Are Initial Public Offerings Appropriate for Regular Investors?

Investors are people. They like novelty; get excited by something new, especially if it holds the promise of making them a whole lot richer and provides bragging rights at their next cocktail party. Maybe that’s why amateur and professionals alike tend to lose their minds in bull markets, particularly when a hot initial public offering, or IPO, is offered to them by their broker.

On one hand, had you bought into the initial public offering of Wal-Mart, Home Depot, Walt Disney, Dell, Microsoft, Coca-Cola, Target, or Starbucks, you may have had some volatile price fluctuations along the way, but there is no question that you have made enough money to substantially change the quality of your life.

A single share of Coca-Cola purchased for $40 at the IPO in 1919, for example, crashed to $19 the following year. Yet, today, that one share, with dividends reinvested, is worth over $5 million. Likewise, $10,000 invested in Wal-Mart is now worth $10 million plus. Clearly, a well chosen IPO investment can be a life changing experience if you simply make the right choice and stick the stock certificates in your safety deposit box for thirty years. On the other hand are companies such as WebVan, the bankrupt web grocer that left investors with total losses, licking their wounds and draining their portfolio of precious capital that could have compounded into huge nest eggs if given enough time.

Leaving us with the question: Should you consider investing in IPOs?

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Being India

India at the moment seems seriously blessed. It’s attracting abundance like never before in history. Two days ago IMF said “buoyant global economic outlook has prompted it to revise” upward India’s GDP growth rate by 0.6 per cent to 9 per cent for 2007. Wisdom it seems is one of the biggest exports of India pegged at USD 12 billion by 2010. If prosperity means money then it’s raining money in India, quite literally.

Private Equity Investments

India today really is capital’s favorite destination. Consider the case of private equity investments in India in 2006. According to Venture Intelligence a total of 302 deals worth $7.5 billion were reported. In the first half of 2007 168 deals have been reported at $5.6 billion. In terms of investment in 2006 the top destination was China. China received around $900 million. London came second with a little more than $800 million. India came at number three with $746 million.

Venture Capital Investments

The India investment attraction can be simply be gauged from the fact that just in the 2nd quarter of 2007 venture capital firms have invested about $112 million across 19 deals in India during the second quarter of 2007. The prominent Venture Capital firms already have offices already set in India to identify potential winners and as the India success story grows so is the attraction of newer players. Consider the case of Clearstone Venture Partners, a leading early stage venture capital firm. With US$650 million of committed investment capital Cleartone sees India a favorable destination.

According to ASSOCHAM the Indian VAS market itself is likely to be Rs.8,500 crores by next year. That’s certainly no small number in worldwide terms too. High growth domestic consumption sectors including telecom, media, entertainment and financial services are further fueling the growth.

Besides innovation probably the biggest fuel for entrepreneurial growth is venture capital investments. VC investments have been only growing in India. In 2006 Venture Capital firms invested $508 million over 92 deals in India. The amount invested during 2006 was significantly higher than that during the previous year (which had witnessing 44 deals totaling $268 million). In 2007 the VC score board so far reads 39 deals worth $242 million in its kitty.

According to Arun Natarajan of Venture Intelligence “The strong return of Silicon Valley VC firms to India as well as the rising number of new India-dedicated VC firms gives confidence that this resurgence in VC investments is likely to be sustained.”

The Flow of Money

For both Private Equity and Venture Funding the Information Technology and IT-Enabled Services (IT & ITES) industry retained its status as the favorite among VC investors during April-June 2007. Apart from Internet-based services, VC investors paid extra attention to BPO and IT Services companies during the quarter. VCs also showed renewed interest in funding “cross-border” technology companies - i.e., companies headquartered in countries like the US, but carrying out substantial part of their R&D operations in India.

According to KEC Raja Kumar, CEO of leading Bangalore-based PE firm, UTI Venture Funds “Private Equity firms are boldly creating innovative partnerships with entrepreneurs to take corporate India to new levels. I will not be surprised if the investment amount in 2007 touches $10 billion,” said “However, going forward, we have to be careful to ensure that this momentum is sustainable and does not get derailed by unrealistic expectations.”

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So you’ve read Advice on College and Advice on Getting to Wall Street. You’ve won that coveted analyst position. It’s the last week of July - in another week, you will probably finish your training and find out your group assignment. Maybe you’ve been on the job for a month or so, and you’re starting to get the hang of things.

This is your first job out of college. It’s a nutty working environment. It can be hard to find time for taking stock. In this post, I will give some advice for new investment banking analysts. Not everyone has the same experience in banking; in fact, some people don’t get a lot of benefit from it. Here are some things you can do to make the most of your two years.

Golden Rules

The Golden Rule of Analysts is: If you work hard and have a great attitude, you will be a star analyst. And a second is like it: Work for experience, not money. Keep these two principles in mind, and you will have a great experience.

