Desicritics Author: Nachiketa

Investment Banking - Sociopaths wanted

Nachiketa — Sat, 12 Aug 2006 18:31:49 EDT

Over the last few years, I have worked with a lot of investment bankers. It seems to me there is one quality that is dominant in most of them: sociopathic behaviour.
Wait, before you start beating me up, let's consider the psychology of a psychopath and some of the clearly visible behaviour exhibited by 'your friendly neighborhood investment banker'.
1. Superficial charm: Investment bankers tend to be smooth, engaging, charming, and slick. Not in the least shy or afraid to say anything.
Indeed this trait is shared with salesmen and consultants.
2. Grandiose sense of self-worth: A grossly inflated view of abilities, self-worth, self-assurance, in short a cocky, braggart. Bankers have the biggest egos of any professional on the planet.
Consider this: they fight over the font size of their names on business correspondence. In the US, a company filing for an IPO has to do a Red Herring(RH). The RH has the names of all the banks whether they be in a lead or co-manager or syndicate capacity. One of the biggest fights in the IPO process happens when bankers can't agree on the font size and the placement of the name of their banks. No wonder they work 90 hours a week. They spend it deciding on the font size.
3. Need for stimulation: An excessive need for novel, thrilling, and exciting experiences. Taking chances and doing risky things. Often have low self-discipline in carrying tasks through to completion because he/she gets bored easily.
In every roadshow meeting I have ever been to, the banker is always playing with his blackberry as opposed to paying attention to the meeting.
4. Pathological lying: Can be moderate or high; in moderate form, will be shrewd, crafty, cunning, sly, and clever (in extreme form, he will be deceptive, deceitful, underhanded, unscrupulous, manipulative, and dishonest).
Never take a banker on his word. They will say just about anything to get you "pregnant'. Once you are far along in the process, there's not much you can do but play along with them. We had our bankers tell us about market conditions and their pre-marketing of our IPO with investors, based on which we signed them on. Guess what? Two weeks after we signed, they came back with different terms because "the market changed." Make sure you communicate clear break-off points before you sign on bankers. Most will be difficult to peg down, but if they say things like "market will tell us", dump 'em.
5. Conning and manipulativeness: The use of deceit and deception to cheat, con, or defraud others for personal gain; distinguished from Item #4 in the degree to which exploitation and callous ruthlessness is present, as reflected in a lack of concern for the feelings and suffering of one's victims.
Again, read the previous point. When I say thay will get you "pregnant"...I mean really pregnant. We spent a lot of money on the IPO filing and the roadshow, before the bankers started squeezing us.
6. Lack of remorse or guilt: A lack of feelings or concern for the losses, pain, and suffering of victims. A tendency to be unconcerned, dispassionate, coldhearted, and unempathic. This item is usually demonstrated by a disdain for one's victims.
Make sure you have two or more people on the call or whenever you talk to the bankers. One key word they like to use is "mis-communication". Keep notes of the conversations and send follow-up emails to clarify everything said. We had a banker promising us his participation in the IPO by committing to buy our shares (called market making). When push came to shove, he claimed ignorance, but there had been five people in the meeting in which he made the promise, and so he took refuge behind the "mis-communication" defence.
7. Shallow affect: Emotional poverty or a limited range or depth of feelings; interpersonal coldness in spite of signs of open gregariousness.
Investment bankers are the most fun people to hang out with when they want something out of you. Their all-expenses-paid dinners are notorious in the business community. You will be surprised how long it takes them to return calls once they have what they want. Again this trait is not uncommon in corporate world. Bankers have simply perfected it.
8. Callousness and lack of empathy: A lack of feelings toward people in general; cold, contemptuous, and inconsiderate. Read the previous point.
9. Impulsive: The occurrence of behavior that is not premeditated and lack reflection or planning; inability to resist temptation, frustrations, and urges; a lack of deliberation without considering the consequences; foolhardy, rash, unpredictable, erratic, and reckless.
Unlike almost every other professional in the corporate world, bankers have absolutely no planning skills. They are primarily "deal sharks" and are geared towards deal generation and consummation. Planning is of secondary importance and for the most part they are not too good at it. Time and time again we made changes to our SEC filing based on banker recommendations only to realize that the bankers had not really thought through things. Make sure you go through the thought process behind each recommendation and you evaluate consequences.
10. Irresponsibility: Repeated failure to fulfill or honor obligations and commitments; such as not paying bills, defaulting on loans, performing sloppy work, being absent or late to work, failing to honor contractual agreements.
One thing we realized was that there is no contract out there worth the paper its written on when it comes to bankers. The agreements they sign with you are notoriously vague with tons of loopholes that allow them to escape without any liability. They simply will not sign an airtight agreement. So the most important thing in picking bankers is referrals. Try get referrals through people who the bankers can't afford to antagonize.

