the government
sold its remaining 25.9% stake in Bank Permata on the stock exchange. The release of government
stocks was supported by Peraturan Pemerintah/PP. No.10 in 2006 on the sale of state’s shares in
Bank Permata and Bank Lippo due to its compelling performance. It was also the result of the
House Commission XI meeting on September 28, 2005. The Government commissioned PPA to
prepare the release of the remaining government shares in Bank Permata through market
mechanisms. The shares were bought by the consortium of Stanchart Consortium with a price of Rp
875 per share or 2.65 PBV based on the performance in 2005. In the transaction, each of the
partners in the consortium acquired 12.95% of the shares. Consequently, the consortium possessed
89% of shares in Bank Permata. This divestment was a follow-up sequence of divestments of
government’s shares to the stock exchange which began in December 2004 when the government
sold 19.7% of shares in the stock exchange and 12.1% of shares were bought by the consortium.
After the last divestment of government’s shares, the ownerships of the bank 44.5% owned by
Stanchart and 44.5% owned by Astra, and the rest owned by public in the bourse which was 11.0%
leaving the government as the regulatory function of the banking industry.

7.2 Analysis
In this section, the model from chapter three is applied to ‘evaluate’ the Bank Permata IEPSA. The
description provided in section 7.1 is similar to the phases identified in chapter three. It can
therefore be concluded that the life cycle of the IEPSA is in accordance with the theory described in
the previous chapter differentiated into a planning, formation, operation, and termination phase.

220
 Table 7.14: Time and duration of each phase
No. Phase Time Duration
1. Planning July to November 2004 5 months
2. Formation December 2004 to March 2005 4 months
3. Operation April 2005 to August 2006 17 months
4. Termination June 2008 1 month

This section provides an analysis of the presence/importance of the factors from the model, i.e.
stakeholder support (7.2.1), strategic match (7.2.2), cultural understanding (7.2.3), internal
organization support (7.2.4), strategic planning (7.2.5), human resource management (7.2.6),
organizational arrangement (7.2.7), management control system (7.2.8), evolved cultural
understanding (7.2.9), internal driver (7.2.10), and external driver (7.2.11).

7.2.1 Stakeholder support

Internal organization support: the intended privatization was socialized intensively to the
stakeholders. Fine organization climate indicated by high degree of internal relationshipwas
derived from successful prior restructurization program, one of the means through merging five
different banks and reducing organization layers. Government had projected Bank Permata’s
privatization in 2004 and this intention was subsequently permitted by the representative.
Therefore, the situation had a positive influence on the internal organization support to the
intended alliance.
Society support: there was a change in the ownership structure, i.e. the government surrenderred its
majority stake. In fact, high degree of internal relationship had contributed to a smooth transfer
of information about privatization in the bank which afterwards created transparency. Moreover,
the share price had a positive influence, i.e. the price paid for shares was above the fair value,
and there was transparency in the process. Thus, society support was positive.
Based on this, it can be concluded that stakeholder support for the alliance during the planning
phase of the IEPSA was positive. Stakeholder support was also evidenced by absence of
oppositions from labor union, management, and society. An overview is provided in table 7.15.

Table 7.15: Relationships for the stakeholder support factor

No. Variable Sub-Factor Factor
1. Company restructuring (+) Internal organization
Plan for privatization (+) support (+)
Stakeholder
2. Change in ownership structure (-) Society support (+)
support (+)
Share price (+)
Transparency of the privatization process (+)

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7.2.2 Strategic match
Attractiveness of macro-economic conditions: within the last three years, GDP growths were below
inflation rates whileexchange ratesof Rupiah to U.S. Dollar fluctuated by below 10%. Thus, GDP
growth was negative and currency rate was positive.
Attractiveness of market: market share of Bank Permata was ranked eighth out of 128 banks in
Indonesia. From 2003 to 2004, the growth of market was more than 10%. Based on this, market
share and growth of market were negative and positive respectively. Thus, the attractiveness of
market was neutral.
Alliance track record: Bank Permata had never established any alliances with foreign companies. In
contrast, Stanchart had enganged with a vast amount of alliances scattered in Africa, America,
United Kingdom, Middle East, South Asia, Hong Kong, and Singapore with successful results.
Thus, the alliance track record was neutral.
Attractiveness of product or service: the quality of product and service were fine. Besides that,
Bank Permata was innovative in adapting products or services to the shifting market requirement
from corporate segment to consumer and commercial segments. Thus, the attractiveness of
product or service was positive.
Attractiveness of technology: Bank Permata had competitive advantage in the platform of
outstanding banking technology inherited from the banks prior to the merger. It utilized one of
the leading banking system technologies, enabling the bank to implement banking platforms
compatible with other system in banking industries and non banking institution. Besides that, the
information technology had been connected and integrated withthe business process in the
organization. Thus, attractiveness of technology was positive.
Attractiveness of financial performance: the ROA of 2.3% was less than WACC of 14% while
growth of sales exceeded 10%. Thus, attractiveness of financial performance was neutral.
Capacity: the combination of the six components discussed above leads to the conclusion that the
capacity had a positive influence on the strategic match.

Complementarity related to the attractiveness of the market: since the foreign partner’s market was
in the life-cycle of growing to maturity while domestic partner’s was in a growth cycle, it can be
concluded that this was positive for complementarity.
Complementarity related to the strategy: since both partners were following a growth strategy, it
can be concluded that this was positive for complementarity.
Complementarity related to the attractiveness of resources: Both partners were able to gain benefits
from each other products and services. In terms of technology, there was a plan to promote

222
 transfer of expertise related to the consumer and small and medium enterprise segments from
Stanchart and loan of car ownership from Astra. It can be concluded that the complementarity of
the attractiveness of resources was positive.
Complementarity: the combination of the three variables discussed above leads to the conclusion
that complementarity had a positive influence on the strategic match.
Pressure on continuity: both partners showed commitment to continue the alliance which was
pledged withrefrain of selling the shares of Bank Permata in three years following the SPA. As
such, the partner designated to continue or invest for long in the alliance. Thus, pressure on
continuity was positive.
Pressure of time on alliance: Both partners treated the alliance as an important asset to exploit
opportunity for the sake of their existences, i.e. to continue growing by grasping Indonesian
market. Thus, pressure of time of alliance was positive.
Alternative to cooperation: both partners had other alternatives to forming IEPSA. For the local
partner, there were many alternatives of partners to form the IEPSA. Thus, the alternative to
cooperation can be considered negative.
Strategic importance: the combination of the three variables discussed above leads to the conclusion
that strategic importance had a positive influence on the strategic match.
Based on this, it can be concluded that the strategic match of the two partners in the alliance during
the planning phase of the IEPSA was positive. An overview is provided in table 7.16.

Table 7.16: Relationship in strategic match factor

No. Variable Component Sub-factor Factor
1. GDP growth (-) Attractiveness of Capacity (+)
Currency rate (+) macroeconomic
conditions (+/-)
2. Market share (+/-) Attractiveness of
Growth of market (+) market (+)
3. Partner’s experience (+) Alliance track record
Partner’s successfulness (+) (+)
4. Quality of product or service (+) Attractiveness of
Innovativeness of product or product or service (+)
service (+)
5. Technology of product or service Attractiveness of Strategic
(+) technology (+) match (+)
Information technology (+)
6. Profitability (-) Attractiveness of
Growth of revenue (+) financial performance
(+/-)
7. Complementarity related to the
attractiveness of market (+)
Complementarity related to the
strategy (+) Complementarity (+)
Complementarity related to the
attractiveness of resources (+)

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 No. Variable Component Sub-factor Factor
8. Pressure on continuity (+) Strategic importance
Pressure of time on alliance (+) (+)
Alternative to cooperation (-)

7.2.3 Cultural understanding

Share of communication: in the planning phase of the alliance, the share of communication between
the partners and stakeholders was frequent. Thus, the share of communication was positive.
Nurture of the alliance: the partners were willing to nurture the alliance by developing, supporting,
and enhancing the performance. Thus, this variable was positive.
Based on positive variable it can be concluded that the cultural understanding in the alliance during
the planning phase of the IEPSA was positive. An overview is provided in table 7.17.

Table 7.17: Relationship in cultural understanding factor

No. Variable Component Factor
1. Share of communication (+) Trust (+)
Cultural understanding (+)
2. Nurture the alliance (+) Commitment (+)

7.2.4 Internal organization support

Participation in the implementation of strategic planning: prior restructurization and merger had
prepared and alerted internal organization with the forthcoming IEPSA. Management and
employees within the organization participated in the implementation of strategic planning. Thus,
the internal organization support was positive.

Table 7.18: Relationships for the internal organization support factor

Variable Factor
Participation in the implementation of Internal organization support (+)
strategic planning (+)

7.2.5 Strategic planning

Commitment: The partners formulated the strategic plan and were committed to its implementation.
They were committed to creating a sustainable competitive advantage and thus increasing value
by providing high quality products and services through enhanced human resource capability,
and in compliance with Good Corporate Governance. Besides that, the partners also pledged to
lock up the share for a minimum of three years (so the foreign partner was tied not to leave the
alliance within three year time). Thus, strategic planning was positive.

224
 Table 7.19: Relationships for the strategic planning factor
Variable Factor
Commitment (+) Strategic planning (+)

7.2.6 Human resource management

Collaborative people: The alliance had launched PAC, considered as one of the most
comprehensive assessment centers in Indonesia, and established eight behavior rules derived
from the five core values of Trust, Integrity, Service, Excellence and Professionalism. Moreover,
the alliance had facilitated a new collective labor agreement, aimed for amicable and harmonious
relationship between management and labor union. Overall, although, there is an opportunistic
behavior on the side of foreign partner related to the financial performance of the alliance, the
collaborative people variable was still considered as positive.

Table 7.20: Relationships for the human resource management factor

Variable Factor
Collaborative people (+) Human resource management (+)

7.2.7 Organizational arrangement

Flattened organization: the alliance had no activities related to flatten the hierarchy of the
organization. Thus, the flattened organization was neutral.
Decentralization of decision making: the bank had made alliances with regional banks to move
closer to customer especially in the remote area. Business units communicated each other by
forming matrix organizations. It was supported by the decentralization of decision making for
the branches in the remote area. It created flexible organization. Thus, the decentralization of
decision making was positive.
Based on one neutral and one positive variable it can be concluded that the organizational
arrangement during the operation phase of the IEPSA was positive. An overview is provided in
table 7.21.

Table 7.21: Relationships for the organizational arrangement factor

No. Variable Factor
1. Flattened organization (+/-) Organizational
2. Decentralization of decision making (+) arrangement (+)

7.2.8 Management control system

Planning: each division was committed to ensuring the achievement of objectives. Thus the
planning was positive.

225
Control structure: the audit committee conducted process feedback on performance by auditing on
the divisional performances within the alliance. The findings of these audits were reported to the
remuneration committee. The alliance had set up the element of control structure and control
process such as vision, mission, general meeting of shareholders, audit committee, audit
committee, remuneration committee, and executive committee, and Corporate Compliance
Group which reported to Compliance Director. The structure complied with the Bank of
Indonesia regulation which was intended to anticipate the occurrence of past mistake. Thus,
control process was positive.
Control process: the control process was not only derived from the divisional performance, rather it
also cascaded down to the individual level. This process aligned the corporate objectives of the
alliance with the organizational objectives. Thus, the control process was positive.
Based on three positive variables it can be concluded that the management control system during
the operating phase of the IEPSA was positive. An overview is provided in table 7.22.

Table 7.22: Relationships for the management control system factor

No. Variable Factor
1. Planning (+)
2. Control structure (+) Management control system (+)
3. Control process (+)

7.2.9 Evolved cultural understanding

Trust: sharing of communication between partners to the organization was frequent. Thus, share of
communication was positive.
Commitment: it was the public’s allegation that the partners (Stanchart and Astra) temporarily,
during 2005, led the alliance performance go down on purpose by increasing the overhead cost
including the personal expenses burdening the profit which was reflected in the plunge of the
share price in the bourse. Nevertheless, the partners nurtured the alliance, indicated by
participation and contribution of Stanchart and Astra in the operations as well as marketing and
sales activities, however it was in the objective to purchase the remaining shares of the
government in September 2006 with low price since government used the price in the stock
exchange as the benchmark which was drifted due to its poor performance. Thus, nurture of the
alliance was positive during the operating phase. Since performance of the bank after the IEPSA
deteriorated which was indicated by decreasing profitability and increasing NPL, thus,
performance of the alliance was negative.

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Based on the combination of the two components discussed above it can be concluded that the
evolved cultural understanding factor during the operating phase of the IEPSA was neutral. An
overview is provided in table 7.23.

Table 7.23: Relationships for the evolved cultural understanding factor

No. Variable Component Factor
1. Share of communication (+) Trust (+)
2. Nurture the alliance (+) Cultural understanding (+)
Commitment (+/-)
Performance of the alliance (-)

7.2.10 Internal driver

Strategic objectives: the government partners thought that the objectives of improving performance
of the alliance had been fulfilled so that it was not necessary to remain in the alliance. Due to this
condition, the variable was the cause of the alliance termination.
Expectancy: the alliance had actually improved its performance so that inability to fulfilling the
expectancy was not the cause of the termination of the alliance.
Corporate leadership: There were no changes in corporate leadership so this was not the cause of
the termination of the alliance.
Thus, in terms of internal driver out of three variables strategic objectives variable was the cause of
the alliance into termination.

Table 7.24: Relationships for the internal driver factor

No. Variable Factor
1. Strategic objectives (-)
2. Expectancy(+) Internal driver (-)
3. Corporate leadership (+)

7.2.11 External driver

External environment: there were no changes in the external environment regarding the regulations
and politics so that external environment was not the cause of the alliance termination.

Table 7.25: Relationships for the external driver factor

No. Variable Factor
1. External environment (+) External driver (+)

7.3 Additional insights

Based on the description presented in section 7.1, there are a few additional insights that can be
provided concerning with stakeholder support (7.3.1), internal support (7.3.2), human resource

227
management (7.3.3), and management control system (7.3.4). These additional insights are aimed to
present additional perspectives and information about the IEPSA that was not covered in section 7.2
(analysis based on the model established in Chapter 3).

7.3.1 Insights on the stakeholder support

Plan for privatization was derived from government decision in 2001 and motivated by
government’s keen interest to acquire cash inflow from the privatization to reduce the budget deficit
on the expenditure. The plan for privatization influenced the existence of company restructuring
which was commenced by IBRA and later supervised by PPA prior to the IEPSA initiation.
Existence of company restructuring one of the means by merging five BTOs into new entity of
Bank Permata eventually influenced positively to the degree of internal relationship inside the bank.
Indeed, there was motivation from the government over budget deficit reduction in 2004. However,
existing high share price in the bourse, and setting up floor price (by the government/PPA) which
was in accordance with the fair value had influenced positively to the offered share price of Bank
Permata.
As such, having both high degree of internal relationship and high share price, they influenced
positively to the transparency of the privatization process in Bank Permata which subsequently
affected to the presence of stakeholder support.

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 Figure 7.2: Stakeholder support – adjusted

Plan for
privatization

+ +

Company Reduction of Share price Existence

restructuring budget deficit in the of floor
bourse price

+ - - +

Internal organization support

Share price
Degree of
internal
relationship

+
+

Society support

Transparency of the
privatization process

+
Stakeholder support

7.3.2 Insights on the internal organization support

The new owners of Bank Permata guaranteed the employees and management on employment.
Besides that they had fit in objective to develop the IEPSA. This situation enhanced the
participation of the internal stakeholder in the implementation of strategic plan in such a way that
they were ascertained about the occupations and motivated as well as enthusiastic with the new
ownership in the IEPSA.

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 Figure 7.3: Internal organization support - adjusted

Guarantee on Fit in objective

employment

+ +

Participation in the
implementation of
strategic plan

Internal support

7.3.3 Insights on the human resource management

The motives of new owners of the IEPSA to buy the remaining government’s shares in 2006 with
low share price by reducing the alliance’s profitability32 indicated an opportunistic behavior during
the operation phase. This influenced negatively the collaborative people which subsequently
influenced negatively to the questions on how the IEPSA arranged its human resource management
during the operation phase.

Figure 7.4: Human resource management - adjusted

Opportunistic behavior

Collaborative people

Human resource
management

7.3.4 Insights on the management control system

Control structure established by the new owners was in compliance with Bank of Indonesia
regulation. It was set up in a purpose to anticipate and avoid the occurrence of past mistakes when
during the economic crisis, the banking collapsed due to the non-existence of Good Corporate
32
This happened since due to decreasing profitability, Bank Permata’s share price in the bourse (as the benchmarked
price) was also plunged providing the new owners with lower share price.

230
Governance. All in all, planning, control structure, and control process which were in accordance
with the Good Corporate Governance influenced positively to the successful management control
system of the IEPSA.

Figure 7.5: Management control system - adjusted

Anticipation of the
past mistake

Planning Control structure Control process

+ + +

Management control
system

7.4 Conclusions
In this chapter, the Bank Permata case was described and the model from chapter three was applied
to measure the factors that played a role for the IEPSA.
First research question: what were the phases in the IEPSA?
The four identified phases in the literature, i.e. planning phase (5 months), formation phase (4
months), operation phase (17 months), and termination phase (1 month), could all be identified for
the Bank Permata case. Thus, the phases followed the model.
Second research question: what were the factors in the IEPSA?
During the planning phase, the IEPSA faced these conditions, i.e. stakeholder support was positive
except change in ownership structure which was negative. Both cultural understanding and strategic
match were positive. Thus, from both analytical and political perspectives the IEPSA could be
considered attractive. Change in ownership structure was considered negative since the majority of
ownership shifted from the government to foreign partner.
During the formation phase, the situation can also be considered positive. Positive influences on
internal organization support and strategic planning were supported by positive participation in the
implementation of strategic planning and positive commitment of both partners. Thus, similar to the
first phase, from both analytical and political perspectives the IEPSA was desirable.
During the operation phase, the IEPSA’s situation can also be considered positive. All of the factors
in the analytical perspectives and cultural understanding were positive indicating the IEPSA was
doing well in the operations and relationship. Positive influences on human resource management,

231
organizational arrangement, and management control system were supported by positive related
variables except neutral flattened organization.
It is possible that the first two phases of the IEPSA took less than one year because of the positive
analytical and political environment, i.e. there was support for the IEPSA.
With positive factor in the operation phase and neutral factor in the evolved cultural understanding,
it was a surprise that the IEPSA was terminated. But actually, it was due to the fulfilled strategic
objectives by the local partner.

Third research question: what were the relationships between factors?

Several relationships between the factors in the model were observed:
 Stakeholder support–cultural understanding. The communication and socialization of the
intended IEPSA was intensive to the stakeholder which influenced positively to the trust level.
Partners were willing to nurture and care of the alliance by developing, supporting, and
enhancing the performance which led to a positive influence on the commitment among partners.
This condition led to a positive influence on the cultural understanding.
 Cultural understanding-internal organization support. Positive influence on cultural
understanding in the alliance coupled with the new owners’ commitment to the alliance’s
objective and ensured the participation of internal organization in the implementation of strategic
planning had promoted positive influence on the internal organization support.
 Internal organization support-strategic planning. Participation of internal organization support
had supported the successful implementation of strategic planning.
 Human resource management-management control system. The alliance enhanced the quality of
human resources partners by launching PAC, set up eight behavior rules derived from the five
core values of Trust, Integrity, Service, Excellence and Professionalism, and facilitated a new
collective labor agreement. Therefore, it helped implement the control process of the IEPSA and
thus supported the management control system.
 Organizational arrangement-management control system. The alliance enhanced the
organizational arrangement by delegating and thus increased the speed of decision making to the
regional branches, initiated alliances with regional banks, set up the alliances with automotive
industries, provided branches with authority in finding customers, implemented the BSC, and set
up control structure and process. Therefore, it helped implement the control process of the
IEPSA and thus supported the management control system.
 Management control system-evolved cultural understanding. Positive management control
system in the alliance had improved the performance of the alliance and thus together with the

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 commitment and intensive communication to the stakeholder had influenced positively to the
evolved cultural understanding in the alliance.
Summary of factors relationship based on the case is presented in table 7.26.

Table 7.26: Relationship of factors based on the Bank Permata case

No. Influencing factor Influenced factor
1. Stakeholder support Cultural understanding
2. Cultural understanding Internal organization support
3. Internal organization support Strategic Planning
4. Human resource management Management control system
5. Organizational arrangement Management control system
6. Management control system Evolved cultural understanding

Additional insights:
There are a few additional insights gathered concerning with stakeholder support, internal
organization support, human resource management, and management control system:
 In Bank Permata, plan for privatization which was in accordance with the government decision
in 2001 had motivated the government to obtain cash inflow from the privatization in the aim to
reduce the budget deficit on the expenditure. The plan for privatization influenced to the
existence of company restructuring commenced by IBRA and later supervised by PPA until the
preparation of IEPSA.
Existence of company restructuring by merging the five BTOs into Bank Permata eventually
influenced positively to the degree of internal relationship inside the bank. Indeed, there was
motivation from the government over budget deficit reduction in 2004. However, existing high
share price in the bourse, and setting up floor price (by the government/PPA) which was in
accordance with the fair value influenced positively to the share price of Bank Permata.
As such, having both high degree of internal relationship and high share price, they influenced
positively to the transparency of the privatization process in Bank Permata which subsequently
affected to the presence of stakeholder support.
 The new owners of Bank Permata guaranteed the employees and management on employment.
Besides that they had fit in objective to develop the IEPSA. This situation enhanced the
participation of the internal stakeholder in the implementation of strategic plan in such a way
that they were ascertained about the occupations and motivated as well as enthusiastic with the
new ownership in the IEPSA.

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 The motives of new owners of the IEPSA to buy the remaining government’s shares in 2006
with low share price by reducing the alliance’s profitability33 indicated an opportunistic
behavior during the operation phase. This influenced negatively the collaborative people which
subsequently influenced negatively to the questions on how the IEPSA arranged its human
resource management during the operation phase.
 Control structure established by the new owners was in compliance with Bank of Indonesia
regulation. It was set up in a purpose to anticipate and avoid the occurrence of past mistakes
when during the economic crisis, the banking collapsed due to the non-existence of Good
Corporate Governance. All in all, planning, control structure, and control process which were in
accordance with the Good Corporate Governance influenced positively to the successful
management control system of the IEPSA.

33
This happened since due to decreasing profitability, Bank Permata’s share price in the bourse (as the benchmarked
price) was also plunged, providing the new owners with lower share price.

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CHAPTER 8: CASE STUDY OF BANK
INTERNATIONAL INDONESIA
In this chapter, the case study of Bank International Indonesia is presented. Section 8.1 describes
the chronology of the case while section 8.2 presents the analysis of the case study based on the
framework and model gathered in chapter 3 with the factors of each of the life cycle phases in the
sub-sections. Section 8.3 provides insight gathered from section 8.1. Finally, in section 8.4 the
answers to three research questions are provided.

8.1 Description of Bank International Indonesia

PT. Bank Internasional Indonesia Tbk. (BII) was established on May 15, 1959 and licensed as a
foreign exchange bank in 1988. It issued an Initial Public Offering in 1989 at Jakarta Stock
Exchange and Surabaya Stock Exchange (now known as Indonesia Stock Exchange). BII was one
of the biggest private banks in terms of assets. The owner of the bank was a prominent
conglomerate of the Sinar Mas Group (Sinar Mas), established in 1962 and led by a Chinese
Indonesian tycoon: Eka Tjipta Widjaja.
Sinar Mas had four core businesses including pulp and paper, agriculture, food, real estate
development and financial services. BII was linked to the pulp and paper industry, which was led by
the Asia Pulp & Paper Co., Ltd. (APP). APP was one of the world's top ten corporations in paper
making, with overall assets of over US$ 10 billion, and an annual production and processing
capacity of more than 10 million tons.
The corporate culture of the BII bank was characterized by family relationships which reflected the
low degree of internal relationship. Furthermore, there was special treatment of managers and
employees who were Chinese, i.e. they had the same ethnicity as the owner.
The late 1990s Asian financial crisis wrought much havoc upon the Indonesian banking industry.
Many Indonesian banks struggled with seemingly insurmountable amounts of non-performing loans
and rising prospects of liquidation. BII was no exception to this. In 1999, the bank was recapitalized
and restructured by the government as a recapitalized bank. It was transferred to the Indonesian
Bank Restructuring Agency (IBRA) in July 2001 as a “Bank under Surveillance” and a Bank Take
Over (BTO).
This section follows the chronology of the case. A description of the banking industry before the
intended IEPSA is provided in section 8.1.1. The initiation of the intent for an IEPSA was in July
2003. The bidding process was undertaken until the SPA was reached on November 16, 2003. This

235
will be discussed in 8.1.2. The partners in the IEPSA formulated the strategic plan until March 2004
(8.1.3) and implemented the strategy (8.1.4) until the IEPSA termination in November 2006 (8.1.5).

8.1.1 Banking industry before the intended IEPSA

In the beginning of restructuring, the Capital Adequacy Ratio (CAR) of BII was 4% below Bank of
Indonesia’s minimum CAR requirement of 8%. The case had become complicated since the
government had three roles with regard to BII:
 It was part owner of BII (56.5 percent of share). As the owner, the government had to spend
around Rp 7.7 trillion to BII, which was to recapitalize the bank of Rp 6.3 trillion (56.5
percent of the cost of recapitalization of Rp 11.114 trillion) plus Rp 1.4 trillion for interbank
payment of bills.

Table 8.1: Cost of recapitalization and government’s shares at BII (IBRA, 2004)
Bank Total Cost of Cost of Cost of Shares of
Recapitalization Recapitalization Government
Recapitalization From FromOther After
Government Investors Recapitalization
Rp Trillion Rp Trillion Rp Trillion %
Bank BII 11.114 6.28 4.486 56.5

 It was a lender to Sinar Mas, the parent company of BII. Sinar Mas had debt to BII. This
debt accounted for 62 percent of the bank’s total outstanding loans. As a lender to Sinar
Mas, the government was concerned with restructuring the loan in order to obtain the
maximum return. The debt restructuring was signed in March 2001 among IBRA, Sinar
Mas, and BII. But, Sinar Mas failed to pay for the interest liability of about US$ 60 million
which was due at the end of June 2001. Since the Sinar Mas loan accounted for 62% of BIIs
outstanding loans, this would potentially deteriorate the performance of BII. Moreover, in
September 2001, there was a principal debt maturity to BII (about 2.5 percent from US$ 1.2
billion) out of Sinar Mas’ total debt of US$ 1.3 billion. In addition to loan problems to Sinar
Mas, BII had two other problems. First, in order to increase the low CAR, BII needed
around Rp 2 trillion to Rp 3 trillion to raise its CAR to over eight percent confirming the
minimum standard requirement set by the Bank of Indonesia. Second, interbank claims
which amounted to Rp 1.4 trillion.
 It was the guarantor of depositors' funds (blanket guarantee). As the guarantor of depositors'
funds, the government was very much concerned about depositors losing faith in the bank.
This was a concern because evidence from previous years of economic recession suggested
that failure of a prominent bank could had a chain reaction leading to failures of other banks.

236
 This was predominantly due to the decline of public confidence in the economy. Thus, each
time the loan of BII to debtors reached maturity (especially Sinar Mas), the public expected
that it was free of problem. Otherwise, it would be probable that customers/depositors would
move their funds out of BII. This led the government to overcome depositors' funds by
injecting additional funds up to Rp 27 trillion. The provision of the loan to Sinar Mas was a
violation act on the Legal Lending Limit. In the fourth quarter of 2000, BII began to stagger
as an impact of complications in APP. Since March 2001 the performance of APP
deteriorated and it was declared unable to pay its obligations and requested for debt
restructuring.
In 2001, the financial performance of BII was bad; NPL reached 60 percent, CAR was minus 47
percent. As the condition of the bank deteriorated, eventually, the government took a higher stake in
BII by injecting additional funds of Rp 4.74 trillion. This made BII one of the BTOs with a 93.69%
ownership by the government.
Following this, are structuring program undertaking by IBRA for financial and debt restructuring,
of BII had been successful. This was reflected in the bank's financial statements as of December
2002. The bank posted a net profit of Rp 128 billion, and had improved financial ratios such as
CAR, NPL and LDR, respectively 33.21%, 9.02%, and 20.04%. The debt restructuring was paid by
the government through a swap between the injection of funds through recapitalization bond and
ownership in the bank. For details of the Key Financial Indicators from December 1999 to
December 2002, see table 8.2.

Table 8.2: The progress of BII’s Key Financial Indicators

In trillion Rp
Financial Position 31/12/99 31/12/00 31/12/01 31/12/02

Total Asset 40.19 37.21 30.75 36.34

Total Deposit 26.10 28.78 24.99 29.50
Total Equity 1.94 2.34 (2.20) 2.98
Total Loans 11.81 18.99 8.92 5.82
Net Profit (Loss) (2.09) 0.27 (4.13) 0.13
Recapitalization Bond 6.63 6.46 19.,86 23.45
Key Ratio (%)
CAR 4.43 7.57 (47.42) 33.21
ROA (5.55) 0.69 (9,73) 0,39
ROE (62.09) 12.51 (3.790,78) 4.45
LDR 45.33 65.99 34.94 19,72
NIM (3.14) 2.32 0.32 (0,15)
NPL 53.10 22.34 61.88 9,02
IBRA Ownership 57.14 56,78 56,68 93,69

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Table 8.3 presents the top banks in Indonesia in terms of assets. The largest bank was Bank
Mandiri, a SOE bank which resulted from the merger of four previously SOE banks; Bank BDN,
Bapindo, Bank Bumi Daya (BBD), and Bank Export Import (Exim).

