The transformation of a partisan newspaper group to perhaps the largest media company for emerging markets with a presence in 127 countries has been achieved by using corporate venturing as a tool to gain a foothold in internet-focused businesses around the world.
Naspers, a South Africa-based publisher, was founded in 1915 as De Nationale Pers (The National Press) with "the explicit aim of … the political and economic upliftment of white Afrikaners", descendants of the Dutch that migrated to South Africa after the 17th century, according to academic Adrian Hadland. Daniel Malan, editor of its first newspaper, Die Burger, subsequently introduced apartheid as prime minister of South Africa after 1948.
The ending of apartheid and election of the country’s first black president, Nelson Mandela, in 1994 transformed South Africa. Although Mandela called for economic sanctions to be lifted only in 1993, Naspers had two years earlier invested in FilmNet, a pay-television operator in western Europe that subsequently became the basis of its corporate venturing unit, Myriad International Holdings (MIH). However, Meloy Horn, spokeswoman for Naspers, said its international investments became financially material for the company only in 1995, after Mandela’s election. (Click here for timeline of Naspers.)
A series of financial transactions over the rest of the decade saw Netherlands-based MIH fund its expansion into Greece, Thailand, the Middle East and sub-Saharan Africa and expand from pay TV and publishing into technology and internet services.
This transformation in the past decade has resulted in a near quadrupling of revenues to R26.7bn ($3.65bn) in the 12 months to end-March from R7.25bn 10 years earlier, as the group starts to reap the rewards from its investments, particularly in Brazil, Russia and China.
Both decisions – to expand into emerging markets after the Asian crisis of 1997 and to focus on the internet as the platform for the future – showed unusual clarity of strategic vision.
Lindsey McDonald, information and communication technology consultant at consultancy Frost & Sullivan, said: "Naspers has certainly come a long way from being just a publishing house, with an array of investments in diverse markets.
"There is one common trend among the company’s investments though, and that is all the markets in which it has chosen to become involved are typically characterised as developing or emerging markets. Even in countries with a mature economy, the company has invested in a start-up or very niche players."
As one South African internet investor said: "Naspers have been very smart in focusing on the BRIC [Brazil, Russia, India and China] countries long before they were even called BRIC. [The acronym was coined in 2001 by Goldman Sachs chief economist Jim O’Neill.] I guess they [Naspers] could see these markets were underserved technologically and would inevitably adopt the web very rapidly."
Gustavo Guida Reis, chief executive of Brazil-based venture capital firm Samba Ventures, and a former developer at Naspers, by email said: "The rationale behind this bold move into the internet was simple. [Naspers] successfully changed [in the mid-1980s] to a cable TV company from the origins of a print and more conventional media group. And what is the next sector that could give them such growth? The internet.
"The turning point for Naspers was its investment in Tencent – a $30m-plus funding [of the China-based internet company] became a multibillion dollar investment. After that, every company and entrepreneur in the third world, especially in Asia, was aware of the company. As the years passed, [Naspers] expanded its investments worldwide, achieving a better and better reputation due to its good bets."
Tencent was founded in 1998 to provide instant messaging, games and internet services in China, and Naspers bought 46.5% of the company for $32m in May 2001, before it was subsequently diluted to just more than 35% in its portfolio company’s flotation.
A partner at a transatlantic, top-decile venture capital firm added: "[Naspers] has been one of the smartest web investors in the past five years [with] amazing insights into developing markets."
However, it took some time for Naspers to arrive at its strategy, having originally taken the model of its internet service provider, MWeb, into China before turning to local operators.
Antoine Roux, chief executive of Naspers’ internet division and board member of Tencent, in an interview with Brainstorm Magazine last year, said: "We made some very expensive mistakes in China in the beginning. We lost a lot of money. But we did not want to compete with well-funded Silicon Valley start-ups and believed emerging markets would eventually yield greater value.
"You go into the market, you don’t understand the language or the culture, and you think this will only work if you fly in expats to manage the business. Not only is this incredibly expensive, but it just does not work.
"The biggest lesson we learned is that you do not invest in a product or an income statement. You invest in a local team. Now we find the best local teams we can get, people we can trust, and then do everything we can to support them."
Naspers is part of a global network of investors shaping the next stage of the internet. In July, Naspers sold its stake in Russia’s largest internet services company, Mail.ru, to the other main shareholder, Digital Sky Technologies. In return, Naspers bought 28.7% of DST for $388m in cash and its 39.3% stake in Mail.ru.
Naspers took a stake in DST as it acts as a holding company for Russian investments and, through its Global division, also invests in US-based social media companies Facebook, Groupon and Zynga.
Naspers’ investment followed Tencent’s $300m investment to buy 10% of DST in April, while the Chinese and South African firms have a joint venture, Ibibo, to start social gaming and e-commerce in India.
Roux, in an interview with news provider Economist, said: "This international presence allows the firms to apply lessons they have learned in one country to another. We spend an enormous amount of time on sharing knowledge."
This is so-called "geographical arbitrage" – looking at a country’s gross domestic product and internet connectivity relative to its peers to gauge the size of opportunity and then building a media business based on free communication tools and other services and virtual goods, such as in games or e-commerce for the real world, developed in other countries but tailored for the local culture in the new market.