*Note: The traits of a sociopath are taken a pyschology journal. If you find these characteristics elsewhere, consider that to be the original source.

Long Live Pakistan!

Nachiketa — Mon, 3 Apr 2006 14:08:59 EDT

Every day bad news trickles in from Pakistan. Balochistan is up in arms and the North West Frontier Province is witnessing intense fighting on a daily basis. To the east, Sindh is increasingly disaffected.

This cannot be good news for India. We don't want a strong and belligerent enemy on our western borders, but we don't want a fragmented and crumbling state either.

The repurcussions of a failed state could be horrendous for India. We would be looking at 162 million people, the majority of them poor and uneducated, looking for stability and possible assimilation into India or the same people in constant strife and possibly an endless resource for terrorist movements.

Manmohan Singh recently spoke about the future of the subcontinent in which the borders would be irrelevant. This cannot be allowed to happen. A borderless subcontinent would give the greenlight to about half a billion people from neighbouring countries to ride piggyback on the success brought about by the hard work of the Indian people.

India was cleaved into two and there are still people (I used to be one of them) who dream about a united India. But the geopolitical and socio-economic realities do not permit us to be romanticists anymore.

Assimilating a population almost half the size of the current one will throw India into disarray. On one hand is the volatile issue of the fundamentalist and feudal mindset of our neighbors, and on the other hand is the issue of the massive economic shocks that would result from a re-unification or federalization of the subcontinent.

On an aggregate basis, the per capita GDP of Pakistan in PPP terms is about $2,400 compared to $3,600 of India. The GDP of Pakistan is obviously inflated by the fact that it receives substantial foreign aid (including $1 billion/year from US). This aid will no doubt stop once the two economies assimilate. The combination of the two economies results in an immediate dilution of about 5% for India (If you factor-in the aid factor, the dilution is higher). This is important as India is fast approaching the theoretical inflection point of per capita GDP that will allow India to achieve the critical mass for long term growth. Any dilution in per capita GDP will only push back the timeline.

According to various estimates 32%-40% of the Pakistani population lives below the poverty line. That translates into 52-65 million destitutes on top of the approximately 250 million that already exist in India. And this does not even take into consideration Bangladesh, which is considerably worse off.

Pakistan's literacy rate is 49% with about 40% of the population less than 14 years of age. This influx of an illiterate young population will put tremendous pressure on the Indian educational infrastructure which is already at capacity. The law & order implications of this influx are even more significant.

In short, the boundaries that were created in 1947 have to stay. We talk of federalization or re-unification only at our own peril. Germany presents a clear example of what happens when two disparate economies combine. Let's work towards peace and collaboration, but let's stay away from re-drawing the geographic or monetary borders. Let us also pray for a stable Pakistan.

The Impending Market Crash of 2006

Nachiketa — Sat, 18 Mar 2006 00:02:46 EST

The Bombay Stock Exchange (BSE) is trading at more than 21 times its Price to Earning (P/E) ratio. In simple terms, it will take an investor more than 21 years to recover the cost of his investment, not taking growth into account. This is obviously a very simplistic argument, but you get the drift. To give you a perspective, the Dow Jones Industrial Average (DJIA) is trading around 22 times.

