Issuing in stages

I apologise for this morning’s post on IPOs. It was one of those posts I’d thought up in my head a long time ago, and got down to writing only today, because of which I wasn’t able to get the flow in writing.

So after I’d written that, I started thinking – so if IPO managers turn out to be devious/incompetent, like LinkedIn’s bankers have, how can a company really trust them to raise the amount of money they want? What is the guarantee that the banker will price the company at the appropriate price?

One way of doing that is to get the views of a larger section of people before the IPO price is set. How would you achieve that? By having a little IPO. Let me explain.

You want to raise money for expansion, or whatever, but you don’t need all the money now. However, you are also concerned about dilution of your stake, so would like to price the IPO appropriately. So why don’t you take advantage of the fact that you don’t need all the money now, and do it in stages?

You do a small IPO up front, with the sole purpose of getting listed on the country’s big exchanges. After that the discovery of the value of your company will fall into the hands of a larger set of people – all the stock market participants. And now that the market’s willingness to pay is established, you can do a follow on offer in due course of time, and raise the money you want.

However, I don’t know any company that has followed this route, so I don’t know if there’s any flaw with this plan. I know that if you do a small IPO you can’t get the big bankers to carry you, but knowing that some big bankers don’t really take care of you (for whatever reason) it’s not unreasonable to ditch them and go with smaller guys.

What do you think of this plan?

IPOs Revisited

I’ve commented earlier on this blog about investment bankers shafting companies that want to raise money from the market, by pricing the IPO too low. While a large share price appreciation on the day of listing might be “successful” from the point of view of the IPO investors, it’s anything but that from the point of view of the issuing companies.

The IPO pricing issue is in the news again now, with LinkedIn listing at close to 100% appreciation of its IPO price. The IPO was sold to investors at $45 a share, and within minutes of listing it was trading at close to $90. I haven’t really followed the trajectory of the stock after that, but assume it’s still closer to $90 than to $45.

Unlike in the Makemytrip case (maybe that got ignored since it’s an Indian company and not many commentators know about it), the LinkedIn IPO has got a lot of footage among both the mainstream media and the blogosphere. There have been views on both sides – that the i-banks shafted LinkedIn, and that this appreciation is only part of the price discovery mechanism, so it’s fair.

One of my favourite financial commentators Felix Salmon has written a rather large piece on this, in which he quotes some of the other prominent commentators also. After giving a summary of all the views, Salmon says that LinkedIn investors haven’t really lost out too much due to the way the IPO has been priced (I’ve reproduced a quote here but I’d encourage you to go read Salmon’s article in full):

But the fact is that if I own 1% of LinkedIn, and I just saw the company getting valued on the stock market at a valuation of $9 billion or so, then I’m just ecstatic that my stake is worth $90 million, and that I haven’t sold any shares below that level. The main interest that I have in an IPO like this is as a price-discovery mechanism, rather than as a cash-raising mechanism. As TED says, LinkedIn has no particular need for any cash at all, let alone $300 million; if it had an extra $200 million in the bank, earning some fraction of 1% per annum, that wouldn’t increase the value of my stake by any measurable amount, because it wouldn’t affect the share price at all.

Now, let us look at this in another way. Currently Salmon seems to be looking at it from the point of view of the client going up to the bank and saying “I want to sell 100,000 shares in my company. Sell it at the best price you can”. Intuitively, this is not how things are supposed to work. At least, if the client is sensible, he would rather go the bank and say “I want to raise 5 million dollars. Raise it by diluting my current shareholders by as little as possible”.

Now you can see why the existing shareholders can be shafted. Suppose I owned one share of LinkedIn, out of a total 100 shares outstanding. Suppose I wanted to raise 9000 rupees. The banker valued the current value at $4500, and thus priced the IPO at $45 a share, thus making me end up with 1/300 of the company.

However, in hindsight, we know that the broad market values the company at $90 a share, implying that before the IPO the company was worth $9000. If the banker had realized this, he would have sold only 100 fresh shares of the company, rather than 200. The balance sheet would have looked exactly the same as it does now, with the difference that I would have owned 1/200 of the company then, rather than 1/300 now!