Table 8.3: Top banks in Indonesia (2003)

Rank of Bank Gov’t Private Public Foreign Total Assets
Asset (Rp Trillion)
1. Bank Mandiri 69.19 % - 30.81 % - 249.0
2. Bank Central Asia 8.56 % 5.20 % 35.24 % 51 % 133.3
3. Bank BNI 99.11 % - 0.89 % - 132.3
4. Bank BRI 58.93 % - 41.07 % - 94.7
5. Bank Danamon 10% - 24% 66 % 52.7
6. Bank International 93.69% - 6.31% - 34.7
Indonesia
7. Bank BTN 100 % - - 27.0
8. Bank Lippo 47.95% - - 52.05% 26.5
9. Bank Niaga 27.98 % - 21.02% 51% 23.7
Adapted from each bank’s annual report

8.1.2 The IEPSA initiation: July to November 2003

The reason to establish an IEPSA was a Letter of Intent between the government of Indonesia and
the IMF to establish a privatization plan. The objective was to help the Indonesian economy out of
the crisis through privatization of SOEs including BTOs by having prior restructuring.
Bidding process
As a result of restructuring and injection of fund from the government as a bail-out of the bank, the
financial performance of BII in the first semester of 2003 improved (BPPN, 2004). After the
injection of funds, the result was quick because the bank posted a net profit of Rp 143.1 billion,
total assets of Rp 34.5 trillion, CAR of 25.88 percent, and NPL of 4.96%.
Based on this improvement, in July 2003 the government intended to sell 51% of the shares in BII
(which was managed by IBRA) to prominent commercial banks. IBRA chairman, Syafruddin
Tumenggung (Suara Merdeka, 2003) said that the government needed a strategic investor who was
capable of running a banking business in Indonesia preferably with minimum rating of BB. In order
to support this divestment process, IBRA appointed ABN AMRO as a financial advisor and
Hadiputranto, Hadinoto and Partners as legal advisors.
On July 9, 2003, the representatives provided permission to the government to divest its shares in
BII for up to 71%. Fifty-one percent through an IEPSA and 20% through a public offering (stock
exchange). In August 2003, IBRA announced this intention through mass-media and conducted
marketing communications to various countries. Subsequently, twenty seven prospective investors,
both foreign and domestic, expressed their interest to buy the government’s shares in BII. At this
stage, IBRA screened the investors based on their experiences with strategic alliances, their

238
financial capability, and their commitment to the alliance and the development of the banking
industry in Indonesia. In situations with a consortium, the consortium had to be led by a commercial
bank with at least a BB rating according to Standard & Poor’sratings and possessing a minimum
50% of voting rights.

Table 8.4: The evaluation team and its task on the first stage of bidding
No. Team Task
1. Evaluation Screening investors based on experiences on strategic
alliances, financial capability with at least a BB rating.
In case of consortium, it should be led by a commercial bank
2. Strategic commitment Analyzing the commitment to the alliance and development
of banking industry in Indonesia

Following the first stage, in September 2003 IBRA nominated three prospective bidders:
 Sorak Financial Consortium (Sorak Consortium); this was composed of Kookmin Bank of
South Korea, Temasek Holding of Singapore (Temasek), the Barclay Bank from the UK,
and the International Commercial Bank Financial Holding Group of Malaysia.
 Bank Panin Consortium (Panin Consortium); this consisted of Bank Panin from Indonesia,
Raffeisen Zentralbank Osterreich (RZB) of Austria, and Fleur Investment Enterprises of
UK.
 United Overseas Bank (UOB) of Singapore.
UOB withdrew because of no clear reasons. This left a second stage competition between the Sorak
Consortium and the Panin Consortium. From September to October 2003, the two consortiums
conducted due diligence. They submitted their final bids on October 27, 2003 containing the
technical aspects, price, and the term of SPA.
With regard to the fit and proper test, it was evaluated by fit and proper test team conducted by
Bank of Indonesia. The evaluation of bids covered the technical aspects which consisted of the
resources; finance, human resource, IT, and experiences. The price was assessed by the evaluating
bid team which compared the offering prices between the consortium’s offer and with the stock’s
share price as well as the floor price to secure the amount of money acquired by the government to
reducing the budget deficit. The terms of the SPA were evaluated by the evaluating SPA team.

Table 8.5: The evaluation team and its task on the second stage of bidding
No. Team Task
1. Fit and Proper Conducting the Fit and Proper Test
2. Evaluating Bid Evaluating the final bid consisting of technical aspects,
business plan, and price
3. Evaluating SPA Evaluating the term in the SPA

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Both prospective partners passed the ‘fit and proper’ test. At the time of quotation, the Panin
consortium bid price of Rp 90 per share (1.3 Price to Book Value/PBV) while the Sorak consortium
bid was only Rp 78 per share (1.2 PBV). The business plan and offering price evaluation was ‘won’
by the Panin Consortium with a score of 60. Sorak Consortium got a score of 52. With regard to the
SPA evaluation, the Panin Consortium submitted the concept for the proposed SPA a few minutes
of lateness and as a result it was only given a score of 2.67 out of maximum score of 20. Sorak
Consortium scored 12.23 for its concept of SPA.

Table 8.6: The assessments of the big two investors

No. Investor Fit and Business SPA
Proper Test Plan & Price
1. Sorak Financial Ok 52 12.23
Consortium
2. Bank Panin Consortium Ok 60 2.67

On November 20, 2003, the Sorak consortium was determined as the winner. Fifty-one percent of
the shares or the equivalent of 24.37 billion shares were released to Sorak Consortiumand the
government received Rp 1.90 trillion. The structural composition of the IEPSA in BII is presented
in figure 8.1.

Figure 8.1: Ownership structure of BII after IEPSA

KOREA SINGAPORE UK MALAYSIA
Asia Financial
Holding/ International
Kookmin Temasek Barclay Commercial
Bank Group Bank Bank

25% 50% 5% 20%

Sorak Consortium
INDONESIA

Government Public Sorak Consortium

22.5% 26.5% 51.0%

Bank International Indonesia

The Sorak Consortium consisted of four partners. Temasek was a state holding company of
Singapore. Kookmin Bank was a leading Korean Bank which ranked 29th globally, sixth in Asia and
first in Korea in financing arrangement. International Commercial Bank was an International
financial services provider based in Schindellegi, Switzerland, with one of the subsidiaries in
Malaysia. It was a large financial services provider with total assets in excess of US$ 1.32 billion

240
and shareholders' equity in excess of US$ 200 million. Barclays was a universal bank and organized
within two business clusters: Corporate and Investment Banking and Wealth and Investment
Management; and Retail and Business Banking. It was the fourth-largest bank worldwide (after
BNP Paribas, Deutsche Bank and HSBC).

The alliance partners

In the beginning of 2003, BII was not on the list of any of the SOEs and taken-over banks that were
intended to be divested by the government for it was still being restructured by the IBRA. However,
as the performance of the bank immediately ameliorated and also for the sake of covering the
government’s budget deficit, the government later intended to divest portions of its shares. This was
through forming an IEPSA with the goal of keeping the bank growing. The divestment of
government’s shares in Bank BII was undertaken based on Presidential Decree No. 5/2003, which
was the replacement of IMF Letter of Intent, or so-called ‘white paper’.
In 2003, BII was the sixth largest bank (see table 8.2). BII aspired to become a prominent national
bank with assets of Rp 50 trillion in compliance with Indonesian Banking Architecture (API).
The Sorak Consortium managed a diversifiable global portfolio, principally in Singapore, several
other countries in Asia, and the OECD Economies. The consortium had made several successful
strategic alliances all over the world such as with Hana Bank of Korea, DBS Group Holdings of
Germany, and ING Bank of Singapore.

Technology
Prior to the economic crisis, BII focused its products and services on corporate banking. This
proved to be risky because of bulk allocations of loans to certain debtors. Hence, after the crisis,
with a goal of spreading risk, BII’s products and services were targeted not only to the corporate
customers but also to consumer and commercial customers. It focused especially on credit cards,
automobile and motorcycle financing, and small and medium enterprises. To tackle problems
related to violating loan provisions and to implement the changes of refocusing the target segments,
BII needed to have capabilities in Good Corporate Governance and risk management as well as in
e-banking technology. In complementary, Sorak Consortium’s could be transferred into the IEPSA.
Besides that, Temasek had core competences in good corporate management and risk management
while Kookmin Bank possessed a superior e-banking technology.

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Capital need
BII needed the alliance to develop and strengthen the added value of its products and services to the
customers so that it would be able to increase its assets. The Sorak Consortium seemed to be an
appropriate partner. In July 2003, the Sorak Consortium, had assets in the banking sectors
exceeding US$ 80 billion with assets in the investment sector of US$ 58.7 billion. The investment
sector had provided shareholder returns since its inception by as much as 18% compounded
annually (Temasek, 2003) and possessed a corporate credit rating of AAA according to Standard &
Poor’s ratings. The partners in the consortium managed a diversifiable global portfolio in Asiaand
the OECD Economies.

Strategies
The vision of BII was to become the prominent national bank in terms of number of assetsby 2010.
Both BII and Sorak consortium were following a growth strategy. BII aimed to become the leading
local bank and the consortium aspired to seek growing banking markets outside their home
countries.
For BII, the alliance was intended to secure the existence of the bank’s development after being
restructured. For the Sorak Consortium, the alliance was a means for gaining access to Indonesia’s
developing market which had begun to re-emerge after the economic crisis.
The Sorak Consortium was committed to form a long-term alliance in BII even though other
alternatives existed in the Indonesian banking industry such as Bank Lippo, Bank Danamon, and
Bank Permata.

The economic environment and share price

In 2003, the GDP growth was 4.1% with an exchange rate of Rp 8,570 per US$. The inflation rate
was 5.06% with the Certificate of Bank of Indonesia/Sertifikat Bank Indonesia (SBI) of 10.17%.
The offering share price of Sorak Consortium was Rp 82 which was lower than that of its
competitor Panin Consortium with Rp 90. The government received Rp 1.998 trillion in the
transaction. Had Panin Consortium’s bid been accepted, the government would have received Rp
2.19 trillion.
Both offering prices were lower than the average three-month value of the share price (between
September to November 2003 which was Rp 113 as presented in Figure 8.2. Figure 8.2 also
identified the initiation of the IEPSA (when the SPA was made) and the share price at the time sales
of the government shares. The government shares sold to the consortium of 1.32 PBV was almost
equal with the fair value of the bank.

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 Figure 8.2: BII share performance in 2003

160

140

120
Rp/share

100

80

60
Time of IEPSA
40

20

BII Share Performance in 2003

Table 8.7: Comparison between selling share price and fair value of BII
No. Item Selling Price Fair Value
1. Price to Book Value 1.32 1.38
2. Amount of 51 % share of equity Rp 1.998 trillion Rp 2.1 trillion

Problem with transparency during initiation

The stock exchange price became the basis for the bidders’ valuation in determining the share price.
In the scheme of transaction of the IEPSA, there was a peculiar issue. The lower share price when
compared with the maximum share price in the stock exchange within six months (see figure 8.2)
had a margin of Rp 53 per share. This was considered high. Apart from the IEPSA, simultaneously
in November 2003, the government (through IBRA) offered 17.43% of the shares for sale at the
stock exchange through a block sale with a price of Rp 90 per share. In other words, Rp 10 lower
than the market price at that time. The total value was Rp 749.46 billion. From October to
November 2003, ABN Amro and Trimegah Securities, which were brokers of the block sale,
purchased over respectively 4.22 billion shares and 474 million shares. In the same period, they sold
the same amount of shares with a very low capital gain of Rp 0.23 per share, or 0.3%. Since broker
fees were also around 0.3% it seemed that ABN Amro and Trimegah Securities were not concerned
with acquiring capital gains through these transactions. Based on this, it was alleged that there were
practices of “cornering” of the share price to be steady at Rp 90.

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8.1.3 Setting up the IEPSA: December 2003 to March 2004
The development of the strategic plan was initiated by the Board of Directors (BOD) of BII (see
table 8.8) which consisted of five directors from Indonesia who were from BII and one director
from Singapore and one from Korea. The BOD was responsible to formulate and implement the
strategy and furthermore reported to the Board of Commissioners (BOC) as the representatives of
the owners.

Table 8.8: Board of Directors of BII

No. Name Position Nationality
1. Henry Ho Hon Cheong President Director Singapore
2. Armand B. Arief Vice President Director Indonesia
3. Judi Prayudi Sudjono Director of Compliance Indonesia
4. Rudy N. Hamdani Director of Consumer Banking Indonesia
5. Sukatmo Padmosukarso Director of Human Resource & Indonesia
Risk Management
6. Dira K. Mochtar Director of SME Indonesia
7. Yoon Myung Han Director of Operations Korea

The new vision and mission was developed by the President Director assisted by Vice President
Director and discussed with other Directors. In terms of strategy formulation, it was initiated by the
Director of Operations. The functional strategies along with the assigned activities were developed
based on the discussions among directors. These functional strategies were aligned with the
corporate and the competitive strategies as well as the vision and mission of BII. The formulated
strategies and the accompanying activities were reported and consulted to the commissioners, see
table 8.9. Two of the Indonesian representatives were independents in accordance with the Bank of
Indonesia’s requirement that Indonesian Banks have independent commissioners. Three
representatives were from the government and four other representatives were from Sorak
Consortium representing the ownership in BII.

Table 8.9: Board of Commissioners of Bank BII

No. Name Position Representation Nationality
1. Peter Seah Lim Huat President Commissioner Sorak Consortium Singapore
2. Sumantri Slamet I.S. Vice President Government Indonesia
Commissioner
3. Pradjoto Commissioner Government Indonesia
4. Putu Antara Commissioner Government Indonesia
5. Fuad Rahmany Commissioner Government Indonesia
6. Taswin Zakaria Commissioner Independent Indonesia
7. Umar Juoro Commissioner Independent Indonesia
8. Jimmy Phon Siew Heng Commissioner Sorak Consortium Singapore
9. Yoon Jong-Kyoo Commissioner Sorak Consortium Korea
10. Lee Jeung-Lak Commissioner Sorak Consortium Korea

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The strategies and the supporting activities are presented in table 8.10.

Table 8.10: Strategy components of BII in 2004

No. Strategy components Description
1. Vision To be the best local bank with world class standard
2. Mission • To launch innovative products and services and emphasize the
importance of fairness, transparency, accountability, independence,
and responsibility
• To steadily transform itself into a major force in the Indonesian
banking industry
• Recognize responsibilities to every customer, employee,
shareholder, and the general public and firmly believe in
unwavering integrity in all aspects of businesses
3. Corporate Strategy Growth strategy by expanding possibilities embarked on a number of
innovative product and services and enhancing bank’s ability to
optimize its large distribution network by expanding its regional
offices and relocating some offices to strategic locations.
4. Competitive strategy Launch innovative products and services by optimizing its large
distribution network by expanding its regional offices and relocating
some offices to strategic locations. Focus on consumer and
commercial/SME segments.
5. Functional • Shift the loan’s credit disbursement policy from the corporate to the
Strategy consumer and commercial/SME sectors.
• Strengthen presence in the market segments through cross selling
and appropriate products.
• Continue to strengthen key capabilities
Activities • Create value in every delivered product and service to the customers
• Enhance highly motivated and skilled employees
• Ensure the proper implementation of Bank Indonesia regulations as
well as other relevant directives.
• Upgrade the technology platforms; to support stronger risk
management systems, to develop more effective management
reporting and analytical tools, and to upgrade the branch delivery
system, in addition to many other new IT initiatives.
• Formulate and adopt a comprehensive approach towards instilling
Good Corporate Governance as a way of life

The strategic plan contained a long-term commitment by developing and nurturing the alliance
focusing on SME commercial and consumer segments (credit card, automobile and motorcycle
financing, and mortgage loan), building infrastructure such as risk management, front-end system,
and investing in redoing, reprocess, and reengineering.
There was a complementarity in terms of the partners’ objective. The aspiration of partners to
achieve its vision can be depicted in the following statement of the representative of Sorak
Consortium which was made two weeks after the Sorak Consortium was declared the winner: “I
trust that this re-energized BII (alliance) will continue to develop new, creative and sophisticated
products and services under the new leadership. The road ahead will be challenging and much work
remains to be done. Nevertheless, we are confident that the Bank will be able to capitalize many
opportunities to create value for all stakeholders” (Annual Report of BII, 2003).

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During this time, the following situations in the alliance still occurred. There was no guarantee on
employment, a rationalization was undertaken by the new owners and several managersin particular
from the Chinese ethnic had already left the company. Therefore, there were oppositions from a
number of managers and employees to the alliance. For the remaining managers and the labor
union, the alliance formed a contractual bargaining agreement/Perjanjian Kerja Bersama (PKB).
This indicated that they were committed to the alliance’s objectives to successfully implement the
strategic plan. Socialization of the new owners’ commitment to the alliance was always
communicated. For example, the CEO always declared to the remaining managers and employees
that “We are beginning from zero point, so let’s go ahead and forget the past”.

8.1.4 Running the IEPSA: April 2004 to October 2006

Human resources
The alliance extended the capabilities of its employees by providing training. Training became an
essential element. Sales and relationships management training and product training for
Commercial and Small and Medium Enterprise (SME) as well as Consumer loans were key
priorities. The Training Department had become a separate division since 2005. Before the alliance,
it was part of Human Resource Development Division. By this separation, the alliance aspired that
the development of Training Department would be accelerated to enhance the capabilities of
employees and diffuse knowledge throughout the organization.
BII delivered a new tracking and training model for job competency across the bank in early 2005.
It developed job competency and an evaluation model that related with Key Performance Indicators
(KPIs) in each of the departments so that the compensation packages to the employees were given
based on the achievement of KPIs. The KPIs were aligned with the strategy and objectives of the
alliance. The Sorak Consortium provided their expertise in risk management, e-banking technology,
and mortgage loan to help extend the BII’s capabilities.

Management of the alliance

The alliance was striving to introduce new value enhancement by changing the old corporate culture
where privileges were given to the Chinese ethnics, see section 8,1. In order to develop an effective
organizational culture that could deal with the problems of ethnicity the alliance needed to do
something besides setting up performance-based compensation packages. The alliance combined
the different ethnicities in the organization through socialization. It made a declaration of unity and
set up the Loenpia as a mascot and role model of cultural blending. The Loenpia was regarded as
food that was introduced by Chinese ethnics in Semarang (one of the cities in Middle Java now one

246
of trademarks of Semarang). It became the model of cooperativeness between all the ethnicities
within the organization including Chinese and Non-Chinese ethnics.
To align the objectives of the corporate office with the employees, the BOD upon approval by the
shareholders (Board of Commissioners) launched an Employees Stock Ownership Program
(ESOP). The intention, with having the ESOP was that employees were also responsible for the
price of the bank’s shares in the stock exchange which was reflected in the performance of the bank.
The number of shares was given in accordance with the level in the organization structure and the
performance. Thus, the higher level one’s position in the bank, the higher number of shares he or
she would have. The alliance also provided higher incentives and number of shares in ESOP for
higher performers. Thus, employees were motivated to achieve or surpass his or her KPIs, which
were indicators set up by their superiors to analyze the performances of the individuals and the
organization.
Although the bank targeted all segments (including corporate, consumer, and commercial) the
corporate segment was only important for the affiliated companies of BII. After the alliance, the
organization paid more attention to consumer and commercial segments. In the automotive retail
segments, BII had formed alliances by owning 43% in Wahana Ottomitra Multiartha Tbk (WOM)34
having 87 branches across Indonesia. The manager in the geographical area division was able to
make decision on the provision of loans especially for credit below Rp 10 billion (interview with
Director). The divisions in a geographical area interacted with each other to form a matrix
organization. The goal was to create a flexible organization which was adaptable to the changes in
environment. Organizational restructuring took place so that the headquarter in Jakarta delegated
the management of the divisions in the geographical area while still providing audits, performing
the risk management, enhancing the Good Corporate Governance, and supplying resources mainly
related with human resources and IT. As a result, related departments in the geographical divisions
reported the activities and performance both to the headquarter manager and to the regional
manager. However, the alliance did not provide changes to the layer of hierarchy in the organization
structure. Rather, it added the span of control by developing an Executive Management Group
having equal level with the BOD. The objective of the group was to accommodate the employees’
needs and perform specific tasks.
The alliance control structure consisted of risk management, compliance, and audit committee. For
instance, in providing a loan, the alliance had a policy that the process be accompanied by the
operational mechanisms related to the risk management, compliance, and quality assurance which
were in compliance with the policy of Bank of Indonesia in the anticipation to avoid having the
34
PT Wahana Ottomitra Multiartha Tbk was established in 1982 as PT. Jakarta Tokyo Leasing to finance Honda
Motorcycles. It is an Indonesia-based financial services provider

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similar past mistake related to Good Corporate Governance. On performance control, the alliance
had general meeting of shareholders, audit committee, remuneration committee, and risk
management. The control attributes were the instruments for feedback to the commissioners, BOD,
top management, and management in compliance with Bank Indonesia’s regulation.

Trust
In the implementation of strategic plan, the trust level was enhanced by frequent socialization. To
ensure the successful implementation of strategic plan, the alliance always communicated the
objectives of the alliance across all of the organization and ensured the participation of managers
and employees. To amplify the effectiveness of the implementation of the strategic plan, the
organization’s common objectives were aligned with the employee stock ownership program (see
previous discussion).
The alliance undertook an organization cultural change by formulating an objective performance
assessment, and equal treatment of management and employees. According to the director the new
culture was tolerant of diverse cultural backgrounds and ethnicity, in particular between Chinese
and Non-Chinese. Nevertheless, despite frequent communication of objectives, alignment of
objectives, and changes of culture, two years after the alliance the performance of the bank was not
as high as it was anticipated by the partners (although it was considered as good).

Performance of the alliance

The bank’s balance sheet grew significantly in 2005. As presented in table 8.11, total assets grew
47% to Rp 49 trillion fueled primarily by increased lending. Total loans increased to Rp 22.2 trillion
as a result of a 95% increase in consumer lending which accounts for over 41% of the total loan
portfolio. SME/Commercial lending grew by 47% and accounts for 30% of total loans. Loan quality
also improved as NPL had continued to decline to 2.95% in 2005. The bank’s CAR improved to
22.41%, significantly above the minimum requirement of Bank Indonesia which was 8% while the
ROE increased from 9.76% in 2003 to 16.26% in 2005.

Table 8.11: Indicators and performances of BII from 2003 to 2006

No. Indicator 2003 2004 2005 2006
1. Number of asset 34.73 trillion 35.79 trillion 49.0 trillion 53.10 trillion
2. Third party 29.5 trillion 30.34 trillion 36.9 trillion 41.0 trillion
deposits
3. Profit Rp 309.1 billion Rp 821.6 billion Rp 725.1 billion Rp 633.7 billion
4. ROE 9.76% 21.66% 16.26% 15.40%
5. ROA 0.87% 2.35% 1.7% 1.43%
6. LDR 34.91% 43.63% 57.1% 57.22%
7. NPL 6.13% 4.02% 2.95% 3.85%

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 No. Indicator 2003 2004 2005 2006
8. CAR 22.02% 20.89% 22.41% 23.30%
9. NIM 3.29% 5.2% 4.9% 5.14%

An example of the bank’s improved performance was in the progress on cross-selling (which was
important to increase the number of customers in the consumer and commercial segments) by
forming collaborations with insurance companies such as AIG and Eka Life in 2005. In terms of
credit cards, the bank ranked in the “Top Four” among card issuers in Indonesia. BII held an
investment in WOM, the third largest motorcycle multi finance company in Indonesia with over 8%
market share of the motorcycle loans market. The goal for this strategic investment was to grow
aggressively in the consumer financing business as well as to increase BII’s distribution network for
cross selling its products and services.

8.1.5 Closing of the IEPSA: November 2006

Due to the good performance of the bank, on November 20, 2006, the government released its
5.22% remaining shares in BII. The goal was to improve the finances in 2006. The sale of the
remaining shares in BII reflected the success of the government. It successfully transferred
ownership in the bank so that the government could run its role as a regulator. The sale of these
minority shares was done through market mechanisms in the stock exchange.
The selling of government’s shares in November 2006 was the last step in a sequence of other
divestments to the public. It started in November 2003 (20.19%), followed by November 2004
(2.03%) and January 2005 (15.25%). In these divestments, Sorak Consortium bought 5.33% of the
shares. After the last divestment, the ownership of BII was composed of Sorak Consortium
(56.33%) and Public (43.67%).

8.2 Analysis
In this section, the model from chapter three is applied to ‘evaluate’ the BII IEPSA. The description
provided in section 8.1 is similar to the phases identified in chapter three. It can therefore be
concluded that the life cycle of the IEPSA is in accordance with the theory described in the previous
chapter differentiated into a planning, formation, operation, and termination phase.

Table 8.12: Time and duration of each phase

No. Phase Time Duration
1. Planning July to November 2003 5 months
2. Formation December 2003 to March 2004 4 months
3. Operation April 2004 to October 2006 31 months
4. Termination November 2006 1 month

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This section provides an analysis of the presence/importance of the factors from the model, i.e.
stakeholder support (8.2.1), strategic match (8.2.2), cultural understanding (8.2.3), internal
organization support (8.2.4), strategic planning (8.2.5), human resource management (8.2.6),
organizational arrangement (8.2.7), management control system (8.2.8), evolved cultural
understanding (8.2.9), internal driver (8.2.10), and external driver (8.2.11).

8.2.1 Stakeholder support

Internal organization support: The bank was being restructured by the time the alliance initiated, but
the degree of internal relationship had not been totally improved due to the influence of the
previous corporate culture. In fact, the alliance was not foreseen to be divested and thus there
was lack of a plan for privatization. Therefore, it possessed a negative influence on the internal
organization support to the imminent alliance.
Society support: there was a change in the ownership structure, i.e. the government deprived its
majority stake. The share price had a positive influence, i.e. the price paid for shares was above
the fair value. But, there existed a negative issue about the transparency of the privatization
process in terms of “cornering” of the share price. Thus, society support was negative.
Based on this, it can be concluded that stakeholder support for the alliance during the planning
phase of the IEPSA was negative. Lack of stakeholder support was also evidenced by the
oppositions from labor union, management, and society on the intended alliance. An overview is
provided in table 8.13.

Table 8.13: Relationships for the stakeholder support factor

No. Variable Sub-Factor Factor
1. Company restructuring (-) Internal organization
Plan for privatization (-) support (-)
Stakeholder
2. Change in ownership structure (-) Society support (-)
support (-)
Share price (+)
Transparency of the privatization process (-)

8.2.2 Strategic match

Attractiveness of macro-economic conditions: The last three years of GDP growth were below the
inflation rates within the same period. The exchange rates of Rupiah to U.S. Dollar fluctuated
between 10% and 20%. Thus, GDP growth was negative and currency rate were neutral. The
situation propelled a negative influence on the attractiveness of macroeconomic conditions.
Attractiveness of market: the market share of BII was ranked 6th in the banking industry in
Indonesia. In terms of market growth, it exceeded 10% from 2002 to 2003. Based on this, market

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 share and growth of market were negative and positive respectively. Thus, the attractiveness of
market was positive.
Alliance track record: BII had never formed any alliances with foreign partners. In contrast, Sorak
Consortium had made a vast amount of successful strategic alliances all over the world with
successful results. Thus, the alliance track record was positive.
Attractiveness of product or service: the quality of product and service were fine supported by BII’s
innovativeness in adapting products or services which had shifted from the corporate-oriented
segment to consumer and commercial-oriented segments. Thus, the attractiveness of product or
service was positive.
Attractiveness of technology: BII focused on consumer and commercial segments especially credit
cards, automobile and motorcycle financing, and small and medium enterprises. To implement
this objective, it needed to enhance its e-banking technology which was potentially secured by
the transfer of Sorak Consortium’s expertise in risk management and superior e-banking
technology. It would potentially connect, transform, and extend the information technology with
the business process. Thus, attractiveness of technology was positive.
Attractiveness of financial performance: the ROA of 1.43% was less than WACC of 14% while
growth of sales exceeded 10%. Thus, attractiveness of financial performance was neutral.
Capacity: the combination of the six components discussed above leads to the conclusion that the
capacity had a positive influence on the strategic match.

Complementarity related to the attractiveness of the market: since the foreign partner’s market was
in the life-cycle of growing to maturity while the domestic partner’s was in a growth cycle, it can
be concluded that this was positive for complementarity.
Complementarity related to the strategy: since both partners were following a growth strategy, it
can be concluded that this was positive for complementarity.
Complementarity related to the attractiveness of resources: In terms of resources, BII’s product
range, quality, and innovation would potentially benefit from those of Sorak Consortium’s
product, e-banking technology, and risk management. Besides that, having superior financial
resource, the foreign partners were able to support and enhance the development of the IEPSA.
So that, it can be concluded that the complementarity of the attractiveness of resources was
positive.
Complementarity: the combination of the three variables discussed above leads to the conclusion
that complementarity had a positive influence on the strategic match.

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Pressure on continuity: both partners showed commitment to continue the alliance. The partners
intended to continue in the alliance for a long time. BII had pressure to form the alliance to
secure its sustainability. Thus, pressure on continuity was positive.
Pressure of time on alliance: Both partners treated the alliance as an important opportunity in
particular with the lucrative Indonesian banking market. BII had pressure to continue its
improving performance. Thus, pressure of time of alliance was positive
Alternative to cooperation: both partners had other alternatives to forming the IEPSA. For the local
partner, there were other potential partners to form the IEPSA as evidenced in the tendering
process. Thus, the alternative to cooperation was negative.
Strategic importance: the combination of the three variables discussed above leads to the conclusion
that strategic importance had a positive influence on the strategic match.
Based on this, it can be concluded that the strategic match of the two partners in the alliance during
the planning phase of the IEPSA was positive. An overview is provided in table 8.14.

Table 8.14: Relationship in strategic match factor

No. Variable Component Sub-factor Factor
1. GDP growth (-) Attractiveness of Capacity (+)
Currency rate (+/-) macroeconomic conditions
(-)
2. Market share (+/-) Attractiveness of market
Growth of market (+) (+)
3. Partner’s experience (+) Alliance track record (+)
Partner’s successfulness (+)
4. Quality of product or service (+) Attractiveness of product
Innovativeness of product or or service (+)
service (+)
5. Technology of product or service Attractiveness of
(+) technology (+) Strategic
Information technology (+) match (+)
6. Profitability (-) Attractiveness of financial
Growth of revenue (+) performance (+/-)
7. Complementarity related to the
attractiveness of market (+)
Complementarity related to the
strategy (+) Complementarity
Complementarity related to the (+)
attractiveness of resources (+)
8. Pressure on continuity (+) Strategic
Pressure of time on alliance (+) importance (+)
Alternative to cooperation (-)

8.2.3 Cultural understanding

Share of communication: in the planning phase of the alliance, sharing communication between the
partners and stakeholders was infrequent. This is one of the means derived from the fact that

252
 initially BII was not the target of privatization in 2003. Thus, the share of communication was
negative.
Nurture of the alliance: the partners vowed to nurture the alliance by developing, supporting, and
enhancing the performance. Thus, this variable was positive.
Based on one negative variable in the share of communication and one positive variable in the
nurture of the alliance, it can be concluded that there was a negative trust and positive commitment
which lead to the neutral cultural understanding. An overview is provided in table 8.15.

Table 8.15: Relationship in cultural understanding factor

No. Variable Component Factor
1. Share of communication (-) Trust (-)
Cultural understanding (+/-)
2. Nurture the alliance (+) Commitment (+)

8.2.4 Internal organization support

Participation in the implementation of strategic planning: in the formation phase, due to the lack of
guarantee on employment and discrepancies between the current and the old clan, some of the
managers deserted the alliance while the rests remained in the alliance. For the remaining
managers and employees, they had provided their commitment to participate in the
implementation of strategic plan. Thus, the internal organization support was neutral.

