Monday, December 28, 2009

Applabs - Strategic Sale: Analysis

VCCircle reported that Sequoia-Backed Testing Firm AppLabs is a considering strategic sale

MNC and Indian suitors may be interested in the Hyderabad-based testing firm, which may attract a valuation of $150mn.

Sequoia Capital-backed AppLabs Technologies Pvt Ltd, a privately-held software services firm focused on the testing space, is considering a strategic sale paving a way for a full or partial exit for the five-year-old investor. The company had earlier looked at initial public offer (IPO) route as an option, however, it seems to have abandoned the IPO plans and is looking at a trade sale instead.

Sashi Reddi, the founder of AppLabs, holds substantial stake in the business while Sequoia Capital is a significant minority shareholder. Sandeep Singhal, managing director of Sequoia Capital India, holds a board seat in the company.
Sources familiar with the development told VCCircle that AppLabs was actively pursuing a plan to attract new buyers, a move that may also result in stake divestment by the investors and the founder. AppLabs is believed to have mandated a global investment banking firm to carry out the exercise. AppLabs, it is learnt, initiated the strategic sale move a year back but it was shelved on account of market conditions. In effect, that process has been revived now, sources said.

It is understood that AppLabs has received good interest from both domestic and MNC technology companies who are looking at a sizeable opportunity in the lucrative testing services segment. Research firm Gartner has reportedly pegged the opportunity for Indian offshore testing companies at around $8 billion at the end of 2008. Now, the company, which is reported to be close to the $100-million revenue mark, is looking at a valuation of $150 million (or 1.5 times the top line), the sources added.

E-mails sent to both Sashi Reddi and Sandeep Singhal last week, seeking comments on strategic sale plans, elicited no response at the time of publishing this story.

Sequoia (then WestBridge Capital) first invested $7 million in 2004 in AppLabs followed by a subsequent round of $10 million in 2006. Founded in 2001 by Sashi Reddi, AppLabs claims to be the world’s largest software testing company with a head count of over 2,000 employees across US, UK and India. AppLabs provides testing services in a range of areas such as performance, ERP, security, certification, test automation and managed testing.

AppLabs has also followed an inorganic growth path to add to scale, competencies and customers. In 2005, it acquired KeyLabs, a software and hardware testing company, followed by a $37-million purchase of UK-based testing consultancy firm IS Integration in 2006.

Interestingly, serial entrepreneur Sashi Reddi is also the founder of a game development company FX Labs, which recently released the Ghajini game, after the Aamir Khan Bollywood flick. Sashi Reddi’s hands are quite full, it would appear, as he is actively engaged in running two companies in niche and fast-growing outsourcing spaces. Is that triggering a deal at AppLabs? That is the question some are beginning to ask.
According to Sashi Reddi’s profile in the company website, he started two other companies prior to AppLabs. EZPower Systems, which was a developer of products for building large web applications, was acquired by DocuCorp and then eventually by Oracle. Subsequently, he founded iCoop, a group purchasing dotcom company which went bust.

Here is my analysis:
  1. With ebitda margins at around 12 percent (Estimated) and Revenues ~100 Mn, Valuation of 150 Million looks steep (unless there is large amount of cash, which I doubt). Therefore sale to a financial  investor is unlikely (more reasons below)
  2. A large strategic investor may take a view that it can cut costs and improve margin. It offers size and entry into Testing vertial . Rules out Tier 1 Indian players (have size and testing teams already). However, given the fact that one could qualify Applabs itself as a rollup operation (it has acquired scale through acqusitions- funded by Sequoia and other investors- at much lower valuations why would they pay a premium price)
  3. Applabs' value proposition (or at least Sales pitch) has been that it is an independent testing company ie someone else builds the app and Applabs tests as independent third party and therefore/potentially does a better job does not Gel with a Services provider.
  4. Possibly, a company like MindTree could have stil acquired it but it has already made an acquisition
  5. TechM may have considered it but there are still trying to digest Satyam
  6. It already claims to be the worlds largest independent tester, so little chance of a pure play testing company acquiring it.
  7. Promoter is serial entrepreneur so he is looking for an exit
  8. CEO is professional manager so this aids a strategic sale

Likely End Game
  1. IPO by Applabs
  2. Someone would overpay (overzealous M&A team)  
  3. Re-Capitalization (Don't happen everyday in India but may be the most preferred option / should be explored)

Sunday, December 20, 2009

Google - Yelp: Deal Analysis


"...Google Inc is in talks to buy Yelp Inc, the popular website for reviews of local businesses, in a deal that could help the Internet search leader tap a lucrative local ads market, media reports say.

Google may pay more than $500 million for Yelp, according to reports confirmed to Reuters by a person familiar with the situation. It came as the Web giant embarked on an acquisition spree that has netted at least five companies since August.

By swallowing privately held Yelp, Google would own one of the Web's most popular repositories of local restaurant and small-business information, including more than 8 million reviews penned by Yelp's users.

That trove of content and a heavy focus on local businesses could provide a valuable foothold for Google as it seeks to convince local merchants to shift their advertising spending to the Internet.

"The local advertising market is a multibillion dollar market that for all intents and purposes is still untapped on the Web," said Needham & Co analyst Mark May.

In July, Internet portal Yahoo Inc teamed up with AT&T Corp in a partnership that involved the phone company's 5,000 sales people selling Yahoo advertising inventory to local businesses.

News of the recent talks between Google and Yelp -- backed by Benchmark Capital and other venture capital firms -- and the $500 million price tag were first reported by the blog TechCrunch.

The source familiar with the situation said talks were currently bogged down by concerns among some Yelp investors that the company could be selling itself prematurely, and that it could be worth far more than $500 million if it had a chance to develop its business.

The source added that Friday's news stories may have been floated to put pressure on for the deal to be consummated at a price that was too low.

Apparently, Google has had its eye on Yelp for some time. According to one former Google executive, the Internet company had had "early discussions" with Yelp about an acquisition several years ago, but ultimately passed on the deal.

"Yelp doesn't monetize very well, so it's always a bit hard to justify an acquisition," the person said.

The local businesses that Yelp sells online advertising to are more interested in promoting their businesses through coupons than online ads, he added, noting he believed Yelp was still an unprofitable business.

