Word on the street has it that Nasdaq is proposing a private market exchange to facilitate buying and selling of venture capital backed startups. Given that the markets have spun unimaginably in the last year and IPO’s have become terribly difficult this is supposed to provide exit options and returns to the risk takers who drive innovation and thus fuel growth in the economy. This is to me is game changing in the venture capital and investing world. This creates an asset class that becomes easily accessible to the retail and the institutional investor.
But is this really an alternate? What really is the difference between a public market like say S&P where I buy and sell stocks compared to a Private exchange where I can buy and sell venture backed companies stocks. One may argue that the difference may lie in the minimum amounts of capital required for trading, the financial disclosure requirements and thus in the risk of the investment by itself. However, isn’t there similar risk of company going bankrupt or stock markets being irrational due to systematic risk factors?
Also a perspective to think about is the pricing mechanism that will determine the initial value of the companies. We are familiar that startups try and create an illusion; example if they ask for $4m in financing and secure $2m, then it raises red flags for the investors. If however, they are successful in raising $2m when they have asked for $1m, then investors usually flock at their doors. In a private exchange this kind of illusion is going to be tough for them to create.
The competition for such a private exchange market is going to be the investment bankers and the OTC market. Will the interest that this possibly thinly traded market be relevant?
Friday, October 16, 2009
Thursday, August 6, 2009
What is it with Anti Trust law?
My friend Ashish got me spinning wheels on this one. Now we all know about Microsoft’s antitrust case about bundling internet explorer with windows and that being restrictive and anti competitive. So Ashish’s query which looked simple at first, why is not Apple tying up an exclusive contract with AT&T not restrictive policy? The simple answer to this without digging too deep is the Herfindahl Index (showing off my MBA knowledge). Microsoft reached the dominant market share according to this index and forced its product along with a dominant market share product. Whereas both Apple and AT&T have probably not reached the dominant market share threshold as suggested by HFL.
Ashish being Ashish, simple explanation was too shallow for him and he digged deeper and asked me “but as a TMobile user suppose in the US, am I not restricted and forced to switch to AT&T just because I want an I-Phone... or the only other choice is not to have an I-Phone... where in as Windows users, people can download and use whatever browser they want... and vice versa - if I have a different system... I still can use IE as a browser... can't I?” His prod follows easy to understand rationale and sounds so logical. However, I was quick to jump to this comment by explaining that AT&T and Apple have a legal, enforceable contract which happens to be an exclusive contract between two companies, with revenue and expense sharing arrangement. It isn’t like I am piling Iexplorer free of cost to the end user because of my dominant market share. If Apple were to now offer free IPod with purchase of MAC products then it might be a case of anti trust. Well this is all good, but however this got me thinking more and more about it. Doesn’t Apple club I phone along with the IPod functionalities? My I phone specifically has an icon which says IPod and I am assuming so does everyone else’s. Isn’t this a restrictive policy? Isn’t IPod being bundled along with I phone for free? Moreover Apple doesn’t allow the use of other music players on its website. Look at another common example of bundling products and restricting usage. Google the search engine giant, doesn’t it offer Google maps and other products along with its dominant market share search engine for free?
Ashish I salute you for asking these tough questions. Can someone help us out here?
Ashish being Ashish, simple explanation was too shallow for him and he digged deeper and asked me “but as a TMobile user suppose in the US, am I not restricted and forced to switch to AT&T just because I want an I-Phone... or the only other choice is not to have an I-Phone... where in as Windows users, people can download and use whatever browser they want... and vice versa - if I have a different system... I still can use IE as a browser... can't I?” His prod follows easy to understand rationale and sounds so logical. However, I was quick to jump to this comment by explaining that AT&T and Apple have a legal, enforceable contract which happens to be an exclusive contract between two companies, with revenue and expense sharing arrangement. It isn’t like I am piling Iexplorer free of cost to the end user because of my dominant market share. If Apple were to now offer free IPod with purchase of MAC products then it might be a case of anti trust. Well this is all good, but however this got me thinking more and more about it. Doesn’t Apple club I phone along with the IPod functionalities? My I phone specifically has an icon which says IPod and I am assuming so does everyone else’s. Isn’t this a restrictive policy? Isn’t IPod being bundled along with I phone for free? Moreover Apple doesn’t allow the use of other music players on its website. Look at another common example of bundling products and restricting usage. Google the search engine giant, doesn’t it offer Google maps and other products along with its dominant market share search engine for free?