Table 8.16: Relationships for the internal organization support factor

Variable Factor
Participation in the implementation of Internal organization support (+/-)
strategic planning (+/-)

8.2.5 Strategic plan

Commitment: Both partners formulated the strategic planning which contained a long-term
commitment of the alliance. They established vision in 2010 to be the best world-class standard
local bank and the related implementation plan such as; developing infrastructure consisting of
risk management, front-end system, and investing in redoing, reprocessing, reengineering, and
refocusing on SME, commercial, and consumer segments. These lists of implementation plans
depicted the commitment of both partners to build and enhance the alliance development as well
as to support the alliance to achieve its vision. Thus, strategic planning was positive.

Table 8.17: Relationships for the strategic planning factor

Variable Factor
Commitment (+) Strategic planning (+)

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8.2.6 Human resource management
Collaborative people: The alliance enhanced the capabilities of the management and employees by
extending the training programs. To support the target to consumer and commercial segments,
the training programs such as sales and relationship management, and product training were
essentials. To accelerate the enhancement of these capabilities, the alliance spun off the training
department from human resource division to be a separate division. The foreign partners also
enhanced the capabilities of the people by transferring knowledge, and expertise of the foreign
partner to the alliance. This was accomplished by moving key people from the headquarters of
Sorak Consortium to BII. Thus the collaborative people variable was positive.

Table 8.18: Relationships for the human resource management factor

Variable Factor
Collaborative people (+) Human resource management (+)

8.2.7 Organizational arrangement

Flattened organization: The hierarchy of organization’s layers remained for the alliance did not
change the layer of hierarchy. The changes that occurred were related to the increasing amount of
assets so that the alliance established one more division (Executive Management Group), equal
with the level of BOD. Thus, the flattened organization was neutral.
Decentralization of decision making: BII delegated the activities outside headquarters in Jakarta to
business units to perform and decide the activities ofdisbursing loan to the debtors. It was also in
the aim to promote new value enhancement of changing the old family clan where decision was
mainly based solely on the family relationship to merit based. To support this delegation of
empowerment of regional divisions, BII formed alliances with regional banks in order to move
closer to customer and in the geographic area by sharing activities and resources with the
regional divisions. Thus, the decentralization of decision making was positive.
Based on one neutral and one positive variable it can be concluded that the organizational
arrangement during the operation phase of the IEPSA was positive. An overview is provided in
table 8.19.

Table 8.19: Relationships for the organizational arrangement factor

No. Variable Factor
1. Flattened organization (+/-) Organizational
2. Decentralization of decision making (+) arrangement (+)

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8.2.8 Management control system
Planning: each layer in the organization had specific performance indicators and was committed to
endeavor that the objectives were able to be achieved. Thus, the planning was positive.
Control structure: the alliance had formulated and implemented the control structure related with
risk management, compliance, and audit committee in compliance with the requirement of bank
of Indonesia and also in the anticipation of the occurrence of past mistake. Providing the loan
was essential and should be accompanied by the risk management, compliance, and quality
assurance. In controlling the performance, the alliance followed the Good Corporate
Governance. In the internal mechanisms, it had general meeting of shareholders, audit
committee, remuneration committee, and risk management. In the external mechanisms, the
shares of ownership had been traded in the stock exchange so that the performance of the bank
had been controlled by the investors (as the owner of the bank’s shares in the bourse). Thus,
control process was positive.
Control process: The performance of the bank was controlled by the BOC as the representatives of
the owners. The achievements of Key Performance Indicators whether in the corporate,
divisional, or individual level were reported in every semester of the year to the BOC, BOD, and
managers. The achievements of KPIs were related with the accompanying bonus and incentives.
In other words, for those who met or surpassed the KPIs were able to receive attractive
compensation packages. Thus, the control process was positive.
Based on three positive variables it can be concluded that the management control system during
the operating phase of the IEPSA was positive. An overview is provided in table 8.20.

Table 8.20: Relationships for the management control system factor

No. Variable Factor
1. Planning (+)
2. Control structure (+) Management control system (+)
3. Control process (+)

8.2.9 Evolved cultural understanding

Trust: the alliance frequently shared communication to the organization regarding the vision,
mission, objectives, and long-term commitment. Thus, share of communication was positive.
Commitment: The alliance had nurtured the alliance which can be indicated by enhanced
performance. The BOC and BOD as well the managers and employees were aligned to have
common objectives. The alliance formulated and issued employee stock ownership program to
align the organization to have common objectives. Thus, nurture of the alliance was positive
during the operating phase. In comparing the performance of the bank before and after IEPSA

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 indicated with increasing profitability and decreasing NPL with the ROA was below its WACC.
Thus, performance of the alliance was negative.
Based on the combination of the two components discussed above, it can be concluded that the
evolved cultural understanding factor during the operating phase of the IEPSA was positive. An
overview is provided in table 8.21.

Table 8.21: Relationships for the evolved cultural understanding factor

No. Variable Component Factor
1. Share of communication (+) Trust (+)
2. Nurture the alliance (+) Cultural understanding (+)
Commitment (+/-)
3. Performance of the alliance (-)

8.2.10 Internal driver

Strategic objectives: since the local partner’s objectives of improving performance of the alliance
had been accomplished, the government deprived the remaining shares and preferred to act as a
banking industry regulator. Hence, the variable was the cause of the alliance termination.
Expectancy: The alliance improved and enhanced its financial and operational performance. Thus,
missed of expectancy was not the cause of the termination of the alliance.
Corporate leadership: Prior to the termination, there had been no changes in corporate leadership.
Based on that, corporate leadership was not the cause of the termination of the alliance.
Thus, in terms of internal driver out of three variables, strategic objectives variable was the cause of
the alliance into termination.

Table 8.22: Relationships for the internal driver factor

No. Variable Factor
1. Strategic objectives (-)
2. Expectancy(+) Internal driver (-)
3. Corporate leadership (+)

8.2.11 External driver

External environment: there had been no changes in the external environment regarding the
regulations and politics so that it can be inferred that external environment was not the cause of
the alliance termination.
Based on this the external driver was not the cause of the alliance termination.

Table 8.23: Relationships for the external driver factor

No. Variable Factor
1. External environment (+) External driver (+)

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8.3 Additional insights
Based on the description provided in section 8.1, there are a few additional insights that can be
provided concerning with stakeholder support (8.3.1), internal support (8.3.2), organizational
arrangement (8.3.3), and management control system (8.3.4). These additional insights are aimed to
present additional perspectives and information about the IEPSA that was not covered in section 8.2
(analysis based on the model established in Chapter 3).

8.3.1 Insights on the stakeholder support

Plan for privatization for this bank was in accordance with the government decision in 1999 to
privatize and motivated by acquiring cash inflow to reducethe budget deficit on the expenditure.
This plan had embarked on restructuring program supervised by IBRA prior to the IEPSA initiation.
Existence of company restructuring from 1999 to 2003 eventually influenced positively to the
improved degree of internal relationship inside the bank. But, in certain instances the existence of
gap between the current new culture and the old clan culture still influenced negatively to the
degree of internal relationship in such a way that a number of managers and employees opposed the
intended alliance. Indeed, there was motivation from the government over budget deficit reduction
in 2003. However, existing high share price in the bourse, and setting up floor price (by the
government/IBRA) which was in accordance with the fair value had influenced positively to the
offered share price of BII.
As such, having both improved degree of internal relationship although it was not optimum with
certain strikes and on street protest from the internal stakeholder and high share price, they
influenced negatively to the transparency of the privatization process in BII. Subsequently, it
inflicted negatively to the presence of stakeholder support.

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 Figure 8.3: Stakeholder support – adjusted

Plan for
privatization

+ +/- +

Company Opposition from Share price Existence

restructuring a number of Reducing of in the of floor
managers or budget deficit bourse price
employees

+ + - - +

Internal organization support

Share price
Degree of
internal
relationship

+ +

Society support

Transparency of the
privatization
+ process

Stakeholder support

8.3.2 Insights on the internal organization support

The new owners of BII did not guarantee the employees and management on employment.
Differences between the current cultures and the old cultures had endorsed the previous old clan
managers to leave the IEPSA since they were anxious and threatened over the already-secured
position. Nevertheless, the partners had fit in objective to develop the IEPSA. This situation
affected to the partial participation of the internal stakeholder in the implementation of strategic
plan in such a way that they were not ascertained about the occupations and merely partly motivated

258
as well as enthusiastic with the new ownership in the IEPSA. As such, it influenced to a partial
internal organization support on the IEPSA.

Figure 8.4: Internal organization support - adjusted

Guarantee on Fit in objective Differences between the current

employment culture and the old clan culture

+ + -

Participation in the
implementation of
strategic plan

Internal organization
support

8.3.3 Insights on the organizational arrangement

In order to change the value from the old clan culture to the new culture, the new owners of BII
delegated activities outside the headquarter, Jakarta, to the branches. It was aimed to promote this
new value enhancement or changing the old family clan where decision was mainly based solely on
the family relationship. This situation influenced positively to the organizational arrangement of the
IEPSA.

Figure 8.5: Organizational arrangement - adjusted

New value
enhancement

Decentralization of
decision making

Organizational
arrangement

259
8.3.4 Insights on the management control system
Control structure established by the new owners was in compliance with Bank of Indonesia
regulation. It was set up in a purpose to anticipate and avoid the occurrence of past mistakes when
during the economic crisis, the banking collapsed due to the non-existence of Good Corporate
Governance. All in all, planning, control structure, and control process which were in accordance
with the Good Corporate Governance influenced positively to the successful management control
system of the IEPSA.

Figure 8.6: Management control system - adjusted

Anticipation of the
past mistake

Planning Control structure Control process

+ + +
Management control
system

8.4 Conclusions
In this chapter the BII case was described and the model from chapter three was applied to measure
the factors that played a role for the IEPSA.
First research question: what were the phases in the IEPSA?
The four identified phases in the literature, i.e. planning phase (5 months), formation phase (4
months), operation phase (31 months), and termination phase (1 month), could all be identified for
the BII case. Thus, the phases followed the model.
Second research question: what were the factors in the IEPSA?
During the planning phase, the IEPSA faced these conditions, i.e. stakeholder support was negative
with negative prior restructurization, plan for privatization, change in ownership structure, and
transparency of the privatization process. In the beginning of 2003, BII was still being restructured
and there was no plan for privatization. In the alliance, the majority of ownership shifted from the
government to foreign partner. Transparency issue stemmed from activities to “cornering” the share
price. Cultural understanding was neutral and strategic match was positive. Thus, from analytical
perspective the IEPSA could be considered attractive while in terms of political perspectivethe
IEPSA could be considered unattractive. During the formation phase, the situation can also be

260
considered mixed. Neutral influence on internal organization support was due to partial support and
participation of the management and labor union where some of the managers deserted the alliance
the rests together with the employees were committed with the alliance. Positive influence on
strategic planning was due to the commitment of the partners in developing the alliance. Thus,
similar to the first phase, from both analytical and political perspectives the IEPSA was mixed.
During the operation phase, the IEPSA’s situation can also be considered positive. All of the factors
in the analytical perspectives and cultural understanding were positive except neutral organizational
arrangement indicating the IEPSA was doing well in the operations and relationship. Positive
influences on human resource management and management control system were supported by
positive related variables except negative flattened organization in neutral organizational
arrangement.
It is quite possible that although the first two phases only took for nine months where the first two
phases of the IEPSA took from July 2003 until March 2004, i.e. less than one year, but the
situations in later phase (operation) had already supported and enhanced the environment which
encouraged positive situation in the alliance.
With positive factor in the operation phase and positive factor in the evolved cultural understanding,
it was a surprise that the IEPSA was terminated. But actually, it was due to the fulfilled strategic
objectives by the local partner.
Third research question: what were the relationships between factors?
Several relationships between the factors in the model were observed:
 Stakeholder support influence on cultural understanding. The communication and socialization
of the intended IEPSA was not intensive to the stakeholder which influenced negatively to the
trust level. However, partners were willing to nurture and care of the alliance by developing,
supporting, and enhancing the performance which led to a positive influence on the commitment
among partners. Therefore, it led to a neutral influence on the cultural understanding.
 Cultural understanding influence on internal organization support. Neutral influences on cultural
understanding in the alliance coupled with the new owners’ commitment to the alliance’s
objective and ensured the participation of internal organization in the implementation of
strategic planning had promoted neutral influence on the internal organization support.
 Internal organization support influence on strategic planning. Participation of internal
organization support, in particular the remaining managers and employees who did not desert
the alliance ensured the successful implementation of strategic planning.
 Human resource management influence on management control system. The alliance enhanced
the quality of human resources by separating training department as autonomous entity and

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 developing a new tracking and training model for job competency. Hence, it helped implement
the control process of the IEPSA and thus supported the management control system.
 Organizational arrangement influence on management control system. The alliance enhanced
the organizational arrangement by delegating and thus increased the speed of decision making
to the regional branches, changing the old clan cultural habit, aligning the objectives of the
corporate to the employees, launching Employees Stock Ownership Program (ESOP), and
refocusing the segments to consumer and commercial, and setting up plan and control structure.
Therefore, it helped implement the control process of the IEPSA and thus supported the
management control system.
 Management control system on evolved cultural understanding. Positive management control
system in the alliance had improved the performance of the alliance and thus together with the
commitment and intensive communication to the stakeholder had influenced positively to the
evolved cultural understanding in the alliance.
Summary of factors relationship based on the case is presented in table 8.24.

Table 8.24: Relationship of factors based on the BII case

No. Influencing factor Influenced factor
1. Stakeholder support Cultural understanding
2. Cultural understanding Internal organization support
3. Internal organization support Strategic Planning
4. Human resource management Management control system
5. Organizational arrangement Management control system
6. Management control system Evolved cultural understanding

Additional insights:
A few additional insights gathered concerning with stakeholder support, internal organizational
support, organizational arrangement, and management control system were revealed:
 In BII, plan for privatization which was in accordance with the government decision in 1999
had motivated the government to obtain cash inflow from the privatization in the aim to
reducethe budget deficit on the expenditure. The plan for privatization influenced to the
existence of company restructuring commenced and supervised by IBRA until the preparation
of IEPSA.
Existence of company restructuring from 1999 to 2003 eventually influenced positively to the
improved degree of internal relationship inside the bank. But, in certain instances the existing
between the current new culture and the old clan culture which endorsed opposition from a
number of managers and employees still influenced to the degree of internal relationship.
Indeed, there was motivation from the government over budget deficit reduction in 2003.

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 However, existing high share price in the bourse, and setting up floor price (by the
government/IBRA) which was in accordance with the fair value influenced positively to the
share price of BII.
As such, having both improved degree of internal relationship although it was not optimum with
certain strikes and on street protest from the internal stakeholder and high share price, they
influenced negatively to the transparency of the privatization process in BII. Subsequently, it
inflicted negatively to the presence of stakeholder support.
 The new owners of BII did not guarantee the employees and management on employment.
Differences between the current cultures and the old cultures had endorsed the previous old clan
managers to leave the IEPSA since they were anxious and threatened over the already-secured
position. Besides that, they had fit in objective to develop the IEPSA. This situation affected to
the partial participation of the internal stakeholder in the implementation of strategic plan in
such a way that they were not ascertained about the occupations and merely partly motivated as
well as enthusiastic with the new ownership in the IEPSA. As such, it influenced to a partial
internal organization support on the IEPSA.
 In order to change the value from the old clan culture to the new culture, the new owners of BII
delegated activities outside the headquarter, Jakarta, to the branches. It was aimed to promote
this new value enhancement or changing the old family clan where decision was mainly based
solely on the family relationship. This situation influenced positively to the organizational
arrangement of the IEPSA.
 Control structure established by the new owners was in compliance with Bank of Indonesia
regulation. It was set up in a purpose to anticipate and avoid the occurrence of past mistakes
when during the economic crisis, the banking collapsed due to the non-existence of Good
Corporate Governance. All in all, planning, control structure, and control process which were in
accordance with the Good Corporate Governance influenced positively to the successful
management control system of the IEPSA.

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264
CHAPTER 9: CASE STUDY OF BANK CENTRAL
ASIA
In this chapter, the case study of Bank Central Asia is presented. Section 9.1 describes the
chronology of the case while section 9.2 presents the analysis of the case study based on the
framework and model gathered in chapter 3 with the factors of each of the life cycle phases in the
sub-sections. Section 9.3 provides insight gathered from section 9.1. Finally, in section 9.3 the
answers to the research questions are provided.

9.1 Description of Bank Central Asia

Bank Central Asia Tbk. (BCA) was established on February 21, 1957, under the name of NV Bank
Central Asia. BCA was owned by a prominent conglomerate of the Salim Group, which was owned
by a Chinese Indonesian tycoon: Sudono Salim. It was the biggest private bank in Indonesia in
terms of assets. In 1998, it suffered a temporary setback as a result of the Monetary Crisis. The bank
was restructured and later acquired by the government as a BTO. As the performance of the bank
ameliorated as a result of the restructuring, the bank survived the status as a BTO and the
government announced its intention to divest the bank to investors in December 2001.
Based on this, the following sub sections describe the case chronology. First a description of the
banking industry before the intended IEPSA is provided in section 9.1.1. Then, the IEPSA initiation
which lasts until a Sales and Purchase Agreement (SPA) is reached will be described in 9.1.2. The
IEPSA initiation process lasted from December 2001 until March 2002. The partners in the IEPSA
formulated a strategic plan until June 2002 (9.1.3) and implemented this strategy (9.1.4) until the
IEPSA was terminated in October 2006 (9.1.5).

9.1.1 Banking industry before the intended IEPSA

BCA had sustainable growth since its inception, reflected by its increasing assets, which grew from
Rp 36.10 trillion in 1996 to Rp 53.36 trillion by the end of December 1997. In 1998, the bank
suffered from the monetary crisis and was included in the private bank recapitalization program.
During the development of the program, the bank turned into a BTO due to the absence of a
controlling shareholder's willingness to participate in the recapitalization program.
On May 28, 1999, the government, through IBRA, recapitalized the bank by injecting
recapitalization bonds amounting to Rp 28.48 trillion. Having this amount, the government
controlled a 92.8% stake in the Bank.

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 Table 9.1: Cost of recapitalization and government’s shares at BCA (IBRA, 2004)
Bank Total Cost of Cost of Cost of Shares of
Recapitalization Recapitalization Government
Recapitalization From From Investor After
Government Recapitalization
Rp Trillion Rp Trillion Rp Trillion %
BCA 30.69 28.48 2.21 92.8%

Significant progress occurred in the BCA restructuring program. At the pinnacle, on April 25, 2000,
IBRA had successfully completed a restructuring program and IBRA’s supervision of BCA was
returned to the central bank, as stated in Decree of Chairman of IBRA at the letter SK-
501/BPPN/0400. Since April 2000, the intended privatization through an IEPSA was discussed
between IBRA and the House of Representatives which lasted until September 2001. Afterwards,
the preparation to initiate the bidding process was undertaken for about three months. During this
time, IBRA conducted an Initial Public Offering, 22.5% of the total shares, on May 30, 2001 with
1.7 PBV.
Details on the progress, which are reflected by the key financial indicators of BCA from December
1999 to December 2001, are presented in table 9.2.

Table 9.2: Key Financial Indicators of Bank BCA (IBRA, 2004)

Financial Position 31/12/1999 31/12/2000 31/12/2001
(Rp Trillion)
Total Asset 96.45 96.19 103.21
Total Deposit 85.58 85.98 90.35
Total Equity 5.12 7.01 9.77
Total Loans 4.10 8.17 14.67
Net Profit (Loss) 0.64 1.80 3.12
Recap Bond 60.88 59.60 58.20
Key Ratios (%)
CAR 34.38 33.84 32.64
ROA 0.28 1.81 3.50
ROE n.a. 31.42 38,32
LDR 4.74 9.28 16.06
NIM (6.60) 2.56 5.65
NPL 8.86 4.19 3.22
IBRA ownership 92.80 70.30 59.71

Divestment of shares in BCA was an important stage of the government’s program to achieve a
healthy banking industry as a prerequisite for economic recovery. In a broader context, the success
of BCA divestiture would further ignite confidence of domestic and foreign investors to invest in
Indonesia.
The government’s intention of carrying out a divestment process of BCA had gained support from
the House of Representatives (in Bahasa Indonesia Dewan Perwakilan Rakyat (DPR)) with some
prerequisites, which were the result of four hearings between DPR and the government (in Bahasa

266
Indonesia these hearings are Rapat Dengar Pendapat (RDP)). DPR was represented in these
hearings by Commission IX which was concerned with finance and banking matters.
1. The first hearing was on October 5, 2000. The focus was on optimization of the divestment
process. In this hearing Commission IX emphasized to the government their concern about
transparency. Transparency was one of the items mentioned in the LOI between the government
of Indonesia and the IMF.
2. The second and third hearings were on respectively February 6 and March 1, 2001. Commission
IX concluded that it was necessary to conduct a gradual divestiture of BCA shares. The
maximum divestment was 40% of total shares by combining 30% through an IEPSA and an
additional 10% through a public offering. It was also concluded that the strategic partner should
be a bank or a financial institution with a good reputation.
3. The fourth and last hearing was on September 12, 2001. In this hearing, the government
proposed divesting 51% of its ownership through an IEPSA, i.e. 21% above the earlier proposed
30%. Commission IX agreed to this with the following thoughts:
- There would probably be a sufficient pool of interested prominent and qualified strategic
investors. This would especially be true if the performance of the BCA would improve.
- As the share price of BCA improved, IBRA would sell the remaining shares at an optimal
price.
- The success of the BCA divestment was expected to be a landmark transaction. Through an
injection of capital into the bank of Rp 89.36 trillion (US$ 8.59 billion) together with the
amount of the recapitalization bond, the government showed its commitment in restoring the
national economy.
- By functioning as a regulator, the government aspired to providea greater contribution to the
banking industry through the total sale of the shares when the bank’s performance improved as
a result of the benefit of strategic sales (IEPSA).
The market of Indonesian banking industry had increased by more than 10% annually from 1999 to
2001. The top banks in terms of assets and ownership structure are presented in table 9.3.

Table 9.3: Top banks in Indonesia (2002)

Asset Bank Government Private Public Foreign Total Assets
Rank (Rp Trillion)
1. Bank Mandiri 69.19 % - 30.81 % - 251.6
2. Bank Central Asia 8.56 % 5.2 % 35.24 % 51 % 143.8
3. Bank BNI 99.11 % - 0.89 % - 125
4. Bank BRI 58.93 % - 41.07 % - 86.3
5. Bank Danamon 76% - 24% - 46.9
6. Bank International 93.7% - 6.3% - 32.8
Indonesia

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 Asset Bank Government Private Public Foreign Total Assets
Rank (Rp Trillion)
7. Bank BTN 100 % - - - 27.1
8. Bank Lippo 100% - - - 25.2
9. Bank Niaga 97.2% 2.8% - 23.11
Adapted from each bank’s annual report

9.1.2 The IEPSA initiation: December 2001 to March 2002

The reason for establishing an IEPSA was a Letter of Intent between the government of Indonesia
and the IMF to provide a privatization plan. The objective was to help the Indonesian economy out
of the crisis through privatization of SOEs including the BTOs by having prior restructuring.
Bidding process
The initiation of the bidding process started in December 2001 when the government sent an
invitation to bid to prospective investors. It received interest from several prospective investors.
IBRA conducted evaluations of the bids in two phases. In the first phase, the prospective investors
had to meet the following criteria:
1. It had to supply a statement that it was not associated directly or indirectly with Salim Group as
the bank’s previous owner, referring to Decree No. KKSK. Kep.03/K.KKSK/11/2000 dated on
November 10, 2001.
2. If the potential investor was a consortium, it had to be led by a bank or by a financial institution
with majority voting rights.
3. It had to be committed to give an irrevocable standby letter of credit (LC) or other forms of
guarantee with the level of US$ 50 million for a period of 60 days. LC was issued by banks
having investment grade rating.
4. It had to pass the fit and proper test conducted by Bank of Indonesia.

Any prospective investors who failed to meet the above criteria would not be considered for the
next stage of evaluation.
On January 28, 2002, IBRA announced that in the first stage of bidding process it had received final
bids from four potential investors:
1. Farallon Capital (Farallon), from the United States
2. Bank Mega Consortium, from Indonesia
3. Gabungan Koperasi Batik Indonesia Consortium (GKBI), from Indonesia
4. Standard Chartered Bank (Stanchart), from the United Kingdom

The process of opening the final bid, which took place on January 28, 2002, was witnessed by Musa
Soebowo (Deputy Chairman of Bank Restructuring of IBRA) and Heri Revelation Setiyarso

268
(Deputy Chairman of the Risk Management of IBRA), before the notary Moendjiati, SH (title of a
person who has a bachelor degree in law) the representative of the World Bank, Mike Edwards, the
representative of the IMF, David Nellor, and the Financial Advisors which consisted of PT
Danareksa Securities, Merrill Lynch Pte. Ltd., and Deloitte &Touche.
On January 29, 2002, all of the data for the fit and proper test from the four bidders were submitted
to the Bank of Indonesia. The Bank of Indonesia was required to provide the results no later than 30
days after all documents had been received.
On February 14, 2002, IBRA reviewed the terms submitted by the bidder as intended to be included
in the SPA. Furthermore, on February 25, 2002, IBRA received the results of fit and proper test.
Based on this evaluation, on February 26, 2002 IBRA decided that Farallon and Stanchart had
passed.
The prospective investors in the second stage were then evaluated based on the following criteria:
1. Quantitative criteria
- The offering price with maximum weight of 50 points.
2. Qualitative Criteria
- The structure of the consortium with a maximum weight of 20 points.
- Requests (terms and conditions) contained in the sale and purchase agreement with a maximum
weight of 25 points.
- Business plan in developing BCA with a maximum weight of 5 points.
The four teams of Pricing, Structure of the investor/consortium, SPA, and Business Plan which
consisted of Financial Advisors, Legal Advisors, and IBRA evaluated the (i) files requests for
bidders in the draft of sales and purchase agreement and (ii) the proposed business plan. Total
weight of quantitative and qualitative criteria was 100 points. The teams and its task are presented
in table 9.4.

Table 9.4: The evaluation team and its task

No. Team Task
1. Pricing Assessing the bid based on cash offered price
2. Structure of the investor/consortium Assessing the quality of leader and member(s) of
the consortium
3. SPA Evaluating the terms and conditions in the SPA
4. Business plan Commitment to develop BCA

Farallon’s offering price of Rp 1,750 per share was lower than Stanchart’s price which was Rp
1,850 per share. In addition to the share price, Farallon’s Terms and Conditions in the SPA were not
as demanding as Stanchart’s. Stanchart demanded that the government would deposit 15% of the
funds to an escrow account in the anticipation of difficult situations and it required a 21% Technical

269
Assistant Fee (a fee from the government to Stanchart to help it improve the performance of the
bank).
In the proposed SPA, Farallon was not the foreign investor but instead it was Farindo in which
Farallon was a partner35. What had been a positive point for the government (IBRA, 2004) was that
Farindo provided a guarantee that downsizing of the firm would be avoided.
When deciding on the winner for BCA’s divestiture, the government undertook both judicial and
administrative considerations which referred to:
1. Government Regulation No.17 of 1999 on Restructuring Agency.
2. Government Regulation No. 63 of 2001 on diversion of status, tasks and authority of the Minister
of Finance in Restructuring Agency to the Minister of State Owned Enterprises.
3. Government Regulation No.530/KMK.01/1999 on Procedures and Reporting of Sales on Assets
under Restructuring Agency.
4. The hearing between the Government and Commission IX of the House of Representatives on
September 12, 2001.
Administratively, the government had considered the whole process of assessment conducted by
IBRA and recommended a joint team consisting of the Coordinating Minister for Economic Affairs,
Ministry of Finance and Minister of State Enterprises. Likewise, the government also considered
input from the community, employees, and management of the BCA, as well as the decision of the
Cabinet and the Coordination Meeting Limited (In Indonesia: Rapat Kordinasi Terbatas/Rakortas)
dated on March 11, 2002 about the planned divestment of government shares in BCA. Another
consideration was a commitment from the government to bring BCA as a benchmark in national
banking industry based on a steady and healthy performance in terms of solvency, profitability and
liquidity.
Based on the above considerations, on March 14, 2002 the government announced to public that:
1. Farindo was the winner of the strategic divestment of government’s stake in BCA.
2. The government requested IBRA to take immediate actions to optimize the interests of the
government, including negotiations to further establish the conditions in the SPA upon
commitments of the Farindo to develop BCA in the business plan.
3. The government requested IBRA to report regularly upon the progress in the implementation of
the SPA and Strategic Plan.
The ownership structure of BCA after the IEPSA is presented in figure 9.1.

35
This was a Mauritius-based consortium of Farallon and Alaerka Investments Ltd. (Alaerka). Alaerka was a local
clove cigarette company of Djarum group owned by the Hartono family.

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 Figure 9. 1: Ownership structure of BCA after IEPSA
INDONESIA USA

Alaerka Farallon

MAURITIUS
0.13% 5.07% 35.24% 8.56% 51%

Directors & Salim Government

Commissioners Public Farindo
Family of Indonesia

BCA

The new shareholders pledged several commitments in the SPA, namely:

1 Encourage the bank to extend loans to the consumer segment, and Small and Medium Enterprises
(SMEs), provided that the bank’s LDR of 16% was very low when compared with the average
industry of 40%.
2. Formulate a Strategic Plan in particular related to employee affairs (enhancing capabilities),
corporate actions (merger, acquisition, and consolidation), and map the role of BCA in the
national banking industry.
3. Reduce the burden of the government to pay interest and principal repayment of bonds (bond
redemption).

The alliance partners

BCA was the second biggest bank in Indonesia. In terms of assets it was worth Rp 143.8 trillion.
BCA’s targeted market segments consisted of the corporate, commercial and SMEs, and consumer
segments. It focused primarily on providing loans to commercial and consumer segments. Before
the economic crisis, the loans were mostly focused on the commercial and corporate segment. This
was in particular with the bank’s affiliated group. In 2002, it was regarded as the leading bank in
Indonesia in the consumer segment (Infobank, 2002). BCA had not formed any strategic alliances
before and was thus inexperienced in this regard.
Farindo, which was buying 51 percent of BCA (or 3,153,005,000 of BCA shares) worth US$ 531
million was a joint venture holding company. One of the joint venture parties was Farallon. Farallon
was an US$ 8 billion hedge fund, an arbitrage fund, specialized in picking up strategic stakes in
companies that were in trouble. As a result, it had formed strategic alliances in many places all over
the world. It was one of the biggest and most-respected hedge funds in the United States. The other
joint venture party, Alaerka, was Indonesian, an investment company under the Djarum group. It
was in the top ten of Indonesia’s wealthiest companies.

