The Arqaam Capital - Case Study Example

Arqaam Capital Ltd Market Expansion Name of Student: Student No: Date: Name of Supervisor: Contents Contents 2 Location of Market 5 Timing of Entry 6 Scale of Entry and Strategic Commitments 6 Overview of Arqaam Capital Ltd 7 Cash Equity 8 Credit Trading 8 Equity Derivatives 8 Treasury 8 Custody Services 9 Corporate Finance 9 Asset Management 9 PESTEL Analysis 10 Political Considerations 10 Economic Considerations 11 Social Considerations 13 Environmental Considerations  14 Technological Considerations 16 Legal Considerations 17 Factor Conditions 18 Demand Conditions 18 Related and Supporting Industries 18 Firm Strategy, Structure and Rivalry 18 Question 2: SWOT Analysis 19 Strengths 19 Weaknesses 19 Opportunities 19 Threats 19 Question 3: Strategic Plan 20 Question 4: Necessary Resources 20 Introduction Arqaam capital is a specialist emerging markets investment bank which offers products of a regional and international nature to emerging markets. Their focus is on providing international best practice in combination with regional expertise while availing investment opportunities to investors from the Middle East mainly who wish to invest both in the region and internationally. They also cater to international investors seeking investment in emerging markets. Arqaam Capital is strongly rooted in the Middle East, and has shareholders who are composed of high net worth individuals, family offices as well as institutions. The headquarters of Arqaam Capital are in the Dubai International Financial Centre (DIFC) and their offices are based in Dubai, Beirut, London and Cairo. Arqaam Capital business interests span Corporate Finance, Asset Management, Cash Equity, Credit Trading, Equity Derivatives, Treasury and Custody. On October 7th 2012, Arqaam Capital announced that an agreement had been reached for the acquisition of Al Rashad Finance and Management Advisory JSC. This purchase agreement encompassed the business, operations and financial services license of Rashad. The acquisition will see the firm operate under the name Arqaam Capital Libya. There has been initial approval obtained from Libyan Stock Market for a financial services license by Rashad. The firm will request that the final approval allows for purchase and sale of securities as well as management of security portfolios and investment funds, promotion of subscriptions in securities, margin funding and proprietary trading. The Chief Executive Officer of Arqaam Capital, Riad Meliti has said that they had noted an increased client interest in the region and therefore established relations with important public and private bodies within Libya. This acquisition is expected to avail more perspective in situ of the Libyan market, which they can then pass on to their clients. This would enhance their network in the region as an addendum to the Tripoli office which is a key service offered to clients. They continued to report that the IMF had pegged the GDP growth for Libya at 121% for 2012 which agreed with their own projections. They expressed confidence in the long-term prospects of the Libyan economy due to its basic strengths such as per capita GDP, youthful population and noteworthy natural resources (Sormani, 2012). There are three basic entry decisions a company must make when trying to penetrate a foreign market (Hill, 2007). These entry decisions comprise of the location, timing and scale of entry as well as strategic commitments. Location of Market If a firm such as Arqaam Capital wishes to extend its business to foreign markets, an evaluation of the long term potential profit must be done. It is important to balance the benefits, costs and risks in order for the country, in this case Libya to be considered a good proposition (Hill, 2007). The market size and purchasing power of consumers are the main indicators of long term economic benefits. When measured by consumer population, a market can seem quite large however standard of living and economic growth rates must be factored in. if the nation is politically stable, in a free market economy, a balance can be achieved with ease. In the case of Libya, the political situation is still in flux, but the standard of living is high due to its natural resources. Timing of Entry Once the location has been selected, the next consideration is when to enter. Arqaam Capital decided that 2012 was a good time for entry for the above stated reasons. Should the firm have entered Libya with its products before others of its kind it would be considered an early entrant, but should there be other businesses established there, it is a late entrant. For the early entrant known as the first mover, they experience several advantages as well as disadvantages according to Hill (2007). Being the pioneer brand gives exposure and acceptance from consumers and therefore a large market segment can be captured. In the case of Arqaam, they acquired a local subsidiary, Rashad, which is able to already have established networks within and without the country giving it a head start over potential competitors. The early entrant has a cost advantage as well when it comes to pricing. However, there is a disadvantage in that start up costs can be substantial for first movers. However, acquiring an already existing firm should mitigate against some of those costs. Scale of Entry and Strategic Commitments Firms can take two routes when entering a new market. Large scale or slowly; the former requires strategic commitment which involves not only having first mover advantage but also risks and inflexibility. Small scale entry gives the company more time to acquire information about the market and this helps in reduction of risk although it may miss out on first mover advantage. Low-cost can be defined as carrying out activities at variance from competitors that gives a consistent set of key activities that augment each other in order to achieve a sustainable position (Porter 1996 in Jiang, 2007). Khalifa (2008) states that a large number of theorists have failed to explain