First, work hard and have a great attitude. Investment banking is a service business. Your bosses (vice presidents, SVPs, and managing directors) are paid more or less on commission. (They have good base salaries too, but if they don’t bring in enough revenue, eventually they’ll be fired.) So bankers do a lot of free analysis and sales presentations, in hopes of someday earning a seven- or eight-figure fee. A lot of this work is prepared on short notice, forcing you to work very, very late.

Senior bankers expect access to 100% of your time. That is the culture. There is no way around it. 90-hour weeks will be your bread and butter. (90 hours means arriving at 8 a.m. and leaving at 1 a.m. on weekdays, plus 10 hours on the weekend - a non-demanding week.) In the busy season (e.g. January and February) you can expect to work over 100 hours for several weeks back-to-back.

Even with smart, motivated coworkers, working such long hours can be stressful. You can help your associate and VP just by keeping a positive attitude. Don’t complain or resist assignments. Don’t take criticism or correction personally. Don’t duck out the door at 9 p.m. - that’s for seasoned second-year analysts. See who needs help. If you work fast and carefully, with a cheerful attitude, you will be a star.

Second, your real pay is the experience. The learning curve is enormous. Money is incidental; you’ll be well paid no matter what, but you won’t have much time to enjoy it. If you are working 100-hour weeks to get a few extra thousand dollars, you will be miserable. Get your priorities straight: you have your whole career to make money and most of it will come in your 40s and 50s. Right now, you need to get skills, a work ethic, and good relationships with your supervisors.

For more on how to act and communicate on the job, I highly recommend two books for new college graduates: From Day One, by Bill White, the former CEO of Bell & Howell, and In But Not Of, by Hugh Hewitt. I could stop there, but here are some practical tips.

Practical Tips

Learn Excel. Excel is the basic tool for all the interesting work you’ll do. Learn to think in Excel. Spend a Saturday pulling apart an LBO to see how it flows. Get comfortable with advanced formulas (once you have INDEX and MATCH, you’ll never VLOOKUP again). I have had good luck with Peachpit Press - try their Excel Quickstart Guide by Maria Langer. Forums like Mr. Excel.com are also helpful.

Get organized. Take your level of organization from college and square it. (1) Learn or develop a naming convention for files, and stick to it. (2) Print and save all source documents. (3) When you are getting numbers from some source, highlight the number itself and tab the page. (4) If you expect to do something more than once, take the time to build an automated template. For example, if you need a histogram of market capitalization sorted by size, let your data provider download the data and let Excel do the sorting. You should only have to enter the tickers and date. A 10-minute exercise reduced to 15 seconds.

Insist on running models. Sometimes there’s so much other work to do that your associate (post-MBA coworker/direct supervisor, probably not a former analyst) will end up doing all the financial analysis. That’s why you’re here, so don’t let six months go by without running a DCF, accretion/dilution, or LBO model. Make sure your associate is letting you take over these tasks - then he or she can spend more time turning into a VP. Also, let the staffer know your interest.

Choose your group carefully. It does matter who you work for - what product or industry, and what banker. Unfortunately, it’s tough to tell what you’re getting into, especially if you get placed into a group when you are hired or during training. Look for industry-level research or news coverage that can help you predict how much activity your sector will see in the next few years. If you get a hot sector, all your time will be taken up with deals, not free work or pitching. Awesome!

Still, it helps to work for the smarter, more connected, more practical bankers. At first this is mostly luck, but if you like your boss, perform well and he or she will help you get staffed on more of his or her projects.

(Note, some groups are more “transferable” than others. There are more outside opportunities if you covered consumer products or pharma than if you covered West Coast insurance companies.)

Life After Banking

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Insurers were lobbying for the past 3-4 years to decontrol fixed premium rates of fire and motor insurance, the last segments of general insurance that had fixed pricing. Detariffing, which means free pricing of rates, started on January 1, 2007. Insurance companies are taking some time to rework their premium rates. So, has removing fixed pricing been beneficial only to the insurance players or has it helped the customer as well?

K N Bhandari, general secretary, General Insurance Council, says that detariffing has resulted in right-pricing of the various segments of general insurance. The healthcare portfolio, which was subsidised earlier, has seen a price correction while the fire segment has seen a fall in premiums.

On motor insurance, insurers were earlier reluctant to provide cover for trucks (prone to high claims). But with setting up of the motor insurance pool on April 1, 2007 this has been solved because, now, when a claim is made the insurance company dips into the common pool, instead of having to bear the costs itself.

This has also resulted in a level-playing field in the insurance industry since earlier only public insurance companies insured trucks while private players kept away from them to avoid losses.

