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February2001
Probil:
MaximizingtheValueofanExitStrategy
KaganCeranpushedbackhischairandstaredoutthewindowofhisIstanbuloffice.ItwasearlyFebruary2001andtheever-growingskylinesilhouettedagainstdarkeningcloudsseemedannoyinglymetaphoricgiventhebusinessenvironmenthecurrentlyfoundhimselfin.Thesupposedlyhigh-flyingyoungventurecapitalistfeltanythingbutself-satisfiedatthemoment–infacthewaspositivelyweigheddownbythedistinctpossibilityofamajorinvestmentfallingfarshortofexpectations.
Ayearearlier,KaganhadleftthesecurityofalargeinternationalassetmanagementfirminLondontostarthisownemergingmarketsinvestmentvehicle,EMEATechnologyInvestmentsorETI,initiallyfocusingoninvestmentsinTurkeyandtheimmediateregion.Hehadfelthisapproachwasuniqueandwellsuitedtohischosenmarkets.Ratherthanraisemoneybasedontrackrecord,hehadincubatedanumberofpromisingcompaniestothepointofinitialfundingandlaunchedhisfundbasedoninvestors’preferenceforconcreteprojectsratherthaninvestmentconcepts.Hisstylewasveryproactiveandhandson.Heusedhiscross-borderknowledgetospotbusinessopportunities.Hethendevelopedbusinessplans,identifiedsuitableexistingcompaniesinwhichtoimplantthem,recruitedanymanagementtalentthatmightbemissing,andplayedasactivearoleinoperationsastimeandsometimes-frustratedexecutiveswouldallow.
HeviewedhismostsuccessfulinvestmenttodatetobeProbil,nowthelargestindependentmulti-vendorsystemsintegratorinTurkey.With$12millioninthebankandtheneedtomaximizeinvestorreturnsoverthenext3years,Probilwascurrentlymakingkeybusinessandfinancingdecisions.AsKagansawit,toaccelerategrowththeycouldtrytoacquirealocaldistributorortheycouldtrytoacquireanInternetprofessionalservicesfirmintheUSortheEU.Ineithercase,theywouldneedmorecashtogrowthecurrentbusiness,makestrategicinvestmentsandstillretainasignificantbufferagainstpotentialfluctuationsintheTurkishmarket.HehadoriginallyplannedforProbiltoraisetheneededcashthroughaninitialpublicofferingofsharesontheIstanbulStockExchange.HestillthoughtthiswasthebestalternativealthoughmarketvolatilitymeanthewouldhavetotimetheIPOjustright.Inaddition,aprivateequityinvestorhadrecentlyindicatedinterestininvestinginProbilprovidinganewoption.
Thecompany'
sboardmeetingwaslessthanamonthawayandKaganneededtoconvincemanagementoftherightstrategyforraisingcashtogrowthecompanyandmaximizehisinvestors'
return.
Turkey
In1923,GeneralMustafaKemal(laterknownas"
Ataturk"
)foundedmodernTurkey,establishingaseculargovernmentandtryingtoorientbusinessandpoliticstowardsthewesternEuropeanwayofthinking.Withapopulationof63millionandaGDPofUS$200billionin1999,Turkeyhadbeenademocraticcountrysincemultipartydemocracywasinstitutedin1945,interruptedonlybythreebriefperiodsofmilitaryrule(1960-61,1971-73and1980-83).Themultipartysystemmadeitdifficultforanysinglepartytowinamajorityduringelections,resultinginweakcoalitiongovernmentsunableorunwillingtoimplementnecessarybutpainfulstructuralreforms.In1980,afterseriouspoliticalviolencethatclaimed5000lives,themilitarytookoverandrestoredlawandorderbycurtailingcivilrightsandinstitutingeconomicreformsthatreducedinflationandthetradedeficit,andfueledeconomicgrowth.In1983,themilitaryregimereturnedcontrolofTurkeytoademocraticgovernment.Politicalstabilityeludedthegovernmentsthatfollowedwhich,appliedloosefiscalpoliciesresultinginaboom-and-bustpatternofeconomicgrowth.
Adecadelater,TurkeyreachedanagreementwiththeEuropeanUnion(EU)onthetermsofacustomsunionthatwentintoeffectonJanuary1,1996.RelationswiththeEUandGreeceimprovedfurtherasaresultofthehelpprovidedbythemtoTurkeyafteradisastrousearthquakehitIzmitonAugust17,1999.ThiswasacrucialturningpointandtheEUdeclaredTurkeyanaccessioncandidate.
EconomicStructure&
Policy
Throughoutthe1980sand1990s,theTurkisheconomywasnotoriousforpersistentlyhighlevelsofinflation.Thismadebusinessplanningandaccountingdifficult,discouragedlong-termsavingandlending,ledtohighrealinterestrates,andtendedtoweakenthecurrency.OneoftheprimarycausesofthehighrateofconsumerpriceinflationwasTurkey'
spersistentlyhighpublicsectorborrowingrequirement(PSBR),whichincreasedthecostofservicingthepublicdebtandcrowdedoutlendingtoproductivesectorsoftherealeconomy.