Yelp was founded in 2004 and has received $30 million in funding from Benchmark Capital, DAG Ventures and Bessemer Venture Partners.

The acquisition talks are the latest in a string of recent deals by Google, including the $750 million acquisition of mobile ad firm AdMob announced in November, that are designed to extend Google's reach into new advertising markets.

The world's No. 1 Internet search engine generated roughly $22 billion in revenues last year, but has seen its top line growth slow from the 40 percent-plus clip it was managing as recently as early 2008.

Google has stepped up efforts to court local merchants recently, encouraging businesses to register their information on its small-business online directory.

But some analysts say Google will have its work cut out trying to sell online ads to local merchants more comfortable with traditional channels like local television, newspapers and the Yellow Pages.

Needham's May estimated that Yelp, which had 8.9 million unique visitors to its site in November according to comScore, is generating revenue at an annual rate of $15 million to $20 million.

"That's a pretty tough nut to crack," May said about selling online ads to local merchants. "Whether Google can crack the code on it, is still to be seen."


Here is my analysis of the (potential) Google - Yelp Deal

  1. With growth slowing down, it is becoming difficult to justify the high revenue multiple on its stock price, so its seems it is buying growth or, at least in this case, a (potential) growth engine
  2. Google has been trying to tap the locals market for some time but has not been able to make a splash despite its obvious strengths in search. Hopes Yelp would help it make a dent. 
  3. 8 million + reviews (on Yelp) are useful (think user reviews on Amazon),  but you know, these are not exactly like product reviews on Amazon. Restaurants change and so do people's tastes. So while there is a network externality, it may not be as strong.  
  4. If Yelp's reveneus are really only 15-20 million then the quoted price ($ 500 Mn) is really over the top.  Am sure if Google really commits even half of the money on local search it can do a better job.  (Build Vs Buy)
  5. Surely, its not to get another bunch of great engineers ( Not at this price)
End Game:

I think this deal (if it goes through) would be paid for mostly through Google Stock. One over expensive stock (currency) for another. Perhaps it would be best for both companies. Yelp's investors would happily cash out by selling Google stock in the open market and as for Google, it would  would have acquired another growth engine where it has been unable to make a huge headway by itself.

 PS: On second thoughts, Yelp + AdMob could be an explosive combination and help Google recover the price paid, many times over.

Thursday, December 17, 2009

Avatar: Fantastic!

Watched Avatar yesterday. Loved the movie. I don't know if this qualifies to be the greatest movie ever but it was fantastic. Visuals were simply out of this world.

Three cheers for Cameron and his team!

Friday, December 11, 2009

IIM falters in CAT and Mouse game, on debut!

CAT 2009 got off to a disastrous start and despite huge efforts by the Prometric and its partners. The exam did not finish on schedule and is continuing to cause anxiety to students, parents, IIMs and even to the HRD ministry. However, what was has been most interesting is the clamor we have seen from the players not involved.

1. Media: Of course media had a field day. TRPs were up, confusion reigned and they kept adding fuel to fire. Well you could argue that It is their business to do so, even if media would say that they do this only in public interest (I’ll be damned if any of the coverage was inspired by concern for these students)

2. Other Online Testing Providers: Sore losers and vultures. You could almost see them laughing secretly and were happy to see Prometric fail. Are now clamoring that if they had been given a change they would have done a better job. Please guys, you were part of a bidding process, if you can do a better job, you should have done a better job at that time. (I can bet my shirt that Prometric and its Indian partner would do a much better job next time, what are these vultures betting?)

3. Coaching Institutes: Most vocal (after media). Want current exam to be scrapped, return to pen and paper format for this year (So they can charge students again for preparation). Act like they are acting in students' interest while a large silent majority was actually able to complete the test.

4. Other Xenophobes - Want contract to be given to an Indian company (yes, we have xenophobes in India too). These are racists, casteists, fascists in new avatar. There is no talk of merit.

Which brings me back to the organizers of the CAT exam. Poor show guys! You need to get your act together. You should make sure that every student who suffered is given another chance, and that this is not repeated the following year.

Monday, December 07, 2009

Twitter, Facebook and MySpace give into Search Seduction!

After holding out for a long time, Twitter, Facebook and MySpace are now falling in (like dominoes) to provide feeds to search engines for real time search. Makes sense, the search engines had to get just one of these to get the others to fall in line. The public bloggers (and in this case micro-bloggers) do suffer from varying bouts of narcissm  or maybe are lonely or  just too desperate to be heard (read 'read') and therfore the advantage to a social network to being visible in real time. Having a rival micro blog network available while you are left behind is a (doubly) huge disadvantage.

Of course, this is one more battle field for Bing and Google. My fear is that both will end up overpaying for this ability to search but can't do without it either.

Sunday, December 06, 2009

What is Jugaad? - And, do you need some of it?

The western world, it seems, has suddenly taken a liking for ‘Jugaad’. Indians have always held ‘Jugaad’ very close to their hearts. Jugaad may be trade-marked Indian, but the concept is not uniquely Desi. However, still, the current fascination of the developed world is amusing. Refer two interesting posts on Jugaad in Techcrunch by Sarah Lacy (who was in India doing research for her upcoming book on entrepreurship) and in Businessweek, which calls it Indian style of Innovation and Invention.

As a verb, Jugaad is the antithesis of ‘Process’. It is improvised (and sometimes very creative) problem solving and with the end result sometimes called a ‘Jugaad’ (noun) or described as ‘Jugaad’ (adjective). Which brings me to, why I find this amusing?

Over the past many years, the western (and pseudo western) trained managers have derided the ‘Jugaad’ solution. I remember an external speaker at the ISB, a few years ago, who was convinced that India is underdeveloped back only because of its ‘Jugaad’ mentality (everything else he said in his hour long speech was just gibberish).

Anyways, now, that the world is now discovering Jugaad, one must be careful not to over use it. Here are my thoughts on Jugaad

1. It provides an improvised quick fix but no long term warranty
2. It can certainly help you solve problems (especially if you are desperate)
3. Its gels perfectly with entrepreneurship, especially while starting out and want to ‘get it done’ ever which  
    way. Has a lot of overlap with 'Bootstrapping' in VC parlance
4. It is low ‘immediate’ cost, but long term costs may not be immediately apparent

PS: A person practicing Jugaad is called ‘Jugaadu’

PS, PS: The article in Businessweek mentions that TCS and Infosys gained world stature by having oodles of Jugaad. Having worked in one of these for over five years, I can tell you that while Jugaad had a role to play, do did 'Process'.