the idea of strategy literature and how it impacts organizations. From a business perspective, strategy can be defined as a plan to facilitate the achievement of an organization’s aims and policies. Davies (2000) adds that the resources required to make this a reality are determined by strategy. Traditional thinking describes organizational design as either vertical or horizontal in terms of control. These two styles of control result in different things. The former gives the advantage of efficiency while the latter is concerned with flexibility. Businesses therefore need to select a model that is commensurate with their goals. When the company chooses one strategy over the other limits the benefits that one can attain from using both, through achieving balance through the contingency perspective are lost (Nobre et al, 2010). Use of the contingency perspective shows that a combination based on needs and objectives of both external and internal environments can create a model that ensures success for any firm. The trick is to find the right balance. In the case of Arqaam Capital Ltd, the acquisition of a local firm instead of coming in to build anew gives them a head start in terms of establishing contacts and networks in the country, while using their own contacts and reputation to further their goals on behalf of their clients. Overview of Arqaam Capital Ltd Arqaam Capital is a specialist emerging markets investment bank. It offers the following services: Cash Equity This is a fully integrated platform that seeks to offer clients the opportunity to carry out listed equity purchase and sale orders, spanning all MENA markets. It combines regional expertise with market knowledge and international best practices. Clientele of Arqaam consist of regional and international financial institutions. Arqaam was recently ranked in the top five of brokers in the NASDAQ Dubai. Credit Trading The Arqaam Capital ltd has one of the most active trading desks within the GCC region. This facilitates market presence in regional bonds and sukuks. Their brief includes assistance in execution of trading strategies for clients as well as construction of portfolio of debt securities depending on how ready they are to assume the risk. There is a trading team who provide daily pricing updates as well as the market colour for regional activity. Equity Derivatives Provision of personalized equity derivative product offerings are part of Arqaam’s brief in all GCC as well as MENA markets. Options range from plain vanilla equity to more exotic options or structured products. Arqaam was the first derivative trading member on the NASDAQ Dubai. Treasury Arqaam provides a custom-made methodology and knowledge across the region to manage the clients’ cash flow in an optimal manner. They also provide a reliable and integrated technology infrastructure platform that serves to bestow competitive advantage to the company. There is also dependable and pioneering investment management strategies that include a foreign exchange service that is competitive. Custody Services Arqaam arranges and provides custody in order to facilitate the businesses of clients within the GCC and internationally. Access is provided to over ninety six markets to clients through just one account with trade possible in any type of product such as options, equities, bonds and FX. BNP Paribas and HSBC among other top rated custodians are used to facilitate this service for clients’ assets. Corporate Finance Corporate finance is offered for companies that operate under different sectors and the focus is on three primary areas which are M&A advisory, fundraising and restructuring. Asset Management The focus for Arqaam is managing MENA regional investment funds and to that end, two funds have so far been established. These are absolute return and credit funds. Arqaam services are leveraged to make differentiated regional investment funds available to clients as well as investment management services. Figure 1: Arqaam Capital Ltd Company Milestones PESTEL Analysis Political Considerations Elections in Libya are to be held six months after the new constitution has been completed (Khan and Grant, 2012). It is unclear as to when this will happen and therefore this could be a source of uncertainty as to the stability of the country. The political contenders are murky and ill-defined with some parties known while some candidates are independents. The first party is the Justice and Construction Party also known as Hizb Al-Adala wa Al-Bina which is the political arm of the Muslim Brotherhood. It has 73 candidates in the election and is considered one of the most organized parties with a well educated and well-connected membership. The second party is the Nation Party or Hizb Al-Wattan, has fifty nine candidates and some important individuals as members. It is thought to be popular with former revolutionaries and is appealing to the working man. The third is the National Forces Alliance or Tahaluf Al-Quwah Al-Wataniya which is a coalition of 58 political parties headed by Mahmoud Jibril. It is considered to be a liberal party and is supported by the Libyan Diaspora. Lastly, there is the National Front Party or Hizb Al-Jabha Al-Wataniya and it is a party that has consistently been in the opposition against Quaddaffi since 1981. Other big parties include Union for Homeland (Al-Ittihad min Ajl Al-Wattan), the National Centrist Party Hizb Al-Ummah Al-Wasat) and the Party of National Development and Welfare (Hizb Al-Watani Liltanmia wa Al-Reaya Al-Egtemaya) (Grant, 2012). Because the political situation is in flux and the date for inception of the new constitution unclear, it is difficult to predict with certainty what socio-economic policies the country will pursue although there seems to be a leaning towards Islamist values and using the Quran as the source of law. This is no different from other places in the Middle East where Arqaam operates and therefore may not pose a big challenge to its operations. Use of a local subsidiary with already established contacts and