Ashish I salute you for asking these tough questions. Can someone help us out here?
Thursday, June 18, 2009
Anubha Humor!
Mom: Son name few animals that can fly?
Son: Crow, Pigeon, ..Pig
Mom: Pig? where did you read that?
Son: Look, swine flu
Son: Crow, Pigeon, ..Pig
Mom: Pig? where did you read that?
Son: Look, swine flu
Thursday, June 11, 2009
Are we really paying too much?
Recently a topic in great limelight in the media and minds of average layman is that of executive pay. I thought I will put my two cents on the ongoing mayhem on how much the captains of industry deserve to get compensated.
In spirit of full disclosure I would caveat that I am an ardent fan of free markets. My biases are heavily towards the Anglo Saxon model of capitalism rather than the government directed French model of capitalism. To me executive pay should be more towards the philosophy value of art lies in the eyes of the beholder a.k.a shareholders. However the recent exuberances of chiefs splurged all over the Wall Street journals begs me to look at the other side of the coin. Needless to say that the tax payers money being spent of buying furnishings for offices and on Ceo’s of collapsing institutions leaves one with the feeling that the government is acting reverse that of Robinhood. But does the behavior of few of these spoilt brats give government the right to cap the pays of everyone in the industry to $500,000?
A look at the disclosure of the pay of top 5 employees at the much revered Goldman Sachs reveals that they made north of $300 million in 2007. (check out the link http://www.sec.gov/Archives/edgar/data/886982/000119312508049485/ddef14a.htm#toc53863_24) . For the very same year the revenues for company grew 27% (69b – 87bn) and net income to shareholders 21% (9bn – 11bn). If you take into perspective the value added in their entire time period at the institution the percentage that they take away home is miniscule. Don’t the very best deserve to take home 10% of what value they have created? (a percentage much less than the coveted hedge fund industry). The controversy comes in when institutions not making enough still continue to pay their chiefs in the same manner.
There are several reasons that strongly support the continuance of pay level of executives in the case of short term aberrations from profitability for an institution. Two that I would like to talk to are the risk taking and government sector’s own pay structure. First, while it is good to pay 10% of value in good time, there is a huge case of asymmetry in bad times. Failure is not punished by taking away 10% of one’s income and savings but only by firing and loss of total income. Doesn’t this favor awarding risk taking by the Captains?
Second, keeping the view that institutions are for long term, one shouldn’t get short sighted on the performance in atypical market conditions and down business cycles. Does the pay of government executives depend on whether the country’s budget has balanced or any other performance metric? If that isn’t the case shouldn’t the government sector ponder about reforms in its own salary structure and leave markets to determine pays for market institutions?
This post is dedicated to my friend and avid blogger ibn-e-sina who inspired me to start blogging. I wish him all the luck as he goes forward to be an investment banker in tumultuous markets and may he earn a whole lot for having the courage and tenacity to be a banker!
In spirit of full disclosure I would caveat that I am an ardent fan of free markets. My biases are heavily towards the Anglo Saxon model of capitalism rather than the government directed French model of capitalism. To me executive pay should be more towards the philosophy value of art lies in the eyes of the beholder a.k.a shareholders. However the recent exuberances of chiefs splurged all over the Wall Street journals begs me to look at the other side of the coin. Needless to say that the tax payers money being spent of buying furnishings for offices and on Ceo’s of collapsing institutions leaves one with the feeling that the government is acting reverse that of Robinhood. But does the behavior of few of these spoilt brats give government the right to cap the pays of everyone in the industry to $500,000?
