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TA Energy (Turkey): A Bundle of International Partnerships Case Solution

Solution Id Length Case Author Case Publisher
1412 2732 Words (11 Pages) William R. Kerr, Daniel J. Isenberg, Ant Bozkaya Harvard Business School : 807175
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Ayhan was an MBA graduate from a university in the U.S.A. He started his career with the restructuring of RG Holding Technology Group. At the time of his joining, the company was $ 35 million in debt, and Ayhan handled it by firing over 300 employees, restructuring the balance sheet, closing many units and merging the company with its subsidiary. Ayhan became the executive board member of RG Holding and a trustee of RG University.

During 1997, as a result of deregulation and privatisation of the electricity power market in Turkey, Ayhan realised an opportunity of establishing a personal autoproducer unit. The expected annual growth of the electricity demand of 7% – 10% over the next 20 years also makes this an attractive opportunity. The structuring as a limited liability corporation and tax incentives offered by the government allows involvement of foreign institutions as well.  The major customers of TA Energy would be subsidiaries of international companies in Turkey and those located within industrial zones. These would be bulk purchasers with stable contracts, bringing increased project returns to the corporation.

Following questions are answered in this case study solution

  1. Introduction

  2. Background

  3. Resource Requirements for TA Energy

  4. Bundling International and Local Partnerships: Factors of Tension  

  5. Issues Confronting Ayhan and Key Stakeholders

  6. Okan’s proposal to Ayhan 

  7. Selecting a Construction Contractor for TA Energy

  8. Developing Multiple Generation Facilities in Turkey

  9. Recommendations

Case Analysis for TA Energy (Turkey): A Bundle of International Partnerships Case Solution

2. Background

In the recent deregulation of the Turkish power industry, the creation of independent power plants by autoproducers using electricity and thermal (steam) facilities was allowed. It was an attractive opportunity for small and medium-sized electric power developers. These were primarily for personal consumption, but excess production was sold for local use by nation’s industries at market prices.

Ayhan also discovered that there were problems with high energy prices and frequent inconvenient outages faced by the end users in the Turkish economy. The reasons behind high prices were:

  • Purchase guarantees given to autoproducers

  • Productivity shortfalls (15%)

  • Excess labour

  • Theft and losses in distribution

  • Unit input fuel prices

Having spotted this opportunity, Ayhan pitched the idea of establishing the first autoproducer of Turkey to the board of RG Holding first. However, the idea got rejected, primarily by Mehmet Dal, who thought that the company lacked the financial muscle and human resources to undertake such a project. Hence, although RG Holdings was looking for a cost-effective solution for its growing energy requirements, the company was hesitant to follow the idea. After it had got rejected by the board, tensions between Mehmet Dal and Ayhan grew, leading Ayhan to resign from the company in 1997.

Ayhan then decided to pursue the idea on his own and started off with an initial investment of $ 80,000, which he got from his personal savings. Although he had decided to venture into the opportunity on his own, Ayhan knew that he would have to gain the support of different firms, get them to be his partners, and arrange the necessary pool of funds and resources. He then sought to create a partnership with construction companies, power generation companies, and banks, to build sufficient reserves for instituting TA Energy.

3. Resource Requirements for TA Energy

To establish, start and successfully run TA Energy at Turkey, Ayhan required the support of various organisations, their partnership contracts, and create a pool of raw material requirements as well (Segal, 2000). It was evident that he could not do this single-handedly. The resource necessities for the instituting TA Energy were:

  1. Autoproducer financing

  2. Partner with RG Holding

  3. Partner with an International power development company

  4. Partner with a construction company for building an infrastructure

Means of Assembling these Resources
• Autoproducer Financing

First and foremost, Ayhan was dreaming of starting up an institution which required a financing amount of $35 million. However, banks were unwilling to lend to RG and other potential customers because they were privately-held companies with no audited or publicly posted financial statements.

To achieve this target, he had to build credibility into his business plan and prove its long term sustenance (Johnson, 2000). Ayhan document a pro forma cash flow and present value estimate to substantiate the fact that the initial financing amount would cover the entire capital required to be profitable. In this way, a steady flow of predictable cash flows is ensured due to increased electricity revenues, the cost of gas and oil supplies, operating and financing expenses, and investments.