Yes, the Indian stock market is now at the same price point as the US. This, despite the fact that there is about 250-550 basis points country risk premium attached to the Indian stock discount rate. This is nothing short of hyper-irrational exuberance. These kind of valuations are not justified even on a growth adjusted basis. Even considering a generous 11% growth rate for non agricultural sectors, this translates into a Price Earning to Growth ratio (PEG, a ratio obtained by dividing the P/E ratio by the project growth in earnings) of 1.91. This compares unfavorably with the PEG of DJIA, which stands at 1.6.

A brief and informal survey of ordinary Indians done by yours truly seems to suggest that most of them have stopped pumping in more money into stocks for now. There is a general feeling that the market is overvalued.

Then why is the market not correcting? The answer seems to be the Foreign Institutional Investors (FIIs). More than 20% of the money invested in the market is by these institutions. Why are they still in the market if it is overvalued? The answer is twofold: i) Lack of alternatives; and ii) Fear of market impact.

i) Lack of alternatives: Over the last few years, hundreds of Indians have taken advantage of the buzz surrounding India and gained a foothold in the foreign financial markets as India experts. These guys are now caught in the spin cycle that they have created. For them to pull out of the Indian market means losing their sway in their firms. If the Indian market goes down, they go down with it. This escalation of committment is like playing the Russian Roulette - you keep pressing the trigger and if the market goes up, you win. But eventually, they will have to come to the loaded chamber...just a matter of time.

ii) Fear of market impact: Some of the saner money managers are stuck in the market for another reason. There is no one to buy from them. And if they unload their holdings, the market will not be able support the supply and they will drive down the prices.

Either way, the result is not pretty. So what do they do? One word - PROPAGANDA. They organize investor conferences, bring out pie-charts and spreadsheets and convince each other that the market is solid. They do all this in air-conditioned hotels and sanitized campuses of major companies. What they try to forget about is the woefully lagging infrastructure outside - shortfall in energy, crumbling roads, slow judicial process.

In short, they are loading up the table with heavy goods, but not reinforcing the weak legs of the table. Eventually, the table has to fall under its own weight.

So what is going to happen? A rudimentary analysis seems to indicate that we are looking at about a 25-50% correction. This range was calculated by rationalizing the P/E as well as the PEG ratios.

For a healthy and growing developing country, P/E in the range of about 16 is what one would expect (about 20-30% discount relative to developed markets). This P/E is 25% less than the P/E of 21 that we are seeing in the market. This is how I got the lower range of the correction.

The PEG of BSE is close to 2 right now. An ideal PEG is around 1. This supplies the upper range of our correction, which is 50%.

The current optimistic estimates of Indian market capitalization place it around $900 billion. So, based on my analysis, it would seem that the market stands to lose between $225-$450 billion over the short term.

Pervert Nation

Nachiketa — Tue, 14 Mar 2006 00:07:44 EST

The UK edition of the Hindustan Times had another article on eve-teasing yesterday. Apparently, the studs of Delhi are so macho that they have to demonstrate their virility by grabbing breasts of random girls, in front of the girls' parents.

Oh, my wonderous nation! The superpower in waiting! How glorious will be your future now that you have spawned such fine male specimens. The world stands in awe of the 8% GDP growth. But little does it realize that this is just a ploy to attract gori kudis so that the virile progeny of Mother India can warm their hands on their unresponsive breasts.

Girls in India can rest assured that all their sexual fantasies will be fulfilled as soon as they step out of the house, thanks to our desh ke laal. These mini Chunkey Pandeys know what the ladies want, even if the ladies themselves don't know it.

After all, why go to Bangkok when you can park your cock in some aunty's behind in a jam-packed bus. She wants it, you know it. Which girl doesn't like randoms penises pushing against her body?

Also, why deprive the elderly of the pleasure? If some old woman is waiting for a bus at the end of a busy day, all she really wants is to get in your Mercedes and get raped by you. Hell! Nobody can accuse the Indian male of age discrimination.

Somewhere up there is a happy mom, her eyes tearing up.

Her little boy is all grown up.

The Indian Economy - Miles to Go

Nachiketa — Mon, 13 Mar 2006 11:57:39 EST

Over the last few years, there has been a newfound confidence in India, and rightly so. The Indian economy has grown at an average rate of 6%+ over the last five years, the per capita is approaching the inflection point of $600, and the world is finally waking up to the Indian economic juggernaut.