1/200 and 1/300 seem like small numbers without much difference, but if you understand that the total value of LinkedIn is $9 billion (approx) and if you think about pre-IPO shareholders who held much larger stakes, you know who has been shafted.

I’m not passing a comment here on whether the bankers were devious or incompetent, but I guess in terms of clients wanting to give them future business, both are enough grounds for disqualification.

Dropping out

Less than a semester into my undergrad (Bachelor of Technology in Computer Science and Engineering at IIT Madras) I wanted to drop out, and start work. I didn’t want to be an “engineer”.

I didn’t know why I’d to spend all my Thursday and Friday afternoons filing away at some piece of iron in the “fitting workshop”. I didn’t have the patience to draw three views of a random object in “engineering drawing”.

And I had the reputation of being one of the studdest programmers in my school. Apart from winning competitions here and there and doing well in acads, I had enormous respect from peers for my programming skills. Given that it was a “high-performance school” (which subjected its own 10th standard students to a test before admitting them to 11th) I guess this peer respect does carry some weight.

So, being good at math, and having the reputation of being a stud programmer, I didn’t know what I was doing studying “engineering”. I wanted to be a programmer, and I wanted to drop out and take up a job. My JEE rank counted almost as much as an IIT degree, I thought. I didn’t have the balls, and I continued.

In hindsight, I’m happy I didn’t drop out. By the end of my second year, I knew for sure that I DIDN’T want to be a programmer. While the theoretical aspects of Computer Science excited me (algo analysis and stuff), I had absolutely no patience for “systems”, or “computer engineering”. I was perhaps alone in my class in my love for Microsoft products (easy to use).

I realized then that I liked only the algorithmic aspect of programming, where one solves a (mostly math) problem and codes it up in a simple program. Huge complicated systems-intensive programming, making GUIs etc. didn’t inspire me at all.

Looking back, all that “major” (i.e. Computer Science and Engineering) stuff that I’ve learnt and internalized was learnt in my first two years of engineering. Of course several concepts that are part of CS&E are taught in the last two years, but I ended up not liking any of that.

Looking back, I do find it positive that I did all those “general engineering” courses. I do find it really positive that we had to do 12 compulsory credits in Humanities and Social Sciences, for that allowed me to discover what I was really interested in, and indirectly led me to doing my MBA.

I have only one regret. That I wasn’t able to switch streams sooner than I could. That IIT, being a one-dimensional technology oriented university, didn’t allow me to transfer credits to a course that I would’ve liked better, simply because it offered undergrad courses only in engineering.

There was a humanities department, where I discovered what I was interested in, but unfortunately it was a “minor” department. It’s been partly rectified now, with the setting up of integrated MA courses, in Economics, etc. (if that course existed back when I was studying, there’s a good chance I’d’ve transferred to it from CS&E). But it’s not enough.

Kids at 17 have no clue what they want to do. What we need are flexible full-scale universities, which allow you to switch from any branch to any other branch after two years of reasonably generalized study (the earlier branch can then contribute to “minor” credits). We need to stop putting our colleges in silos such as “engineering”, “arts and science”, etc. Only then would our universities be truly world class, even from an undergraduate point of view.

And looking back, I’m really happy I didn’t drop out.

The Basavanagudi Food Arrangement

  • Vidyarthi Bhavan has its weekly holiday on Friday
  • Mahalakshmi Tiffin Room doesn’t open for business on  Saturday
  • Brahmins Coffee Bar is closed on Sunday
  • Upahara Darshini used to be closed on Mondays, though in the last few years they’ve been open 7 days a week
  • Dwaraka and the Gandhibazaar branch of Adigas are closed on Tuesdays (not sure of Adigas anymore, Dwaraka still closed on Tuesdays)

A wonderful arrangement by the different restaurants in Basavanagudi to ensure that they all get their weekly off, and yet not deny food to the residents of the area!

Written after a leisurely and sumptuous breakfast at Mahalakshmi. Idli-vade-khalidose-coffee.