The good news

Customers can expect a further cut in their premium payments on car and home insurance from September 2007. In the last six months, although the market was detariffed, Insurance Regulatory and Development Authority had set a range of 20-40 per cent within which companies could change their policy prices. From September, however, this band will go and insurance companies will enjoy more flexibility in pricing.

Car insurance: This segment has two facets-own damage (when your vehicle is damaged in an accident) and third-party liability (when damage occurs to the other person’s life and vehicle). The premiums charged on the former have fallen, while they have increased for the latter. Also, now premiums will depend on the car, its age, and no claim bonus. Most likely, premiums will be lower than last year.

Home insurance: Cover is usually given for burglary, fire, floods and other natural catastrophes. The premiums are usually less than 1 per cent of the value of the contents of your house. For example, if the structure of the house and the valuables in the house amount to Rs 35 lakh (Rs 3.5 million), the premium would be less than Rs 4,000 a year. Post-detariffing premiums have fallen marginally as fire is just one of items the home is insured for.

The Bad news

Health insurance: Premiums of mediclaims offered by state-owned insurers have gone up. This is because insurers provide a bundle of covers, such as fire, engineering, healthcare and property, to corporates. This forms a large revenue base for them. However, due to high claim payouts, mediclaim has been a bleeding portfolio for the public sector insurers.

The loss from this segment was being compensated by the profits from the fire portfolios they insured. But, with fire premiums being dismantled now, insurers are pricing covers depending on the claim experience of each segment.

With these new premiums applicable now, maybe it’s time for you to dig out your insurance papers and take a relook at them.

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Google’s aura of invincibility is faltering as the company draws nearer to its initial public offering.

Fresh concerns about shares issued improperly to insiders and signs of weaker-than-expected demand are creating last-minute reservations about the deal–an oddball offering that’s nevertheless expected to be among the largest and highest-priced in recent history, if it proceeds as planned.

Having once heralded the Google IPO as a surefire success that would bring an important boost to the investment-banking industry, some on Wall Street are now changing their tune.

At least two equity banks have speculated that Google would postpone its IPO, based on both the SEC problem and what they believe is lukewarm interest from investors.

“There is unconfirmed speculation that Google is considering pulling its IPO, due both to a poor reception for the offering and the issue reported yesterday with shares issued to employees and consultants that it failed to register,” read an internal memo circulated this week at one bank that was seen by CNET News.com.

Mountain View, Calif.-based Google is preparing to raise as much as $3.3 billion in an offering that could happen as soon as next week, according to bankers familiar with it. But as the launch closes in, the search company is being inundated with negative publicity that paints the IPO as overpriced and undesirable.

That’s a sharp reversal of fortunes for a company that only months ago was seen as powerful enough to essentially rewrite the book on how technology IPOs are done.

Google has been full of surprises for Wall Street and investors from the moment it filed plans for the offering with the U.S. Securities and Exchange Commission.

The company has angered some people in the investment community for what they call its hubris and its unorthodox approach to the IPO process, which covers everything from its dual-stock plan to the “Do No Evil” mandates laid out in its prospectus.

“Institutional and retail investors are taking a wait-and-see approach. There is no real advantage to owning the stock before the IPO,” said one investment banker, whose firm is participating in the offering and who asked not to be identified.

Unlike traditional IPOs, Google’s stock launch will feature a Dutch-style auction format that aims to democratize the sale process and give individual investors a better crack at buying into the company. But that has alienated institutional investors, which typically have the option of setting the initial share price and of buying in early so that they can get a “pop” from the shares on the first day of trading.

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Source: www.business-standard.com/

Punjab National Bank’s (PNB) proposed foray into life insurance with the UK-based Principal Financial Group, UK Paints (India) and Vijaya Bank has hit a roadblock, with some of the partners wanting to withdraw from the venture.

Berger Paints, which was to own 32 per cent in the new venture - ‘Principal PNB Life Insurance Compan - is considering withdrawing from the venture, while Vijaya Bank, with a 12 per cent stake, is weighing its options. Principal Financial holds the remaining 26 per cent stake , the maximum that a foreign partner can hold.

PNB, which has 30 per cent stake in the joint venture, said the venture needs to be reviewed.

“There has to be some rethink on the proposed venture. There is a problem as some of the shareholders are not willing to participate,” said K C Chakrabarty, chairman and managing director, PNB.

In May, the Insurance Regulatory and Development Authority (Irda) declined to clear the R1 application of Principal PNB Life insurance and had sought clarifications. The clearance is basically an in-principle approval by the Irda to the proposed terms of an insurance company.

“We had asked for certain clarifications on which they have still not got back to us,” said an Irda official.

According to sources, the Irda had raised concerns on the participation of UK Paints in the venture. The Kolkata-based paints company was considering withdrawing from the venture.

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