PS, PS, PS: There is a blog detailing list of Indian 'Jugaads'

Saturday, December 05, 2009

Better Product = Market Leadership?

Split right down the middle. I am talking about the first poll I conducted on this blog. The question asked was
"Does having the best product ensure market leadership?". Fifty percent of the voters agree, while the other half disagree. I belong to the latter category.

Now, I am not saying that having a good product is not important and that it does not help. It does, surely. But It takes more than just having the perfect product to gain market leadership. Sales and Marketing for example, Distribution reach is other, Price is equally important. And, sometimes it is something purely superficial such as color etc

Internet based markets are democratizing some of these effects. But product managers would do good to take some of the other considerations in to account and not fall into the hype of their own products

PS: More importantly how do you conclude a product is better.  For whom. Humans are (some economists may diagree) not completely rational. I wonder if it is sometimes "Arbit' and more importantly "Is it Luck". Which brings me to the next poll?  How important is luck to business success?

Thursday, November 26, 2009

Black Friday

Okay! This is interesting

Came across this term, " Black Friday" in the context of Thanksgiving a couple of days ago. Could not understand as to why this phrase was associated with this day. Of course being a finance person, the first thought that occurs on hearing the term is a market collapse (like here).  So, I was confused about the association.

Finally checked the term on wikipedia today. Accoding to the entry, the first known usage of the term is from 1965 Philadelphia

"Black Friday" is the name which the Philadelphia Police Department has given to the Friday following Thanksgiving Day. It is not a term of endearment to them. "Black Friday" officially opens the Christmas shopping season in center city, and it usually brings massive traffic jams and over-crowded sidewalks as the downtown stores are mobbed from opening to closing.

There are other interesting facts. Check them out here

Wednesday, November 25, 2009

Chidambaram is "Sorry"

The former finance minister and the current home minister, P Chidambaram, is a learned man and he has a sharp, almost acidic wit. Despite that, I have always liked him for his intelligence. He appears to know what he is doing (unlike many others) and has clearly thought through situations. However, in this TV show, hosted by Barkha Dutt, he just took his superiority complex too far.

When one of the survivors of 26/11 made an emotional plea to him that there should have been stronger measures to bring the perpetrators to justice, Chidambaram went out on the offensive and put the poor chap on the hot seat and asked him what he would have done in his place.

It was totally unbecoming of his position although not completely surprising coming from him. It certainly appears that Mr. Chidambaram is still sulking on his loss of the finance portfolio. Even then, this does not mean he can vent his anger on an innocent man, who is so overcome with emotions that he is barely coherent. Of course Chidambaram got no reply.
This, after all Chidambaram could say, on the issue of the Maharashtra Polices’ inability to locate Karkare’s bullet proof vest, was “I Am Sorry”

Shame on you Mr. Chidambaram for doing this! You had no right. Rather than giving a straight answer, you chose to be vitriolic. I am sorry too Chiddu, but if you don’t have an answer then you ought not to be the home minister. Correct me if I am wrong, but you are the home minister and the fact is, that despite the government making tall claims, none of the accused has been brought to justice. Not even one. So it was a fair question and deserved a straight reply.

Monday, November 23, 2009

Devdutt Pattanaik: East vs west -- the myths that mystify

Deeply resonates with my belief on why a lot of economic analysis is flawed as it does not take into account all the dimensions of "My World"

Sunday, November 22, 2009

New Poll: Does having the best product make you the market leader?

Well, this is the first poll on this blog. Have a decent number of people reading this blog, so thought that it would not hurt if I could do some primary research on areas that have been intriguing me and may have, at some point, intrigued you. Would be kind of nice to know what you think. Promise to publish the analysis soon

The questions is

"Does having the best product make you a market leader?"

Friday, November 20, 2009

Educomp: Securitization?

Secutization Debate: How Educomp is turning its Financing Cash Flows into Operating Cash Flows? But isn't that a good thing?

India's largest education company by market capitalization, Educomp Solutions, has been the "Darling" of investors since its IPO days. And for good reasons, many would argue. It has consistently maintained an explosive growth, the profit margins have been excellent and growing at an even faster rate and of course, more importantly, has given its investors over 30x returns since its IPO (despite falling over 25% from its high). Educomp has had a near "Dream Run" in the markets ever since it debuted, in fact rallying 100% on day 'One' of its listing.

However since its last results, Educomp has suddently lost favor with the "Investment Experts". To be fair, there were enough people who privately and not so privately expressed doubts about this company from the beginning. However, never have I seen another company being panned like this, and "rather rudely" in public. At least not a company which had a 9000 crore market cap and certainly not in India. I mean they have had had their share of controversies in the past. But which company, growing at an explosive rate, does not?

To be sure, its Q2 FY10 results were just as "stupendous" and the management upped the guidance for FY10 and FY11. So what changed, that a large swathe of investors and analysts suddenly did an about turn and are now calling it "... a very unique and strange company." or "..the only company I would short in the Indian market.."

Almost every one now blames, their newly announced securitization policy. This is what they have done

Educomp "Smart Class" Model

Before Securitization

With a high "upfront" capex model, their operating cash flows have always been low, putting a constraint on their growth. Therefore they have had to constantly borrow or raise equity to maintain the high growth rate. Now, one of the ways to ensure scalability is to securitize your investment/receivables which privide a company with enough liquidity to fuel its growth without the need to dilute equity. Which is what Educomp did, in last quarter.

New "Securitization" arrangement

Where Edu-SPV is an "unrelated" entity, apparently floated by ex-employees of Educomp

Now, "Securitization" is not a bad thing and sure it does turn Financing CF into Operating CF and the management should have been applauded for this, but there are curious angles to this peculiar case and apparently are the source of discomfort for the investors. Can you guess, why?

Mind you, nothing is illegal here, just what some people may call "smart" and "innovative" structuring

Tuesday, November 17, 2009

The Hidden Cost of 'Free' Online Information

While we like to get information for free, especially when it comes to online sources, one must watch out for biases and hidden motivations of the writers.Now, I am not implying that information carried in other channels is always free of such biases but given the ease of being able to shout out loud over the internet, makes this medium particularly susceptible.

