closing case Megahertz Communications Established in 1982, U.K.-based Megahertz Communications quickly became one of Great Britain's leading independent broadcasting system builders. The company's core skill is in the design, manufacture, and installation of TV and radio broadcast systems, including broadcast and news-gathering vehicles with satellite links. In 1998, Megahertz's managing director, Ashley Coles, set up a subsidiary company, Megahertz International, to sell products to the Middle East, Africa, and Eastern Europe. While the EU market for media and broadcasting is both ma- ture and well served by large established companies, the Mid- dle East, Africa, and Eastern Europe are growth markets with significant long-term potential for media and broadcasting. They also were not well served by other companies, and all three re- gions lacked an adequate supply of local broadcast engineers. Megahertz International's export strategy was simple. The company aimed to provide a turnkey solution to emerging broadcast and media entities in Africa, the Middle East, and worried that Megahertz would not get paid on time, or at all, or that currency fluctuations would reduce the value of payments to Megahertz. Even when Megahertz had a letter of credit from the customer's bank and export insurance documentation, many lenders still saw the risks as too great and declined to lend bridging funds to Megahertz. As a partial solution, Megahertz turned to lending companies that specialize in financing international trade, but many of these companies charged interest rates significantly greater than those charged by banks, thereby squeezing Megahertz's profit margins. Coles hoped these financing problems were temporary. Once Megahertz established a more sustained cash flow from its international operations, and once banks better appreciated the ability of Coles and his team to secure payment from foreign customers, he hoped that they would become more amenable to lending capital to Megahertz at rates that would help to protect the company's profit margins. By 2002, however, it was clear that the company's growth was too slow to achieve these goals anytime soon. As an alternative solution, in 2003 Coles agreed to sell Megahertz Communications to AZCAR of Canada. AZCAR acquired Megahertz to gain access to the expanding EU market and Megahertz's contacts in the Middle East. For Megahertz, the acquisition gave the company additional working capital that enabled it to take full advantage of export opportunities. Eastern Europe, offering to custom-design, manufacture, in- stall, and test broadcasting systems. To gain access to cus- tomers, Megahertz hired salespeople with significant experience in these regions and opened a foreign sales office in Italy. Megahertz also exhibited at a number of exhibitions that focused on the targeted regions, sent mailings and e-mail messages to local broadcasters, and set up a Web page, which drew a number of international inquiries. The response was swift. By early 2000, Megahertz had already been involved in projects in Namibia, Oman, Romania, Russia, Nigeria, Poland, South Africa, Iceland, and Ethiopia. The international operations had expanded to a staff of 75 and were generating £10 million annually. The average order size was about £250,000, and the largest, f500,000. In recognition of the company's success, in January 2000 the British government picked Megahertz to receive a Small Business Export Award. Despite the company's early success, it was not all smooth sailing. According to Coles, preshipment financing became a major headache. Coles described his working life as a juggling act, with as much as 20 percent of his time spent chasing money. Due to financing problems, one week Megahertz could have next to nothing in the bank; the next it might have £300,000. The main problem was getting money to finance an order. Megahertz needed additional working capital to finance the purchase of component parts that go into the systems it builds for customers. The company found that banks were very cautious, particularly when they heard that the customers for the order were in Africa or Eastern Europe. The banks Sources: www.megahertz.co.uk; W. Smith, "Today Batley, Tomorrow the World?" Director, January 2000, pp. 42-49; and "AZCAR Acquires 80% of Megahertz Broadcast Systems," Canadian Corporate Newswire, March 31, 2003. Case Discussion Questions 1. What was the motivation for Megahertz's shift toward a strategy of export-led growth? Why do you think the opportunities for growth might be greater in foreign markets? Do you think that developing countries are likely to be a major market opportunity for Megahertz? Why? 2. Does Megahertz's strategy for building exports make sense given the nature of the broadcast industry? Why? 3. Why do you think Megahertz found it difficult to raise the working capital required to finance its international trade activities? What does the experience of Megahertz tell you about the problems facing small firms that wish to export? 4. Megahertz solved its financing problem by selling the company to AZCAR of Canada. What other solutions might the company have adopted?