clientele is also a plus and will help to smooth the transition into this market for Arqaam. Economic Considerations The Libyan economy was said to be the fastest growing in the world in 2012, due to production of oil and exports which rebounded from the Arab spring much faster than anticipated (Business Monitor International, 2012). They project a real GDP growth expansion of 58.9% which is an increase from the reduction to 49.2% that occurred in 2011. Due to the revolution, there is a tremendous requirement for reconstruction, and therefore gross fixed capital formation may suffer as investors wait for clarity to emerge in the security and political situation. The projected growth is a factor of the faster than expected progress made in domestic oil production and exports which are the main driving forces of wider macroeconomic recovery. This is particularly true given the structural destruction that occurred in 2011. The hydrocarbon sector has also registered a remarkable rejuvenation after the revolution stopped international shipments. A National Oil Corporation official reported that crude oil exports set a post-war record in April due to a quick resumption of production, delays to shipments in March and ongoing problems with Libya’s largest refinery, Ras Lanouf (Dabrowska, 2012). Officials aim to achieve full resumption of pre-war crude production which is estimated at 1.65m barrels per day as of mid 2012 (Dabrowska, 2012). The Business Monitor (2012) made changes to projected hydrocarbon production forecasts, adjusting them upwards and new estimates project that total liquids output would show a mean of 1.66m b/d and net exports average 1.44m b/d. these liquids include condensates, refinery gains and natural gas liquids. Libya has one of the least diversified economies globally and the sharp recovery exhibited in the oil production means good growth in the short term. IMF estimates that hydrocarbons make up about 70% of the GDP, over 95% of the exports and 90% of government revenues. The Business Monitor (2012) goes on to state that due to the unstable political situation, the long term economic outlook up to 2021 may not be predictable. Sustaining the forward momentum may be difficult considering the opaque domestic policy trajectory currently taking place. Arqaam must take all these factors into account and may have been instrumental in their decision not to go Greenfield but instead to acquire an already existing firm with established contacts within the country and experience in operating within this environment. Social Considerations Libyans are facing a situation of heightened tension and division with the future being very uncertain. The regime change that has taken place is not necessarily a new beginning for Libya when it comes to social relations unless there is communication, responsibility and the process is made participatory. The new government needs to be more responsive to citizens’ demands and needs especially when it comes to freedom, equality and transparency. The divisive issues that face Libya include: Role of Sharia in the constitution. One school of thought has it that this should be the only source of law while another is amenable to the idea of other sources of law in addition to Sharia. The meaning of freedom and equality is under debate with the need to translate these definitions to law and practice. While many view these terms through a political lens, there are those that want them to include the broader terms of freedom of expression, religion and assembly. Others are suspicious of them, viewing them as imports from the West which could erode Islamic values. The shape of political and administrative system is divided. There are those that advocate decentralization of the administration while others support federalism. The supporters of decentralization are in favour of dissemination of services and resources which would hopefully lead to a more homogenous development across Libya. Others are in support of only administrative decentralization in order to make some regions independent in terms of ethnic, geographical and tribal representation. Integration of minorities is an issue because of the viewpoint of many which insists that there are no minorities in Libya due to a common Muslim background. Though there is an acknowledged minority in terms of tribe and ethnicity as well as a small Jewish community. There is also a demand to have Arabic taken as the official language in some schools of thought, while others feel that Amazigh and Arabic should be used. The role of women in society is always a bone of contention and in one school are those who advocate for equality among the sexes. Others demand that this equality must not clash with religious tenets especially as pertains to inheritance and marriage. Others are in opposition to female participation in political and economic life and view the woman’s role as completely different from that of males (Halim and Doumit, 2012). All of these are factors that Arqaam must consider when entering this market because it will affect the manner in which they do business. Environmental Considerations  Libya has a largely unsustainable energy sector which is also very poorly managed. Electricity is generated primarily by the burning of natural gas. This method is finite and also harmful to the environment. Research on this field is limited and the best estimates predict thirty more years of oil production is left, however true reserves are not known. In order for Libya’s future to be sustainable, there must be development of other options that are more sustainable however, so far there is no discussion on the matter. Such alternative sources include solar power using the example of the Kuraymat solar power plant in Egypt. In 2007, Libya used about 26GW of energy and according to UN figures, the population is slated to grow by a third by 2030. Factoring urbanization, more industrialization and projects such as railways and water desalination plants, this means that the amount of energy that could be in usage by 2030 