To be fair, information can be flawed for other reasons as well including lack of research or because the writer placed undue reliance on another such information source.

While we do not pay for the these 'biased statements' masquerading as 'expert knowledge', there are hidden agency costs that we can end up being saddled with, aside from the time that we 'spend' browsing.

Monday, November 16, 2009

HDFC Credila: Deal Analysis

HDFC has acquired 41% in education loan provider - Credila Financial Services from DSP Merrill Lynch for $2.2 Mn. The transaction values the Mumbai based company at $ 5 Mn.

Promoters - Anil Bohora and Ajay Bohora hold the remaining 59% in the company.

The deal marks HDFC's entry into Rs 30,000 Cr education loan market, which is expanding at 30% per annum. At present, HDFC Ltd offers very specialized education loan to students in select institutions like ISB, Hyderabad, IIM Ahmedabad and Symbiosis, Pune.

Formed in 2007, Credila has disbursed loan of Rs 16 cr in 2008-09. It currently has offices in Pune, Bangalore, Hyderabad, Chennai, Delhi and Nashik.

Unlike bank education loans, Credila’s loans are all secured. The company insists on one or more creditworthy co-borrowers for all disbursals. It has also entered into agreement with a students tracking agency abroad.

Before founding Credila, the Bohoras founded a healthcare claims processing company called ClaimsBPO in January 1997 with a US joint venture partner. In 2003, ClaimsBPO was sold to WNS Global Services, a Warburg Pincus-owned company, listed on NYSE.

The promoters are both engineers who have relocated from executive positions in the US. Ajay was earlier with MetLife in its New York office, while Anil had worked in senior positions in AOL Time Warner and Pitney Bowles.

The Education loan space have seen good credit growth in the recent past. Most of the players have reported over 25% growth in the student loan portfolio.

Union Bank of India reported 40% growth for the quarter, while Bank of India and Bank of Baroda reported 24% and 29% growth respectively in their education loan porfolio.

Here's My Analysis

1. Provides HDFC with an excellent platform for expanding into education loans.
2. Enters a high growth market: HDFC needs to create more growth engines to keep its growth momentum
3. Buy vs build approach gives them quicket acess to market. Credila's conservative approach (all loans are secured) to lending, gels well with that of HDFC's
4. Backing a winning team with their skin still in the game.

End Game
Behoras are serial entrepreneurs and would probably be bought out by HDFC over the next couple of years. HDFCs huge reach and brand would give them the leverage to expand, create value and exit.

PVR - DT Deal analysis

Multiplex chain PVR Ltd has announced twin deals. It has acquired the cinema exhibition business of DT Cinemas Ltd, a subsidiary of real estate major DLF, in a cash-cum-stock deal. As per the structure of the deal, PVR will pay a cash component of Rs 20.02 crore and allot 2.55 million shares to DT Cinemas.

Simultaneously, PVR has also raised Rs 42.19 crore through a preferential share allotment of over 2.55 million shares to Major Cineplex Group Plc. of Thailand. The deal involves an overall stake dilution of 18.18% by PVR, with both Major Cineplex and DT Cinemas getting 9.09% stake each

PVR already has a joint venture called PVR bluO Entertainment Ltd with Major Cineplex for setting up bowling alleys, karaoke centres and ice-skating rinks.
Here is my analysis
1. Low risk capacity addition (they know the kind of revenue generation run rate DT has)
2. Gives them virtual monoply in certain regions (Gurgaon for example)
3. Gets closer in size to Adlabs - Gives them greater bargaining power over producers
4. DLF and PVR have also entered into an agreement by which the latter will gain exclusive and unlimited access to the multiplex space in all future mall developments of the DLF group
5. Ties Major Cineplex's interests to growth of PVR and thus increasing coordination for their JV
1. Gets a strong anchor partner for new shopping mall and recreation properties
2. Reduces cash requirement for non core businesses
Currently, DT Cinemas operates 26 screens with three more screens expected to start in the next six months. This will add to PVR's existing 108 screens and further strengthen its position in the National Capital Region (NCR).

DLF and PVR have also entered into an agreement by which the latter will gain exclusive and unlimited access to the multiplex space in all future mall developments of the DLF group. The deal further re-affirms company's strategy to rapidly grow in the film exhibition space and to be a dominant player in all key markets, it said, in its filing to BSE.

The preferential issue has been made at Rs 165 per share. The shares of PVR Ltd closed at Rs 139.8 today, up by more than 1%. Taking today's closing price, DT Cinemas stands to get another Rs 35.74 crore over its the cash component of Rs 20.02 crore.

DLF, which is looking cut its debt of around Rs 12,000-13,000 crore, has been shedding its non-core assets and plans to raise Rs 4,500 crore through this process.

Random Walk & Mean Reversion

The question of market efficiency has puzzled many experts. There is a group that stands by their belief that market is efficient and takes in to account all information available up to that point of time. Others vehemently oppose this and say that the market is a Random Walk and has a mind of its own.  Yet others believe in the theory of mean reversion and quote Horace (including Buffett)

I believe that market is efficient, but only on average and its displays mean reversion but ends up swinging to the other extreme and for large periods its just appears to be on a random walk in some territory. 

There are others still, who find patterns in this random dance and call it momentum, support, resistance, breakout etc. No expert has a unifying theory of the markets.

Will the real Einstein (of the markets) please stand up!

Wednesday, November 11, 2009

Sh*t his dad says!

This guy has apparently landed a TV deal for his twitter account.

Sample this:

"Son, people will always try and fuck you. Don't waste your life planning for a fucking, just be alert when your pants are down."

Tuesday, November 10, 2009

Captive M&A

Captive M&A is the current hotspot for deal making activity in India. Some of the recent deals include the following

Cognizant - UBS India - $ 75 Mn
Mphasis - AIG Systems Solutions - NA
Wipro - Citi Technology Services - $ 127 Mn
TCS - Citigroup Global Services - $ 505 Mn
WNS - Aviva Global Services - $ 228 Mn
EXL - American Express Business Travel - $ 30 Mn

EXL American Express Deal Analysis

Nasdaq listed EXL has signed a deal with American Express to acquire the global travel service center operations located in Gurgaon, India, from American Express Business Travel (AEBT) for approximately $30 million. The deal follows the trend of sell off of technology captives by large multinationals. For a seasoned outsourcer like American Express, you would think that this would have happened sooner than now.