• RG Holding – Partnership

The partnership with RG Holding was Ayhan’s top most priority. He was aware that the company was facing frequent power outages, and though it lacked the financial muscle to establish its autoproducer, it would willingly partner with one such company, as a long-term solution to its problem. The two companies entered into an Electricity Sales Agreement, and agreed on:

  • 10% equity stake in RG Holding.

  • Total plant capacity would be of 35MW.

  • During the first two years of the plant’s operation, RG would acquire an additional 40% shares.

• Power Ventures – Partnership

Ayhan partnered with an experienced power development company called Power Ventures. In exchange for signing an agreement contract, Power Ventures was to pay a developer’s fee of 5% of the total capital budget.

Ayhan planned to reinvest the developer’s fee back into the business, to retain a significant equity position of TA Energy. He hoped to exploit his first mover advantage position and create six or so autoproducers by 2000. The benefit of this partnership was that TA Energy would receive support in the shape of expertise and management from Power Ventures. The company would also come up with the project financing amount of $ 35 million. Power Ventures will also provide the land space required for TA Energy on the lease, in exchange of which the company will get a 10% stake in TA Energy.

• International Power Cooperation (IPC) – Partnership

Ayhan also left the need of partnering with an international power development company to bring the idea to fruition, given his lack of experience and capability of acquiring finances. Such a partnership would build the needed credibility, provide with appropriate power generation equipment, and manage construction and operating contracts. Considering the extensive technological capabilities, financial strength, international experience in the world market of autoproducers, Ayhan partnered with International Power Cooperation (IPC). The IPC could be the operation, construction and development partner, and equipment supplier for TA Energy.

• EC Italy – Partnership

With a 450 page document prepared by Power Ventures, specifying the role of the construction company partnering with TA Energy, Ayhan flew to EC Italy’s HQs to enter into a partnership with him. The document clearly stated the civil, mechanical, electrical, and control engineering designs and calculations. Ayhan met with the company representatives and was convinced by its extensive construction experience. The fact that IPC and EC Italy had worked together before helped him reach a decision.

Ayhan further received five bids but only those of EC-Italy and RG- construction was competitive. Both firms committed to complete the project in 18 months, for $ 27.5 million (RG – Construction) and $ 27.9 million (EC – Italy)

4. Bundling International and Local Partnerships: Factors of Tension 

The most obvious concern when combining international and native companies, and bringing them together to work on a single project, is the effect of cultural differences (Hasim Deari, 2008). Among these, a few factors of caution which can otherwise cause tensions are:

  • Language differences (Hasim Deari, 2008).

  • Collisions of different cultures: manners and customs in the different cultures (Vermeulen, 1997).

  • Altered ways of doing businesses

  • Quotations of resources in unalike pricing units

Apart from an understanding of cross-cultural practices and their implications, other important issues are:

  • Legal issues concerning the changed sets of the environment (Differences Between Domestic And International Business, 2011).

  • Foreign accounting practices

  • International finance and currency matter

  • Political climate of the other countries (Dunung, 2011)

If TA Energy successfully manages to address these problems, it would maximise its profits and benefits from the numerous partnerships it is currently seeking. It will be able to improve efficiency, decrease costs and increase market share as well.

5. Issues Confronting Ayhan and Key Stakeholders

There were some problems faced by Ayhan in the scenario of partnering with different firms to build the required resource pool for instituting TA Energy. Namely:

  • He had to choose between RG Holdings and EC Italy for a construction partner. The dilemma was that both companies had submitted competitive bids to Ayhan. Mehmet Dal was putting significant pressure on Ayhan to sign the contract with RG Holdings. He said that losing a contract in the home country would send a negative signal to the Turkish markets. He was hoping to sign the contract to get a large, public electricity facility. Ayhan was very satisfied with EC Italy, but the cons highlighted by Dal put him in an unsure position.

  • He had to respond to Okan’s proposal for buying a large stake in his company, and eventually stepping aside from the entire idea.

  • He had yet to decide the degree of involvement of Power Ventures in the entire decision-making process.

  • The project financing decision was yet to be arranged due to the pending decisions of partnering firm

The key stakeholders in the current situation were four companies: International Power Cooperation, Power Ventures, RG Holdings and EC Italy, and the lending banks. The issues faced by them were:

RG Holdings was facing the threat that if the construction contract were not signed with them, they would lose face in their current markets and clientele.
The banks were having a hard time agreeing to lend to “unknown” firms with no records of financial statements.

Power Ventures, as a subsidiary of International Power Cooperation, was seeking to arrange the $35 million financing amount for TA Energy

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