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Technology
Since 1991, before the economic crisis, BCA spent large amount of operational expenditure on
Information Technology. It benefitted from this by the developing one of the largest market shares
in terms of the number of customers in the Indonesian banking industry (Infobank, 2002). At the
time, BCA had one of the most advanced banking technology platforms in Indonesia (Infobank,
2002). The bank’s had, through the years, developed technological capabilities in integrated
banking. It also had a number of specific task-oriented application systems which collectively
provided an efficient and effective integrated platform able to conduct over 2 million transactions
daily. The bank popularized the use of the very small aperture terminal (VSAT) communication
system to enhance inter-branch communication in 1991. BCA had successfully implemented an IT
security policy in 2000 and popularized the use of pin pads for over-the counter services in 2002.
BCA was also epitomized as a bank with leading information technology due to the widespread
availability of the ATMs and the reliability of the data network in branches. BCA was very
selective in the adoption of technology.
Farindo had no expertise in the banking technology rather it had capabilities in funding, human
capital related to the investment, and Good Corporate Governance such as the ability to offer a
more prudent and risk-managed orientation to the alliance.

Capital need
In 2001, after the restructuring period, the bank was looking for an alliance with a partner that could
provide financing for extending its capability in IT and simultaneously expand the number of
customers. IT was the core competence of BCA and it provided convenience to the customers
(Infobank, 2002).
Farindo, had the financial resources to support the objective of BCA. Farindo was looking for
capital gains through purchasing under-valued assets in growing markets such as Indonesia.

Strategies
Both BCA and Farindo had a corporate growth strategy. BCA’s growth strategy was based on
strengthening its position as a transactional bank of choice, being a financial intermediary, and to
further extend its position as a leading bank. It had advanced information technology but lacked
Good Corporate Governance and risk management.
Farindo, and especially its partner Farallon, was aggressive on picking up strategic stakes in
companies under difficulty and had expertise in risk management. Farindo could transfer core
competence and expertise in Good Corporate Governance and risk management to the alliance. This

272
transfer of core competence would enable BCA to tackle the risk in providing loans and to provide
control mechanisms in the organization.

The economic environment and share price

In 2001, prior to the alliance, the GDP growth was 5.0%, an increase from 0.2% in 1999 and 3.5%
in 2000. In 2001, the exchange rate of the Rupiah to the US$ was 10,400. This was an increase in
value from 7,085 in 1999 and 9,595 in 2000 while its fluctuation ranged from 8% to 35%. The
inflation rate was 12.02%. This was lower than that of 1999 (20.32%) but higher than the 4.52% in
2000.
The average share price in the stock exchange in 2001 was Rp 4,900. This was higher than the
selling price of the government’s shares to Farindo, i.e. Rp 1,750. The selling price was equal to 1.2
PBV and below the fair value of 4.4 PBV. From this divestment, the Government of Indonesia
encountered an opportunity loss of Rp 20.84 trillion. But, the government still exercised the
privatization plan in the motive to reduce the budget deficit on the expenditure.

Table 9.5: Share price of BCA from July to November 2004

No. Month Share Price Situation
1. December 2001 Rp 3,650 Government sent invitation bids to prospective
partners
2. January 2002 Rp 4,850 Four potential investors were announced
3. February 2002 Rp 4,900 IBRA reviewed the terms submitted by the bidder
Farallon and Stanchart passed the fit and proper test
4. March 2002 Rp 6,450 Farindo was determined as the winner

Table 9.6: Comparison between selling share price and fair value of BCA
No. Item Selling Price Fair Value
1. Price to Book Value 1.2 4.4
2. Amount of 51 % share of equity Rp 5 trillion Rp 25.84 trillion

Problem with transparency during initiation

Several transparency issues were observed in the process of the initiation of the alliance. These
were based on the following.
 Farindo’s offering price of Rp 1,750 per share was lower than the Stanchart which was Rp 1,850
per share.
 Farindo was being advised by Deutsche Bank. This led to the perception that Farindo was
helped by the IMF because the head of the Deutsche Bank’s Asian operations used to be a
director of IMF.

273
 In the second stage of the bidding process, Farallon, an investment company from the United
States was determined as the winner. However, it was eventually Farindo, a consortium of
which Farallon was a partner, which signed the sales and purchased agreement.
 There was an allegation that the previous owner (Salim Group) would seize control of the bank
by endorsing Farindo as the party which signed the SPA. This was because Alaerka, a member
of Farindo, had a close relationship with the Salim Group.
 The timing of the IEPSA initiation was not right. It happened when the stock exchange index of
Jakarta (which was used to indicate the benchmarked price) was not performing well and thus
this timing negatively affected the price of the government’s share.
 Farindo did not have neither an infrastructure nor expertise related to banking industry
 Finally, the selling price of the government shares in BCA was much lower than both the share
price in the stock exchange and the fair or fundamental value.
These issues of transparency created opposition against the IEPSA plans in particular from a
number of managers and employees including the labor union which reflected the low degree of
internal relationship in the bank despite prior restructuring. They frequently held protests in front of
the main office of BCA on Jl. Sudirman, Jakarta.

9.1.3 Setting up the IEPSA: April to June 2002

The alliance had fit in objective and pledged certain commitments related to employee or labor
issues, corporate actions, and the role of BCA in the national banking system. This was reflected in
the strategic plan.
The strategy was initiated by the board of directors of BCA (see table 9.7), which consisted of six
directors from Indonesia and two directors from the United States.

Table 9.7: Board of Directors of BCA

No. Name Position Nationality
1. D.E. Setijoso President Director Indonesia
2. Aswin Wirjadi Deputy President Director Indonesia
3. Jahja Setiaatmadja Director of Operations Indonesia
4. Dhalia M. Ariotedjo Directorof Wholesale Banking Indonesia
5. Suwignyo Budiman Director of Retail Banking Indonesia
6. Subur Tan Director of Compliance Indonesia
7. Anthony Brent Elam Director of Risk United States
8. M.M. Dick Noordeen Director of Commercial Banking United States

The mission was developed by the President Director assisted by Deputy President Director and
discussed with other Directors. In terms of strategy formulation, it was initiated by the Director of
Operations. The functional strategies along with the assigned activities were developed based on

274
discussions among directors. These functional strategies were aligned with the corporate and the
competitive strategies as well as the mission of BCA. The developed strategies and activities were
reported and discussed with the Board of Commissioners. This consisted of four Indonesians and
two Americans as depicted in table 9.8.

Table 9.8: Board of Commissioners of BCA

No. Name Position Representation Nationality
1. Eugene Keith Galbraith President Commissioner Farindo United States
2. Tonny Kusnadi Commissioner Farindo Indonesia
3. Renaldo Hector Barros Commissioner Independent United States
4. Cyrillus Harrionowo Commissioner Independent Indonesia
5. Raden Pardede Commissioner Government Indonesia
6. Alfred H. Rohimone Commissioner Government Indonesia

The alliance set up the strategy components of BCA as the following.

Table 9.9: Strategy components of BCA in 2002

No. Strategy Description
components
1. Vision Not established
2. Mission BCA participate in promoting Indonesia’s economic development
by providing a wide range of high-quality banking products and
services which targeted to retail and commercial customers through
the largest banking branch network in the country while aiming to
achieve a return on assets higher than the national banking
industry’s average
3. Corporate Strategy Growth strategy to anticipate the growing industry demand by
creating the most comprehensive and integrated transactional
banking platform of unrivaled depth and reach in Indonesia.
4. Competitive strategy Provide integrated premium products and services, be recognized as
a trendsetter and as an innovator for technology-based products and
services designed to meet, and exceed customer expectation
5. Functional • Continue to expand its exposure in consumer banking and credit
Strategy card services in view of the large demand and potential for such
services in Indonesia
• Optimize the use and application of its current range of products
and services
• Leverage the extensive reach and depth of its multi-channel
delivery platforms
• Maintain close relationship with existing customers while
developing new ones
6. Activities • Provide innovative and creative marketing and promotional
programs offering more attractive prizes and incentives.
• Forge strategic links and alliances with other consumer goods and
services providers
• Emphasize importance on the principle of relationship
management
• Employ, train, mobilize and retain people in order to provide
quality service and timely delivery to customers
• Develop and apply technologies specifically aimed at improving
efficiency and effectiveness within the bank

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The alliance set up three main programs in the strategic planning. First, the alliance began to
penetrate the markets in particular the consumer segment more proactively through the expansion of
loans. Second, it cooperated with the government to speed up the repayment of the government’s
recapitalization bond. Third, the alliance shared the implementation plan with the employees and
management.
Despite the commitment from both partners, protestswere frequently held by the employees
regarding the fears for rationalization. In other words, there was no guarantee on employment from
the new owners. This was similar to the period during the bidding process. At the time, the
Sudirman road, the capitol street of Jakarta where the BCA headquarter located, was frequently
flooded with the demonstration of the labor union. Furthermore, management oppositions to the
alliance still existed. Similar with the union, they were mostly afraid of losing power because of the
alliance. All in all, despite fit in objective of the partners on the IEPSA but absence of guarantee on
employment influenced to lack of participation in the implementation of strategic plan and
subsequently to the lack of internal support.

9.1.4 Running the IEPSA: July 2002 to September 2006

Human resources
BCA’s core strength lay in its commitment towards innovation and its ability to employ, train,
mobilize and retain its people in order to provide quality service and timely delivery to its
customers.
The bank’s human resource divisionwas constantly searching for innovative methods that it could
adopt and that would lead to excellence and standardized prime quality service from its employees.
To employ uniform standards of service as well as motivating others to provide service to the best
of their abilities, the bank employed a certification system for the best tellers. An estimated 400 of
the bank’s 3,000 tellers were certified. The certification was jointly developed with the Australian
Institute of Management.

Management of the alliance

The hierarchy in the organization did not change after the IEPSA was established. The existing
hierarchy was already considered as flat. It was also considered to be able to respond quickly to a
changing business environment.
The organization was decentralized. The decentralization system was structured around a) types of
loans especially on consumer and commercial segments, b) due diligence in determining decisions
of loans, and c) parties involved in the four eyes principle, i.e. which required a minimum of two

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people for deciding on a loan. For instance, commercial and large retail loan was decentralized in
the approach, with the parties involved are regional head and regional credit center. The detail
scheme of decentralization of decision making is presented in table 9.10.

Table 9.10: Decentralization of loan decision making (Annual Report of BCA, 2002)
Loan Types Approach in Loan Parties involved in Four eyes Monitoring Tool(s)
Authority Principle
Corporate Centralization  Corporate and Commercial Credit Risk Scoring
Business Division (Head System
Office)
 Credit Division
Commercial and large Decentralization  Regional Head Credit Risk Scoring
retail  Regional Credit Center System
Retail, SME and Decentralization &  Branch Head Credit Risk Scoring
Consumer at smaller Automation  Info Flow Application System
branches System

The alliance had aligned its objective setting in the organization. It had granted BCA managements
and top employees a Management Stock Ownership Program (MSOP) through the issuance of
294,398,600 BCA’s common shares.
The Board of commissioner and Director held a meeting once aweek. The goal of this meeting was
to respond to the business environment more quickly and flexible. The meetings were attended by
90% of the members.
As of September 2006, there was no vision developed for the organization by the management of
BCA. They were still searching to develop the right vision.
The alliance had implemented a system of Good Corporate Governance to ensure effective
leadership and controlling the management. The board of commissioner was mainly responsible for
overseeing and directing the Board of Directors in formulating and achieving the company’s
mission and business strategy. The Board of Commissioners, with the help of Audit Committee and
Remuneration Committee, was also involved in ensuring the implementation of Good Corporate
Governance practices within the Bank. The Board of Directors was responsible for establishing the
internal control infrastructure; ensuring the execution of internal audit function; and taking action
based on internal audit findings in line with policies and guidelines established by the Board of
Commissioners. There were other committees such as a nomination committee, executive
committees, internal audit, and also BCA bankers’ code of ethics. The control structure of the bank
operated periodically in annual basis and provided feedback for the operations performance. The
control structure was in compliance with Bank of Indonesia regulation. It was established in a
purpose to anticipate and avoid the occurrence of past mistakes related with Good Corporate
Governance.

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Trust
According to one of the commissioners “The alliance can be regarded as one of the most ideal
places to work in”, thus, trust level can be felt in the environment. Trust was obtained from the
credibility and accountability of all the employees and partners. The level of commitment was good
since the performance appraisal system of the company was able to provide a fair reward and
punishment which was already inherent in the company and became part of the motivation system.
Moreover, the high level of trust and commitment of the company was also ignited by the good
system.
The level of trust and commitment increased considerably during the operation phase because the
directors and managers shared and communicated information with the organization. Both partners
explored ways to improve the resources, i.e. human resources, IT, innovation for the benefit of the
alliance. They had adapted to each other, and became one solid team which was able to achieve a
solid performance.

Performance of the alliance

The year 2005 presented unique challenges for Indonesia’s banking industry. It began with
confidence due to improved political stability and the previous year’s economic growth. In the
second half of the year, economic performance quickly changed as the government raised the
domestic fuel price. This was done to maintain fiscal sustainability in the face of increasing world
oil prices. To alleviate inflationary pressures, the Bank of Indonesia tightened its liquidity by
increasing interest rates and by increasing requirements for bank reserves. For the banking sector
the consequences were quite dramatic as banks were challenged with rising cost, decreasing NIM,
and escalating NPL (Annual Report of BCA, 2005).
As presented in table 9.11, BCA ended the year with notable achievements as the assets, loans, and
profits grew considerably. Nevertheless, the third party deposits did not grow as expected.
Commercial and SME loans provided the largest portion (44.45%) of the total loans which was
channeled to commercial and SME businesses. The remaining portions were in the corporate,
consumer segments and employee loans, each respectively representing 37.12%, 16.46% and 1.97%
of total loans.

Table 9.11: Indicators and performances of BCAfrom 2002 to 2005

(Annual Report of BCA, 2002, 2003, 2004, and 2005)
No. Indicator 2002 2003 2004 2005
1. Number of asset Rp 117.3 trillion Rp 133.3 trillion Rp 149.2 trillion Rp 150.2 trillion
2. Third party deposits Rp 103.7 trillion Rp 118.0 trillion Rp 131.6 trillion Rp 129.6 trillion
3. Profit Rp 2.54 trillion Rp 2.39 trillion Rp 3.20 trillion Rp 3.60 trillion

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 No. Indicator 2002 2003 2004 2005
4. ROE 33.5% 23.85% 28.32% 28.16%
5. ROA 3.18% 2.6% 3.21% 3.44%
6. LDR 20.44% 24.62% 30.60% 41.78%
7. NPL 3.47% 2.34% 1.28% 1.71%
8. CAR 32.19% 27.95% 23.95% 21.53%
9. NIM 5.77% 4.93% 5.28% 6.00%

9.1.5 Closing of the IEPSA: October 2006

In October 2006, government of Indonesia sold its remaining 5.02% of BCA shares to the public.
They were worth Rp 3,550 per share or 3.1 PBV. This was essentially a continuation of the
government’s divestment through the stock exchange. This divestment began with an initial public
offering (IPO) in 2000 of 22.55% of the shares. It was followed by 10.59% of the shares in June and
July of 2001, 0.15% of the shares in 2002, and then another 3.54% of the shares in 2004.
Additionally, in 2002, private owners sold 1.95% to the stock exchange.
The government thought that BCA had achieved optimum performance through its alliance with
Farindo. Thus, it was the proper time for the government to divest since there was no need to
remain in the bank. There was also a need for the government to recover its financial investment
which was valued around Rp 2.194 trillion.
After the government’s last divestment in BCA, Farindo’s ownership in BCA was 51%, Public
(43.8%), and Private (5.2%).

9.2 Analysis
In this section, the model from chapter three is applied to ‘evaluate’ the IEPSA at BCA. The
description provided in section 9.1 is similar to the phases identified in chapter three. It can
therefore be concluded that the life cycle of the IEPSA is in accordance with the theory described in
the previous chapter differentiated into a planning, formation, operation, and termination phase.

Table 9.12: Time and duration of each phase

No. Phase Time Duration
1. Planning December 2001 to March 2002 4 months
2. Formation April to June 2002 3 months
3. Operation July 2002 to September 2006 51 months
4. Termination October 2006 1 month

This section provides an analysis of the presence/importance of the factors from the model, i.e.
stakeholder support (9.2.1), strategic match (9.2.2), cultural understanding (9.2.3), internal
organization support (9.2.4), strategic planning (9.2.5), human resource management (9.2.6),

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organizational arrangement (9.2.7), management control system (9.2.8), evolved cultural
understanding (9.2.9), internal driver (9.2.10), and external driver (9.2.11).

9.2.1 Stakeholder support

Internal organization support: prior to the establishement of the alliance, the bank had been
restructured by the government through IBRA. It is noteworthy that the intended privatization
was not communicated to the internal organization (reflected with a low degree of internal
relationship) eventhough the bank was slated for privatization and the foreign partner was
committed to refrain from a rationalization program. This situation gave impetus to a positive
influence on the company restructuring and a negative influence on the plan for privatization.
Society support: there was a change in the ownership structure, i.e. the government deprived its
majority stake. The share price had a negative influence, i.e. the price paid for shares was below
the fair value. There was a negative issue on transparency in terms of the offered share price
from Farindo which was below its competitor (Stanchart). Besides that, the fact that
representative of Deutsche Bank acting as advisor of Farindo was the previous IMF’s director
ignited allegation of conflict of interest. Thus, society support was negative.
Based on this, it can be concluded that stakeholder support for the alliance during the planning
phase of the IEPSA was negative. Lack of stakeholder support was also evidenced by the opposition
from labor union, management, and society on the intended alliance. An overview is provided in
table 9.13.

Table 9.13: Relationships for the stakeholder support factor

No. Variable Sub-Factor Factor
1. Company restructuring (+) Internal organization
Plan for privatization (-) support (+/-)
Stakeholder
2. Change in ownership structure (-) Society support (-)
support (-)
Share price (-)
Transparency of the privatization process (-)

9.2.2 Strategic match

Attractiveness of macroeconomic conditions: The last three consecutive years data show that
inflation rate surpassed the GDP growth while the exchange rates of Rupiah to U.S. Dollar
fluctuated by 35%. Thus, GDP growth and currency rate were negative.
Attractiveness of market: the market share of BCA was ranked 2nd in banking industry in Indonesia.
In terms of growth of market, it was more than 10% from 2001 to 2002. Based on this, market
share and growth of market were positives which produced positive attractiveness of market.

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Alliance track record: BCA had never formed any strategic alliances before. In contrast, Farindo
was an investment consortium, specialized in picking up strategic stakes in companies on the
difficulties in which Farallon as a member of the consortium had formed strategic alliances in
any places all over the world. Thus, the alliance track record was neutral.
Attractiveness of product or service: the quality of product and service were fine supported one of
the most advanced banking technology platforms in Indonesia. Thus, the attractiveness of
product or service was positive.
Attractiveness of technology: BCA was generally viewed as a leading bank on information
technology due to the widespread availability of the abundant ATMs and the reliability of the
information networks within the value chain activities. As an investment company, Farallon had
the ability to transfer a more prudential and risk-managed activities to the alliance. It is also
noteworthy that the information technology had been integrated in the organization. Thus,
attractiveness of technology was positive.
Attractiveness of financial performance: the ROA was less than WACC while growth of sales
exceeded 10%. Thus, attractiveness of financial performance was neutral.
Capacity: the combination of the six components discussed above leads to the conclusion that the
capacity had a positive influence on the strategic match.

Complementarity related to the attractiveness of the market: since the foreign partner’s market was
in the life-cycle of growing to maturity while domestic partner’s was in a growth cycle it can be
concluded that this was positive for complementarity.
Complementarity related to the strategy: since both partners were implementing a growth strategy,
it can be concluded that this was positive for complementarity.
Complementarity related to the attractiveness of resources: in terms of resources, there was
complementarity on the attractiveness of partners’ products and services. This was due the
foreseen BCA’s product range, quality, and innovation which potentiallygained benefit from
those of Farallon, in particular with more prudential and risk-managed orientation to the alliance.
Besides that, having superior financial capability, the foreign partner was potentially able to
support and enhance the development of the IEPSA and implement the strategy. So that it can be
concluded that the complementarity of the attractiveness of resources was positive.
Complementarity: the combination of the three variables discussed above leads to the conclusion
that complementarity had a positive influence on the strategic match.

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Pressure on continuity: both partners showed commitment to continue the alliance. The alliance was
regarded as a mode of securing BCA’s prominent position in banking industry. For Farindo, the
alliance would support its growth strategy in acquiring the prospective company. Thus, pressure
on continuity was positive.
Pressure of time on alliance: both partners treated the alliance as an important assetto exploit the
opportunity for the sake of their existences. After the restructuring period, BCA possessed a time
pressure to forming the alliance with the aim to acquire an increasing number of customers.
Thus, pressure of time on alliance was positive.
Alternative to cooperation: both partners had other alternatives to forming the IEPSA. Besides
Farindo, BCA had other alternatives of alliance partner such as with Stanchart and likewise
Farindo had other alternative target of banks in Indonesia such as with Bank Niaga. Thus, the
alternative to cooperation can be considered negative.
Strategic importance: the combination of the three variables discussed above leads to the conclusion
that strategic importance had a positive influence on the strategic match.
Based on this, it can be concluded that the strategic match of the two partners in the alliance during
the planning phase of the IEPSA was positive. An overview is provided in table 9.14.

Table 9.14: Relationship in strategic match factor

No. Variable Component Sub-factor Factor
1. GDP growth (-) Attractiveness of Capacity (+)
Currency rate (-) macroeconomic
conditions (-)
2. Market share (+) Attractiveness of
Growth of market (+) market (+)
3. Partner’s experience (+/-) Alliance track
Partner’s successfulness (+/-) record (+/-)
4. Quality of product or service (+) Attractiveness of
Innovativeness of product or product or service
service (+) (+)
5. Technology of product or service Attractiveness of
(+) technology (+)
Strategic
Information technology (+)
match (+)
6. Profitability (-) Attractiveness of
Growth of revenue (+) financial
performance (+/-)
7. Complementarity related to the
attractiveness of market (+)
Complementarity related to the
strategy (+) Complementarity (+)
Complementarity related to the
attractiveness of resources (+)
8. Pressure on continuity (+) Strategic importance (+)
Pressure of time on alliance (+)
Alternative to cooperation (-)

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9.2.3 Cultural understanding
Share of communication: in the planning phase of the alliance, sharing communication between the
partners and stakeholders was infrequent. Thus, the share of communication was negative.
Nurture of the alliance: the partners were willing to nurture the alliance by developing, supporting,
and enhancing the performance. Thus, this variable was positive.
Based on one positive variable and one negative variable it can be concluded that the cultural
understanding in the alliance during the planning phase of the IEPSA was neutral. An overview is
provided in table 9.15.

Table 9.15: Relationship in cultural understanding factor

No. Variable Component Factor
1. Share of communication (-) Trust (-)
Cultural understanding (+/-)
2. Nurture the alliance (+) Commitment (+)

9.2.4 Internal organization support

Participation in the implementation of strategic planning: In the formation phase, the management
and labor union were afraid of rationalization. A rationalization program that was implemented
by the new owners led to a situation where several managers left the company. These conditions
made the remaining managers and employees reluctant to participate in the implementation of
strategic planning. Thus, the internal organization support was negative.

Table 9.16: Relationships for the internal organization support factor

Variable Factor
Participation in the implementation of Internal organization support (-)
strategic planning (-)

9.2.5 Strategic planning

Commitment: The strategic planning developed by the alliance contained a long-term commitment
of the alliance by developing the alliance with focus on commercial and consumer segments,
optimizing the use and applications of its current range of products and services, leveraging the
extensive reach and depth of its multi-channel delivery platforms, and maintaining close
relationship with existing customer while developing new ones. These show strong commitment
of the alliance, thus, the strategic planning was positive.
Table 9.17: Relationships for the strategic planning factor
Variable Factor
Commitment (+) Strategic planning (+)

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9.2.6 Human resource management
Collaborative people: One of the commissioners said that the alliance can be regarded as one of the
most ideal places to work with and filled with collaborative people able to undertake relationship
in the organization and to the customers. To improve the capabilities of people, the alliance
enhanced the training program as well as encouraged and motivated the managers and employees
to be well-performed. Alliance designed the performance appraisal system which was able to
provide a fair reward. Job competency and evaluation model had been built. All of these were
aimed to encourage innovativeness in providing product and service to the customers. Thus, the
collaborative people variable was positive.

Table 9.18: Relationships for the human resource management factor

Variable Factor
Collaborative people (+) Human resource management (+)

9.2.7 Organizational arrangement

Flattened organization: the organization did not change the layer of hierarchy in the organization.
Top management considered that the current hierarchy was able to respond quickly to a changing
business environment. Thus, the flattened organization was neutral.
Decentralization of decision making: it occurred in the loan provision to the debtors. Decision
making was determined based on types of loan, approach in loan authority, and parties involved
in the four eyes principle. Commercial and large retail loans were decentralized to the regional
division, with the involved parties being the regional head and regional credit center, while the
loan to the corporate segment was centralized by headquarter in Jakarta. Thus, the
decentralization of decision making was positive.
Based on one neutral and one positive variable it can be concluded that the organizational
arrangement during the operation phase of the IEPSA was positive. An overview is provided in
table 9.19.

Table 9.19: Relationships for the organizational arrangement factor

No. Variable Factor
1. Flattened organization (+/-) Organizational
2. Decentralization of decision making (+) arrangement (+)

9.2.8 Management control system

Planning: the alliance formulated the strategic plan which committed to achieving the alliance’s
objectives in accordance with the mission statement. Thus, the planning was positive.

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Control structure: it complied with Bank of Indonesia’s regulation on Good Corporate Governance
and risk management to evade the occurrence of past mistakes which had a huge impact upon the
economic crisis in 1998. In one instance, to provide a loan, the process was accompanied by
assessment of risk management, compliance, and quality assurance. To assess its performance,
the alliance established general meeting of shareholders, audit committee, remuneration
committee, and risk management. These control attributes were the sources of feedback to the
commissioners, BOD, top management, and management. Audit, remuneration, and nomination
committees were established to ensuring the implementation of Good Corporate Governance
practices. In addition to it, executive committees, internal audit, were established to promote the
effectiveness of risk management implementation. Thus, control structure was positive.
Control process: the control process was conducted semi annually in the corporate, divisional and
cascaded or deployed to individual level. This process was aimed to acquire information
regarding the fulfillment of performance indicators and analyze any gaps between the current
performances and the objectives and afterwards designated implementation plan to reduce the
gaps. Thus, the control process was positive.
Based on three positive variables it can be concluded that the management control system during
the operating phase of the IEPSA was positive. An overview is provided in table 9.20.

Table 9.20: Relationships for the management control system factor

No. Variable Factor
1. Planning (+)
2. Control structure (+) Management control system (+)
3. Control process (+)

9.2.9 Evolved cultural understanding

Trust: there was frequent sharing of communication from the partners to the organization. Thus,
share of communication was positive.
Commitment: the alliance committed to achieving the vision and mission. To ensure the
achievement of the common objectives, the shareholder and managers as well as employees’
interest were aligned with the employee stock ownership program. By this alignment, managers
and employees was expected to be more aware of the value of the alliance which was reflected in
the bourse’s share price. Thus, nurture of the alliance was positive during the operating phase.
Performance of the alliance: when comparing the performance of the bank before and after
IEPSA, the performance improved in profitability and deteriorated in NPL with the ROA of the
bank above its WACC. Thus, performance of the alliance was positive.

285
Based on the combination of the two components discussed above, it can be concluded that the
evolved cultural understanding factor during the operating phase of the IEPSA was neutral. An
overview is provided in table 9.21.

Table 9.21: Relationships for the evolved cultural understanding factor

No Variable Component Factor
1. Share of communication (+) Trust (+)
2. Nurture the alliance (+) Cultural understanding (+)
Commitment (+)
3. Performance of the alliance (+)

9.2.10 Internal driver

Strategic objectives: local partner determined that the alliance’s objectives of improving
performance had been fulfilled so that it was not necessary to remain in the alliance and
preferred to be the industry regulator by selling the remaining shares. Due to this situation, this
variable was the cause of the alliance termination.
Expectancy: the alliance improved its performance which inferred that missing expected
performance was not the cause of alliance’s termination.
Corporate leadership: There were no changes in corporate leadership so that it was not the cause of
the termination of the alliance.
Thus, in terms of internal driver out of three variables strategic objectives variable was the cause of
the alliance into termination.

Table 9.22: Relationships for the internal driver factor

No. Variable Factor
1. Strategic objectives (-)
2. Expectancy(+) Internal driver (-)
3. Corporate leadership (+)

9.2.11 External driver

External environment: there were no changes in the external environment in terms of regulations
and politics so that it can be inferred that external environment was not the cause of the alliance
termination.
Based on this the external driver was not the cause of the alliance termination.

Table 9.23: Relationships for the external driver factor

No. Variable Factor
1. External environment (+) External driver (+)

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9.3 Additional insights
Based on description provided in section 9.1, there are a few additional insights that can be
provided related to stakeholder support (9.3.1), internal support (9.3.2), and management control
system (9.3.3). These additional insights are aimed to present additional perspectives and
information about the IEPSA that was not covered in section 9.2 (analysis based on the model
established in Chapter 3).

9.3.1 Insights on the stakeholder support

In the year 1999, government acquired BCA as one of the BTOs and planned for its privatization
through IEPSA. To revive the bank and secure a successful privatization, the government
restructured the bank until it improved the performance prior to the IEPSA. But, due to the
significant low degree of internal relationship before the restructuring exists as well as opposition
from managers and employees, the existence company restructuring had not influenced positively to
the degree of internal relationship. In such situation, strikes and on the street protests were rampant
prior to the privatization.
Motivation of budget deficit reduction in 2002 when the GDP growth was 4.5% and inflation rate of
11.88% affected negatively to the share price since the government seemed to hastily divest the
bank. There was existence of low share price in the bourse (as the benchmarked price) due to the
economic crisis that influenced negatively to the share price of BCA. Government decided to
benchmark the share price in the SPA with the share price in the bourse that was below its fair
value.
Having both low degree of internal relationship and low share price in the SPA influenced
negatively the transparency of the privatization process which afterwards influenced to the absence
of stakeholder support.