PS: “Plain dose” and “khali dose” mean different things in Bangalore, though they literally mean the same thing. Khali dose is soft and fluffy. Plain dose is dark brown and crisp, basically masale dose without the masale.

Red wine and mirchi

is such an awesome combo. As we just discovered, here in Monastiraki square in Athens. It was this restaurant called Savas. Specializing in one “Sauvlaki”.

So over the last week or so of vacation, the girlfriend has been complaining of not eating spicy enough food. So as we settle down today, and get our can of wine (yeah, you get half a litre of wine in an aluminium can here. Awesome it is), I see this “spicy hot peppers” on the menu.

And given that the girlfriend has been deprived of spicy food, and I like peppers it doesn’t take long for me to order it. And boy was it hot.

I gave up after a couple of bites of the pepper. No amounts of pita bread and Tzatziki (the Greek version of raita – with cucumber and garlic blended into curd) could cure the hotness on my tongue. With there being no water on the table, I went straight for the wine.

I’ve always suspected it when the girlfriend has claimed to have Gult roots. Of course, I’ve seen a lot of Gult being spoken in her family, and had half my pre-wedding dance party inundated with Gult songs, but still find it hard to accept she’s Gult. And did she prove it! She ate four whole peppers, as I struggled to finish half..

A couple of minutes back, we staggered back to the hotel. Absolutely drunk. We’d had 250 ml of red wine each, “house wine” according to the restaurant. And mirchi. Whatta combo. Surprised the “shady bars” of Bangalore haven’t exploited it yet. Maybe no one drinks wine there.

Sai Baba and his tricks

Back when I was a kid, an annual “excursion” was to the Sai Baba’s ashram in Whitefield, near Bangalore (ok, back then it was “near Bangalore”. Now people claim it’s part of Bangalore). This would usually be in summer, when the Baba would descend on his “summer home” in whitefield. There would be lots of people there, with a large proportion of them being Caucasian. To other “devotees” of the baba (as they like to call themselves), the presence of fair-skinned people among the followers was proof enough that the Baba was not “fake”.

We had to queue up, get frisked, and sit down cross-legged for a while, before the Baba decided to bless us by appearing in front of us. He would wave, produce caramilk chocolates (I think from his sleeve, while my aunt claimed it was from thin air) and throw them to the crowd, which would go into a frenzy trying to catch this “Prasad”. My eldest aunt was especially adept at catching these chocolates and giving them to us kids. I remember my father never came in. He spent the time peoplewatching outside the ashram. He said he enjoyed that better.

One of my greatest fantasies when I was a kid was to expose the Baba. Somehow plan with a bunch of friends, and catch him in the act trying to pull caramilk toffees out of his sleeve. And then shoot the video and escape, well at a faster rate. I remember putting myself to sleep on several days thinking about a plan like this. Unfortunately I never really got to implement that. Thinking back, I don’t think I’d ever planned in any of these daydreams about how I’d get past all the security and the hangers-on to reach the Baba and expose him.

It seems I was not alone in these dreams. Several others thought of this too, and did more than what I wanted to do. Check out this video (HT: Amit Varma). It relies on publicly broadcast footage to show that the Baba is likely to be a fraud.

Of course his “devotees” would deny this. After all, they stand to lose any power and credibility they have in the “organization” if they were to come out. A few devotees who have dared to come out against the Baba (mostly on charges of paedophilia) have found themselves ostracized and hounded by the pro-Baba community. Once “in”, it’s never made sense for any of the “devotees” to turn against the Baba. Until now.

Following the Baba’s demise last week, commentators are predicting a succession war among people who are close to him. And therein lies the great hope. That one or more of the parties involved in his succession battle is going to spill the beans. So far it made eminent sense for all these worthies to defend the Baba at any cost, for they drew their (not inconsiderable) power by being in the good books of the Baba, and more power to the Baba meant more power to them. Now that the Baba is no more, the losers in the succession battle are likely to have anyway lost all their power. And now they have little to lose, and the adulation of the world-at-large to gain, if they were to expose the Baba. And if they were to admit that the Baba’s “miracles” were nothing but a bunch of simple magic tricks, they would also succeed in cutting to size the people who would win the Baba succession battle.

