An Entrepreneur Air-Express Company in Pakistan
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This case introduces Khalid Awan, co-founder of TCS, an entrepreneurial air-express company in Pakistan. Awan has succeeded in building a sizeable company despite serious obstacles, including pressure from the public postal system, an environment prone to corruption, and a nonexistent market for venture capital. The firm largely made extensive use of leasing contracts to expand with small initial cash deposits. However, in the aftermath of September 11, 2001, Awan is now faced with a number of questions regarding further expansion of the firm. The tragic events of September 11 will most likely put pressure on the firm’s revenues and create considerable uncertainty.
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Given the tightly-regulated economy and corruptive government in Pakistan, Khalid Awan managed to negotiate with the government for a joint venture with DHL as well as the rights to offer limited domestic courier services. The former, which only limits to international courier services, benefits TCS with DHL’s systems in terms of productivity, service standards, and customer endorsements. The latter, approved under a central excise duty,
gave TCS a right to exploit this profitable market and TCS successfully obtained over half of the market share as shown in Exhibit 8.
TCS has been self-funded with the extensive use of leasing. Its key benefit is to provide leverage to those who do not have a significant asset base already on their initial cash deposit. Hence, it enables small enterprise like TCS to gain access to finance. Also, given the underdeveloped capital markets, creditors’ rights and collateral laws and registries would be weak. Leasing thus offers a less default risk. With the extra consideration of tax advantage over leasing, in overall, the policies make sense.
Since a typical lease did not require any up-front payment and lessee can pay a small residual asset value to own the asset outright at the end of the lease term, TCS can thus accumulate a broad base of acquired assets from its internally generated cash flow year after year. This allows TCS to develop from small to big and gradually expand the scope of its services.
I would advise the second proposal – linking the numerous small exporters in Pakistan with their buyers in North America and Europe. First, the cash balance is low, as shown in Exhibit 12. It would be risky to continue geographic expansion immediately without sufficient financial buffer for any crisis, especially when the tragic events of September 11 created considerable uncertainty. Second, under such an unstable political environment in Pakistan, multinationals may not have strong incentives to develop Pakistan operations. Hence, the timing for establishing supply-chain management businesses does not fit in. Relatively, the connecting service is more promising as the events of September 11 would create demand for trading companies to facilitate export sales. In addition, the linkages created would be beneficial to the expansion of TCS; yet, such a virtual platform should not cost much.
Awan should not seek external financing. First, the proposal does not demand much capital investment. Second, extra debts would increase the risks of the company. Third, TCS used not to take on any long-term debt. It would be simpler to rely on internal cash.
Awan believed TCS had great growth potential and was unwilling to exit the business before realizing full value. Later, we saw from Exhibit 22 “the statement of strategy, 2001-03”, TCS will continue developing its services through strategic alliances and with a focus on broadening its range of customized services. We observe there were still potentials for TCS to expand in terms of the scope of business and geographic locations. Thereby, we predict the valuation of TCS would improve as the time goes by.
Awan should start harvesting only when: (1) there are many hindrances on its market entry, or (2) the capital reserve is inadequate for further expansion.
In case (1), the business is likely to reach maturity stage and about to decline. The valuation performance is best at that time. Awan should then sell a large part of TCS to investment bank to harvest as much as possible.
In case (2), there are constraints on the business developments and attracting other stakeholders would help to improve its future financial performance. By selling small part of the company stakes to interested investors, it enables TCS to overcome financial problems and yield a better return in the future than forgoing expansion opportunities.