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 Figure 9.2: Stakeholder support – adjusted

Plan for
privatization

+ +/- +

Company Opposition from Share price

restructuring a number of Reduction of in the
managers or budget deficit bourse
employees

+ + - -

Internal organization support

Share price
Degree of
internal
relationship

+
+

Society support
Transparency of the
privatization process

Stakeholder support

9.3.2 Insights on the internal organization support

The managers and labor union were afraid of rationalization since the new owners did not guarantee
the internal stakeholder on the employment. Therefore, despite the existence of fit in objective of
the partners, the situation in the planning phase did not motivate internal stakeholder to participate
in the implementation of strategic plan in such a way they were secured and enthusiastic with the
IEPSA. This situation influenced negatively to the internal support.

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 Figure 9.3: Internal organization support - adjusted

Guarantee on Fit in objective

employment

+ +

Participation in the
implementation of
strategic plan

Internal organization
support

9.3.3 Insights on the management control system

Control structure established by the new owners was in compliance with Bank of Indonesia
regulation. It was set up to anticipate and avoid the occurrence of past mistakes when during the
economic crisis, the banking collapsed due to the non-existence of Good Corporate Governance. All
in all, planning, control structure, and control process which were in accordance with the Good
Corporate Governance influenced positively to the successful management control system of the
IEPSA.

Figure 9.4: Management control system - adjusted

Anticipation of the
past mistake

Planning Control structure Control process

+ + +
Management control
system

9.4 Conclusion
In this chapter the BCA case was described and the model from chapter three was applied to
measure the factors that played a role for the IEPSA.

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First research question: what were the phases in the IEPSA?
The four identified phases in the literature, i.e. planning phase (4 months), formation phase (3
months), operation phase (51 months), and termination phase (1 month), could all be identified for
the BCA case. Thus, the phases followed the model.
Second research question: what were the factors in the IEPSA?
During the planning phase, the IEPSA faced these situations, i.e. stakeholder support was negative
except company restructuring which was positive. Cultural understanding was neutral and strategic
match was positive. Thus, from analytical perspective the IEPSA could be considered attractive
while in terms of political perspectivethe IEPSA could be considered unattractive. Change in
ownership structure was considered negative since the majority of ownership shifted from the
government to foreign partner. Transparency issue stemmed from lower share price of Farindo
compared to its competitor (Stanchart), low degree of internal relationships, and the previous staff’s
of IMF acting as representative of advisor of Farallon.
During the formation phase, the situation can also be considered mixed. Negative influence on
internal organization support was due to the partial participation of the management and labor union
in the implementation of strategic plan. Positive influence on strategic planning was due to the
commitment of the partners in developing the alliance. Thus, similar to the first phase, from both
analytical and political perspectives the IEPSA was mixed.
During the operation phase, the IEPSA’s situation can also be considered positive. All of the factors
in the analytical perspectives and cultural understanding were positive except neutral flattened
organizational variable indicating the IEPSA was doing well in the operations and relationship.
Positive influences on human resource management and management control system were
supported by positive related variables.
Although the first two phases only took seven months where the first two phases of the IEPSA took
from December 2001 until June 2002, i.e. less than one year, but the situations had already
supported and enhanced the alliance which encouraged positive situation in the operation phase.
With positive factors in the operation phase and a positive factor in the evolved cultural
understanding, the IEPSA was terminated due to the fulfilled strategic objectives by the local
partner.
Third research question: what were the relationships between factors?
Several relationships between the factors in the model were observed:
 Stakeholder support influence on cultural understanding. The communication of the intended
IEPSA was not intensive to the stakeholderswhich negatively influenced the trust level.
However, the partners were willing to nurture and take care of the alliance by developing,

290
 supporting, and enhancing the performance which led to a positive influence on the commitment
among partners. Hence, it led to a neutral influence on the cultural understanding.
 Cultural understanding influence on internal organization support. Neutral influences on cultural
understanding in the alliance coupled with the new owners’ commitment to the alliance’s
objective and ensured the participation of internal organization in the implementation of
strategic planning had promoted positive influence on the internal organization support in
particular for the managers and employees who remained in the alliance.
 Internal organization support influence on strategic planning. Although there was a partial
internal organization support, the remaining managers and employees committed to the alliance
by participating in the implementation of strategic planning.
 Human resource management influences on management control system. The alliance enhanced
the quality of human resources by improving the capabilities of human resources and setting fair
performance-based system. Thus, it helped implement the control process of the IEPSA and
thus supported the management control system.
 Organizational arrangement influences on management control system. The alliance enhanced
the organizational arrangement by setting up decentralized authorization of loan determination,
aligned its objective setting in the organization, granting BCA management and top employees a
Management Stock Ownership Program (MSOP), setting up Audit Committee and
Remuneration Committee, as well as other committees such as nomination committee,
executive committees, internal audit, and also BCA bankers’ code of ethics. This situation
helped implement the control process of the IEPSA and thus supported the management control
system.
 Management control system influences on evolved cultural understanding. The situation of
positive management control system in the alliance had improved the performance of the
alliance and thus together with the commitment and intensive communication to the stakeholder
had influenced positively to the evolved cultural understanding in the alliance.
A summary of the relationships between factors based on the case is presented in table 9.24.

Table 9.24: Relationship of factors based on the BCA case

No. Influencing factor Influenced factor
1. Stakeholder support Cultural understanding
2. Cultural understanding Internal organization support
3. Internal organization support Strategic Planning
4. Human resource management Management control system
5. Organizational arrangement Management control system
6. Management control system Evolved cultural understanding

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Additional insights:
There are a few additional insights gathered concerning with stakeholder support, internal
organization support, and management control system:
 In the year 1999, government acquired BCA as one of the BTOs and planned for its
privatization through IEPSA. In order to revive the bank and secure a successful privatization,
the government restructured the bank until it improved the performance prior to the IEPSA. But,
due to the significant low degree of internal relationship before the restructuring and opposition
from a number of managers and employees, the existence company restructuring had not
influenced positively to the degree of internal relationship. Strikes and on the street protests
were rampant prior to the privatization.
Motivation of budget deficit reduction in 2002 when the GDP growth was 4.5% and inflation
rate of 11.88% affected negatively to the share price since the government seemed to hastily
divest the bank. There was existence of low share price in the bourse (as the benchmarked price)
due to the economic crisis that influenced negatively to the share price of BCA. Government
decided to benchmark the share price in the SPA with the share price in the bourse that was
below its fair value.
Having both low degree of internal relationship and low of share price in the SPA influenced
negatively the transparency of the privatization process which afterwards influenced to the
absence of stakeholder support.
 The managers and labor union were afraid of rationalization since the new owners did not
guarantee the internal stakeholder on the employment. Despite the existence of fit in objective
of the partners, the situation in the planning phase did not motivate internal stakeholder to
participate in the implementation of strategic plan in such a way they were secured and
enthusiastic with the IEPSA. This situation influenced negatively to the internal support.
 Control structure established by the new owners was in compliance with Bank of Indonesia
regulation. It was set up to anticipate and evade the occurrence of past mistakes during the
economic crisis in 1998, the banking collapsed due to the non-existence of Good Corporate
Governance. All in all, planning, control structure, and control process which were in
accordance with the Good Corporate Governance influenced positively the successful
management control system of the IEPSA.

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CHAPTER 10: CROSS-CASE ANALYSIS
In this chapter the cross-case analysis of the six cases is discussed. The aim of the analysis is to
compare the results across the cases. The analysis of determining the answer on the first research
question about phases based on cross-case analysis is presented in section 10.2. The answer to the
second research question about factors is presented through a cross-case analysis in section 10.3.
Finally, the answer on the third research question, the relationship of factors, is presented in section
10.4 based on the cross-case analysis. First, section 10.1 provides a general introduction with an
overview of ownership changes over time.

10.1 Introduction
The cases, as presented in table 10.1, of the IEPSAs comprise various industries from
telecommunications (Indosat), cement (Semen Gresik), and banking (Bank Niaga, Bank Permata,
Bank International Indonesia, and Bank Central Asia).
The cases were prominent companies in Indonesia. Semen Gresik was market leader, while Indosat
and BCA were second in their markets in terms of market share. Bank Niaga, Bank Permata, BII,
and BCA were all in the top-ten in the banking industry in terms of market share.
The foreign partners were from Singapore (Indosat), Mexico (Semen Gresik), Malaysia (Bank
Niaga), England (Bank Permata), United States (BCA), and for BII foreign partners were from
several countries, i.e. Singapore, South Korea, Switzerland and England.
In terms of the ownership, the majority shares were owned by foreign partners except for Semen
Gresik. It can be considered as a split ownership in accordance with Bleeke and Ernst (1991). The
foreign partner owned 51-52% and the local partner possessed 48-49% of ownership. The
ownership structure changed from the planning and formation, operation, to termination phases. In
the termination phase, government in the banking IEPSAs sold out its remaining shares in such a
way that it became only an industry regulator. The foreign partners were the major owners since the
government sold its remaining shares or became the minority owner except in the cement IEPSA
where it persisted to be a dominant owner. In the case of Indosat, since it was a former subsidiary of
a U.S. multinational company, ITT, and nationalized in 1980, the stakeholder opposition to the
alliance subsided in the operation phase, so that when STT sold its shares to Qtel, a Qatar
telecommunications company, it left the government as the minority owner.

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 Table 10.1: Cross-case data of the IEPSA profiles
No. Indosat Semen Bank Bank Bank Bank
Gresik Niaga Permata International Central
Indonesia Asia
1. Industry Telecom Cement Banking Banking Banking Banking
2. Rank of
market 2 1 9 7 6 2
share
3. Foreign Singapore Mexico Malaysia England Singapore United
partner South Korea States
Swiss
England
4. Ownership
based on
SPA
Foreign 41.94% 25.53% 51.0% 51.0% 51.0% 51.0%
Government 15% 51.01% 27.98% 45.6% 22.5% 8.56%
Public 43.06% 23.46% 21.02% 3.4% 26.5% 40.44%
Local 58.06% 74.47% 49.0% 49.0% 49.0% 49.0%
5. Ownership
in the
operation
phase
Foreign 41.94% 25.53% 51.0% 51.0% 51.0% 51.0%
Government 15% 51.01% 9.76% 25.9% 20.47% 5.02%
Public 43.06% 23.46% 39.24% 23.1% 28.53% 43.98%
6. Ownership
in the
termination
phase
Foreign 41.94% 24.9% 52.6% 89% 56.33% 51%
(Qtel) (Rajawali Corp) (CAHB) (Consortium (Sorak (Farindo
of consortium) consortium)
0.63% Stanchart
(Cemex) and Astra)
Government 15% 51.01% 0% 0% 0% 0%
Public + 43.06% 24.09% 47.4% 11.0% 43.67% 49%
Private

During the initiation and operation of the IEPSA process in Indonesia, there had been five times an
Indonesian Presidency turnover. Former President Soeharto was still on his tenure during
preparation of the IEPSA in Semen Gresik. It was the prerequisite demanded by IMF to restructure
the economy and in turn IMF provided loan to the government. The IEPSA in Semen Gresik was
continued during Habibie’s Presidency in one year period of tenure. The second batch of IEPSA in
Indonesia was the IEPSAs in Bank Niaga, Bank BCA, and Indosat which was prepared during
Wahid’s Presidency and proceeded by Megawati. Her tenure of presidency also provided path to the
third batch of IEPSA which were BII and Bank Permata. Since October 2004, after Yudoyono’s
tenure as the President there had been no IEPSAs program planned but all the IEPSAs were still
being operated. The turnover of presidencies during the initiation and operation of the IEPSAs is
presented in table 10.2.

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 Table 10.2: The president and accompanying IEPSA case(s)
No President Tenure IEPSA program planned
1. Soeharto 1968 – 1998 Semen Gresik
2. Prof. B.J. Habibie 1998 – 1999 Semen Gresik
3. Abdulrahman Wahid 1999 – 2001 Bank Niaga, BCA, Indosat
4. Megawati Soekarno Putri 2001 – 2004 Bank Niaga, BCA,
BII, Bank Permata
5. Dr. Susilo Bambang Yudoyono 2004 – 2009 -

10.2 First research question

The first research question was formulated as: what were the phases in the privatization through
IEPSAs in Indonesia at the firm level in the banking, cement, and telecommunications industries? A
comparison across the cases, in line with the framework in chapter three, shows that for each of the
cases four phases were identified: a planning phase (10.2.1), a formation phase (10.2.2), an
operation phase (10.2.3) and a termination phase (10.2.4). Table 10.3 shows the duration of each of
these phases for each of the cases.

Table 10.3: Duration of the phase in months

Phase Indosat Semen Bank Niaga Bank BII BCA
Gresik Permata
Planning 4 4 10 5 5 4
Formation 3 4 1 4 4 3
Operation 62 90 27 17 31 51
Termination 1 1 1 1 1 1
Total 70 99 39 27 41 59

The IEPSAs lasted an average of 56 months, i.e. four years and eight months. The shortest was the
Bank Permata IEPSA which lasted less than 2.5 years. The longest was the Semen Gresik IEPSA
which lasted 99 months, i.e. 8.25 years. The analysis and discussion in section 10.2.1 through 10.2.4
will provide insight into the causes of these differences.

10.2.1 Planning phase

The planning phase in general consisted of four steps: an announcement, a first bidding stage, a
second bidding stage and concluding with a sales and purchase agreement.

Figure 10.1: The planning phase

First bidding
stage: Sales and
Announcement Preliminary bid Second bidding Purchase
and due stage Agreement
diligence

295
The first step in the planning phase was the announcement of the intended IEPSA by the Indonesian
government. The announcement was done in two different ways. In five of the six cases the
announcement was a mass media announcement. The exception was the Semen Gresik case where
instead of a mass media announcement invitation letters were sent. For the Semen Gresik situation,
invitation letters were regarded as more effective than a mass-media announcement due to the low
number of prospective partners.
The second step in the planning phase was the first bidding stage. In this stage a preliminary bid
was submitted by prospective partners generally followed by due diligence. The preliminary bid
was generally conducted before the due diligence since the bid would allow the Indonesian
government to screen potential investors in particular when there were many potential investors.
The preliminary bid was evaluated by the Indonesian government on four items: alliance
experiences, financial performance, commitment to the alliance and financial capability. The due
diligence involved assessment of the targeted alliance’s resources and capabilities, such as
technology, capital need, and strategies in terms of complementarity with those of the foreign
investor which eventually resulted with determination of financial fair value of the company as
documented in the offering price within the final bid.
Exceptions to this sequence of preliminary bid followed by due diligence were Indosat and Semen
Gresik. In these cases the due diligence was conducted prior to the submission of the preliminary
bid due to the low number of prequalified investors.
Another distinction in the process was that for the Semen Gresik case, none of the documents of
commitment to the alliance existed in the first stage of bidding process. However, this was the first
IEPSA alliance in Indonesia. For the subsequent IEPSAs, a document of commitment had become
one of the prerequisites in the first stage of bidding process as required by IBRA and PPA due to
the opposition of stakeholders in Semen Gresik as a result of lack of employment commitment on
the side of Cemex.
Another difference in the cases was that since in the other previous IEPSAs the target of incoming
funds could not be assessed, for the last IEPSA, i.e. Bank Permata, the preliminary bid was
accompanied with Request for Qualification which primarily consisted of the offering price. By
having this, the government representative (at the time was PPA) was able to set the price floors, a
minimum price limit that means the price could not go lower than it possibly could, from the
prospective partners in the second bidding stage as well as assess the amount of incoming fund from
the divestment of its shares in the bank.
The third step in the planning phase was a second bidding stage. In general, the final bid was
conducted after the preliminary bid and due diligence except in Semen Gresik where it was

296
undertaken after the restructuring of the offer due to the opposition of the shareholder to the
composition of ownership. This involved the final bids from the foreign partners. This final bid was
evaluated for price, clauses of the SPA, and business plan. Bid bond, as a reflection of the bidder’s
financial capability, was a prerequisite in the Bank Niaga situation. This was a result of the
opposition of the stakeholder to the previous IEPSA of BCA, questioning its financial capability so
that prospective investor should show its capability in this stage. Fit and proper test document was
included in the banking IEPSAs since the regulator needed to participate in the assessment of the
complementarity between bidder with the offered bank and its commitment to industry.
The fourth and last step in the planning phase was reaching a sales and purchase agreement. This
involved a commitment from the foreign partner to the development of alliance performance,
enhancement of synergy through complementary resources, support of financial capability, and to
provide security of employment. In the banking IEPSAs, participation in the improvement of
Indonesian Banking industry was included in the IEPSA as the alliance improved performance was
vital and influenced the economic recovery.
In the four banking industry cases a fit and proper test was inserted into the process as Bank of
Indonesia (BI), the regulator, was concerned about assessing the bidders. While in Indosat and
Semen Gresik, the Ministry of State-Owned Enterprises had participated in the government team
during assessment of the bidders. For three of the cases (Bank Niaga, BII, and BCA), this test took
place within the final bid, while in one case (Bank Permata) it was undertaken after the winner in
the final bid had been determined which was caused by the intention of PPA (government
representative) to select the best bidder (before the fit and proper test). This avoided government
and political intrusion (through Bank of Indonesia) to screen the best bidders, rather the bidders
were selected by the PPA and promoted the candidate of winning bidders to BI to be further
assessed.

Table 10.4: Steps in the planning phase

Planning Indosat Semen Gresik Bank Niaga Bank BII BCA
phase Permata
Step 1: Mass media Invitation Mass media Mass media Mass media Mass media
announcement letter
Resulting 14 3 23 22 27 20
number of 6 withdrew
potential
investors
Step 2: Due diligence Due diligence Preliminary Preliminary Preliminary Preliminary
preliminary bid followed by followed by bid followed bid with bid followed bid followed
and due preliminary preliminary by due request for by due by due
diligence bid bid diligence qualification diligence diligence
and
subsequently
followed by

297
 Planning Indosat Semen Gresik Bank Niaga Bank BII BCA
phase Permata
due diligence
Resulting 8 2 3 5 2 2
number of
shortlisted
investors
Step 3:second Final bid Restructuring Final bid Final bid Final bid Final bid
bidding of the offer
followed by
final bid
Result selected 1 1 1 1 1 1
investor
Step 4: sales SPA SPA SPA SPA SPA SPA
and purchase
agreement

The planning phase took generally four to five months. The exception to this was the Bank Niaga
planning phase. The planning phase at Bank Niaga took ten months. This was due to a much lower
selling share price than that in the stock exchange. To deal with this required prolonged discussions
between government and the stakeholders. In this case, the first three steps of the planning phase
were conducted in about three months, i.e. similar in duration as the other IEPSAs, but the fourth
step (SPA) took about seven months in the midst of stakeholder opposition on the price offered by
the foreign partner.
In conclusion, it was found that the first phase of forming an IEPSA was the planning phase. This
phase lasted in general four to five months. The planning phase was characterized by four distinct
steps: making an announcement, a first bidding stage, a second bidding stage, and reaching an
agreement. Based on a comparison of the six cases it was found that slight changes to this process
were found when; only a low number of potential investors were available, commitment was not
documented, an industry regulatory body was involved, there was a different level of opposition or
there were difficulties with accepting the offering price.

Figure 10.2: The planning phase - adjusted

Number of Documented Industry Level of Acceptability

prospective commitment regulatory opposition of price
partners involvement

First bidding
stage: Sales and
Announcement Preliminary bid Second bidding Purchase
and due stage Agreement
diligence

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10.2.2 Formation phase
The formation phase in general consisted of five steps: forming the Board of Directors (BOD) and
Board of Commissioners (BOC), setting up a new vision and mission, formulation of strategies,
developing an implementation plan, and acceptance from the commissioners.

Figure 10.3: The formation phase

Forming Setting up Formulation Acceptance

the BOD new vision of Implementation from the
and BOC and mission strategies plan commissioners

The first step in the formation phase was forming the BOD and BOC.

Table 10.5: Forming the BOD and BOC

Formation Indosat Semen Bank Bank BII BCA
phase Gresik Niaga Permata
Number of 5 local 4 local 4 local 8 local 5 local 6 local
board of 4 foreign 2 foreign 3 foreign 2 foreign 2 foreign 2 foreign
directors
Number of 2 local 3 local 4 local 7 local 6 local 4 local
board of 4 foreign 2 foreign 4 foreign 3 foreign 4 foreign 2 foreign
commissioners

Table 10.5 shows that in general, the composition of the Board of Directors in all cases had a
majority of local members. The BOC composition is slightly different. In the case of Indosat there
was a majority of foreign commissioners. This was due to the immense market opportunity in the
telecommunications industry in Indonesia which triggered the foreign partner’s intention to transfer
activities and knowledge to the alliance through the BOC. The other exception was Bank Niaga
which had an equal amount of local and foreign commissioners. This situation was established since
the proportion of ownership was somewhat balanced which accounted for 51% of foreign partners
and 49% of local partners including the government and investors in the bourse. With the same
proportion of ownership with Bank Niaga, in latter banking IEPSAs, these banks had the majority
proportion of local partners in BOD and BOC due to inclination of the foreign partners to avoid
facing opposition with the stakeholder. Due to foreign minority of ownership in Semen Gresik
(25.53% foreign and 74.47% local), the foreign partner was the minority in the BOD and BOC.
Proportionately with the ownership structure, the BOD of foreign partner in Indosat was the
minority composing of 5 local and 4 foreign.

299
The second step in the formation phase was setting up a new vision and mission. This involved
board of directors (BOD). The exception was in BCA where the alliance did not formulate a new
vision due to time constraint to establish a new one.
The third step in the formation phase was the formulation of strategies. In this step, the BOD
formulated the strategies, which consisted of corporate, competitive and functional strategy.
The fourth step was the implementation plan. The BOD planned the activities so that the formulated
strategies could be implemented.
The fifth and the last step was the acceptance by the BOC. This involved the BOD reporting upon
the new vision, mission, formulated strategies, and the implementation plan to the BOC to seek for
their agreement.

Table 10.6: Steps in the formation phase

Formation Indosat Semen Bank Bank BII BCA
phase Gresik Niaga Permata
Step 1: yes yes yes yes yes yes
Forming the
BOD and BOC
Step 2: setting vision and vision and vision and vision and vision and mission
up new vision mission mission mission mission mission
and mission
Step 3: corporate, corporate, corporate, corporate, corporate, corporate,
formulation of competitive, competitive, competitive, competitive, competitive, competitive,
strategies functional functional functional functional functional functional
Step 4: plan for plan for plan for plan for plan for plan for
implementation activities activities activities activities activities activities
plan
Step 5: yes yes yes yes yes yes
acceptance
from the
commissioners

In conclusion, it was found that the second phase of forming an IEPSA was the formation phase.
The formation phase was characterized by five distinct steps: forming the BOD and BOC, setting up
a new vision and mission, formulation of strategies, implementation plan, and acceptance from the
commissioners. The formation phase lasted in general three to four months. The exception was
Bank Niaga (only one month) which was due to the discussion and formulation of a strategic plan
between the partners during the prolonged discussion before the SPA. In other words, this shorter
period came as a result of the longer period in the planning phase which was caused by the informal
formulation of strategies.
Based on a comparison of the six cases it was found that slight changes to this process were found
when a vision statement was not established. In such situations the new owners thought that the
current mission statement was adequate to be the direction of the alliance and they needed more

300
time to set up a new vision. Besides that, in one of the cases foreign partner dominated the BOC. In
this situation, the market gap between local and foreign was very wide so that foreign partner
allocated more human resources in the alliance.

Figure 10.4: The formation phase - adjusted

Ownership Market Time Informal formulation
percentage opportunities constraints of strategies

Forming Setting up Formulation Acceptance

the BOD new vision of Implementation from the
and BOC and mission strategies plan commissioners

10.2.3 Operation phase

The operation phase in general consisted of three steps: enhancement of human resources,
organizational arrangement, and setting up control system.

Figure 10.5: The operation phase

Enhancement of
human Organizational Setting up
resources arrangement control system

The first step in the operation phase was the enhancement of human resources. In this step, the
alliances enhanced the human resources through building the development program on human
resources.
The second step in the operation phase was the organizational arrangement. This involved
decentralization of the decision making to the branches and subsidiaries. As an exception, in
Indosat, it involved the merger of the subsidiaries (IM3 and Satelindo) into the parent company.
This was done to provide one stop service solution to the customers.
The third and the last step in the operation phase was the setting up of the control system. This
included establishing an audit committee, compliance division, and key performance indicators.
Slight difference occurred between the banking alliances and non-banking alliances. The reason

301
was that banking alliances were required by regulation to have the compliance division in
accordance with the Bank of Indonesia requirement.
Financially, the performances of all IEPSAs were satisfactory in particular compared with that
before the initiation of the IEPSA. But, only two cases (Bank Niaga and Bank Permata)
accomplished performance in compliance with the objective of the alliance initiation. For example,
Indosat and Semen Gresik experienced decreasing market share and Bank Permata and BII were not
able to achieve the target profitability and asset size as expected by the objective in the initiation.

Table 10.7: Steps in the operation phase

Formation Indosat Semen Bank Niaga Bank BII BCA
phase Gresik Permata
Step 1: development development development development development development
enhancement program program program program program program
of human
resources
Step 2: flattened no flattened no flattened no flattened no flattened no flattened
organizational organization organization organization organization organization organization
arrangement merger of decentralizati decentralizati decentralizat decentralizat decentralizat
subsidiaries on to on to ion to ion to ion to
into parent subsidiaries branches branches branches branches
company
Step 3: audit audit audit audit audit audit
setting up committee, committee committee, committee, committee, committee,
control key key compliance compliance compliance compliance
system performance performance division, key division, key division, key division, key
indicator indicator performance performance performance performance
indicator indicator indicator indicator
Financial + + + + + +
Fulfillment of - - + - - +
objective
(as of in the
initiation)

In conclusion, it was determined that the third phase of forming an IEPSA was the operation phase.
The operation phase was characterized by three distinct steps: enhancement of human resources,
organizational arrangement, and setting up of the control system. The operation phase lasted
between seventeen and sixty two months. The shortest period was Bank Permata and the longest
one was Semen Gresik. In general, the IEPSAs of non-banking industries (telecommunications and
cement industry) spent more time in the operation phase than those in the banking IEPSAs. It took
more than five years in the telecommunications and cement IEPSAs to operationalize before the
changes occurred in the internal and external conditions which led to the termination of the IEPSA.
While in banking industries, it took less than five years before the alliances achieved above-average
return performances leading to termination. This is due to the fact that stakeholders in the banking
IEPSAs had less influence than those of the other types of IEPSA given that they were previously
owned by private owners and taken-over by the government during the economic crisis. Eventually,

302
the regulations were developed based on the international standard (Bassel Standard) and relied on
the past mistakes experiences in particular with the corporate governance.
Based on a comparison of the six cases it was found that slight changes to this process in particular
to the organizational arrangement were found when; previous separated industry were available,
existence of the already flat organization, and regulation

Figure 10.6: The operation phase - adjusted

Previous Already flat Corporate

separated organization Regulation governance
subsidiary

Enhancement of
human Organizational Setting up
resources arrangement control system

10.2.4 Termination phase

The termination phase in general consisted of two steps: existence of a termination driver and
termination.

Figure 10.7: The termination phase

Existence of
termination Termination
driver

The first step was existence of a termination driver. The reasons for termination were resulted from
both drivers but one case from only an internal driver. The exception was the termination in the
Indosat case. This was due to a combination of internal drivers (strategic objectives and expectancy)
and external drivers (the emergence of regulation to forbid foreign dominant in telecommunications
industry related with threat of monopoly) which was decided in court.
Another difference that occurred across the cases was the internal driver. The banking industry
IEPSAs were all terminated due to the fulfillment of the objective, i.e. improving performances of
the alliances on the side of Indonesian partners. This led to the sale of the remaining shares on the
stock exchange. It was different in the cases of Indosat and Semen Gresik where there were

303
unfulfilled performances related to SPA. For Indosat there was the unfulfilled strategic objective of
increasing dominance in the industry. For Semen Gresik there was the issue of ownership (clause in
the SPA) and the expectancy that the alliance continued to increase the installed capacity.
The second step was termination. In general, the termination phase was exercised within one month.
The termination took place when the alliances achieved above-average return performances.
Nonetheless, within all cases partners had been well-prepared about the possibility to terminate.
Therefore, it took only one month for the alliances to terminate. In spite of termination, since the
final performances of the alliances were impressive, it can be implied that during the prior phases
the partners did not undermine the termination rather they focused on enhancing the alliance
accomplishment.

Table 10.8: Steps in the termination phase

Formation Indosat Semen Bank Bank BII BCA
phase Gresik Niaga Permata
Step 1: Internal Internal Internal Internal Internal Internal
existence of due to due to due to due to due to due to
termination unfulfilled unfulfilled performance performance performance performance
driver SPA SPA objective objective objective objective
External (in
court)
Step 2: Out of court Out of court Out of court Out of court Out of court Out of court
termination Sell of the Sell of the Sell of the Sell of the Sell of the Sell of the
shares shares shares shares shares shares

Termination of alliances in Indosat and Semen Gresik IEPSAs were problematic and involved
internal and external stakeholders. Nevertheless, both partners (in Indosat and Cement Gresik) as
also occurred in other cases, opted diplomacy by selling of the shares to terminate the alliances
rather than jeopardized future relationship with the hostile termination.
Based on a comparison of the cases, it was found that slight changes to this process in particular to
the existence of termination driver were found when; threat of monopoly arouse, and unfulfilled
objective.

Figure 10.8: The termination phase - adjusted

Threat of Unfulfilled
monopoly objective

Existence of
termination Termination
driver

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10.2.5 Knowledge contribution
IEPSA is the type of equity alliance classification in the form of equity arrangement. A vast amount
of literatures suggest that IEPSA is appeared to be lack of research investigated than the other types
of strategic alliances such as joint ventures and collaboration. There are common shares of equity in
this form which one partner possesses equity of the other partner. The context of IEPSA is
geographical area between (among) companies from different countries where the hosts were in
Indonesia, a South East Asian country.
The life cycle of an IEPSA is discerned into planning and formation phases due a thorough
negotiation and intensive analytical and political considerations prior to the SPA. Management,
implementation, and evolution phases are combined into operation phase in the IEPSA. As such, the
phases in the privatization through IEPSAs in Indonesia at the firm level in the banking, cement,
and telecommunications industries are composed of planning, formation, operation, and
termination. The planning phase took generally four to five months while the formation phase lasted
in general three to four months. The operation phase lasted between seventeen and sixty two
months. Eventually, the termination phase was exercised within one month.
In the IEPSA, the steps to be taken into considerations in the planning phase are; announcement,
first bidding stage; preliminary bid and due diligence, second bidding stage, and sales and purchase
agreement. In each of the steps the following factors need to be considered, they are; number of
prospective partners, documented commitment, industry regulatory involvement, level of
opposition, and acceptability of price.
In the formation phase, the steps to be taken into consideration in the IEPSA are forming the BOD
and BOC, setting up new vision and mission, formulation of strategies, implementation plan, and
acceptance from the commissioners. The factors to be considered in each of the steps are ownership
percentage, market opportunities, time constraint, and informal formulation of strategies.
In the operation phase of the IEPSA, the steps to be taken into consideration are enhancement of
human resources, organizational arrangement, setting up control system. The factors to be
considered in each of the steps are previous separated subsidiary, already flat organization,
regulation, and corporate governance.
In the termination phase of the IEPSA, the steps to be considered are existence of termination driver
with threat of monopoly and unfulfilled objective as factors to be well thought of.