In short, in the marathon race of global commerce, India has been running like a true sprinter. Compared to the 70s and the 80s, this is truly amazing. At this rate, India will double its economy about every decade.

But there are some sobering facts that need to be looked at before we start dreaming of the second coming of the golden age of India. The question one should be asking is...is this growth sustainable?

India needs massive investments in infrastructure and some additional help from the gods to sustain this level of growth. Critical areas of development exist that will need to suck up the next wave of investments.

India is woefully lagging in meeting its energy needs. It has about 110 GW of installed capacity. This is about a quarter of that of China and less than a tenth that of US. Indians have 13 MMBTUs of energy available per capita as opposed to 35 of the Chinese. It needs dedicated electricity to power its manufacturing and service industry in order to fuel its growth. It needs a massive ramp-up in this area with limited options available to it.

The drinking water availability of India remains a big concern. By 2010, India would have approached the UN defined stress line of per capita availability of water. History tells us that the rise and fall of civilazations has been predicated on the availability of water. This is a big concern and has the potential of derailing the economy.

Despite these elephants in the room, the Indian stock market has been behaving like it was the developed market. Indian valuations on a relative basis are approaching all time highs. At the current valuations, Indian companies are starting to become more expensive than companies almost anywhere else in the world.

What is the drawback you ask? Outflow of investments!

Currently, more than 20% of the capital in the stock markets is from Foreign Institutional Investors (FIIs). There is a surprising unanimity in the the foreign capital markets that India is overpriced. We are looking at a significant pullback of investments and profit-taking. Thus, just when we need the billions and billions of dollars to fund the infrastructure spending, we will be seeing a net outflow of funds.

Hijacking of India

Nachiketa — Thu, 2 Mar 2006 14:59:25 EST

New York Times published a less than enthusiastic article today about Bush's trip to India. I'm sure this article is well balanced and well researched (unless Jason Blair is the ghost writer), but the only lasting impression that remained with me is the threat of suicide bombing by a Mumbai Muslim youth. I'm not sure how credible this statement is, or if it was even made, but it left me feeling angry and frustrated.

A nation of 1.1 billion people, 66% of whom admire USA (according to Pew Research), and the one thing that people take away from this article is that Indians want to suicide bomb America, and yes, they will even get visas to do that. I am disappointed by the biased reporting of NYT, but I am even more disappointed by what's happening in India.

Everyone I know supports and loves America, yet a minority opinion is being presented as the opinion of India. The people demonstrating in Delhi, Mumbai and Hyderabad have shown a reckless disregard for the majority by their demagoguery.

Why is it that these people hate Bush so much...because he invaded Iraq? I'm sure a lot of Indians share that opinion, but they still welcome Bush's visit and US-India ties as they believe that it will benefit India. Are these demonstrators suggesting that they are more concerned about some distant middle-eastern country than their own country?

The majority has allowed madrassa-educated fanatics to control the message that goes out of India. In US and worldwide media, the message is that Indians are burning US flags and cursing Bush. The same Indians who are taking away US jobs are wishing ill of them.

The majority has allowed the very perception of India to be hijacked. We worked so hard to change the perception from snake charmers to IT wizards. Now, these guys are trying to paint us as reactionary jehadists.

As a democracy, it is important that all viewpoints be allowed. The key here is 'ALL'. In this case, a narrow fanatical viewpoint that is antithetical to India is being presented. If Indians don't wake up and respond to it, we'll soon wake up under the crescent moon.

Light Hearted Conversations of Amor Sing

Nachiketa — Thu, 23 Feb 2006 22:50:14 EST

"Cocka Cola peeyegi?" leered Amor Sing as he fixed his gaze on Maxima Chudri's 36DD.

"Naheen Amorjee, I'm on a diet," quivered the sultry siren with a coy smile. "Aaj Kal kaam thoda slow hai, moti ho gayee hoon. When I am in shootings, I maintain myself."

"Bolbachchanjee se baat kara doon? Tab to Cocka Cola peeyogi?" Asked a concerned Mr. Sing, licking the slow trickle of Banarsi Paan off his bulbous lips.

