Wednesday, June 18, 2008

LinkedIn Valuation: US$1bn

After astronomical valuations of Facebook, here comes LinkedIn. The professional networking site has received US$53m investment in fourth round of funding. The transaction involving investment from Bain Capital, Sequoia Capital, Bessemer Venture Partners and Greylock Partners values the company at US$1bn.

Microsoft invested US$240m late last year in Facebook for a 1.6% stake valuating the social network at US$15bn. The high price tag attached with these deals puts all traditional valuation matrices like net profit, book value, PE ratio etc at back burner. While many analysts claimed that the deal reflected Microsoft's urge to grow its advertising business more than Facebook’s true worth, LinkedIn deal appears more balanced though still on the higher side. LinkedIn has 23 million members whereas Facebook had 50 million members at the time of the deal.

Some simple back of the envelope calculations show that deal valued Facebook at a PE multiple of more than 300 and sales multiple of 100!!! On the other hand traditional manufacturing including automotive component companies are being sold at annual sales multiple of 1 or even less. Are we missing something??? The situation resembles tech bubble euphoria. Last year, eBay admitted that it overpaid for the internet telephone service provider Skype when it bought it for US$2.6bn in 2005. Back home Satyam paid hefty INR4.99bn for some Indiaworld (I doubt if anyone remembers it now except Rajesh Jain) at the height of dot com bubble.

Unlike Facebook, LinkedIn is making profits and generates revenue from advertising and premium subscriptions. The company also may make acquisitions with its new cash. Let’s hope it’s not the other bubble in the offing.

Tuesday, June 17, 2008

PIPE deals: PE players caught on the wrong foot

Ahhhh…. sounds like consolation, but it’s not just retailers losing money in the market. Even the valuation experts were taken by storm in the recent bull market.

Apart from the usual investment in unlisted companies with 2-3 years timeline, Private Equity (PE) players invest in some listed companies as well. These kinds of deals are known as private investment in public enterprises (PIPE).

It not a written law in some market bible that PE firms can’t invest in listed companies, but they usually refrain from doing so and for good. Last bull market saw many PE firms charting PIPE deals at exorbitantly high valuations only to see their money vanishing in a jiffy.

A market study by Venture Intelligence shows at least 33 such deals are already out of money. The impact gets magnified with additional information that PE players striked 51 PIPE deals last year.

The deal book has all big names including Carlyle's investment in Allsec Technologies, Reliance Capital's in Maxwell Industries, Goldman Sachs Investments' in Spentex Industries, New Vernon's in JB Chemicals and Unichem Laboratories, Clearwater's in Kopran, ICICI Venture's in Geometric Software. Nalanda Capital lost heavily in Vaibhav Gems where it invested at Rs230 per share. The scrip is trading at Rs70 nowadays.
However, the deal format is not likely to fade away. Most players see market reaction as a temporary blip and are really not bothered. The PE funds are likely to play a more activist role in running their investee companies.

Monday, June 16, 2008

25% returns strategy: Way to go

Financial year 2007-2008 has ended and Indian stock markets are off the radar of global investors. Most mutual funds gave excellent returns as long as the market was in top gear and there is a clutch of funds with superb numbers even after the January crash. However, retail investor is again trapped with no solution in sight.

If the situation is prompting you to think that stock markets are a perfect destination for becoming millionaire by investing billions, please stop reading this. With all sincerity and after taking a heavy beating on my own portfolio, I still believe that stocks are perfect to make serious money without sharing the same risks of running a business. World’s richest person got all his greens from investing in stocks, after all.

The description should ideally lead to the conclusion that rampant and wild directionless investment albeit large size is not going to get anywhere except at the bottom of the pile. Simultaneously, it calls for a change in investment strategy. Talking about one year outlook from here, almost everyone will agree that markets will appreciate by 25% (assuming 18.75K with one year from 15K now). But very few can claim to generate 25% returns on their individual portfolios.

This is in contrast to the fact that generating decent returns from here is relatively easy as compared to the situation 4 months back. Investor’s response to the same question would have been positive just 4 months back.

The logic of overreacting markets while technically correct lacks conviction here. Broader markets appreciated much more than Sensex or Nifty with penny stocks touching dizzy heights. Markets have reacted like this only in the past and there are no indications of change in its way.

Intermediate concerns about inflation, rising oil prices, impending elections and fears of drop in corporate earnings are all just and fine. I’m calling them intermediate as these concerns loose ground as soon as market starts going up. So, for die-hard bulls, here is the way to go. I wouldn’t be dwelling into the time tested axiom to invest in blue chips as it has already been assumed.

1. Cash is still king
I assume most of the investors have lately started to appreciate the beauty of this cliché, with compelling valuations but no cash to invest. Last year, Warren Buffet was being criticized for sitting on cash (no small amount, US$38bn), eventually he was laughing all the way to the bank. While we are not investors with a high degree of sophistication, it makes sense to exit the market at the high levels and keep the cash to be invested at lower levels. Use small rallies to sell.

2. Cash itches….a lot
Most investors, after pocketing reasonable returns and holding on cash soon develop the urge to reinvest the amount. Wait for the market to come down. Sustain the temptation now, remember it later for good.

3. Invest in a staggered way
No one has got money these days. Dedicate a certain amount every month to be invested in market. You will see your money growing six months down the line.

4. Plan B: Get aggressive at bottoms
There is no business in the world without risks and surprises. Stock market is no exception. Just like there are chances of failure in any other business, stock market has its share too. And just like any other business, there should be a plan B for this market as well. This is for all those dare devils who want positive returns at any rate. Leverage your portfolio by pledging the shares. In any case, you are not going to sell the shares at these valuations. Pledge them, get loans against securities and invest the amount at lower levels.