CEO INTERVIEW - Emergency Breakthrough

FOR MOST OF HIS FOUR YEARS AS chief executive of British wireless communications giant Vodafone Group, Arun Sarin has been under siege.

He had barely settled in as the successor to Sir Christopher Gent, best known for his takeover of German rival Mannesmann, when Vodafone had to declare a loss of £22 billion ($41 billion). Shareholders demanded that Sarin take quick steps to boost the stock price, from slashing costs and nixing emerging-markets expansion to selling Vodafone’s 45 percent stake in U.S. carrier Verizon Wireless (which won’t pay shareholder dividends until at least 2009). Investors owning 9 percent of the company’s shares voted against keeping Sarin as CEO at Vodafone’s annual general meeting last year. As recently as October rumors surfaced that he was about to step down.

Sarin, 53, has resisted calls for rash action and pursued a measured turnaround that is finally bearing fruit. On November 13, Vodafone released solid six-month results, sending its shares up 7.5 percent on the London Stock Exchange. Revenues jumped by 9 percent and earnings by 7 percent over the previous-year period, on a 49 percent surge in data revenues and 40 percent sales growth in such emerging markets as Turkey and Sarin’s native India.

The CEO remains focused on taking Vodafone’s massive European cash flows and investing them in faster-growing, less-competitive markets. One of its most promising ventures is a product called M-PESA, which allows residents of developing countries to transfer money by using their mobile phones at retail stores. It could be a predecessor to mobile phone wallet-type services’ being rolled out worldwide within two years.

During a visit to New York last month, Sarin sat down with Institutional Investor Assistant Managing Editor Justin Schack.

Institutional Investor: How did it feel to be targeted by activist shareholders?

Sarin: That’s the price of leadership. If you’re a leader, you have to have a strong point of view as to where you’re taking the company and stay the course. People will be shooting at you from every direction, because either they disagree, they don’t understand, or they’ve got some other objectives. And that’s fine. You can’t lead by watching polls or being sensitive to two or three people. The vast majority of the shareholders voted in favor. Everyone focuses on the 9 percent who voted against.

Well, they were the loudest.

That’s fine. Some shareholders feel it is their prerogative to make a lot of noise, and I agree they have that right. It’s fine to disagree. But in the U.S. the attitude would be, “If you don’t like what you’re hearing, sell the shares.” In the U.K. people like to hold their shares and talk rather than let their buying or selling do the talking.

You’ve said you want to bring to your European operations some of the practices of emerging markets you’ve moved into. Can you elaborate?

Outsourcing networks, IT and becoming much more focused on the front-end, customer acquisition relationship side of the house. That’s very prevalent in India. The cost structure there is very low. Part of it is explained by low wages, but part of it is also just different business models that they use that we can bring back to Europe.

What kinds of models?

In India we don’t use air-conditioning in a number of our cell sites. And our equipment works just as well there as it works in Europe, where we’re running our AC generators all the time. So you say, “Why don’t you switch it off and see what happens?” There’s basic stuff like that, and then there’s more advanced stuff like outsourcing IT infrastructure and networking.

What are your long-term plans in the U.S.?

In time we’ll get dividends from the Verizon Wireless stake, and it will be a very good asset that’s shared between two large companies. Beyond that, who knows what happens five or ten years from now.

Why not pursue a control investment, or at least a minority stake that will bear some dividends, while you’re waiting to see what happens long term?

Our bid for AT&T Wireless four years ago was our best opportunity to accomplish something like that. The price got out of hand. We are a financially disciplined lot, so we said no. T-Mobile is not a seller. Sprint is going through Sprint-itis, or whatever they’re going through, right now.

You’re now testing the M-PESA money transfer service in Kenya. Will you take it to other developing nations?

We’re basically testing the platform there before we take it to India and then China. In all these countries you have massive migration of people from rural to urban areas, and there are no efficient ways to send money back to the families people leave in rural areas while they’re earning money in the cities. We’re using very basic technology that we have for our prepaid cards. If you have that service, you can go to one of 400,000 stores in India and send or receive money. If you’re in Delhi and you want to send money to your relatives in a village, you go to any one of these places and say, “Here’s 500 rupees.” The merchant takes the money and gives you a PIN code. You SMS message your family and say go pick it up at another of these 400,000 places. They show up and give the PIN code and get the 500 rupees. There’s no new technology — just a little bit of authentication so there’s no cheating.

What about the locations? Do you incur real estate or occupancy costs?

Our locations are the size of this conference table. The guy is selling cigarettes, shampoos, sodas, everything. He’s a general merchant and we’re adding one other product to the shelf.

How big can this revenue stream be for you?

It’s so early stage right now. But it will help us attract and retain customers.

Internet content providers and handset makers are moving into your business. How do you respond?

Our core business is mobile communications. There are other companies whose core business is the Internet or entertainment. My view is, let’s bake a big pie and we’ll all take whatever revenue share we can, depending upon what assets we bring to the table. If we bring more assets to the table, terrific. We’ll take more of the share. If someone else does, they will. But there’s no reason to bake a small pie. Let’s bake the biggest pie possible and duke it out in the marketplace.

Will there be consolidation between services, handset and content companies?

That day is quite far away. Somebody asked why we don’t get into Google’s business. That would require us getting into search technology. How much sense does that make? How much sense does it make for us to get into operating systems? Should we take search and operating systems and entertainment and mobility and put them all together? Yes. But we will remain independent companies doing partnerships to bring those things together. We don’t need to merge.

Are there other financial services applications for wireless phones?

Your phone could easily be a wallet. You go to the grocery store and pass your phone over a reader and it deducts the money from your account. No writing checks, taking out a card or swiping. None of that.

How close are we to that?

It’s happening in Japan already. It’s a couple of years away from becoming mainstream in Europe and in America.

Are you talking with financial institutions as potential partners for such a service now?

Yes, but very early stage.

What’s the hardest part of your job?

Continuously finding profitable growth opportunities around the world. Our market cap is roughly $200 billion. For us to increase our share price by 10 or 15 percent, we’ve got to add $20 billion to $30 billion of value every year. Where do you find those opportunities, and how do you execute on them? It’s something all large-cap firms face. When I chat with my peers, this is the common thing we always talk about. That’s the reason we’re all going to India and China and South Africa and getting into these new spaces — because we’re constantly hunting for new profit streams that are material enough for our companies.

Is there a global support group out there for super-cap CEOs?

[Laughs]. No, we kind of run into each other in one forum or another. So you get to meet people from time to time, and we all exchange ideas on what’s happening to the world and how we run our companies and what we find interesting. We all face similar challenges. We’re all doing the same set of things in different industries. There’s no support group for chief executives. You’re pretty much your own support group.