Despite being a big outsourcer Amex has always had a strong internal IT department. This department is responsible for outsourcing and vendors get little direct access to business (except IBM)

Now, for EXL, this is certainly a step up, both in terms of deal size and that it gives them a marquee customer in the travel industry as well as ready access to new capabilities that they can put to use in other deals.

However, I am surprised by the fact that we did not hear of IBM vying for this. IBM is a deeply entrenched player in Amex’s technology operations (Credit Cards and Travel). It even provides office supplies, or at least used to a few years ago, to Amex. This effectively shuts out IBM from at least this part of the business for the next 8 years. I would not be surprised if IBM attempts to buy EXL at some point in the near future.

From my time at Amex, I remember that once one of the VPs there had given a contract to a small vendor instead of IBM, to diversify risk and also perhaps to make a point that IBM needs to improve its service. However, by next quarter IBM came back in and took over this small company.

Monday, November 09, 2009

Abu Azmi hit by MNS leader for taking oath in Hindi

WTF... Now I am not commenting on Azmi, but he too, like the FUBAR MNS MLA who hit him, is a democratically elected member and many of those who voted for him knew that he does not speak Marathi and he represents them. The rules allow him to take the oath in Hindi so why the fuss

If proficiency in speaking Marathi language is the only criteria for judging, then lets hold a language exam to elect the assembly. Why the fracas and expense of elections?

Someone needs to put a leash on these MNS guys and stop this nonsense...

Check the out the Video Coverage here: Abu Azmi hit by MNS leader for taking the assembly oath in Hindi

Sunday, November 08, 2009

Deja Moo, Ear Job, Blamestorming and the The Office Life

Could not resist posting these!

  • Al Desco - Describes any meal eaten at your desk (you have our sympathies if it's dinner).
  • ALAP - As Late As Possible
  • Blamestorming - Meeting to discuss a failure and find a scapegoat
  • Deja moo - The nagging feeling that you've heard this B.S. before
  • Enail - An email sent for the sole purpose of making a point in writing, usually at another person's expense. Most effective when cc'ed to as many senior people as possible
  • Ear candy: Flattery
  • Ear job: The act of passing on some juicy company gossip verbally, and in private. "I'm just running into a meeting, but I'll give you an ear job later."
  • Facipulate - An unfortunate mix of 'facilitate' and 'manipulate', this contrived verb refers to influencing the course of a discussion by indirectly promoting particular lines of thought
  • FUBAR- F***ed Up Beyond All Repair
  • Head shunting - The secret hiring of a head hunter to persuade an ineffectual employee to take a position at another firm. Nicely eliminates the mess of having to fire someone

My favorite is Deja Moo. Perfectly describes what you feel while listening to the "experts" on business channels predicting whether the market is going to go up or down

These are a few samples from the new / interesting jargon at the office life

Tata Nano

It has been two years since it was unveiled and four months since it was launched, I have yet to see a Tata Nano being driven on road in the national capital region. All the talk about the "Peoples' Car" flooding, overwhelming and choking the traffic system seem to have to have come from some over imaginative, fear mongering journalist. It may still happen, but not any time soon.

The Tata Nano has been in production since July, and during that time, Tata Motors has reportedly sold over 7,500 copies of its 100 K car. The Indian automaker has plenty of potential customers for its inexpensive little econo-gem, but production capacity is another matter altogether. Tata is producing the Nano with existing plant floor capacity until its new, reported (as per 250,000-unit/year factory comes online at the end of March 2010.

Tata is also considering licensing the Nano to other automakers, with or without Tata branding. Tata Vice Chairman Ravi Kant reportedly mentioned at an awards function that the company would allow micro-assembly sites to build their own Nano within India, adding, "We call it Nano, they don't have to."

With recent reports of the cars catching spontaneous fire and murmurs or poor build quality, I still have doubts on whether the Nano will be as big a hit as earlier imagined even if capacity constraints are removed.

Monday, November 02, 2009

Double Dip, Echo Bubble, Green Shoots, LUV

I do not know if I am a better investor after this recession, but have certainly learnt some new, fascinating term. The neo-recession dictionary includes the following

Double Dip Recession:
When gross domestic product (GDP) growth slides back to negative after a quarter or two of positive growth. A double-dip recession refers to a recession followed by a short-lived recovery, followed by another recession. (Investopedia)

Echo Bubble:
A post-bubble rally that becomes another, smaller bubble. (Investopedia)
People point to the rally that occurred after the market crash of 1929 as an example of an echo bubble. Just like its more-prominent predecessor, the smaller echo bubble eventually burst. Also, after the technology bubble that occurred at the turn of the 21st century--one of the biggest bubbles of all time--people believed that another echo bubble was on the way.

Green Shoots:
Green shoots is a term used colloquially to indicate signs of economic recovery during an economic downturn.

It was first used in this sense by Norman Lamont, the then Chancellor of the Exchequer of the United Kingdom, during the 1991 Recession.The phrase was used again by Baroness Vadera, former Business Minister of the UK in January, 2009 to refer to signs of economic recovery during the late-2000s recession, again to criticism from the media and opposition politicians. The U.S. media started to use the phrase to describe domestic economic conditions in February 2009 when the New York Times quoted Bruce Kasman, chief economist at JPMorgan Chase as saying, "It's too early to get excited, but I think there are a couple of green shoots that say we're not going down as heavily in the first quarter [of 2009] as we were in the fourth quarter [of 2008]." The Federal Reserve Chairman, Ben Bernanke, made the first public use of the phrase by a Fed official in a March 15, 2009 interview with CBS 60 Minutes (Wikipedia)

Luv hurts... Sir Martin Sorrell has warned of a 'LUV-shaped recession'.
The boss of ad giant WPP, which includes JWT and Ogilvy and Mather, as well as Finsbury PR and TNS market research, is saying the recession is L-shaped in the UK and Western Europe, U-shaped in the US, and V-shaped in Asia and the BRIC countries.