Since 2003, Naspers’ proportion of revenues from outside South Africa has fluctuated at about a third, according to its final results, but the overseas’ contribution is expected to rise above 50% over time, its chief executive said earlier this year.
In an interview with news provider MoneyWeb, Koos Bekker, chief executive of Naspers, said: "The dividend payments we are starting to receive from Tencent andfrom the print investment in Brazil, called Abril, are now becoming quite significant, and every year the proportion of profit coming from South Africa will recede."
Tencent posted revenues up by 49% and contributed R2.1bn to Naspers’ core headline earnings, an increase of 76% from the year before.
Bekker added to Moneyweb: "We will continue to develop in emerging markets – two reasons really. One is if we compete in the US we have to compete against Google and Apple and these are guys which will probably clobber us over the head and beat us to a pulp, so we try to avoid fighting heavyweights on their own turf.
"The second is that emerging markets are growing faster. The typical market we are in, including the rest of Africa, grows at about 5%, even now, and there is no reason that should stop [because] the population generally is younger, the levels of debt at government level is lower because those countries could not borrow as heavily as Ireland or Iceland or the UK, and then a certain vitality.
"What saps Europe at the moment is just a sort of general malaise. The emerging market is a lot more buoyant. We find the engineering talent is improving all the time. The currency we need in the internet is in raw engineering computing power."
Tencent has the most internet engineers in China, while Naspers has focused on its technology platform particularly from the 1980s with the move into pay TV and the internet.
As a risk factor at its listing on the Nasdaq stock exchange in 2002, Naspers said its long-term success depended on the continued development of the internet as a commercial medium, which was uncertain.
However, the company has continued to expand beyond print, broadcast and internet publishing in trying to fulfil its mission "to develop into the leading group of media and ecommerce platforms in emerging markets".
McDonald at Frost & Sullivan said: "The company’s search for growth has seen it become more involved in the African market and in the last four years plans were directed towards expanding the company’s presence and offering on the mobile platform.
"The onset of the recession brought with it serious curbs in spending and resulting delays in the execution of this plan. I would now expect MIH to once again place its sights on content provision on the mobile platform.
"Essentially, Naspers has perfectly positioned itself as a one-stop shop of content provision. It works in the traditional segment, is very well represented in the digital space, new media, instant messaging, social networking and of course the mobile platform.
"It is, therefore, to be expected that any new acquisitions would be focused on organisations that provide a complementary service or application to this portfolio."
Bekker told Moneyweb: "We have reduced it to a very simple pitch. We are simply saying, if you want the biggest broad-based media company for emerging markets, this is what we offer you.
"So when we compete with media companies that are bigger, they are virtually all based in one country or are very dependent on one country. We now operate at last count in 127 countries and, of course, some are more important than others, but we say to people, if you like media and emerging markets, this is thebest spread you can get and we would like to build that further."
Naspers has been refining its currency for further venturing- style acquisitions. In July, MIH issued a $700m bond. As Reis at Samba Ventures said: "[Naspers’] track record (mostly because of Tencent) allows them to access the bond and equity markets from big economies and then use this resource to buy cheap companies in China, India, Brazil and so on."
Rating agency Fitch said the $700m bond was investment grade at BBB- as a reflection of
Naspers’ "strong historical funds from operations (FFO) growth supported by the profitable core pay TV segment and rising FFO contribution from international internet assets and associated income cashflows – notably from Tencent".
In its financial year to end-March, Naspers said its print media businesses saw a 5% fall in its revenues while pay TV was up 12% and internet up by 24% to R9.2bn. This pushed overall revenues up by 5% to R28bn and core headline earnings increased 22% to R5.3bn.
By comparison, Naspers’ three main media peers at the time South Africa’s media market started to open up 20 years ago have showed what could have happened with an alternative, or less-successfully executed, strategy.
McDonald said: "If Naspers had not taken on this acquisition strategy it would be a very different company indeed and perhaps even non-existent in the current form we know today. The last two years have proved to be tough for the media industry, with magazines having to shut down and Naspers reportedly shedding hundreds of jobs to cut costs.
"The organisation has emerged leaner and as invigorated as ever, and we would expect them to continue to keep abreast of the latest developments in new technology and applications that fit in with a converged media strategy.
"If one looks at the companies in which Naspers has shares, it becomes evident that the business has tried to become involved in all levels of the media value chain.
"[By comparison, a] lack of foresight would have seen Naspers as either non-existent today or desperately trying to eke an income from traditional print publications and some printing and distributions activities – two industries in which margins continue to come under consistent pressure."
Fact box – Naspers
Market capitalisation: $15bn
Revenues
Year (Rbn)
2010 28
2009 26.7
2008 20.5
Key people: Ton Vosloo, chairman Naspers;
Koos Bekker, chief executive Naspers;
Hein Pretorious, chief executive MIH;
Antoine Roux, chief executive Naspers Internet;
John Kotsaftis, chief executive DStv Online and head of Strategic Worldwide Applications & Technologies (SWAT);
Hein Brand, chief executive MIH Print Media