"Ek baar kaam mil jaaye, aapki Cocka Cola peeyoongi aur aapko momos khilaaoongi,"demured the virginal Ms. Chudri.

Amor's beady eyes lit up and he fumbled in his pants for his cell, which took him a while as he kept grabbing the wrong hard object. Feverishly he dialed Bolbachchan's number, never taking his eyes off the fertile valley of Ms. Chudri's 36DD.

"Bolbachchan...helloo, my phrend...this eej Amor. Houu aarr yoo?" brayed Mr. Sing into the phone.

"Amorjee...good to hear from you. I am just walking out of the hospital," replied Mr. BB in his thunderous voice. He was really upset. He had gone through so much effort to evade the tax guys, but they had showed up at the hospital. All the trouble for nothing. "Kya seva karoon aapki? Bengali rasmalai ya kuchh naya taaja?" inquired the solicitous Mr. BB, knowing Amor's penchant for exotic items that liked to suck his Cocka Cola.

"Aapka Maximajee ke baare mein kya vichaar hai?" asked Amor while doing mental somersaults off the said lady's 36DDs.

"Acchee hain, bahoot acchee.", replied Mr. BB has he remembered the one night in Goa, when he had evaluated her hidded assets by taking her in-depth screen test. "Lekin mujhe taxwallon sey time miley to mein kuchh karoon," added Bolbacchanjee, as he thought about his own hidden assets.

"BBjee, taxwallon ki kya majaal jo aapko haath lagayen. Aap to desh ka heera hon, you are a national treasure. The country should pay you taxes." replied Amor, as he thought of a new strategy to hose the electorate.

"To mein samjhoon ki tax vax ki problem khatam?"

"Bilkul, mera desh mahaan! Is mein khet or khalihaan, maali jitne phool lagaye, neta sabhi tod ke le jayen." sang Amor as he anticipated eating momos with Maximajee.

"Then fine! I will take Maxima in my new blockbuster, Tu Jhuk Mein Maroon."

Global Ownership of Oil

Nachiketa — Thu, 23 Feb 2006 15:57:33 EST

What constitutes ownership? Does mere possession guarantee the right of ownership? Is violation of global norms cause for dispossession?

In light of the global importance of oil and the serious repercussions that result from irresponsible behavior of oil producing states, these are some of the questions that the global community needs to be asking right now.

Established law all over the world has long held that misuse or irresponsible use of one's possessions can result in confiscation of the same. In some western countries, the law goes to the extent of relieving the parent of their children if it is suspected that the parents have shown negligent or harmful behavior towards the child.

Why is it that the global community stands mute at the extreme irresponsible behavior of the oil producing states? What grants these states "abnormal" rights over their possessions?

One country uses the oil wealth to fund and promote an ideology of hatred. It sets up madrassas all over the globe in pursuit of this goal, despite being a witness to the resulting mayhem. Another country decides to use its oil wealth to reward suicide bombers in a distant country. How long can this irresponsible behavior be tolerated by the global community?

Would the global community stand mute if Brazil decides to set fire to the entire Amazon forest? Would the world not react, even forcefully, to prevent Brazil from destroying the lungs of the earth? Since Brazil possesses the Amazon basin, can it claim sovereignty and do its will to the detriment of the world?

What if Greenland starts installing heating ducts all over its land in order to melt the snow and reclaim land for agriculture? Will the world community let it raise global sea levels just because Greenland wants to grow more plants, even if it is important for its economy?

Oil has tremendous influence on the fortunes of nations. Every human being on the planet is affected by the price as well as availability of oil. If that is the case, why allow unstable regimes to control such an important resource. Why allow the wolf to guard the sheep?

How about a scenario in which the global oil deposits are owned by the world as a whole? Each nation is given an ownership stake in proportion to its population. Countries consuming more than the global average per capita of oil can buy the oil from nations consuming less. Countries in Africa probably will be some of the biggest beneficiaries of this. Current oil-producing states will be entitled to an extraction fee.7

Why Private Equity Firms Destroy Value

Nachiketa — Tue, 14 Feb 2006 15:34:58 EST

The New York Times announced in December that a group of private equity (PE) firms are making a bid on a large Danish firm.