10.3 Second research question

The second research question was formulated as: Which factors and variables influenced these steps
and phases? A comparison across the cases, in line with the framework in chapter three, shows that

305
factors were identified for each of the cases: stakeholder support, strategic match, and cultural
understanding in the planning phase (10.3.1), internal support, and a strategic plan in the formation
phase (10.3.2), human resource management, organizational arrangement, a management control
system, evolved cultural understanding in the operation phase (10.3.3), and external and internal
driver in the termination phase (10.3.4). Table 10.9 shows result of the factors.

Table 10.9: The result of factor influences

Indosat Semen Bank Bank BII BCA
Gresik Niaga Permata
Planning Phase
Stakeholder support - - + + - -
Strategic Match + + + + + +
Cultural understanding +/- - + + +/- +/-
Formation Phase
Internal Organization support +/- - + + - -
Strategic Planning + + + + + +
Operation Phase
Human Resource Management + + + + + +
Organizational Arrangement + + + + +/- +
Management Control System + + + + + +
Evolved cultural understanding + - + + + +
Termination Phase
External Driver - + + + + +
Internal Driver - - - - - -

The analysis was carried out to obtain the adjusted model in accordance with the following
arrangement. Firstly, the sub-factor and variable that are matched against the factor and sub-factor
are preserved to be included in the adjusted model. Secondly, the acceptable exceptions (of the
sufficiently matched sub-factors or variables) can be regarded as; the sub-factor or variable with a
merely possessed one inconsistent data point in comparison with the factor, and with the sub-factor
or variable having two slight differences of data points compared with the factor, i.e. the sub factor
or variable is - or + and the factor is +/-, etc. Therefore, these sub-factors and variables of
exceptions are preserved to be included in the adjusted model. Thirdly, sub-factors and variables
unmatched appropriately against the factors and not classified as those with acceptable exceptions
were removed from the initial model (as it was constructed in chapter 3). Fourthly, discussions on
these exceptions were presented. It resulted with the revealed variables and their relationship with
variables as were obtained in the model in chapter 3. Finally, having both appropriately matched
variables and revealed variables yielded to the adjusted model of each factor within the phases of
the IEPSA.

306
10.3.1 Planning Phase
Factors in the planning phase are stakeholder support, strategic match, and cultural understanding.
All of the factors are embedded within the steps of: announcement, first bidding stage: preliminary
bid and due diligence, second bidding stage, and sales purchase agreement in the planning phase
(mentioned in 10.2.1). The accompanying variables consist of number of prospective partners,
documented commitment, industry regulatory involvement, level of opposition, and acceptability of
price. These steps are aimed to acquire partners that are complementary (as analyzed in the strategic
match), have supports not only from the government and the company but also other external
stakeholders (as analyzed in the stakeholder support). And in order to gain the stakeholder support
there should be a trust and commitment between partners and stakeholder (as analyzed in the
cultural understanding).

Stakeholder support
Based on the cross-case data in table 10.9, most of the IEPSAs faced opposition from the
stakeholders except in the Bank Niaga and Bank Permata cases where the stakeholders supported
the intention of the alliances. In Bank Niaga, the stakeholder support was obtained mostly from the
high degree of internal relationship between directors, management, and employees while in the
Bank Permata case it was due to the extensive prior company restructuring.

Table 10.10: The result of stakeholder support

Indosat Semen Bank Bank BII BCA
Gresik Niaga Permata
Stakeholder support
Internal organization support +/- - + + +/- +/-
Company restructuring - - + + + +
Plan for privatization + - + + - -
Society support - - + + - -
Change in ownership structure - + - - - -
Share price - - + + + -
Transparency of the privatization - - + + - -
process

The steps obtained in section 10.2 were part of the framework and embedded in all factors within
the phases. The description about how the steps embedded in the factors was presented in the initial
section of each phase.
The data from table 10.10 shows that the only variable which showed the same pattern as
stakeholder support was transparency of the privatization process. Another observation is that a
negative value for one or both of the internal organization support variables, i.e. company
restructuring and plan for privatization, is accompanied by two or more negative values for the three

307
society support variables, i.e. change in ownership structure, share price, and transparency of the
privatization process. In other words, a neutral or lack of internal organization support occurs
simultaneously with a lack of society support. The plan for privatization and the share price showed
several commonalities with stakeholder support. It is also interesting to observe that another pattern
can be observed across cases.
These observations point to a common pattern in each of the cases. This pattern is that the primary
factor that determines stakeholder support is the transparency of the privatization process. If the
process is not transparent, which is a societal support issue, then there is also no overall positive
stakeholder support. The transparency of the process is influenced by two factors. One factor is the
degree of internal relationship. This is an internal organization support issue and reflects whether
the existing organization support is characterized by good relationships between employees,
managers, directors and owners. The degree of internal relationship is influenced by the company
restructuring which in turn is influenced by the plan for privatization.
The other factor that influences the transparency of the process is the share price. The share price is
influenced by a motivation to handle a budget deficit, and by factors such as the existence of an
unprecedented moment, share price in the bourse, floor price, and a limited number of shares on the
bourse.
For example, in the Bank Permata case (see chapter seven), the transparency of the process was
high. This was positively influenced by the share price (the price paid was above the fair value) and
by positive internal relationships which were the result of the extensive restructuring. This provides
a contrast to the transparency in the BCA case (see chapter nine). In this case there were issues with
the share price as well as with the degree of internal relationships which, despite restructuring and
the plan for privatization remained problematic.

308
 Figure 10.9: Stakeholder support – adjusted

Plan for
privatization

+ + +

Company Opposition from Unprecedented Share Limited Existence

restructuring a number of Reducing moment price in shares in of floor
managers and of budget the the price
employees deficit bourse bourse

- - -
- -
+/-
+
Internal organization
support
Share
Degree of price
internal
relationship

+
+
Society support

Transparency of
the privatization
process

Stakeholder support

All in all, stakeholder support is one of the considerations that partners should take into account in
the planning phase.

Strategic match
The strategic match is composed of capacity, complementarity, and strategic importance. From the
cross-case dataas presented in table 10.11, they suggested that all cases had good strategic match
stemmed from good capacity, complementarity, to strategic importance.

309
 Table 10.11: The result of strategic match
Indosat Semen Bank Bank BII BCA
Gresik Niaga Permata
Strategic match
Capacity + + + + + +
Attractiveness of macroeconomic - - - + - -
conditions
GDP growth - - - + - -
Currency rate - - - + +/- -
Attractiveness of market + +/- +/- + + +
Market share + + - + +/- +
Growth of market + - + + + +
Alliance track record + + + + + +/-
Partner’s experience + +/- +/- + + +/-
Partner’s successfulness + + + + + +/-
Attractiveness of product or service + + + + + +
Quality of product or service + + + + + +
Innovativeness of product or + + + + + +
service
Attractiveness of technology + + + + + +
Technology of product or service + + + + + +
Information technology + + + + + +
Attractiveness of financial - - +/- +/- +/- +/-
performance
Profitability - - - - - -
Growth of revenue - - + + + +
Complementarity + + + + + +
Related to the attractiveness of + + + + + +
market
Related to the strategy + +/- + + + +
Related to the attractiveness of + + + + + +
resources
Strategic importance + + + + + +
Pressure of continuity + + + + + +
Pressure of time on alliance + + + + + +
Alternative to cooperation + - - - - -

From the cross-case data in table 10.11, it can be shown that the sub-factors of capacity,
complementarity, and strategic importance were appropriately matched with the strategic match.
Observations in the capacity sub factor showed that all cases had positive growth of market except
in Semen Gresik when the IEPSA was undertaken during the abyss of the economic crisis. In terms
of market share, the SOEs and BTOs were prominent companies in the Indonesian industry except
Bank Niaga and BII. Variables that showed the same pattern as capacity were attractiveness of
product or service and attractiveness of technology while variables which nearly appropriately
matched with the exceptions were attractiveness of market and alliance track record.

310
Another observation in the complementarity sub-factor showed that all cases had positive variables
and showed the same pattern with the complementarity except in terms of the complementarity
related to the strategy in Semen Gresik. In this case of complementarity, local partner was still in
the state of implementing the restructurization strategy which was different from the aggressive
growth strategy of the foreign partner. Variables that were appropriately matched were
complementarity related to the attractiveness of market and resources with the exception was
complementarity related to the strategy.
The last observation was in the strategic importance sub-factor. Variables that were appropriately
matched were pressure of continuity and pressure of time on alliance while alternative to
cooperation was negatively matched. The reason was that there were ample of alternatives or
options in the IEPSAs except in the case of Semen Gresik when there were only two prospective
partners participated in the planning phase. As such, alternative to cooperation variable has negative
influence to the strategic match.
Besides the existences of macroeconomic crisis in five out of the six cases, the IEPSAs were still
carried on, one of the means due to complementarity of resources and capabilities leading to
positive strategic match. In other words, despite existences of problems in the capacity partners
valued the complementarity and strategic importance of the IEPSAs in such a way that all of the
complementarities of the alliances appropriately influenced the strategic match. Exception was on
the complementarity of strategy in Semen Gresik IEPSA. In this instance, to retaliate with lack of
complementarity of strategy, the foreign partner focused on enhancing the complementarity related
to the attractiveness of market and resources through imposing on the standardization of system
while endorsed adaptation to local needs. It can be implied that the strategic match between partners
in the cases were not due to a matter of luck rather partners valued long-term result than short-term
gain in the IEPSAs. In such a way, they proceeded with the intention to initiate the IEPSAs despite
any drawbacks, such as poor financial performances, which were affected by the downturn of
macroeconomic situations.
Evidences in Bank Niaga and Bank Permata suggested that strategic match influenced positively to
the cultural understanding provided that the stakeholder support had been in existence prior to the
intended IEPSAs. But, it could not be applied to other cases since the stakeholder supports were
non-existence before the intention of the IEPSAs.

311
 Figure 10.10: Strategic match - adjusted

Adaptation to local Standardization of

needs system

+ +
+

Complementarity Complementarity Complementarity related

related to the related to the to the attractiveness of
attractiveness of market strategy resources

+ + +

GDP Currency Market Growth Partner’s Partner’s Quality of Innovativeness Technology of Information Profita Growth
growth rate share of experience successful product or of product or product or technology -bility of
market ness service service service revenue

+ + + + + + + + + + + +

Attractiveness of Attractiveness of Alliance track Attractiveness of Attractiveness of Attractiveness of

macroeconomic market record product or technology financial
conditions + service performance

- + + + + -

Cultural + Pressure on Pressure of time on Alternative to

understanding continuity alliance cooperation
+
+ + -
Capacity Complementarity Strategic importance
+ +
+
+ Stakeholder support
Strategic match

312
All in all, strategic match is one of the considerations that partners should examine since it will
influence planning phase.

Cultural understanding
The cross-case data in table 10.12 suggested that in the planning and formation phases, the trust
level varied from non-existence in Indosat, Semen Gresik, BII, and BCA to conducive in Bank
Niaga and Bank Permata with the commitment level differed from ordinary in Semen Gresik to
strong in the rest of the IEPSAs.

Table 10.12: The result of cultural understanding

Indosat Semen Bank Bank BII BCA
Gresik Niaga Permata
Cultural understanding
Trust - - + + - -
Share of communication - - + + - -
Commitment + +/- + + + +
Nurture of the alliance + +/- + + + +

The data from table 10.12 shows that there were often inconsistencies between the trust and
commitment except in Bank Niaga and Bank Permata. This suggested that commitment of the
partners either on the IEPSA or to the enhancement of industry can be promptly established
between partners. But the trust took longer time to be established as indicated in Indosat, Semen
Gresik, BII, and BCA. This is due to the fact that there were lacks of stakeholder support in these
IEPSAs which affected negatively to the lack of share of communication which later influenced the
inadequacy of trust.
Share of communication varied from existence in Bank Niaga and Bank Permata to non-existence
in Indosat, Semen Gresik, BII, and BCA. The lack of share of communication in Semen Gresik was
due to foreign partner’s despondency about restructurization of the bidding offer from 35% to
25.53% which was demanded by the stakeholder.
Another observation is that there were existences of nurture of the alliance in all IEPSAs except in
Semen Gresik. In this instance, restructurization of the bidding offer was also the reason to the
ordinary nurture of the alliance between the partners in Semen Gresik and hence to the ordinary
commitment. It can be deduced that assurance of the bidding offer influenced both variables. In
other words, restructurization of the bidding offer in Semen Gresik caused the deterioration of both
partners to nurture of the alliance and share of communication.

313
From the cross-case data, it can be suggested when there was existence of stakeholder support, it
would likely influence to the conducive cultural understanding (positive trust and commitment) or
vice versa.
In terms of relationship between the factor with the sub-factors, the evidences suggested that
commitment had more similar pattern with the cultural understanding than did of the trust. This can
imply that trust between partners was formed within a longer period of time than did the
commitment. Commitment was prone to be conveyed by the partners, but the trust was more
difficult to be created in the stakeholders since the intention to initiate IEPSAs affected their life
and interests.
The cultural understanding has reciprocal relationship with the trust and commitment. In other
words, high degree of evolved cultural understanding will enhance to the high degree of trust and
commitment between partners.

Figure 10.11: Cultural understanding - adjusted

Stakeholder support Assurance of

bidding offer

+ + +

Share of Nurture the

alliance
Feedback

communication

+ First loop acquired during +

interaction in the planning and
prior to formation phase Commitment
Trust
Feedback

+ +

Cultural
understanding

All in all, cultural understanding is vital in the planning phase since it influences both stakeholder
support and strategic match.

10.3.2 Formation Phase

Factors in the formation phase of an IEPSA are composed of internal support and strategic plan. All
of the factors are embedded within the step of: forming the BOD and BOC, establishing new vision
and mission, formulation of strategies, implementation plan, and acceptance from the

314
commissioners in the formation phase (mentioned in 10.2.2) with the accompanying variables of
ownership percentage, market opportunities, time constraints, and informal formulation of
strategies. These steps are aimed to formulate and implement the strategy and gain internal support.
Forming the BOD and BOC, setting up new vision and mission, formulation of strategies, and
acceptance from the commissioners are embedded in the strategic plan sub-factor while
implementation plan is embedded in both internal support and strategic plan.

Internal organization support

Based on the cross-case data in table 10.13, internal organization support differed from ordinary
(Semen Gresik, BII, and BCA) to attractive within the rests of the cases. These were stemmed from
various participation in the implementation of strategic planning from non-existence (Semen
Gresik, BII, and BCA), ordinary (Indosat), to existence in Bank Niaga and Bank Bali. All in all,
existences of commitments were possessed in all cases.

Table 10.13: The result of internal organization support

Indosat Semen Bank Bank BII BCA
Gresik Niaga Permata
Participation in the implementation of +/- - + + - -
strategic planning

In general, partners in the IEPSAs addressed guarantee on employment in such a way that people
ultimately participated in the implementation of strategic planning. An exception was in Semen
Gresik, where foreign partners did not pledge to avoid downsizing of employees and neither have fit
in the strategic objective between the partners. In BII and BCA, employment security issues were
addressed but still people who felt threatened abandoned the alliances. This situation was due to the
new different cultures endorsed by the foreign partner which might threaten managers originated
from the old clan.
From the cross-case data of internal organization support and cultural understanding in Bank Niaga
and Bank Permata, it was revealed that existence of internal organization support would positively
influence the cultural understanding or vice versa. This influence was established since the
existence of cultural understanding endorsed the participation in the implementation of strategic
plan. Formulation of successful strategic plan in Bank Niaga and Bank Permata had elevated the
trust and commitment as a prerequisite to cultural understanding as well as ensured the guarantee on
employment in the alliances.

315
 Figure 10.12: Internal organization support – adjusted

Strategic plan

+ +
Cultural Guarantee on Difference between the
understanding employment Fit in objective current culture and the old
clan culture

+ + + -

Participation in the
implementation of
strategic plan

Internal
organization
support

Overall, internal organization support influences the implementation of the strategic plan by
ensuring participation of the implementation of strategic plan in the IEPSA. This is established
through the participation of the stakeholder in the implementation of strategic plan. Existences of
positive cultural understanding, guarantee on employment, and fit in objective influence positively
to the participation in the implementation of strategic plan and furthermore to the internal
organization support. In contrast, existence of difference between the current culture and the old
clan culture inhibit the participation in the implementation of strategic plan and likewise to
opposition in the internal organization.

Strategic plan
In all cases, partners had established strategic plan which was composed of formulation of strategies
and its implementation plan. In other words, they formulated the strategic plan which reflected the
commitment to the alliances.

Table 10.14: The result of strategic plan

Indosat Semen Bank Bank BII BCA
Gresik Niaga Permata
Commitment + + + + + +

316
Cross-case data in tables 10.10 and 10.14 shows that presence of commitment in Bank Niaga, Bank
Permata, and Indosat had contributed to the existence of internal organization support in the
IEPSAs. Nevertheless, the situation could not be applied to the cases of BII and BCA since the
alliances did not guarantee on the employment to the employees. Exception case was in Bank Niaga
where faster time was consumed in the process of formulating the strategic plan due to the existence
of informal meeting between the partners on strategy formulation prior to the SPA which took five
to six months longer than were of the other cases. Likewise, in Bank Niaga, the commitment could
be built and enhanced in a relatively shorter period time due to the existence of informal meeting on
strategy formulation.

Figure 10.13: Strategic plan - adjusted

Existence of informal
meeting on strategy
formulation
+
Commitment

+
Internal organization + Strategic plan
support

Overall, strategic plan is an important factor in the formation phase. It also influences the internal
support, in particular with the implementation plan and its control which constitute the contribution
of internal stakeholder in the functional divisions and the accompanying activities. In other words,
this requires and is developed based on the commitment of the internal stakeholder and partners.
Successful formulation of strategic plan enhances the internal organization support and vice versa
since it is composed of detailed implementation plan in such a way that everyone in the
organization participates in the implementation.

10.3.3 Operation Phase

Factors in the operation phase are composed of human resource management, organizational
arrangement, and management control system. All of the factors are embedded within the step of
enhancement of: human resources, organizational arrangement, and setting up control system in the
operation phase (mentioned in 10.2.3) with the accompanying variables of number of previous
separated subsidiary, already flat organization, regulation, and corporate governance.

317
In general, the cross-case data of the factors in operation phase were good. They were reflected with
good variables in human resource management and management control system factors. An
exception was in the flattened organization variable of the organizational arrangement factor such
as in Semen Gresik, Bank Niaga, Bank Permata, BII, and BCA. In these instances, the variable
(flattened organization) was considered as ordinary.

Human resource management

Evidences on the human resource management suggest that all partners in the IEPSAs had
established and enhanced the collaborative people.

Table 10.15: The result of human resource management

Indosat Semen Bank Bank BII BCA
Gresik Niaga Permata
Human resource management
Collaborative people + + + + + +

The cross-case data indicated that that human resource enhancement was one of the resources to be
improved in order to gain sustainable above average performances. An exception was in the IEPSA
of Bank Permata where the opportunistic behavior of the foreign partner by increasing the personal
and administrative expenses had influenced negatively to the effectiveness of human resource
management and thus plunged the profitability of the alliance. As the cultural understanding in the
alliances evolved positively such as those in Indosat, BII, and BCA, there were inclinations of
alliances to put more emphasis on the human resource management which in turn re-influenced the
cultural understanding. Evidences also suggested that successful implementation of human resource
management influenced positively to the management control system.

Figure 10.14: Human resource management - adjusted

Opportunistic
behavior

-
Collaborative
people

+
Evolved cultural + Human resource + Management
understanding management control system

318
All in all, human resource management is important in the operation phase since it is established to
improve the IEPSA’s learning capability, cooperation and conflict resolution, trust, candor, and
communication, and commitment to the objective setting. It has reciprocal causal effect with the
evolved cultural understanding and influence the management control system.

Organizational arrangement
In terms of organizational arrangement, all IEPSAs can be characterized with possessing
decentralization in the decision making so that it perfectly related with the organizational
arrangement.

Table 10.16: The result of organizational arrangement

Indosat Semen Bank Bank BII BCA
Gresik Niaga Permata
Organizational arrangement
Flattened organization + +/- +/- +/- +/- +/-
Decentralization of decision making + + + + + +

Flattened organization only occurred in the case of Indosat when partners introduced the new value
and thus required subsidiaries to be merged into the corporation. In order words, there was no
strong commonality between flattened organization with the organizational arrangement. These
evidences implied that decentralization of decision making in IEPSA was mandatory and the
organization structure of most IEPSAs was already flattened by the time the alliances formed. In the
IEPSA of BII, new value enhancement from the partners to change the old family clan was
promoted to establish a successful organizational arrangement. Cross-case data also revealed that
effectiveness of organizational arrangement in the IEPSAs had positive influenced to the
management control system in the alliances and re-influenced the organizational arrangement.

Figure 10.15: Organizational arrangement - adjusted

New value
enhancement

+
Decentralization of
decision making

+
Organizational + Management
arrangement control system

319
Overall, organizational arrangement is vital in the operation phase in order to achieve
responsiveness and flexibility so that the IEPSA can adapt to the changes in environment.
Organizational arrangement is determined by flattened organization and decentralization of decision
making. In this regard, decentralization of decision making is mandatory. As indicated in the
adjusted model, in the situation of partners imposed on new value enhancement, this will influence
the flattened organization and decentralization of decision making.
In terms of the order of importance variables, the most important variable was decentralization of
decision making (since it perfectly matched) and followed by flattened organization.
Organization arrangement has causal effect with management control system. In other words,
effective implementation of organizational arrangement influences positively to the management
control system and re-influence the organizational arrangement.
To adapt to the dynamic environment as an organizational requirement of a strategic alliances as
mentioned by Bleeke and Ernst (1991) and Callahan and Mac Kenzie (1999), an IEPSA needs to
decentralize its decision making. This can be enhanced when partners in an IEPSA need to endorse
new value to the alliance.

Management control system

From the cross-case data, all cases had positive variables within the management control systems
consisting of planning, control structure, and control process.

Table 10.17: The result of management control system

Indosat Semen Bank Bank BII BCA
Gresik Niaga Permata
Management control system
Planning + + + + + +
Control structure + + + + + +
Control process + + + + + +

The cross-case data in table 10.17 shows that that any positive factors in the operation phase
(human resource management and organizational arrangement) which were supported by the
accompanying positive variables (collaborative people, flattened organization, and decentralization
of decision making) would influence positively to the management control system. In banking
IEPSAs, the management control system was emphasized on the corporate governance and risk
management as the anticipation to avoid the similar past mistakes occurred in the banks as
happened before the IEPSAs.

320
Evidences in all cases suggested that positive evolved cultural understanding influenced positively
to the management control system which in turn re-influenced to the evolved cultural
understanding.

Figure 10.16: Management control system - adjusted

Anticipation of the Organizational

past mistake arrangement
+ +
Planning Control Control
structure process

+ + +
Evolved cultural + Management + Human resource
understanding control system management

All in all, management control system is an important factor in the operation phase since it is
established as one of the control mechanisms in an IEPSA. Successful implementation of planning,
control structure, and control process brings into successful achievement of management control
system. Besides that, there is a causal effect between evolved cultural understanding and
management control system. Human resource management is another factor that influences the
management control system. According to Das and Teng (2001), control in the strategic alliances
consists of behavior control, output control, and social control. Behavior control is also called
process control, since it focused on the process which turns appropriate behavior into desirable
output (Das & Teng, 2001: 260). Output control is about result orientation and whether or not the
alliance achieves the objectives (Das & Teng, 2001). Social control aims at reducing the
discrepancies in goal preferences of organizational members through the establishment of common
culture and values (Das & Teng, 2001). In relation to the adjusted model of management control
system, behavior control is located within the human resource management in which collaborative
people are required by the partners in the IEPSA. In the alliance, collaborative people who concern
for others and self are the ones control the required behavior in the IEPSA. Planning, control
structure, and control process have the role to establish an output control in the alliance. Social
control is embedded in the evolved cultural understanding which is composed of trust and
commitment. This factor (evolved cultural understanding) is established to accommodate the
establishment of common culture and values.

321
Evolved cultural understanding
In the evolved cultural understanding, trust level as one of the components varied from non-
existence in Semen Gresik to positive in the rest of the IEPSAs while share of communication
existed in all IEPSAs with the exception in Semen Gresik.
Commitment, as another component in cultural understanding, differed from ordinary in Indosat,
Semen Gresik, Bank Permata, and Bank International Indonesia to existence in Bank Niaga and
BCA. Nurture of the alliance resided in all IEPSAs with the exemption in Semen Gresik.
Performance of the IEPSAs varied from unattractive in Indosat, Bank Permata, and BII to attractive
in Semen Gresik, Bank Niaga, and BCA.

Table 10.18: The result of evolved cultural understanding

Indosat Semen Bank Bank BII BCA
Gresik Niaga Permata
Evolved cultural understanding
Trust + - + + + +
Share of communication + - + + + +
Commitment +/- +/- + +/- +/- +
Nurture of the alliance + - + + + +
Performance of the alliance - + + - - +

Cross-case data in table 10.18 shows that variables appropriately matched with the evolved cultural
understanding were share of communication and nurture of the alliance while performance of the
alliance was not matched with the factor. The cross-case data of Bank Permata and BII revealed
similarities of all the variables.
Trust was resulted from the communication and socialization of the program which were intensified
in Indosat, BII and BCA. Nevertheless, the remaining lack of trust level in Semen Gresik where
partners had no communication program to spread the objectives to the entire organization was
originated from an unclear clausal SPA on ownership. This issue was about whether the
government had a put option or an obligation to sell the shares in such a way that Cemex became
the dominant owner in the alliance. Trust can be enhanced or diminished by the degree commitment
between partners. For instance, when there is an opportunistic behavior occurring in one of the
partners, this situation will reduce the degree of trust. In contrast, high commitment of the partners
will enhance the degree of trust.
Nurture of the alliance was appropriately matched with the evolved cultural understanding.
Unattractive performances were regarded by partners due to the fact that the accomplishments not
in line with the objectives. Therefore, there was no strong commonality between the alliance
performances with the evolved cultural understanding.

322
The cultural understanding had evolved positively in comparison with the cultural understanding in
the initial phases (planning and formation), in particular with the cases in BII and BCA where the
partners in the banking alliances shared communication more intensively in the operation phase.
This implied that the evolved cultural understanding in the operation phase was influenced by the
cultural understanding in the initial phases. The evolved cultural understanding influenced by
previous cultural understanding and management control system has reciprocal relationship with the
trust and commitment. In other words, high degree of evolved cultural understanding will enhance
to the high degree of trust and commitment.
From the cross-case data, presence of evolved cultural understanding positively influenced the
management control system or vice versa except in Semen Gresik. This exception was due to the
local insistence on getting rid of the foreign partner from the alliance so that keeping up the good
performance was important to preserving a high profitability once the foreign partner was
dismissed.
Successful implementation of human resource management in all cases had influenced positively to
the management control system which in turn re-influence to the human resource management
through sharing of communication and nurturing the alliance.
Evidences also suggest that cultural differences did not inhibit the IEPSA. Rather, all IEPSAs
improved in the performances besides opposition from stakeholders in particular with such certain
cases as Indosat, Semen Gresik, BII, and BCA. Even, for the western and eastern international
strategic alliances such as those in Bank Permata and BCA, the performances ameliorated. In these
instances, trust and commitment diminished the risk of cultural differences between the partners.

Figure 10.17: Evolved cultural understanding - adjusted

Human resource Unclear SPA
management
-
+ -
+
Share of Nurture the
communication alliance
+ +
Trust Commitment

+ +

Cultural + Evolved cultural + Management

understanding understanding control system

323
All in all, evolved cultural understanding is important in this phase. It is influenced by trust and
commitment. Factors, such as human resource management and management control system have
causal effect to the evolved cultural understanding. Besides that, cultural understanding in the initial
phases influences the evolved cultural understanding in the operation phase.

10.3.4 Termination Phase

Factors in the termination phase are external driver and internal driver. All of the factors are
embedded within the step of: existence of termination driver and termination in the termination
phase (mentioned in 10.2.4) with the accompanying variables of threat of monopoly and unfulfilled
objective.

External Driver
External driver was the reason to the Indosat termination. It was decided in court as the
consequence of the emergence of regulation to forbid domination of a certain company to possess
more than 50% market share in the telecommunications industry.

Internal Driver
Terminations in all IEPSAs were due to the internal drivers in terms of strategic objectives
regardless of whether they were accomplished. In banking IEPSAs, accomplishment of strategic
objectives in terms of improved performances was the reason of Indonesian partner to selling the
remaining shares in the IEPSAs to the investors in the stock exchange. In contrast, partners’
incapability to accomplish the strategic objectives of the IEPSA in Semen Gresik (increase
production capacity and market share) and Indosat (increase market share) was the reason of the
IEPSA to terminate. In Semen Gresik, partners’ failure to meet synergy was another reason to
termination in particular related with the strategic objectives and expectancy.

Table 10.19: The result of factors in termination phase

Indosat Semen Bank Bank BII BCA
Gresik Niaga Permata
External Driver
External environment - + + + + +
Internal Driver
Strategic objectives - - - - - -
Expectancy + - + + + +
Corporate leadership + + + + + +

324
 Figure 10.18: Internal driver - adjusted

Failure to meet
synergy
- -

Strategic Expectancy Corporate

objectives leadership

- - -
Internal driver

Altogether, the termination of an IEPSA is caused by internal and external driver according to the
sequence of importance. In particular with the internal driver, it is derived by the reasons related to
and in accordance with the sequence of importance: strategic objectives, expectancy, and corporate
leadership. As presented in the adjusted model, given failure of partners’ resources to meet synergy,
it will influence to the strategic objectives and expectancy. In the external driver, change of external
environment is the sole reason to termination.
These drivers confirm Kanter (1994), Sierra (1995), Porter (1998), and Mockler (1999). In
particular with IEPSA, failure to meeting synergy is the factor that influences the internal driver of
strategic alliance termination.
To summarize, cross-case data revealed that factors in each of the IEPSAs was inclined to turn out
to be attractive in the operation phase. In other words, cases with unattractive factors in the planning
phase such as those in Indosat, Semen Gresik, BII, and BCA, had converted to mostly attractive in
the operation phase. In these instances, IEPSAs experienced evolved factors from planning,
formation to operation phases.

