Competition on price grounds is very difficult because of the activities of the regulator,

and therefore competition is based largely on coverage, service and brand image.
However, the regulator is keen to prevent any supplier from dominating the market, and
if it appears that one supplier is increasing their market share, the regulator would
impose rules to re-balance competition.
Substitute products – At present, it is difficult to envisage any threat of substitute
products to the mobile networks. Even the threat of 'doing without' seems unlikely, given
people's increased dependence on the mobile phone.
2 Response to shareholder concerns
Agency relationship – Avo is correct in suggesting that 2Tel’s board are accountable to
the company’s shareholders; but equally, under the agency relationship, directors are
entrusted, by the shareholders, to run a company responsibly on their behalf.
If the shareholders believe that the amount of risk in the decisions that 2Tel are taking – or are
considering – is excessive, then they will be concerned that the directors are not running the
company responsibly. As such, this represents a breakdown in the agency relationship.
Consequently, the board should take account of their shareholders’ expectations of when
assessing 2Tel’s appetite for risk.

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In this case, it is particularly important to take account of Avo because they are the largest
shareholder. As such, they are likely to have a relatively high level of power and interest in the

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company, so 2Tel should try to ensure its strategies are acceptable to them.
Risk appetite – Equally, however, the directors’ risk appetite needs to be consistent with
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2Tel’s strategy and objectives. As a commercial organisation, one of 2Tel’s underlying
objectives is to generate value for its shareholders, so any potential investment in TFS should
be evaluated in terms of its potential to do this.
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Although Avo has highlighted the potential risk involved in the moving into TFS, this also needs
to be considered in relation to the potential returns which 2Tel could generate from doing so.
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‘Risk appetite’ does not relate solely to the level of risk involved in a strategy, but the balance
between risk and return. (In this respect, it is somewhat surprising that Avo – as an equity
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investor – appears to be focusing only on risk, rather than on the return which could be
generated from an investment.) Although there has been political unrest in TFS, our analysis of
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the competitive environment in its mobile operator industry suggests it should remain profitable
– and therefore 2Tel would benefit from entering the industry.
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Moreover, 2Tel has grown through significant acquisition, and has extensive experience in
buying companies and integrating them into the group. In essence, a potential expansion into
TFS would seem consistent with 2Tel’s strategy to date, and (as it does for any new market
entry) 2Tel is working with independent consultants to evaluate the market before deciding
whether or not to enter.
Therefore, the level of risk attached to the strategy is not necessarily as high as Avo might fear.
Nonetheless, it would be beneficial for you to arrange a meeting with Avo to discuss these
issues. By doing so, you can demonstrates that 2Tel recognises its accountability to its
shareholders, and takes their views seriously. Equally, the meeting could give you the
opportunity to reassure the shareholders that 2Tel will not accept a proposal if the risks
involved are excessive. (It will also be important to remind Avo that, although they have heard
a rumour about a potential acquisition, 2Tel has not committed to any such deal yet, and will
conduct appropriate due diligence before doing so.)
Ultimately, if Avo remain unhappy with 2Tel’s strategies they could sell their shareholding in
the company. As the largest shareholder, this could have a significant negative impact on
2Tel’s share price, and therefore is something 2Tel should try to avoid.

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