Sunday, November 01, 2009

HSBC Credit Cards

HSBC has fallen to new lows in terms of customer service and ethics. In the last three months my brother and I have separately cancelled our HSBC Platinum Credit Cards. We were good loyal customers with excellent payment record. But HSBC would simply not honor any commitment, fraudulently kept charging membership fees and other charges after promising that the there would be none, again and again. The experience was horrible.

It is a myth that foriegn banks in India offer better customer service and HSBC has been the worst. Its is time these banks were taken to task by RBI and other authorities

Friday, October 23, 2009

Twitter - Tharoor

The Tharoor-Twitter bug seems to have firmly bitten India. I don't mean it in a negative way. The (debatable) negative publicity for Tharoor has done huge service to popularize twitter in India amongst geeks/non-geeks. Corporate honchos, Bollywood celebrities (including fake ones) along with everyone else (OK..I don't mean every one of the one billion Indians, I just meant everyone...including the 'Cattle Class' including yours truly), now seems to have a twitter account or is at least making an effort to know what this is all about.

Things haven't turned out too badly for Tharoor himself. I mean how many people knew him or cared about the fact that he once came close to getting the top UN job before Twitter happened. Seems like the urban youth in India feel deeply connected to Tharoor, like no one else. His twitter account currently has over 350 thousand followers (and counting). That's HUGE!!

Admitted that, Ashton Kutcher (the famousque Hollywood celeb) has over 3 Million followers (He beat CNN- the news network in a fiercely fought race to be the first with One Million followers on Twitter), remember this is India we are talking about, and even though we have the largest number of young people only a small fraction use the Internet.

They say imitation is the best form of flattery. Tharoor even had an impersonator at . That and the fact that the impersonator's account has been suspended by Twitter (within hours of someone noticing it and compaining about it) speaks volumes about his online influence. Way to go ST.

Wednesday, October 21, 2009

Mobile Blogging

Whoa! this is my first blog post from my E71 handset. Not every thing works, but its not too shabby! Meanwhile, KS decided to come out and issue a clarification on the issue of cutoffs for IIT-JEE saying revising it was the sole perogative of the IITs themselves. Kudos to the minister for not dragging his feet orver this.

Monday, October 19, 2009

Cutoffs for IIT-JEE to be raised?

IIT JEE cutoffs could be raised. Minister for HRD, Kapil Sibal announced yesterday that, he would like to see 80 -85% marks in Class 12 board exams as minimum cutoffs for eligibility to appear in IIT-JEE. The reason given for this is to stem the huge (and ever increasing) importance of tuition centers, that have become a necessary evil in the process of gaining admission to the prestigious engineering institutions. While this is desirable, I am not sure if the suggested move would have the intended impact. On the flip side, it is very likely that the following effect would be dominant.

This would lead to increase in stress levels that students have to bear as there would be two hurdles that they have to cross, instead of one. This is certainly not desirable. The minister's earlier decisions on making class 10 exams optional and moving to a grading system, aimed at reducing the stress that students have to face.

There are other problems. If the cutoffs are imposed, the system would have to find a way to normalize cut off scores across multiple boards. (though the Minister in the past has indicated a need to move to a single board). Then, there are other questions like ensuring uniform standard of marking scores, especially in subjective questions, what would be the cutoffs for the reserved categories etc adding to the complexity. We need to simplify not overly complicate the system.

Overall, however, the direction is good. The positive intent for reforms is visible. This is a huge positive for the education sector in India. This does not mean that India is ready for 'For-profit' education yet, which seems to be the only way to transform education in the country. But, we hope that steady pace of reforms would continue. This would ensure the human capital is available to fuel India's continuous growth and prosperity.

Thursday, October 15, 2009

IPL spoiling team India?

There is a debate happening on whether the Indian Premier Leargue (IPL) money is ruining the Indian cricket team. The thought is absurd. The fact that the Indian team did not do well in the Champions Trophy does not mean that IPL is ruining team India or for that matter to even reach a conclusion that the Indian team is ruined.

After all, the Indian team was only recently (albeit for a brief period) ranked the the number one team in the world. I do not remember a time when Indian team was ranked at number one (Pre IPL) so one could argue that the actual case should be made in reverse. Although coincidence dows not imply correlation.

What do you think?

Friday, October 09, 2009

The trouble with regulating bonuses

President Obama called Wall Street’s outsize pay packages “shameful,” especially for companies in need of federal bailouts. Such pay, he said, is “exactly the kind of disregard for the costs and consequences of their actions that brought about this crisis — a culture of narrow self-interest and short-term gain at the expense of everything else.”

We have seen harsh calls around the world, even in countries such as India.

Rather than restricting pay and bonuses which is against the spirit of free markets and creates distortions, it is much more desirable to tie bonuses to long term performance. But it has side effects too.

The ‘Collosseum’ really for this debate has been the Wall Street, where the ‘Gladiators’ aka Investment banks have been slugging it out. Now, for ages these I Banks have reared these big bullies, the smartest people from B Schools, who demand to get paid a cut of the money earned by them. But this instant ‘Nirvana’ also led to the problem of Agency Costs, given the fact that there is huge churn, to and fro in these banks. You could make investment decisions based on the money earned in the same year, get paid a cut of the profits and not worry if the same investment led to an even bigger loss the following year, as you had already encashed and left the organization for greener pastures or even if you stayed put there is no negative bonus. Having deferred bonuses obviously would help to solve this problem.

However, I guess the non desirable side effect is visible too. For example how would you make sure that you get paid in case you are asked to leave next year or even if you decide to jump ship to another job? Would the unpaid bonus unfairly hold you back?

There are solutions like keeping the deferred bonus amount in escrow, but they increase administrative costs and complexity. I don't think anyone really understands what the fallout of such a plan would be. Another CDO, CMO in the making perhaps

We should perhaps have rating agencies to rate such plans :)

Saturday, October 03, 2009

Bharti MTN Deal Analysis

The Bharti MTN deal has fallen through. While there was a lot of analysis and news reporting (often breaking) on why the deal broke down, there has been a clear lack of analysis in the media on the merits of the deal, other than the fact that this would have be India's largest M&A transaction.