10.3.5 Knowledge contribution

Figure 10.9 revealed that the transparency is influenced by the internal organization support and the
share price which is derived from company restructuring, opposition from a number of managers
and employees, reducing of budget deficit, unprecedented moment, share price in the bourse,
limited shares in the bourse, existence of floor price, and plan for privatization. Figure 10.10 also
suggested that when there is a lack of trust or a state of distrust exists in the organization-
stakeholder relationship, transparency is a required condition for rebuilding trust and commitment
in the relationship. The concept of transparency is linked to openness and is described as being both
a relational characteristics as well as an environmental condition for organizational processes.

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Figure 10.10 suggested in the factors of an IEPSA in the planning phase there is existence of causal
relationship between cultural understanding and strategic match through the pressure on continuity
of the partners toward the IEPSA as well as influence of strategic match on the stakeholder support
through the cultural understanding acquired from the strategic match, complementarity, and
strategic importance over the resources and capabilities of the partners. Besides that motivation of
adaptation to local needs and standardization of system can influence the complementarity sub
factors in the strategic match.
From figure 10.11, trust in the planning phase of an IEPSA is obtained through the sharing of
communication which is influenced by the stakeholder support and assurance of bidding offer. The
sharing of communication can consist of both goodwill and competence. They are endorsed by the
stakeholder who has prior knowledge about the partners and the intended IEPSA due to the positive
influence of strategic match to the stakeholder support. Related to competence, an existence of
assurance of bidding offer influences positively to the share of communication since it consists of
assurance about the transfer of competence, and capabilities between partners in the IEPSA. The
model refines Das and Teng (2001) who stated that trust is composed of goodwill trust and
competence trust. Goodwill trust is about one’s good faith, good intentions, and integrity. It is about
whether a firm has a reputation for dealing fairly and caring about its partner firm’s welfare in
alliances (Das & Teng, 2001:256). Competence trust is based on the various resources and
capabilities of a firm (Das & Teng, 2001: 257).
From figure 10.12, it can be obtained that strategic plan influences internal organization by having
plans which convince the entire organization to participate in the implementation and provide
guarantee of employment. Besides that, a formulated strategic plan influences positively to the
cultural understanding which in turns endorse the participation in the implementation of strategic
plan. Other factor that enhances participation is the existence of fit in objective between (among)
partners while difference between (among) the current culture of the partners with the old clan
culture hinders participation.
Figure 10.13 suggested that commitment is required by the partners to complement and exploit the
resources to obtain capabilities as sources of the alliance’s competitive advantage. Existence of
informal meeting on strategy formulation by the prospective partners on strategy formulation may
enhance the commitment. The state of strategic plan which comprises commitment of partners in
terms of resources has causal effect to the internal organization support for existence of internal
organization support enhances the implementation of strategic plan and vice versa.
In terms of human resource management as presented in figure 10.14, collaborative people are
required in the IEPSA to tackle the processes of exchange and adaptation, i.e. facilities and

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resources sharing, knowledge transfers, and cultural adaptation between (among) the partners.
Nevertheless, opportunistic behavior such as overburden the personal expenses in the IEPSA can
hinder the establishment of collaborative people in the IEPSA. Besides that, human resource
management influences positively to the management control system in the alliance in all sub-
factors such as planning, control structure, and control process and has causal effect with the
evolved cultural understanding since effective human resource management enhances the share of
communication and commitment of the alliance in the IEPSA and therefore improved performance
of the alliance can be expected.
To adapt to the dynamic environment as an organizational requirement of a strategic alliances, an
IEPSA needs to decentralize its decision making. This can be enhanced when partners in an IEPSA
endorse new corporate value to the alliance.
In terms of management control system as presented in figure 10.16, human resource (one of the
resources which are managed in the IEPSA) influences the management control system through
controlling, structuring, and processing the system which can be referred as a ‘hard-side’ of control
system. Collaborative people are required by the partners in the IEPSA. They are the ones who
concern for others and self and control the system in the IEPSA in such a way that it is able to
achieve the objectives which can be referred as ‘objective’ of control system. Besides that evolved
cultural understanding which is composed of trust and commitment can enhance the management of
control system. This factor (evolved cultural understanding) is established to accommodate the
establishment of common culture and values. This can be referred as the ‘soft-side’ of control
system.
From figure 10.17, it can be obtained that evolved cultural understanding is composed of trust and
commitment. The evolved cultural understanding in accordance with the model is acquired by the
establishment of management control system consisting of planning, control structure and control
process as well as cultural understanding in the previous phases (planning and formation). As the
objective of the partners can be fulfilled in the IEPSA through the effective management control
system, this enhances the evolved cultural understanding and vice versa. Trust is built through share
of communication of the partners and people in the IEPSA as well as effective human resource
management while commitment is obtained by partners’ nurture of the alliance. Nonetheless,
human resource management can influence the partner’s nurture of the alliance while unclear SPA
may influence negatively to the share of communication and partner’s nurture of the alliance. As
such, human resource management can influence the evolved cultural understanding and vice versa.

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Termination of an IEPSA is influenced by internal and external drivers. This confirms Kanter
(1994), Sierra (1995), Porter (1998), and Mockler (1999). In particular with IEPSA, failure to
meeting synergy is the factor that influences the internal driver of strategic alliance termination.

10.4 Third research question

The third research question was formulated as: How were the relationships between (among) factors
and variables was created? A comparison across the cases, in line with the framework in chapter
three, shows that for each of the cases relationship were identified: a relationship of the factors
(10.4.1).

10.4.1 Relationship of the factors

From the cross-case data in general, evidences suggest that in the initiation phases (planning and
formation), the stakeholder support influenced positively to the cultural understanding which
afterwards also influenced the stakeholder support and internal organization support. Evidence
which supported the cultural understanding influenced positively the stakeholder support was the
data in Bank Niaga which had a solid relationship reflected with the non-existence of labor union.
Strategic match also influenced the cultural understanding and stakeholder support which were
supported by the data in Bank Niaga and Bank Permata when strategic match influenced and
enhanced the cultural understanding (which had been conducive before the initiation of the
alliances) in the two cases.
In general, the internal organization support not only influenced positively and re-influenced the
cultural understanding, but also influenced the strategic planning which afterwards re-influenced the
internal organization support.
Generally, in the operation phase, cultural understanding influenced the evolved cultural
understanding. Evolved cultural understanding together with human resource management and
organizational arrangement influenced positively to the management control system. As such,
positive implementation of management control system re-influenced positively to the evolved
cultural understanding. Relationship of the factors is presented in table 10.20.

Table 10.20: Relationship of the factors

No. Influencing factor Influenced Indosat Semen Bank Bank BII BCA
factor Gresik Niaga Permata
1. Stakeholder Cultural      
support understanding
2. Strategic match Cultural - -   - -
understanding
3. Strategic match Stakeholder - -   - -

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 No. Influencing factor Influenced Indosat Semen Bank Bank BII BCA
factor Gresik Niaga Permata
support
4. Cultural Stakeholder - -  - - -
understanding support
5. Cultural Internal      
understanding organization
support
6. Internal Cultural      
organization understanding
support
7. Internal Strategic      
organization Planning
support
8. Strategic planning Internal      
organization
support
9. Human resource Management      
management control system
10. Organizational Management      
arrangement control system
11. Management Evolved cultural      
control system understanding
12. Evolved cultural Management      
understanding control system

In the planning phase, the trust level was initially established by the socialization upon policy of the
alliance initiation to the stakeholder. This initial trust level influenced the stakeholder support and
in turn re-influenced the trust level. The strategic match enhanced the stakeholder support and in
terms of strategic importance also influenced the trust level.
In the formation phase, the trust level which was inherited from planning phase influenced the
internal support which in turn re-influenced the trust level depending upon the management and
employee support in the alliance. The strategic plan which was supported by the internal
stakeholder in the implementation in return re-influenced positively the internal stakeholder of the
alliance so that it also influenced the trust level.
In all cases, management control systems were relatively easier to implement provided that
planning, control structure, and control process were positives due to the increasing trust level in
such a way that structure and process mechanism were exercised in the ambience of trust. In
banking industry, the Good Corporate Governance and stricter rules on compliance had improved
the effectiveness of management control systems implementation. Likewise, the trust level had
improved (evolved) due to the increasing performance level of these factors; organization
arrangement, and human resource management.
Therefore, the relationship of the factors is presented in figure 10.19.

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 Figure 10.19: Relationship of the factors

Stakeholder Internal Human

support organization resource
support management

+ ++ +
+

+
Management
Cultural + Evolved + control
+ cultural
understanding system
understanding

+ +

Strategic Strategic Organizational

match planning arrangement

10.4.2 Knowledge contribution

Along the life cycle of an IEPSA, relationships of the factors can be obtained. In the planning and
formation phase, strategic match influences positively to the stakeholder and has reciprocal
influences with cultural understanding while stakeholder support has reciprocal influences with
cultural understanding. These relationships suggest that stakeholder support is initially established
through the information related to the prospective partners before or during the due diligence to
determine the strategic match between the prospective partners. Cultural understanding which is
composed of trust and commitment is established and enhances strategic match and stakeholder
support as well as the internal organization support in the formation phase. In other words, strategic
match, cultural understanding, stakeholder support, and internal organization support can be
enhanced with reciprocal relationships one to another. Internal organization support has reciprocal
relationships with strategic planning. Besides that, cultural understanding influences the evolved
cultural understanding in the operation phase. But, evolved cultural understanding can change due
to its reciprocal relationships with human resource management and management control system.
The latter is influenced by both human resource management and organizational arrangement.

10.5 Conclusions
In this chapter, the answers of research questions were provided. The answers were obtained from
the cross-case analysis to all cases. The first research question was undertaken to describe the life

330
cycle of the alliances so that the phases of the alliance including were able to be revealed. The
second research question was aimed to analyze the cross-case data of the factors and variables
through which theory was able to be developed. The third research question was answered by the
elaboration of the prior cross-case analysis so that the relationship between the factors within the
lifecycle was able to be determined.
Cross-case analysis is very beneficial to enrich the discussions analysis of the phenomena by
comparing them into the cross-cases. Enrichment of the discussions analysis has already revealed
the steps in the life cycle of an IEPSA, obtained the adjusted model of the factors in each of the
phases, as well as unveiled the relationship of the factors.

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332
CHAPTER 11: CONCLUSIONS, REFLECTIONS,
AND RECOMMENDATIONS

This chapter provides the conclusions, reflections, and recommendations of the research
undertaken. Conclusions are presented in section 11.1, while reflections are discussed in section
11.2, and recommendations are provided in section 11.3.

11.1 Conclusions
This section provides conclusions which relate with the answers to the central research question:
How did the privatization process through International Equity Placement Strategic Alliance take
place in Indonesia? They were obtained by elaborating answers to each of the accompanying
research questions in the following sub-sections. Research question 1 is discussed in section 11.1.1,
research question 2 is discussed in section 11.1.2, and research question 3 is discussed in section
11.1.3.

11.1.1 Phases
This section presents answers to research question 1: What were the steps/phases in the
privatization through IEPSAs in Indonesia at the firm level in the banking, cement, and
telecommunications industries and how were they formulated?
IEPSA is the type of equity alliance classification in the form of equity arrangement. A vast amount
of literatures suggest that IEPSA is appeared to be lack of research investigated than the other types
of strategic alliances such as joint ventures and collaboration. There are common shares of equity in
this form where one partner possesses equity of the other partner. The context of IEPSA is
geographical area between (among) companies from different countries.
The previous authors who researched about phases of strategic alliances mentioned various phases
in the life cycle of strategic alliances. Faulkner (1995) stated that it consists of formation,
management, and evolution while Lorange and Roos (1993) mentioned that it comprises of
formation, implementation, and evolution. Mulyowahyudi (2001) stated that it is composed of
formation, operation, and termination. In the IEPSA, the previous formation phase of these
aforementioned authors is discerned into planning and formation phases due to a thorough
negotiation and intensive analytical and political considerations prior to the SPA. Management,
implementation, and evolution phases are combined into operation phase in the IEPSA. As such, the
phases in the privatization through IEPSAs in Indonesia at the firm level in the banking, cement,

333
and telecommunications industries are composed of planning, formation, operation, and
termination.
How partners formulate the IEPSA is depicted in the step of each of the phases. Establishing the
planning phase in general consists of four steps (see section 10.2.1): an announcement, a first
bidding stage (preliminary bid and due diligence), a second bidding stage and concluding with a
sales and purchase agreement. In each of the steps the following factors need to be considered. They
are; number of prospective partners, documented commitment, industry regulatory involvement,
level of opposition, and acceptability of price.
The formation phase in general comprises four steps (see section 10.2.2): setting up new vision and
mission, formulation of strategies, implementation plan, and acceptance from the commissioners.
The factors to be considered in each of the steps are ownership percentage, market opportunities,
time constraint, and informal formulation of strategies.
The operation phase in general is composed of three steps (see section 10.2.3): enhancement of
human resources, organizational arrangement, and setting up control system. The factors to be
considered in each of the steps are previous separated subsidiary, already flat organization,
regulation, and corporate governance.
Eventually, the termination phase in general consists of two steps (see section 10.2.4): existence of
termination driver and termination. In the termination phase of the IEPSA, the steps to be
considered are existence of termination driver with threat of monopoly and unfulfilled objective as
factors to be well thought of.

11.1.2 Factors and variables

This section provides answer to Research Question 2: Which factors and variables influenced these
steps and phases?

In planning phase, the factors consist of stakeholder support and strategic match. The stakeholder
support comprises of society and internal organization.
The stakeholder support factor consists of variables (see figure 10.9), which are; transparency of the
privatization, share price, degree of internal relationship, fulfillment of budget deficit, company
restructuring, unprecedented moment, limited shares in the bourse, existence of the floor price, and
plan for privatization. Jahansoozi (2006) mentioned that when there is a lack of trust or a state of
distrust exists in the organization-stakeholder relationship, transparency is a required condition for
rebuilding trust and commitment in the relationship. The concept of transparency is linked to
openness and is described as being both a relational characteristics as well as an environmental

334
condition for organizational processes. In addition to Jahansoozi (2006), this research revealed that
the transparency is influenced by the internal organization support and the share price which is
derived from company restructuring, opposition from a number of managers and employees,
reducing of budget deficit, unprecedented moment, share price in the bourse, limited shares in the
bourse, existence of floor price, and plan for privatization. Change in ownerhisp structure variable
is not included within the model of stakeholder support since there is no consistency of findings
between the variable with the factor. In other words, stakeholder support factor is not influenced by
the change of ownership.
Strategic match consists of capacity, complementarity, and strategic importance (see figure 10.10).
The factor comprises attractiveness of macroeconomic conditions, product or service as well as
technology and financial performance, attractiveness of market, and alliance track record,
complementarity related to the attractiveness of macroeconomic conditions, market and resources,
complementarity related to the attractiveness of market, complementarity related to the strategy,
complementarity related to the attractiveness of resources, pressure on continuity, pressure of time
on alliance, and alternative to cooperation. The attractiveness of macroeconomic conditions and
financial performance are included in the capacity sub-factor since the IEPSA intentions were
carried on despite unfavourable macroeconomic conditions which hampered the financial
performance of the SOEs and BTOs. In other words, the strategic match is negatively influenced by
the attractiveness of macroeconomic conditions and financial performance. In the strategic
importance sub-factor, alternative to cooperation is also included in the model since the more
alternative to cooperation in the IEPSA will influence negatively to the strategic importance of the
alliance. The model of strategic match differs with Niederkofler (1991), Lorange and Roos (1992),
Faulkner (1995), Sierra (1995), Segil (1996), Medcof (1997), and Douma (1997) as from the
unveiled situation that there is existence of causal relationship between cultural understanding and
strategic match through the pressure on continuity as well as influence of strategic match on the
stakeholder support. Besides that, motivation of adaptation to local needs and standardization of
system can influence the complementarity sub factors in the strategic match.
From the cultural understanding model (see figure 10.11), trust in the planning phase of an IEPSA
is obtained through sharing communication which is invigoratedby the stakeholder support and
assurance of bidding offer. The sharing of communication can consist of both goodwill and
competence. They are endorsed by the stakeholder who has prior knowledge about the partners and
the intended IEPSA due to the positive influence of strategic match to the stakeholder support.
Related to competence, an existence of assurance of bidding offer influences positively to the share
of communication since it consists of assurance about the transfer of competence, and capabilities

335
between partners in the IEPSA. The model obtained in this research refines Das and Teng (2001)
who stated that trust is composed of goodwill trust and competence trust. Goodwill trust is about
one’s good faith, good intentions, and integrity. It is about whether a firm has a reputation for
dealing fairly and caring about its partner firm’s welfare in alliances (Das & Teng, 2001:256).
Competence trust is based on the various resources and capabilities of a firm (Das & Teng, 2001:
257).

In formation phase, the factors are internal organization support and strategic planning. Internal
organization support includes labor union and management support sub-factors (see figure 10.12).
The factor consists of participation in the implementation of strategic planning, guarantee on
employment, fit in objective, and differences between the current culture and old culture. In the
model of internal organization support, strategic plan influences internal organization by having
plans which convince the entire organization to participate in the implementation and provide
guarantee of employment. This confirms Lorange and Roos (1993) who mentioned that the entire
organization should be sufficiently explained and clearly motivated to ensure that everyone sees the
tasks ahead and can focus on them as an opportunity. Besides that, in this research it was revealed
that a formulated strategic plan influences positively to the cultural understanding which in turns
endorse the participation in the implementation of strategic plan. Other factor that enhances
participation is the existence of fit in objective while difference between the current culture with the
old clan culture hinders participation.
In the strategic plan factor (see figure 10.13), it consists of commitment and existence of informal
meeting on strategy formulation. In the model of strategic plan, commitment is required by the
partners to complement and exploit the resources to obtain capabilities as sources of the alliance’s
competitive advantage. Lorange and Roos (1992) mentioned that creating a competitive advantage
is desired in the strategic plan. In addition to Lorange and Roos (1992), this research unveiled that
the state of strategic plan which comprises commitment of partners in terms of resources has
reciprocal relationshipwith the internal organization support.

In operation phase, the factors are human resource management, organizational arrangement,
management control system. The factors consist of collaborative people, opportunistic behavior,
decentralization of decision making, new value enhancement, planning, control structure, control
process, trust, commitment, share of communication, nurture the alliance, and unclear SPA.
Lorange and Roos (1992) mentioned that people in the strategic alliances represent core
competencies which need to be identified and cultivated. Strategic alliances arise through various

336
types of interactions between the partners. These interaction processes are of two principal types:
exchange and adaptation. In the model of human resource management of this research (see section
10.3.3 about human resource management), it was revealed that collaborative people are required in
the IEPSA to tackle these processes of exchange and adaptation. Nevertheless, opportunistic
behavior can hinder the establishment of collaborative people in the IEPSA. Besides that, it was
unveiled that human resource management influences positively to the management control system
in the alliance and has causal effect with the evolved cultural understanding.
To adapt to the dynamic environment as an organizational requirement of a strategic alliances as
mentioned by Bleeke and Ernst (1991) and Callahan and Mac Kenzie (1999) (see section 10.3.3
about organizational arrangement), through a cross-case analysis it was suggested that an IEPSA
needs to decentralize its decision making. This can be enhanced when partners in an IEPSA need to
endorse new value to the alliance. The flattened organization variable is not included within the
model of organizational arrangement provided that the choise of the layers in the organization is
determined by the formulated and implemented strategy of the IEPSA.
In the model of management control system of this research (see section 10.3.3 about management
control system), behavior control is located within the human resource management where
collaborative people are required by the partners in the IEPSA. In the alliance, collaborative people
who concern for others and self are the ones control the required behavior in the IEPSA. Planning,
control structure, and control process have the role to establish an output control in the alliance (see
figure 10.16). Social control is embedded in the evolved cultural understanding which is composed
of trust and commitment (see section 10.3.3 about evolved cultural understanding). This factor
(evolved cultural understanding) is established to accommodate the establishment of common
culture and values. This refines Das and Teng (2001) who mentioned that control in the strategic
alliances consists of behavior control, output control, and social control. Behavior control is also
called process control, since it focused on the process which turns appropriate behavior into
desirable output (Das & Teng, 2001: 260). Output control is about result orientation and whether or
not the alliance achieves the objectives (Das & Teng, 2001). Social control aims at reducing the
discrepancies in goal preferences of organizational members through the establishment of common
culture and values (Das & Teng, 2001).
The model of evolved cultural understanding (see figure 10.17) is consistent with Parkhe (1998)
who stated that trust can deliberately be “produced”. Trust, in accordance with the model as
obtained in this research is acquired by the establishment of management control system consisting
of planning, control structure and control process. The performance of the alliance variable is not
included in the model since it is part of the management control system. In other words, the

337
financial performance is controlled within the planning, control structure, and control process
variables of the management control system. The model is consistent with Arino, de la Torre, and
Ring (2001) who stated that as the quality of the relational improves the potential for positive
conflict resolution increases, which in turn enhances the partners’ views of each other
trustworthiness. As the objective of the partners can be fulfilled in the IEPSA through the effective
management control system, this situation enhances the evolved cultural understanding in the
alliance which is composed of trust and commitment. This situation can alleviate the cultural
understanding inherited from the previous phases (planning and formation phases).

Finally, in termination phase the factors are internal driver and external driver which consist of
strategic objectives, expectancy, corporate leadership, and failure to meet synergy, as well as
external environment variable (see section 10.3.4). This confirms Kanter (1994), Sierra (1995),
Porter (1998), and Mockler (1999). In particular with IEPSA, failure to meeting synergy is the
factor that influences the internal driver of strategic alliance termination.

11.1.3 Relationship of factors

Along the life cycle of an IEPSA, relationships of the factors can be obtained (see figure 10.19). In
the planning and formation phase, strategic match influences positively to the stakeholder and has
reciprocal influences with cultural understanding while stakeholder support has reciprocal
influences with cultural understanding. These relationships suggest that stakeholder support is
initially established through the information related to the prospective partners before or during the
due diligence to determine the strategic match between the prospective partners. Cultural
understanding which is composed of trust and commitment is established and enhances strategic
match and stakeholder support as well as the internal organization support in the formation phase.
In other words, strategic match, cultural understanding, stakeholder support, and internal
organization support can be enhanced with reciprocal relationships one to another. Internal
organization support has reciprocal relationships with strategic planning. Besides that, cultural
understanding influences the evolved cultural understanding in the operation phase. But, evolved
cultural understanding can change due to its reciprocal relationships with human resource
management and management control system. The latter is influenced by both human resource
management and organizational arrangement.
In all cases, management control systems were relatively easier to implement provided that
planning, control structure, and control process are positives due to the increasing trust level so that
structure and process mechanism were exercised in the culture of trust. In addition to Das and Teng

338
(1998), in banking industry, compliance to Good Corporate Governance and risk management had
improved the effectiveness of management control systems implementation. Besides that, the trust
level had improved due to the increasing level of these factors; organizational arrangement (through
its influence to management control system), and human resource management. These were
identified as control mechanism in terms of structural according to Das and Teng (1998) about trust
and control in strategic alliance. As such, the situation improved the performance of the alliance and
subsequently the commitment of the partners in the alliance improved both attitudinal and
calculative commitment in accordance with Cullen et al. (2000). In the attitudinal commitment
(Cullen et al., 2000: 226), the alliance assumes a position of status and importance; the partners are
willing to nurture and care for it. There is a fairly deep psychological identification with the
relationship and a pride of association with the partner and with the alliances. For a relationship to
continue there must be a positive benefit/cost analysis for the partners. Managers must see a
potential for returns and/or a need to avoid switching costs. This is the rational and economic side
of commitment. It is called calculative commitment (Cullen et al., 2000: 225-226).

Effects of attractiveness of market, alliance track record, product or service, and technology
Resource complementarity between partners will be positively associated with strategic
performance (Sarkar, Echambadi, Cavusgil, & Aulakh, 2001). The attractiveness of market, alliance
track record, product or service, and technology are the capacities that become determinants to the
performance of the IEPSA. According to Song, Droge, Hanvanich, and Calantone (2004),
marketing-related and technology related capabilities in a joint venture have positive performance
impact. Hence, the determinants to the performance of the IEPSA are consistent with those of a
joint venture since market share relates with the capability of the partner to exploit the market
opportunities in the business environment. In addition to it, alliance track record which is referred to
the partners’ reputation and the capacity to high quality product or service should also be included
since they bring confidence to the IEPSA in sharing their capacities. This can be implemented
through the transfer of key people, knowledge, experience, and expertise from the partners to the
strategic alliance.
Therefore for managers, the implication is clear: scrutinize the capacity of partners in terms of
marketing which reflects in the ability to gain prominent market share in the business environment,
reputation related to experiences and successfulness on strategic alliances, ability to produce high
quality of distinctive product or service supported by the leading-edge technology.

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Interaction of capacity
Glaister and Buckley (1996) found that access to complementary resources rather that the sharing of
risks and development of economies of scale were the primary reasons firms for alliances. From the
empirical data, bundling and complementarity of partners’ market and technology capacities
enhanced by partners’ confidence through proven alliance track record and product or service has
the potential to boost the performance of the IEPSA. In one instance, a banking IEPSA with
marketing capacity, superior product and service as well as advance technology on the local partner
side and reputation on strategic alliances and bundled with Good Corporate Governance capacity on
the foreign partner side had provided a competitive advantage to the bank. This bundling,
complementarity, and interaction of capacity in the IEPSA can be related to four potential sources
of inter-organizational competitive advantage (Dyer & Singh, 1998) which includes (1) relation-
specific assets, (2) knowledge-sharing routines, (3) complementary resources/capabilities, and (4)
effective governance.
Das and Teng (1998) suggested that partners bring at least four categories of potential resources-
financial, technological, physical, and managerial-to an alliance. Complementary to Das and Teng
(1998), for managers, scrutinizing the sharing and bundling of partners’ capacity in the IEPSA upon
the capacity of marketing, reputation, and innovativeness leading to high quality of product of
service is crucial to ascertain the IEPSA develop a new core competence and gain a competitive
advantage. In a later stage of the IEPSA (after the formation), managers should provide control
mechanisms which includes setting up Key Performance Indicators (KPI), formulate the
implementation plan, and evaluate the achievement of KPI. This is also necessary to eliminate
weaknesses in the company prior to the IEPSA upon lack of capacity in marketing, innovativeness,
and alleviate notorious reputation which may exist. Firms seek to establish a resource bundle
through alliances that is valuable, rare, and difficult to imitate (Gulati, Nohria & Zaheer, 2000) can
be fulfilled. Thus, experimental learning, which generates unique, new knowledge is the target
alliance formation and use (Lei et al., 1996; Zahra, Nielsen & Bogner, 1999). Partly, through
learning, alliances help firms overcome limitation in their own resource set and seek other
competitive advantage that can exploit the changes in the business environment (Hagedoorn, 1995;
Hite & Hesterly, 2001; Mitchell & Singh, 1996). This is aimed in order to remain competitive (Lei
et al., 1996; Teece, Pisano & Shuen, 1997).

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 Figure 11.1: Bundling of capacity and its influence on performance of an IEPSA

Bundling of
Capacity
Marketing between partners

Core Competitive
Product or Innovativeness competencies of advantage of the
service the IEPSA IEPSA

Performance of
Reputation the IEPSA

Strategic importance
Trust is a willingness to accept vulnerability based upon positive expectations of partner behavior
(Hutt et al., 2000). When trust exists, the company does not fear its partner’s actions (Deutsch,
1973, McAlister, 1995), because the partners can depend on each other to achieve a common
objective (Gerhard & Odenthal, 2001). Trust is developed during the tendering process and due
diligence as well as established from the reputation of partners which solidifies the commitment and
influences positively to the strategic match in the IEPSA through its influence on the pressure on
continuity upon the alliance. There is a relationship between the initial trust between partners with
the pressure on continuity upon the IEPSA. This initial trust is developed through the reputation of
the partners in forming and managing strategic alliances and relationship established during the
partners’ interaction in particular during the tendering process and due diligence. This brings
commitment and furthermore leads to a cultural understanding between partners in the IEPSA in
such a way that any differences derived from the different cultures of partners will not influence to
the intention to establishing an IEPSA. In other words, high level of trust and commitment will
bring pressure on the alliance continuity as partners feel comfort with the alliance and imminent
competitive advantage obtained. Pressure of time on alliance can be enhanced by the
complementariry of market between partners. For instance, one partner possessing a growing
industry market and the other with maturity market will incline to establishing an IEPSA by taking
advantage of this synergy thus enabling to exploit opportunities in the business environment.
The implication for manager is clear: that relationship and interaction between partners during the
tendering process and due diligence is crucial to create trust and commitment which further inhibits
problem related to the different cultural backgrounds such as corporate culture and national culture.

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Interaction between trust, strategic match, and stakeholder support
Trust is a vital aspect of social capital (Cullen, Johnson, & Sakano, 2000; Dess & Shaw, 2001).
Firms with strong social capital are likely to choose partners with whom they have a bond of trust
prior to the alliance (Ireland et al., 2002). Tacit knowledge (such as trust and social capital) is a
strong stimulus of achieving competitive advantage by integrating complementary resources
(Harrison et al., 2001). Besides that, strategic match between partners will increment trust between
partners. In other words, there is a reciprocal influence between trust and strategic match. Existence
of trust and commitment will create cultural understanding in such a way that it will function as a
buffer to any discrepancies of cultures between partners whether in the scope of corporate or
national.
Good strategic match between partners will potentially create imminent benefits to the stakeholder
such as employment, dividend, society development etc. Thus, it influences to the IEPSA’s
acceptance from the stakeholder.

Figure 11.2: Cultural understanding, strategic match, and stakeholder support

Cultural Stakeholder
Understanding support

Trust
Strategic Core Competitive
match competencies of advantage of the
the IEPSA IEPSA
Commitment

Performance of
the IEPSA

Cultural compatibility of the partners will be positively associated with strategic performance
(Sarkar et al., 2001). In this article, cultural compatible is related with cultural understanding in the
IEPSA composed of trust and commitment. The cultural understanding influences positively to the
strategic match, which afterwards enhances the performance through established core competencies
and competitive advantage.