Between1982and1987,acomparativelylowrateofdepreciationagainstmajorcurrenciesledtoanincreasingovervaluationoftheTurkishlira.Thisstabilizedduringtheperiod1988-92,butaheavyinflowofspeculativefundsin1993,attractedbyhighrealinterestratesandaboomingstockmarket(theindexrosebyover200%inUSdollartermsintheyearasawhole)contributedtoafurtherrealappreciationofthelira.This,combinedwithstronggrowthindomesticdemandforimportshelpeddrivethecurrentaccountfrombeingapproximatelyinbalancein1991toadeficitofUS$6.4bn,or3.5%ofGDP,in1993.
Thecrisiscametoaheadatthebeginningof1994,asinvestorconfidenceinTurkeyweakenedsharply.InJanuaryof1994,twoUS-basedratingagenciesreducedTurkey'
screditratingonsovereigndebttosub-investmentgrade,triggeringarapiddepreciationinthevalueofthelira,whichfellbyalmost35%againstthedollarinthefirstquarteroftheyear.Inresponse,thegovernmentannouncedapackageofemergencystabilizationmeasuresandpassedacomprehensiveprivatizationlaw.ThegovernmentfollowedupitsemergencypackagewithaUS$742mborrowingfromtheIMFtoreducetheinflationrate,thenaround107%,tobalancethecurrentaccountin1994and1995,andtoreducePSBR.ButtheframeworkofthatApril1994austerityprogramgraduallydisintegratedduringthemonthsfollowingtheSeptember1995governmentcrisis.ThegovernmentstartedspendingitswayintotheDecember1995election,causingtheIMFtosuspendthelasttrancheofitsJuly1994standbyagreement.Theeconomyremainedrudderlessduetoun-stablegovernmentsfrom1996-99.
In1999,TurkeyagainreachedanagreementwiththeIMFforUS$4bnofstand-byfacilitytotacklethehighdouble-digitinflation.InDecember2000theIMFincreaseditssupportfortheTurkishstabilizationprogrambyextendingaUS$7.5bnsupplementalreservefacility(SRF),inadditiontothethree-yearUS$4bnstand-byfacilityagreedinDecember1999.TheextrafacilitybecamenecessarywhenUS$6bn-7bnworthofforeigncurrencyfledTurkeyamidfinancialmarketturmoilinlateNovember-earlyDecember2000.TheSRFprovidedtheCentralBankofTurkeywithacushionofreserveswithwhichtodefendthepreordainedrateofdepreciationoftheTurkishlira--avitalingredientoftheanti-inflationstrategy.Also,onDecember21,2000,theWorldBankapprovedaUS$5bnthree-yearCountryAssistanceStrategyforTurkey.
Throughfiscaltighteningandmodificationstotheexchangerate,Turkeybegantoreduceinflationfromtheannualaverageof80percentduringthesecondhalfofthe1990s.TheGovernmenthadsetaninflationtargetof25%for2000and12–15%for2001.PreliminaryestimatesinJanuary2001indicatedtheactualinflationtobearound39%for2000.Bytheendof2000,Turkey’ssovereigndebtratingasratedbyS&
PandMoody’swasBandB1respectivelyand46.8asratedbytheInternationalInvestor(SeeExhibitM).
ITMarket
TheTurkishITsectorgrew28.4%from1995to1999,whichwas9timesthecorrespondingGDPgrowthduringthesameperiod.Since1987–withtheexceptionof1994,whentheTurkisheconomywentthroughamajorcurrencycrisisandaGDPcontractionof5.0%–theITsectorhadregistereddoubledigitgrowthrates.
ThetotalsizeofthemarketwasUS$1.8bnin1999,or1.0%ofGDP,accordingtotheIDC.In1997,thehardwarearmofTurkey'
sITsectoraccountedfor0.45%ofGDP(comparedtoa2.49%ratioinEUanda2.78%ratiointheOECD),whileservicesandsoftwareaccountedforonly0.29%ofGDP(comparedtoa0.98%ratiointheEUanda1.30%ratiointheOECD).So,Turkey'
sIThardwaresectorwasrelativelylessunderdevelopedthanservicesandsoftwarewhencomparingTurkeywiththeEUandtheOECD.ThedistributionofITrevenuesattheendof1999was:
hardware68%,services17%,software12%andsupplies3%.ThiswasconsistentwiththehighergrowthbeingobservedinthesoftwareandservicessegmentsoftheTurkishITsector.Thispatternofhighdevelopmentratesreflectedthatthesectorwasalsohighlysensitivetopricesandunderlyingeconomicgrowth.AregressionanalysissuggestedthatthecombinedeffectofpercentchangesinGDPandrealexchangeratesexplainedtogetheronaverage72%ofthepercentagegrowthintheoverallsector.
ITBusinessEnvironmentandCompetition
OnefeatureoftheTurkisheconomywasthepreponderanceofholdingcompanies.ThesecompaniestypicallyownedawidevarietyofbusinessesandwerethelargeplayersinTurkey.Forexample,aholdingcompanymightownbusinessesintextiles,manufacturing,transportation,export/import,banking,leasing,realestate,retailandinformationtechnologyservicestonameafew.Eachofthesubsidiarycompanieshadanadvantageinthatessentiallyithadtherightoffirstrefusalwithitssiblings.Forexample,Koç
Sist
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