Intuitively, it seems strange that you would want to acquire the largest player in the territory. Clearly, Bharti did not have the appetite to do an all cash deal. Now the largest player can only grow so much on the already large scale that it has, so how would Bharti have added value. It would, in my opinion have been much better to acquire a smaller player with licences to operate in large number of regions and build on top of it. That the market rewarded the Bharti stock with a nice gap up opening on stock closure seems to suggest that this perception was right. I guess no one would know now as to what would have been the outcome if the deal had gone through.

One fear I have is that Bharti can see growth slowing down in India (due to high base, increased competition) and therefore it wanted to use its high valued currency (read stock) to purchase assets that were relatively trading at fair (if not cheap) value. This is the only reason I can think of as to why Bharti would want to acquire / merge with MTN. There don't seem to be any cost synergies (Its not as if you could share infrastructure, towers!! across continents)

It would'nt have given Bharti greater bargaining power with vendors. You know it is not a small player anyways. Perhaps in the future, media (at least business media) can actually do some financial analysis and ask relevant questions rather than just giving in to the hype.

Wednesday, September 30, 2009

Equity Research

Recently, I came across a report on the Education sector in India, by a leading brokerage house. This was by far the best report in terms of data collection effort and presentation style that I have seen in recent months. Just under the skin of this report, it is clearly a very successful effort to create interest in the Education Sector in India and especially in the largest education company in India, by market cap. The conclusions derived in this report have this goal in mind.

Sample this. It says Educomp’s business is mapped to the most attractive segments in Education. (Educomp, for those who do not know already is opening its own ‘for profit schools’. Schools as we know have to be necessarily not for profit bodies. However they have devised a clever structure to pull all profits out of schools.

The report puts the K-12 market segment size at $20 Billion. It is easy to get blinded by this, unless you look deeper in the report. According to the report, the private schools market is as follows
1. Unaided Premium = 15000 schools , monthly fee average Rs1250 = 6.7 Billion dollars pa
2. Unaided standard = 29400 schools, monthly fee Rs 750 = 7.9 Billion dollars pa
3. Aided = 30660 schools, monthly fee average Rs 450 pa = 4.9 billion dollars pa
Total of $ 20 billion. Therefore the K-12 schools initiative by Educomp is mapped to the most attractive segment. Really ??

Now consider the following: Assume that I sell liquor. Total sales in the country of liquor are Rs 100 Cr So, I can say my market is 100 Cr. Really ? What if, I all I manufactured was a foreign brand liquor at Rs 3000 per bottle. Would my target market still be Rs 100. It is more like 1% of the above

Now Educomp charges, Rs 3000 – Rs 4000 as tuition fee for these schools. Clearly it is a subset of 1 as above. And, 200% away from average. Even with best case distribution, it is not likely to be more than 10% of these ‘Premuim’ schools (In normal distribution, if std error equals half mean and fee 2.5x mean this would be less than 1%). So even if there are 10% schools with fee > 3000, it implies that they are playing in the market of $2 Billion.

At one percent, it would be $200 million market

Anyways, $2 billion vs. $20 billion is nearly not as attractive, is it?

  • Consider the following
  • Building a school is capital intensive. More so for Premium Schools.
  • For ‘For Profit schools’, land is not exactly going to come cheap in the form of subsidized land from the government.
  • On top of this, there is also a regulatory risk. Nowhere, in the world is School education allowed to be run by ‘for profit’ enterprises.
  • Educomp’s schools are in India. Given Indian sensitivity to education and the jumpy unpredictable regulation track record in India, what if, one fine day an overzealous regulator wakes up and dictates that this is all illegal. They would not be able to close down the school and liquidate their investment.
  • The one billion dollars includes the Scindia and Doon schools of the world which have decades of heritage and brand name going for them.

The report either ignores or brushes these issues aside. I don’t blame the writers. The brokerage (as all brokerages) does not get paid for research. The research department is only designed to get investors to buy in, even if it means buying it at 20 times LTM revenue, and then to sell. Churn is what keeps them going. Soon enough, the very same brokers would be pointing these out and asking you to sell, if you haven’t already. You may have made your profit or suffered 50% loss. But the brokerage house would have made their money both ways for executing your trades.

Tuesday, September 22, 2009

Delhiites should change behaviour before Commonwealth Games

So says the home minister. Of course we need to be more caring, follow the rules, cross roads only at the zebra crossing, not jump red lights, use the over bridge to cross the road, no jay walking.

Wait a minute, what over bridges should we use, where there are none, what bus shelter should commuters wait patiently when there are none, what non-working red lights should we not jump.

How is it that when the same delhiites travel abroad they respect all the rules. Is it the air that makes them obey the rules. No!. Its not even fear of the law that makes them, we do so because the infrastructure exists.

Infrastructure affects people's behavior. Take for example honking. delhiites honk. In fact some might even say we love to honk and despise us for the same. But it is the cramped infrastructure that made us develop this habit. I've lived in both phoenix and in new york. Can you guess where people are like us delhiites.

In phoenix, you hardly hear anyone honk. in fact it is considered rude to honk. Whereas in NY, honking is a way of life because of constant traffic

So dear home minister, please improve the infrastructer and we (collectively) shall improve our behavior

Thursday, May 14, 2009

National Skills Registry

Nasscom's skills and resume verification initiative is back as 'National Skill Registry'. Albeit in a diluted avatar (yet, they are only verifying factual information), it claims that it would raise the brand equity of Indian IT (How it would achieve that is unknown). What Nasscom has done for the IT industry over the years is laudable, but this step just smells of some thing else

It says this initiative would save cost of repeated background checks (by getting employees to pay and that too all of them and make it mandatory), given it will stop people from faking their experience (what is the percentage of people who do??). But it also gives them a lot of leverage over IT employees and over IT companies (even though them may not realize it now)

And for this alone, I do not like it. As Spidey says "With great power, comes great responsibility" i hope the powers that be at nasscom use theirs responsibly. Some guy from Cognizant call it the NSR as the virtual social security number for organizations.

Anyways my company too has made it mandatory for all employees to register and charging Rs 331 from everyone. Arrrfgggg.