11.2 Reflections
11.2.1 Reflection of research expectations
IEPSA as one type of privatization in Indonesia was a sensitive issue where the political sense was
prominent which brought about lack of respondents willingness to be interviewed. In most cases,

342
the privatization policy maker preferred not to engage with interview that connected with
privatization. Stakeholder influences were prominent since the IEPSAs comprised a huge injection
fund to restructure the companies prior to the IEPSA composing of more than 25% of Indonesia’s
GDP.
To gain access to the respondents in the cases studied, a strategy was made through acquiring
references from key person having prominent influence in the organization. The strategy seemed to
work well since the number of respondents was much higher than by directly asking the key person
to be interviewed. One possible reason is not only due to security matters, but also since Indonesian
have a high power distance (Hofstede, 1991) where subordinates are dependent upon superiors they
are more likely to accept equal status, and to follow the leader.
Nonetheless, in several cases during the meeting it was indicated that the messages from
respondents were not correctly conveyed. It seemed that some of the information was concealed. As
such, in particular data about transparency, share price, trust and commitment, stakeholder support
were not always easily obtained. Moreover, in a case of interviewing the commissioner but during
different period of time had resulted with different conclusion. In this research, cross check upon
the data obtained from the interview with other sources of data such as with another primary data,
secondary data and observation were exercised to determine the convergence of the findings.
Another primary data type, such as observation was useful to triangulate the data, for example in
Semen Gresik wherein after almost eight years of alliance, labor union defiantly put on a giant
banner to aspire for local dominant in the alliance with Indonesian flag ahead in the headquarter
office protesting the intention of Cemex to push government to exercise its put option. In the same
case, one of the conspicuous observations was the behavior of head of labor union that seemed
nervous and rejected to be directly interviewed; rather he submitted his view upon IEPSA on pieces
of documents. The same situation occurred when interviewing the general manager of Indosat, a
former head of labor union. He preferred to present his book upon the chronology of the IEPSA
along with its controversies rather than providing detailed answers to the question raised.
The research objectives have been fulfilled as expected ingaining insight into the privatization
processes through IEPSAs in Indonesia. Insight had been described in the preceding chapters and in
particular presented in the case chapters. Fundamentally, the research questions have been fulfilled
leading to the answer to central research questions: How did the privatization process through
International Equity Placement Strategic Alliance take place in Indonesia? Answers of the central
research questions had been presented in chapter 10.

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11.2.2 Reflection of the research model
The conceptual framework or model which has been constructed in this research represents a
process within the alliance life cycle from the planning, formation, operation to the termination
phase covering the accompanying factors and variables. Design of the process model was made to
answer the research questions and intended to fill the gap in the research on strategic alliances
which has been more focused on joint venture and collaboration.
The model developed is dynamic, meaning that the circumstances of trust and commitment of the
partners can alter over time. In other words, partners in the IEPSA with many hindrances in the
beginning phases (planning and formation) were able to alleviate its partnership and stakeholder
relationship when using the model. In this instance, four (Semen Gresik, Indosat, BII, BCA) out of
six cases studied in the research experienced pitfalls in the beginning phases, but the three alliances
were able to ameliorate the relationship in the latter phase. Partners in one (Semen Gresik) of the
alliances were not able to improve the relationship due to the ownership structural problem that was
not able to be resolved.
The model offers a dynamic process where there were availability of factors and variables to
maintain or improve the condition. However, it should be reckoned it is important to stick to the
model from the earliest phase of the IEPSA so that the alliance can be considered successful from
the beginning phases. Lessons learned from Indonesian experiences were that most of the IEPSAs
ruined the reputation of the IEPSAs as one of the privatization alternatives. The processes were
considered as not-transparent indicated by selling prices of much lower than the fair or fundamental
value, i.e. the selling price of Indosat was Rp 12,950 per share while the fair value was Rp 43,105.
Nevertheless, IEPSAs in Indonesia had proven to be successful in the implementation in terms of
improved financial performances.
Another lesson learned was that, within the three types of industries experiencing the IEPSAs;
cement, telecommunications, and banking, it was necessary for the government to establish the
related regulation before or after the IEPSAs. There were regulations that had been developed and
released by the government such as the regulation of Antimonopoly (Law No. 5/1999),
Telecommunications (Law No. 36/1999), State-Owned Enterprises (Law No. 19/2003), and
Indonesian Banking Architecture. These regulations helped enhance the speed of recovery in those
industries. In contrast, when there were absences of regulations it would be difficult to lead an
IEPSA into high performer. As such, regulations barrier can be an additional hurdle to what have
been researched by Austin, et al. (1986).
One of the most sensitive issues arose in the initiation of an IEPSA was the share price. The lessons
of IEPSAs in Indonesia taught that the share price should be at least the same with the fair or

344
fundamental value otherwise the transparency issue occurred. For instance, in the cases of Semen
Gresik, Indosat, and BCA the price benchmarking in the capital market was undervalued compared
with the fair value. Nonetheless, the government should exercise the fair value in the SPA not only
for securing IEPSA’s degree of success but also inducing the capital market by enticing more
investors to enter the stock exchange. Related with hurdles of privatization as indicated by Austin et
al. (1986), issue about the share price is rooted from the economic barrier since economic recession
affects the low share price of the company intended to conduct an IEPSA.
The cultural and management differences were not the sources of the obstacles in the IEPSA. Two
cases of the IEPSAs in Semen Gresik and BCA were examples of the differences in terms of
cultural characteristics between Indonesian and Mexican as well Indonesian and United States.
From the cases, evidences suggest that issues in the alliances were not due to the cultural
differences. Rather, the issues of transparency, share price, and rationalization were more notable.
As such, the alliances between Indonesian and United States partners turned out to be very
successful after seven years of alliance. This confirms Arino et al. (2001) about the evolutionary of
trust in alliance’s life cycle that as the quality of the relational improves the chance for positive
conflict resolution increases, which in turn enhances the partner’s views of each other’s
trustworthiness.
Government’s plan to privatize SOEs and BTOs could influence negatively to the degree of internal
relationship provided that a number of managers and employees opposed the intended alliance.
Motivation of budget deficit reduction in the privatization was supported from the fact that
government urged to establish the IEPSA when the end of year was approaching, i.e. the case of
Indosat (in December 2002). Altogether, both the occurrence of unprecedented moment such as
Bali Bombing (in October 2002) and the affected share price in the bourse influenced negatively to
the share price of the SOEs and BTOs being privatized.
Besides that, high share price in the bourse, and the set up floor price such as in the case of Bank
Permata established in accordance with the fair value influenced positively to the share price of the
SOEs and BTOs. All in all, both low degree of internal relationship and low share price influenced
negatively to the transparency of the privatization process which afterwards influenced to deter the
stakeholder support on the IEPSA.
Absence of guarantee on employment created negative impact to the alliance from the opposition of
stakeholder, i.e. the case of Semen Gresik when Cemex Mexico did not guarantee on preventing
laying-off. Despite occurrence of fit in objective between partners, the issue of rationalization
influenced negatively to the participation of management and employees in the implementation of
strategic plan. Subsequently, the situation affected negatively to the existence of internal support.

345
Adaptation to local needs and requirement was also necessary to acquire the complementarity
related to the attractiveness of Indonesian market. These were in an effort of the foreign partner to
enhance the strategic match between the partners.
Absence on the assurance of bidding offer as the case in Semen Gresik when the bidding offer
restructure from 35% to 14% despite the winning bidder has been determined, influenced negatively
to the share of communication between partners and nurture the alliance. Since, this situation
disappointed and demotivated the partner to share communication and nurture the alliance. These,
subsequently, influenced negatively to the trust and commitment in the IEPSA.
Despite fit in objective declared by the partners in the initiation phase, non-existence of guarantee
on employment created anxiety to the internal stakeholder. It influenced negatively to the lack
participation in the implementation of strategic plan which was the case of Semen Gresik shown by
the strikes and on the street protests in Gresik and Jakarta after the SPA.
Existence of informal meeting on strategy formulation between the partners prior to the SPA (in the
case of Bank Niaga) influenced positively to the commitment which in turn affect to the successful
strategic plan. This occurred since actually the strategic plan was established during the period
whilecommitment acquired to enhance the successful strategic plan.
Control structure established by new owners should be in compliance with the government
regulation such as banking industries should comply with Bank of Indonesia regulation. It was set
up in a purpose to anticipate and avoid the occurrence of past mistakes in particular during the
economic crisis, the banking collapsed due to the non-existence of Good Corporate Governance
which was due to one of the means lack of proper control structure. All in all, planning, control
structure, and control process which were in accordance with the Good Corporate Governance
influenced positively to the successful management control system of the IEPSA.
Unclear SPA as occurred in Semen Gresik, influenced negatively to the nurture of the alliance.
This, in turn, influenced negatively to the lack of trust and commitment in the IEPSA.
The termination was derived by the IEPSA’s failure to meet synergy such as transferring know-
how, technology, and fund. It was indicated by the reduced market share related with inability to
achieve strategic objectives and expectancy in the IEPSA. This situation influenced to the internal
driver of the IEPSA termination.

11.3 Recommendations
The recommendations are differentiated into recommendations for the Indonesian government, for
the firms, and for the proposed future research.

346
11.3.1 Recommendations for the government
The following section is the recommendations for the government related with the inititation and
implementation of an IEPSA. It includes transparency, regulation, restructurization, consistency,
donor pressure, and compliance to the model.

1. Transparency
In particular with the life-cyle the IEPSA, the government should promote transparency. In the
planning phase, the government should announce to the public upon the IEPSA through mass media
announcement invitation letters so that a vast amount of prospective bidders participate in the
tendering scheme. Government should socialize tendering procedure, process result, and set up
clear rule including criteria of determining the winning bidder.
The established evaluation team and the assigned tasks should be announced public including
revealing the identity of financial advisors and underwriters, and announcement of offering price of
each bidder. The tendering committee should announce to public of assessing the bidder. Besides
price, business plan, clausal of SPA, and fit and proper test, the committee should have check-list
on strategic match between the prospective partners. To intensify a sense of transparency, the
committee should be escorted by independent committee to assess the bidders. The winning bidder
is the result of assessment which was bolstered by tendering process and supervised by independent
committee.
In the Sales and Purchase Agreement (SPA), the entity of the winning bidder should be announced
to the public to ascertain that the entity is the one participating in the tendering without any other
new entities signing the SPA or the existence of Special Purpose Vehicle.Ultimately, government
should announce to public upon incoming fund from the formation and termination of an IEPSA
including detail the expenses used along with net incoming fund to the government.

2. Regulation
The government should establish the related regulations and the infrastructures before or after the
IEPSAs. The regulations that promote incentives to industry competition, anti-monopoly, and Good
Corporate Governance are examples to be established or refined. Besides that, commissions for the
supervisions of business competition, and anti-monopoly as well as Good Corporate Governance
should also be established to make certain upon the implementation of the regulations.

347
3. Restructurization
The government should implement the restructurization of the SOEs and BTOs. This should include
restructurization of resources (financial, organization, technology, and physical location as well as
human resource) and activities (operations, logistics, marketing and sales, infrastructure, human
resource management, technology management, and purchasing) in such a way to improve
performance prior to the intention to form an IEPSA.In the case of banking IEPSA, infrastructure to
support the restructurization program should be established, i.e. related to Asset Management
Credit, Asset Management Investment, Risk Management, and Support and Administration. It
should be supervised by Ministry of Finance, Financial Sector Policy Committee and the Oversight
Committee. The members include the economic ministers, and the Independent Review Committee,
which includes representatives from the donor organization.

4. Consistency
The government should be consistent with fulfilling the implementation of the terms and conditions
stipulated in the tender and in the SPA, i.e. the proportion of offered ownership, the timing of
exercising put option when the government pledged to dilute its ownership within a designated
years.

5. Donor pressure
In the situation when the donor organization exists such as World Bank or IMF, government should
urge the donor organization to cooperate instead of imposing on the programs. The government
should discuss with donor organization for instance about selecting which SOEs to be privatized
and its timing of initiation. The government shouldstrictly turn down the donor organization’s
interference during the formation and implementation of an IEPSA, i.e. in the determination of the
fair value of the share price and the winning bidder.

6. Compliance to the model

The government may use the steps and model of an IEPSA as in figure 3.2 and its relationship in
figure 10.18 with the models of factors as discussed and presented in chapter 10. This will help
confirm a successful formation and implementation of an IEPSA.

348
11.3.2 Recommendations for the firms
There are recommendations for practitioners who intend to perform an IEPSA as the preferred type
of strategic alliance. The recommendations are related with the economic condition, share price,
transparency, ownership structure, and restructurization program.

1. Economic condition
Although the IEPSAs were mostly commenced during the dismal economic situation, practitioners
should avoid establishing IEPSA during the abyss of economic crisis to forestall issues of
stakeholder opposition. In addition to that, the practitioners should also notice to avoid establishing
IEPSA during the striking events that hamper the performance of capital market.

2. Share price
In terms of share price, the domestic partner should establish a valuation team. The valuation should
reckon the fair value which take into account and reflect the synergy resulted from both partners’
complementarity of capacity.

3. Ownership structure
Ownership structure is the recommendationthat should be considered meticulously. To secure a
successful IEPSA, foreign partners should have ownership structure of more than the government’s
share, i.e. 51-49, 55-45, and 60-40.

4. Restructurization
Partners should be aware of the prior restructurization program. The restructurization program on
the side of domestic partner should be undertaken prior to the establishment of the IEPSA through
which the program has already resolved issue of rationalization and clan culture in the organization.

5. Trust and commitment

Partners should maintain and enhance its trust and commitment from the planning phase to the
operation phase since trust and commitment may evolve over time.

6. Compliance to the model

Likewise, partners may use the steps and model of an IEPSA as in figure 3.2 along with its
relationship in figure 10.18 with the models of factors as discussed and presented in chapter 10.

349
This will help partners alleviate the difficulties and lead to a successful formation and
implementation of an IEPSA.

11.3.3 Recommendations for further research

Firstly, as all alliances in this research had formed IEPSA and conducted Public Offering, the future
research will be determining the optimum composition of ownership structure between IEPSA and
Public offering in order to have optimum performances. The performances can be in relationship
with efficiency and effectiveness. Other consideration can be in relationship with the stakeholder
support. The cases can be differentiated into SOEs and BTOs.
Secondly, the follow-up quantitative research on the IEPSA would be an interesting research topic
to validate the factors and variables based on conceptual framework developed within the phase one
of the means to obtain the relationships of the factors and variables as well as to find other insight
from different angle of methodology on the alliance.

350
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Appendices
Appendix A: Valuation of Indosat
(in billion of Rp
Valuation 2002 2003 2004 2005 2006 2007
Assumed sales growth rate 20% 17.5% 15.0% 12.5% 10.0%

Net sales 6,766,982 8,120,378 9,541,445 10,972,661 12,344,244 13,578,668

COGS (% of sales) 60.0% 60.0% 60.0% 60.0% 60.0% 60.0%
Cost of goods sold (4,060,189) (4,872,227) (5,724,867) (6,583,597) (7,406,546) (8,147,201)
Gross profit 2,706,793 3,248,151 3,816,578 4,389,065 4,937,698 5,431,467

Depreciation & amortization 1,723,933 2,068,720 2,430,746 2,795,357 3,144,777 3,459,255

Less selling G & A 11% (744,368) (893,242) (1,049,559) (1,206,993) (1,357,867) (1,493,654)
Operating profit 1,962,425 2,354,910 2,767,019 3,182,072 3,579,831 3,937,814

Other expenses 9% (609,028) (730,834) (858,730) (987,540) (1,110,982) (1,222,080)

Earning Before Tax 1,353,396 1,624,076 1,908,289 2,194,532 2,468,849 2,715,734

Note: Estimated WC 46% 3,080,708 3,696,849 4,343,798 4,995,367 5,619,788 6,181,767

For FCF Valuation:

Earning Before Tax 1,353,396 1,624,076 1,908,289 2,194,532 2,468,849 2,715,734
Less taxes 30% (406,019) (487,223) (572,487) (658,360) (740,655) (814,720)
Net earning after-tax 947,377 1,136,853 1,335,802 1,536,173 1,728,194 1,901,014

Add depreciation & amortization 1,723,933 2,068,720 2,430,746 2,795,357 3,144,777 3,459,255
Less change in NWC (586,801) (616,142) (646,949) (651,570) (624,421) (561,979)
Less capex 3.46% (233,989) (280,786) (329,924) (379,413) (426,839) (469,523)
Free Cash Flow (FCF) 1,850,520 2,308,645 2,789,675 3,300,548 3,821,711 4,328,766
Terminal value 68,454,746
FCF including TV 1,850,520 2,308,645 2,789,675 3,300,548 3,821,711 72,783,512

WACC 16.07% 14.86% 13.64% 12.43% 11.21% 10%

Present value factor 1 0.87 0.77 0.70 0.65 0.62
Present value of cash flow 1,850,520 2,010,030 2,160,103 2,322,529 2,498,153 45,192,835
Cumulative present value 56,034,170
ROE
Enterprise value 56,034,170 2002 2003 2004
Less net debt (11,261,621) 3.27% 50.52% 12.39%
Less minority debt (137,442) Average ROE 20%
Equity value, total 44,635,107 http://www.advfn.com/p.php?pid=financials&symbol=IIT
Equity value of government 65% 29,012,819.24
Shares outstanding (millions) 1,035,499,999
Shares belong to government 673,074,999

Fair value of equity per share, Rp 43,105

Exchange rate (Rp/US$) 9,315
In US Dollar 4.63
Number of shares sold to STT 434,250,000
Actual price per share sold to STT (Rp) 12,950
Amount of IDR received to government 5,623,537,500,000

Fair amount of IDR received to gov't 18,718,295,533,364

Difference in value (IDR) (13,094,758,033,364)

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Appendix B: Valuation of Semen Gresik
(in Billion of Rp)
Valuation 1997 1998 1999 2000 2001 2002 2003
Assumed sales growth rate 16.0% 26.9% 20.0% 20.0% 20.0% 20.0%

Net sales 1,588 1842.1 2337.6 2805.1 3366.1 4039.4 4847.2

COGS (% of sales) 46.0% 47.0% 47.0% 47.0% 47.0% 47.0%
Cost of goods sold (847.4) (1,098.7) (1,318.4) (1,582.1) (1,898.5) (2,278.2)
Gross profit 994.7 1,238.9 1,486.7 1,784.1 2,140.9 2,569.0

Less selling G & A 15% (276.31) (350.64) (420.77) (504.92) (605.91) (727.09)
Operating profit (EBITDA) 718.4 888.3 1,065.9 1,279.1 1,535.0 1,842.0

Less depreciation & amortization (261.0) (331.2) (397.5) (476.9) (572.3) (686.8)
EBIT 457.4 557.1 668.5 802.2 962.6 1,155.2

Note: Estimated WC 14% 222.3 257.9 327.3 392.7 471.3 565.5 678.6

For DCF Valuation:

EBIT 457.4 557.1 668.5 802.2 962.6 1,155.2
Less taxes 30% (137.22) (167.12) (200.55) (240.66) (288.79) (346.55)
Net operating profit after-tax 320.2 390.0 467.9 561.5 673.8 808.6

Add depreciation & amortization 261.0 331.2 397.5 476.9 572.3 686.8
Less change in NWC (35.6) (69.4) (65.5) (78.5) (94.3) (113.1)
Less capex (40.0) (50.8) (60.9) (73.1) (87.7) (105.3)
Free Cash Flow (FCF) 505.6 601.0 739.0 886.8 1,064.2 1,277.0
Terminal value 19,155.7
FCF including TV 505.6 601.0 739.0 886.8 1,064.2 20,432.8
WACC 32.70% 28.5600% 24.4200% 20.2800% 16.1400% 12.00%
Present value factor 1 0.777847 0.645981 0.574672 0.5496329 0.56742686
Present value of cash flow 505.62 467.51 477.40 509.64 584.92 11,594.10
Cumulative present value 14,139.19

Enterprise value 14,139.19

Less net debt (4,113.50)
Less minority debt (23.1)
Equity value, total 10,002.59

Shares outstanding (millions) 593.2

Fair value of equity per share, Rp 16,862.09 Semen Gresik share price, Rp: 6500
Exchange rate (Rp/US$) 14500 Exchange rate (Rp/US$) 14500
in US dollars $ 1.16 In US dollars $0.45

364
Appendix C: Valuation of Bank Niaga
TOTAL INVESTED CAPITAL CALCULATION (In million of Rp)
Liabilities & Equity 2002 2003 2004
Liabilities
Marketable Securities Issued
Related Parties - - 464,250
Third Parties 90,000 - 200,000
Borrowings 1,440,447 737,342 995,732

TOTAL LIABILITIES 1,530,447 737,342 1,659,982

Minority Interest 6,736 8,239 6,754

Equity
Share Capital 746,907 746,907 748,594
Additional Paid up Capital 9,270,323 538,709 547,954
Fixed Assets Revaluation Reserve 147,222 255,116 255,116
Difference in Transaction of Equity Changes in Subsidiary 844 1,163 1,163
Unrealized (Losses)/Gains on Available for Sale Securities (51,897) 19,320 (48,973)
Cumulative Translation Adjustments 290,941 143,355 -
General and Legal Reserve 37,138 37,138 83,842
Retained Earnings / (Accumulated Losses) after Eliminating
Deficit of Rp 8731614 on 31-7-2003 Through Quasi-Reorg. (8,965,351) 233,518 775,305

TOTAL EQUITY 1,476,127 1,975,226 2,363,001

TOTAL INVESTED CAPITAL 3,013,310 2,720,807 4,029,737

EVA CALCULATION
Item 2002 2003 2004
NOPAT
Operating profit 38,905 336,641 633,359
Interest income
- income tax 95,237
- tax shield on interest - - -
NOPAT 38,905 336,641 538,122

Item 2002 2003 2004

Capital charges
Inv.capital beg of year 3,013,310 2,720,807
Inv.capital end of year 2,720,807 4,029,737
Inv.capital (average) 3,013,310 2,867,059 3,375,272
Capital charges 508,535 484,897 552,148

EVA (469,630) (148,256) (14,026)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Total Invested Capital 3,013,310 3,163,976 3,322,174 3,488,283 3,662,697 3,845,832 4,038,124 4,240,030 4,452,031 4,674,633 4,908,364
Total Borrowing 1,530,447
EVA (469,630) (394,489) (310,660) (217,462) (114,168) 0 125,870 264,327 416,315 582,841 764,978
Terminal Value EVA 6,425,817
PV EVA (469,630) (338,070) (228,522) (137,529) (62,177) - 51,081 92,823 126,714 154,009 175,771
1,476,479
Accumulated of PV EVA 840,949

Market Equity value(Fair Value) 2,323,812

51% of Market Equity of the Firm 1,185,144
Price to Book Value 1.57

365
Appendix D: Valuation of Bank Permata
TOTAL INVESTED CAPITAL CALCULATION (in million of Rp)
Liabilities & Equity 2003 2004
LIABILITIES
Borrowings 501,510 546,631

TOTAL LIABILITIES 501,510 546,631

SHAREHOLDERS' EQUITY 2003 2004

Additional Paid-in Capital 61,346 61,346

Unrealized (Losses) Gains on (Decrease) Increase in Value

of Marketable Securities and Government Bonds Available-
for-Sale-net of tax - (3,234)

Differences Arising from the Translation of Foreign Currency

Financial Statements 98,715 107,945

Revaluation increase in Premises and Equipment - -

Share options - 6,570

Retained Earnings (Accumulated Losses) (Rp 15,847,851 of

accumulated losses was eliminated against general reserve,
revaluation increase in premises and equipment, unrealized gains
increase in value of marketable securities and Government
bonds available-for-sale, revaluation increase in the fair value
of net asset and additional paid-in capital after the effect of the
reduction of issued and paid-up capital, as a result of the quasi-
reorganization as of December 31, 2003 0 821582

SHAREHOLDERS' EQUITY - NET 162,064 996,213

TOTAL INVESTED CAPITAL 663,574 1,542,844

EVA Calculation
Item 2003 2004
NOPAT
Operating profit 258,725 812,287
Interest income
- income tax
- tax shield on interest expense - -
NOPAT 258,725 812,287

Item 2003 2004

Capital charges
Inv.capital beg of year
Inv.capital end of year
Inv.capital (average) 663,574 1,542,844
Capital charges 116,011 263,172

EVA 142,714 549,115

366
 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total Invested Capital 2,682,695 2,816,830 2,957,671 3,105,555 3,260,833 3,423,874 3,595,068 3,774,821 3,963,562 4,161,740 4,369,827

Total Borrowing 918,724

EVA 67,644 99,195 133,731 171,474 212,656 257,527 306,354 359,420 417,027 479,495 547,169
Terminal Value EVA 4,136,067

PV EVA 67,644 85,190 98,770 109,064 116,642 121,981 125,483 127,484 128,267 128,066 127,078
960,589
Accumulated of PV EVA 2,196,258

Market Equity of the Firm (Fair Value) 3,960,229

51% of Market Equity of the Firm 2,019,717
Price to Book Value 2.31

367
Appendix E: Valuation of Bank International Indonesia
TOTAL INVESTED CAPITAL CALCULATION (in million of Rp)
Liabilities & Equity 2003 2004
LIABILITIES
Borrowings 501,510 546,631

TOTAL LIABILITIES 501,510 546,631

SHAREHOLDERS' EQUITY 2003 2004

Additional Paid-in Capital 61,346 61,346

Unrealized (Losses) Gains on (Decrease) Increase in Value

of Marketable Securities and Government Bonds Available-
for-Sale-net of tax - (3,234)

Differences Arising from the Translation of Foreign Currency

Financial Statements 98,715 107,945

Revaluation increase in Premises and Equipment - -

Share options - 6,570

Retained Earnings (Accumulated Losses) (Rp 15,847,851 of

accumulated losses was eliminated against general reserve,
revaluation increase in premises and equipment, unrealized gains
increase in value of marketable securities and Government
bonds available-for-sale, revaluation increase in the fair value
of net asset and additional paid-in capital after the effect of the
reduction of issued and paid-up capital, as a result of the quasi-
reorganization as of December 31, 2003 0 821582

SHAREHOLDERS' EQUITY - NET 162,064 996,213

TOTAL INVESTED CAPITAL 663,574 1,542,844

EVA Calculation
Item 2003 2004
NOPAT
Operating profit 258,725 812,287
Interest income
- income tax
- tax shield on interest expense - -
NOPAT 258,725 812,287

Item 2003 2004

Capital charges
Inv.capital beg of year
Inv.capital end of year
Inv.capital (average) 663,574 1,542,844
Capital charges 116,011 263,172

EVA 142,714 549,115

368
Item 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Estimated Growth of Invested Capital 5%
WACC 17% 16.80% 16.60% 16.40% 16.20% 16.00% 15.80% 15.60% 15.40% 15.20% 15%
Spread EVA -10.81% -8.65% -6.49% -4.33% -2.16% 0.00% 2.16% 4.33% 6.49% 8.65% 10.81%

Item 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total Invested Capital 3,879,766 4,073,754 4,277,442 4,491,314 4,715,880 4,951,674 5,199,258 5,459,220 5,732,181 6,018,790 6,319,730

Total Borrowing 501,510

EVA (419,562) (352,432) (277,540) (194,278) (101,996) 0 112,451 236,146 371,931 520,703 683,422
Terminal Value EVA 5,740,749

PV EVA (419,562) (301,740) (203,791) (122,555) (55,371) - 45,446 82,557 112,676 136,933 156,282
1,312,767
Accumulated of PV EVA 743,642

Market Equity of the Firm (Fair Value) 4,121,898

51% of Market Equityof the Firm 2,102,168
Price to Book Value 1.38

Chosen Fair Value of 51%

Equity

369
Appendix F: Valuation of Bank Central Asia
TOTAL INVESTED CAPITAL CALCULATION (In million of Rp)
Liabilities & Equity 2002 2003 2004 2005
Marketable securities issued 112,883 252,202 425,039 652,439
Borrowings 385,854 219,652 484,127 525,316

TOTAL LIABILITIES 498,737 471,854 909,166 1,177,755

Minority Interest 643 776 990 1,268

Equity
Share capital at par value of Rp 125 per share at year end 2004
and Rp 250 per share at year end 2003:
Authorized capital: 44,000,000,000 shares at year end 2004 and
22,000,000,000 shares at year end 2003
Issued and paid-up capital: 12,303,213,500 shares at year end 2004
and 6,131,134,500 shares at year end 2003
Addtitional paid-in capital 1,504,381 1,504,381 1,504,381 1,504,381
Financial statements translation adjustment 3,708,894 3,708,894 3,708,894 3,708,894
Unrealized gain (loss) from changes in fair value of available-for-sale 1,059,907 1,059,907 1,059,907 1,059,907
marketable securities
Revaluation increment 193,254 193,254 193,254 193,254
Stock options 2,147 2,147 2,147 2,147
Retained earnings
Appropriated for general reserve 232,357 232,357 232,357 232,357
Unappropriated (after elimination of accumulated deficit of
Rp 25,853,162 million through quasi reorganization on
31 October 2000) 4,806,970 4,806,970 4,806,970 4,806,970

TOTAL EQUITY 11,507,910 11,507,910 11,507,910 11,507,910

TOTAL INVESTED CAPITAL 12,007,290 11,980,540 12,418,066 12,686,933

EVA CALCULATION
Item 2002 2003 2004 2005
NOPAT
Operating profit 3,633,715 3,119,246 4,476,897 5,003,995
Interest income
- income tax (858,435) (748,723) (1,333,099) (1,525,937)
- tax shield on interest - - - -
NOPAT 2,775,280 2,370,523 3,143,798 3,478,058

Capital charges
Inv.capital beg of year 12,007,290 11,980,540 12,418,066
Inv.capital end of year 11,980,540 12,418,066 12,686,933
Inv.capital (average) 12,007,290 11,993,915 12,199,303 12,552,500
Capital charges 2,264,635 2,150,701 2,119,098 2,180,451

EVA 510,645 219,822 1,024,700 1,297,607

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Total Invested Capital 12,007,290 12,607,655 13,238,037 13,899,939 14,594,936 15,324,683 16,090,917 16,895,463 17,740,236 18,627,248 19,558,610

Total Borrowing 498,737

EVA 510,645 662,254 827,747 1,008,134 1,204,490 1,417,961 1,649,768 1,901,211 2,173,674 2,468,630 2,787,648
Terminal Value EVA 35,352,356

PV factor 1 0.848461 0.7322587 0.6429746 0.5745359 0.5225581 0.483892 0.4563128 0.438314 0.4289689 0.42785511
PV EVA 510,645 561,896 606,125 648,204 692,023 740,967 798,309 867,547 952,752 ######## 1,192,709
15,125,686
Accumulated of PV EVA 23,755,829

Market Equity (Fair Value) 35,264,382

51% of Market Equity of the Firm 17,984,835
Price to Book Value 3.06

370

Chosen Fair Value

of 51% equity BCA