A look at the disclosure of the pay of top 5 employees at the much revered Goldman Sachs reveals that they made north of $300 million in 2007. (check out the link http://www.sec.gov/Archives/edgar/data/886982/000119312508049485/ddef14a.htm#toc53863_24) . For the very same year the revenues for company grew 27% (69b – 87bn) and net income to shareholders 21% (9bn – 11bn). If you take into perspective the value added in their entire time period at the institution the percentage that they take away home is miniscule. Don’t the very best deserve to take home 10% of what value they have created? (a percentage much less than the coveted hedge fund industry). The controversy comes in when institutions not making enough still continue to pay their chiefs in the same manner.
There are several reasons that strongly support the continuance of pay level of executives in the case of short term aberrations from profitability for an institution. Two that I would like to talk to are the risk taking and government sector’s own pay structure. First, while it is good to pay 10% of value in good time, there is a huge case of asymmetry in bad times. Failure is not punished by taking away 10% of one’s income and savings but only by firing and loss of total income. Doesn’t this favor awarding risk taking by the Captains?
Second, keeping the view that institutions are for long term, one shouldn’t get short sighted on the performance in atypical market conditions and down business cycles. Does the pay of government executives depend on whether the country’s budget has balanced or any other performance metric? If that isn’t the case shouldn’t the government sector ponder about reforms in its own salary structure and leave markets to determine pays for market institutions?
This post is dedicated to my friend and avid blogger ibn-e-sina who inspired me to start blogging. I wish him all the luck as he goes forward to be an investment banker in tumultuous markets and may he earn a whole lot for having the courage and tenacity to be a banker!
Wednesday, June 10, 2009
On AT&T chief to be new GM Chairman
Treasury has appointed Edward Whitacre to be the new chief of GM as it emerges out of restructuring. Edward definitely has a commendable background and turning AT&T to the world's largest telecommunication company is to his creddit. I have no doubts on his leadership and management skills in stressful conditions as he was part of the restructuring group of Lazard in the early years of his career. What I have been contemplating is doesnt knowledge of an industry play a role at all in being able to be successful in it? I ask the following questions to myself:
1.Doesn't capital structure, cash flows and financials change with different industries and isnt mastering of these for years which comes with experience important to be able to reingeer a company and rise it from ashes?
2. Doesn't the Chairman need to comprehend competitve dynamics of an industry to be able to come up with a market attack plan?
3. Can a Chairman be agnostic to industry dynamics and trends, only exposure being that of riding a automobile, and succeed in it?
4. Don't companies expanding in businesses and brands other than their core expertise fail to add shareholder value over time? (Examples of failed endeavors by companies into non core activities abound in my mind)
I understand that GM has no where to go but up from where it is right now. Though can someone please point to evidence that makes this appointment rational. Is all that is needed to turn around GM is an iron fist attitude and strong headedness? I wish the new Chief luck in his new job and to me nothing but luck can help him get out of it.
1.Doesn't capital structure, cash flows and financials change with different industries and isnt mastering of these for years which comes with experience important to be able to reingeer a company and rise it from ashes?
2. Doesn't the Chairman need to comprehend competitve dynamics of an industry to be able to come up with a market attack plan?
3. Can a Chairman be agnostic to industry dynamics and trends, only exposure being that of riding a automobile, and succeed in it?
4. Don't companies expanding in businesses and brands other than their core expertise fail to add shareholder value over time? (Examples of failed endeavors by companies into non core activities abound in my mind)
I understand that GM has no where to go but up from where it is right now. Though can someone please point to evidence that makes this appointment rational. Is all that is needed to turn around GM is an iron fist attitude and strong headedness? I wish the new Chief luck in his new job and to me nothing but luck can help him get out of it.
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