Private equity firms play a great role in providing liquidity to small & mid cap firms. However, when it comes to the larger public companies like the TDC, I see a tremendous loss of overall value. In the short term the shareholders gain by the bump in stock price, however, by its very nature PE firms might cause more damage to the large company in the long-term than the benefits they provide to the shareholders.

Let us consider the value the PE firms bring:

- Liquidity to owners

- Sophisticated management techniques

- An expanded network

All these things are valuable to the smaller firms. However, to the large firms all these things are already available and there is no advantage of private equity.

Now let us consider the downside of PE:

- Reduction in capital expenditures

- Reduction in R&D

- Lower credit rating

- Higher interest rates

- Cash outflow through management fees etc.

Again for the smaller firms, these negatives are not all that bad as those firms don't invest as much in R&D etc anyways and already have a lower credit rating. For them, the fall is not as precipitous. However, for a large cap such as TDC these drawbacks are enormous. TDC's credit rating has already been reduced a notch from Baa1 to Ba1. This might result in 20-100 basis points increase in their interest obligations. On top of that the reduction in R&D and Capex could be significant enough that it might impair the firm's ability to compete effectively in the future.

PE firms have existed in the US for a long time and have a track record of success. However, in the Indian context, whether the PE firms will succeed is still an open question. Deals in India are different from those in US in many ways:

i) Indian promoters still value organic growth over acquisitions.

ii) Indian promoters are unwiling to give up control.

iii) Most large PE firms in India would like to invest $50m+ in a transaction. Deals that size are not available in India.

India is too big and important of a market for PE firms to ignore it, but I suspect that in the short term these firms might have to absorb some losses here. Firms like Chrys Capital have had some success in the mid-market space, but with the valuations going up significantly over the last year, acquisitions in India are increasingly unattractive. Consider for example that the averge P/E ratio of the Dow Jones is about 18, while the average P/E of Bombay Stock Exchange is about 17.

We are Fighting the Huns

Nachiketa — Tue, 7 Feb 2006 23:18:04 EST

One and a half millennia later, the fall of the Roman Empire presents some very valuable lessons to us. Between 400-500AD, the Romans were so weakened by the constant harassment of the Huns that the empire eventually collapsed. What the US and India faces today is nothing short of the attack of the Huns.

The Roman historian Ammianus Marcellinus describes the Huns thus:
"When attacked, they will sometimes engage in regular battle. More often, however, they fight in no regular order of battle, but by being extremely swift and sudden in their movements, they disperse, and then rapidly come together again in loose array, spread havoc over vast plains, and flying over the rampart, they pillage the camp of their enemy almost before he has become aware of their approach. When in close combat with swords, they fight without regard to their own safety..."

Just like the Huns, the Jehadists want nothing short of complete destruction of the non-Muslim world.

Their strength is deception, and terror. By using conventional search and cordon tactics, neither will we win nor would we deter. We are simply playing into their strategy of getting media coverage and helping their propaganda machine. We need a multi-pronged approach to not only defeat them but to break their will. Following needs to be done:

1) Identifying the enemy - The most critical thing is to make sure that the civilized world understands the threat presented by islamo-fascism.

2) Assymetric warfare - Using assassination squads targeting key leaders; The motto of an Indian Army school is "Fight the guerrilla like a guerilla", we need to adopt that on a global scale.

3) Information warfare - Using the same techniques as the terrorists to disseminate information. We have to get a more liberal message out there.

4) Internationalizing the response - We have to get militarily significant countries involved in middle-east. This includes - China, Russia, India, France and Turkey. All of these countries face certain issues and given the right incentive, would be willing participants. Some of these countries might be our long-term rivals, but in the short term we have to ally with them to defeat the immediate enemy. Afterall, we partnered with USSR in WWII.

5) Destroying the will to fight - On one hand, educational and economic opportunities should be created for the youth in the Islamic countries, and on the other hand a more severe war of attrition should be waged. The hopelessness of violence coupled with the presence of economic opportunities will drain the jehadists will to fight.