Saturday, May 09, 2009

Bangalore or Buffalo

While the industry debates whether or not Obama’s new proposal on tax is going to hurt IT outsourcing to India it is missing the forest for the trees. For the first time in recent history we have the President of United States talking openly about populist measures and proposing steps for greater protectionism. Given that US has virtually nationalized its greatest bastions of capitalism and free markets(read financial institutions), this development indicates a dangerous trend not just of the IT outsourcing industry in India but also outsourced manufacturing in China and from other developed countries.

Given that the unemployment rate is at record levels and rising, this (current proposal) could perhaps merely be more visible steps or simply rhetoric to boost the government’s popularity, what we need to watch out for is follow on actions.

Tuesday, April 21, 2009

Padma Awards: Dhoni and Harbhajan Saga

Perhaps you may not agree with me, but the current anger by the Sports Minister on Dhoni and Harbhajan was uncalled for. The President may be the presiding deity for government officials, but is still a public servant. And therfore, that the two were unable to show up should not be held against them and is their perogative. Perhaps players's lack of respect for the awards is a reflection on what a sham and tamasha these awards have become over the ages.
The ministers who have made no real contribution to sports, or for that matter to any other thing, get to show their importance through angry (uncalled for) outbursts. They deserve to be snubbed. As for our sportsmen (and sportswomen) the award is only a recognition for their achievement and not the achievement themselves. Not being present on the award ceremony does not make their contribution less great.

Monday, April 13, 2009

Satyam acquired by TechM: Analysis

TechM emerged today as the highest bidder for Satyam. While this is puts TechM in a new league, the question that must be asked is the following
  • Did TechM have an information advantage as there was one common member on the boards of both the companies? Now don't take me wrong, the information passed does not necessariy have to be explicit. Just the fact that the board member, who has a fudiciary responsibility to protect the interest of shareholders not stopped techM from bidding where it did means they had an advantage.
  • Had it not been the case, would it not have made more sense for L&T to have bid higher since it already has a 12% stake in the company?
If this is the case then TechM got satyam for a bargain and perhaps this explains the jump in price in TechM's shares.
IBM which was rumored to be bidding for Satyam was clearly never going to be in the race. It had the least to gain. Why should an IT player such as IBM take only a financial risk of class action suites. It already has access to customers and to offshoring (remember it already has 50K+ employees in India). Same for Cognizant (it therefore withrew at the 11th hour). Wilbur Ross (a financial player) was only going to to be interested in partnership with a strategic player and at cheaper valuations. In normal times it could have leveraged and may have been able to offer higher valuations. Then again, these are not normal times.

Thursday, April 09, 2009

Freidman vs Keynes

Milton Friedman, notes that, "There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income."

A certain Keynes may argue that the government is “.. Of the people, By the people and For the people”, spending people’s money or at least is supposed to be under a democratic system. Perhaps, it was this belief that led him to propose government intervention to prop up the economy.

So whether you believe in the ‘invisible hand’ of the market as proposed by Classicists or chose to follow the Keynesians, could ultimately depend on your view of the government’s sincerity

My 2 cents

  1. Both the World Views (Weltanschauung) are flawed. They are joined at the hip by economics, which is based on the assumption of rational behavior of humans
  2. I for one don’t want to take it too seriously for the following reasons
  • I am not sure if humans are capable of being always rational
  • Even if they are, how do you define rationality (Economics only measures rationality on one dimension aka money. Humans can be rational on many dimensions while appearing completely irrational on money)

While, both approaches can work wonderfully at various times (as seen in the past), the tremendous belief in their own worth (hubris) is their tragic flaw (hamartia) and ultimately causes reversal of fortunes (peripetia)

Perhaps, a mix of both approaches such as seen in India. Free (relatively) markets tempered with government oversight and occasional intervention may be the way forward

Saturday, January 17, 2009

Technical Analysis

Recommend going long on NIFTY with a tight stop loss at 2750

Tuesday, January 13, 2009

A Grade Directors, B Grade Boards - Satyam Fiasco

Government has appointed 3 big names as independent directors to the new board of Satyam and promises to expand the board further. While the credentials of the three cannot be questioned, it is to be seen how they perform as a team. 

The previous board too had big names. People who are gurus in their own right. The likes of Palepu, M R Rao, Vinod Dham were truly 'A' Grade Directors. Raju for that matter did create India's fourth largest IT services company. However, as a team, it did turn out to be a 'B' Grade Board. Palepu infact was an expert on corporate governance. One of his course presentations begins with the title 'A Grade Directors, B Grade Boards'. Apparently its easier to preach then to perform. 

Anyways, what are the incentives for these new board members to perform? What about their existing organizations where there are already directors and conflict of interests? Only time would tell on how they perform. 

Friday, January 09, 2009

(A)Satyam Fiasco

The turn of events at Satyam has gone progressively from bad to worse over the last few weeks culminating in the confession letter from the Chairman, B Ramalingam Raju. The independent directors have already fallen like nine pins with half the board having resigned even before the 'suicide' note sent by Raju.

However, what baffles most is the claims made in the letter itself. Even more than the fact that he did defraud the investors, what was baffling is that how system (investor scrutiny, a reputed independent auditor and scores of professionals in the company, all sworn to ethics by their affiliation to the association to the body of chartered accounts.

Add to that the disbelief that the company itself was poorly managed and the claim that the company made just 3 percent operating margin on revenues of over 2000 crores (Rs 20 Billion) in Q2 of FY09 while even smaller companies made margins between 12-15 percent. The larger ones infact make close to 30 percent margins.

So the fear is that Satyam actually made money (and cash) all these years and this has been siphoned off over the last few months or systematically over the years into either the the infra companies (Maytas infra and Maytas Properties)

The aborted Maytas deal was the first botched step to cover the tracks. The letter seems like a last ditch attempt to save the rest of the family (read the Raju sons) from ruin and from the law catching up with them and possibly other friends (read accomplices) at Satyam.

He, infact may be counting on the laxity in law enforcement in the country. The cases go on for years while he roams free on bail.

That he has damanged his reputation is a sad fact that would have happened anyways. Its unfortunate that he resorted to this. After all he is the man behind creating India's fourth largest IT services company.

The equity analysts have withdrawn their coverage on Satyam as they the accounts that they rely on now have no credibility

Banks have stopped relying on certificates issued by PWC. Even for other organizations. If the circle of Trust, the very basis of the finance has been broken we could all face anarchy.
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