As Tony Greig would say, it’s all happening out there.

Correcting for astigmatism

I suffer from astigmatism. I see better at certain angles than at others, so if I’m not wearing spectacles that correct for it, the aspect ratios of everything I see is quite messed up.

It also results in massive parallax errors. When I was entering the wedding hall where I was going to get married the next morning, I was asked to cut a ribbon. And given that I was wearing contact lenses (which don’t correct for astigmatism) I ended up putting the scissors in a place where the tape didn’t exist, leading to much laughter among the attendees, and worries among the bride’s relatives that she was marrying a blind man.

It also leads to embarrassments on the cricket pitch, when you find that you can’t judge the ball properly in three dimensions, and you end up mistiming the shot, or dropping sitters. In this respect, I have great respect for men like Sourav Ganguly, Anil Kumble, Asanka Gurusinha and Sreesanth, all of whom play/played their cricket wearing contact lenses, which don’t correct for astigmatism.

I also think the measurement of astigmatism is quite unscientific. The doctor puts on a lens in various angles and makes you read the usual “DHLEN CTPALO.. ” chart. And asks you which angle makes you see it most clearly. When most angles look pretty much the same, you just end up making a random choice, which may not correct your actual astigmatism at all .

I wonder why they haven’t come up with a technique like making you compare lengths of lines in different directions, and inferring the angle of astigmatism based on what you say about these comparisons.

And if one such scientific method do exists, and it’s just my opthalmologist who’s not using it, I better change opthalmologists soon!

Inventory

You know inventory represents a huge cost when online retailers such as Flipkart which don’t have to invest in keeping inventory at storefronts in expensive malls and high streets offer massive discounts, of the tune of 30 to 40% at times.

You know that inventory represents a huge cost, and shop space is precious, when you go shopping in summer trying to find a nice sweater and find that no half-decent store is even selling sweaters!

Oh, and I think you can judge the standard of a clothing retailer by the quality of their trial rooms.

Indian attitudes to vacations

Us Indians aren’t a very vacation-y lot. We don’t like to go on long vacations, unless we are visiting friends or relatives, or going on pilgrimage.

When the wife told her colleagues that we’re going to Italy and Greece starting with the middle of this week, they all responded with “oh, second honeymoon so soon?”. Ok i don’t get this concept of a second honeymoon. Yeah, we thought we needed a break, and we wanted to experience a few places so we’re going. I don’t know why I need to classify it.

If I look back at my childhood, and vacations taken with parents, it broadly fits these patterns – we went somewhere either because we had relatives there, or because there was a temple there that my parents wanted to visit. If I remember right, each year, my parents carried forward most of their quota of vacations.

I think the reason for this vacation-aversion among us Indians is similar to the aversion we traditionally had to eating out. There were lots of intricate (and insane) caste taboos, which prevented people from eating where they wanted to.

You get a flavour of this when relatives start asking you what food you are carrying, given that you are going to “non-veg countries”. You get a flavour of this when most people go to Europe on package tours with “indian vegetarian jain meals included”. You get a flavour of this when they had to take massive barrrels of Gangajal on board the ships that took Indians to work as indentured labour in the West Indies.

There was a taboo on eating food whose source was not known, or known to have had the hand of a person belonging to a different caste. This massively limited mobility, and put limits on the potential places where a person could travel.

So you went to cities where they were relatives, for you could eat at their house. You went on pilgrimages in huge groups of your own caste, and you could cook. Even if you couldn’t the visit to the temple would wash away the sins incurred in eating random food.

So yes, we are going to Italy and Greece, for a week each. And no, we are not going as part of some Patelpackage. We are traveling on our own, without a plan, apart from hotel bookings. And no, we are not carrying any food along with us. And we aren’t going on pilgrimage.

And the kannada word “pravaasa” which translates to “travels” always cracks me up, since the first time I heard it was as part of the phrase “bekkina pravaasa” (the cat’s travels), a hilarious story in my Kannada text book in primary school.