is about 40 GW (Gatnash, 2012). The environment in the workplace is another issue that needs review with many Libyan workers operating in an environment that does not reward or value initiative (Gatnash, 2012). This is a crucial issue for Arqaam that must be addressed in order to ensure profitability. The roads are overcrowded and public transport is definitely a sector that will require future development. Arqaam needs to keep these requirements in mind as it seeks to operate in this environment, in a sustainable manner. Technological Considerations Figure 2: Countries with the lowest internet speeds in the world. After the revolution in 2011, it became necessary to rebuild Libya’s society, its infrastructure and economy. A reliable high-speed internet connection still remains a challenge for them. This issue is crucial because communication across the web is essential for both personal and business interactions. The Arab IP Centre reports that during the Quaddafi years, there was a lot of monitoring of electronic activity and limited data could be accessed. During the revolution, this one Internet Service Provider was cut off, meaning that Libyans were left with no internet connection. This means that there is currently a lot of reconstruction going on in the tech field in terms of telecommunication infrastructure. Due to the combination of having had a history of censorship of the internet as well as a damaged telecom infrastructure means that Libya has the slowest internet in the world. The average internet speed is less than 256K which implies that the use of many web applications is not possible. As seen in figure 2 above, Akamai’s 2011 State of the Internet report shows that Libya ranked lowest in internet speed. Since then, there may have been deterioration in the situation as compared to other countries on the list (Kifah, 2012). With the global economy being driven by technology, a high speed internet connection is crucial to operations in commerce, business and industry. Financial institutions especially rely on the instant communication that the internet provides to operate in an optimum manner. Currently, it is not considered wise to rely on the Libyan Telecom and Technology Company, which is Libya’s main internet provider, since they are not able to provide the kind of service necessary to run a business so far. Legal Considerations There are no legal impediments to operating a business in Libya, having acquired a local subsidiary which will operate under the name Arqaam Capital Libya. Initial approval to operate with a financial services license has been obtained from the Libyan Stock Market. The final license will include provisos to buy and sell securities, manage security portfolios and investment funds, advise on securities investments, proprietary trading, margin funding and promotion of subscription in securities. Question 1: Competitive Advantage Factor Conditions Using an already established firm means that difficult to access contacts are now within reach as well as a ready pool of clients. The country is in recovery mode and there are many opportunities for investment in reconstruction of industries as well as development of new sources of energy and telecommunication. This means that Arqaam clientele are in a unique position to take advantage of all these opportunities. Demand Conditions Libya’s economic and social situation is currently in flux although the economy is set to grow by 121% according to the IMF but the country primarily relies on oil production for revenue. Wherever there is revenue however, there is a demand for financial services. Related and Supporting Industries Financial services are available in Libya but the unavailability of high speed internet is definitely a bottleneck to the efficient conduct of business. Firm Strategy, Structure and Rivalry Arqaam has come into Egypt as an investor at a time when reconstruction is taking place and Libya is in search of investors. This serves to create a dichotomous situation where both entities can take advantage of the situations to their own benefit. Choosing to buy a local firm and convert it to a subsidiary eliminates the initial suspicion and xenophobia that might be experienced if one was to attempt to operate entirely as a foreign entity within Libya whose current political, economic and social situation is currently in flux. Question 2: SWOT Analysis Strengths Already established networks and contacts in place. Libya’s strong economic recovery means that income is high. Experience with dealing with GCC and MENA country clients will assist with interaction with locals. Weaknesses Telecommunication system, no high speed internet is available. Lack of local structures in place such as the constitution may create uncertainty. Opportunities There are many areas that require investment including renewable energy, telecommunication, industry and social amenities. Many international firms are wary of engaging with Libya due to the unstable political situation which means competition is low. Threats The political situation is an issue that could result in problems. Oil production has been projected to cease in thirty years. There is no accurate measurement of how much oil is actually available. Question 3: Strategic Plan The best strategic plan for Arqaam in the next three years would be to develop the local subsidiary in terms of technology and infrastructure in order to improve the efficiency of systems and enable them to provide credible services to investors in the long term. They could do this by partnering with government and other interested parties to ensure upgrade of technology and putting the necessary infrastructure in place for successful operation of business. Question 4: Necessary Resources Arqaam is going to have to invest in a significant financial way in order to get the local subsidiary to a point where they can serve clientele effectively. This means influx of money, expertise and actual infrastructure in order to achieve this. 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