Archive for January, 2007

Back to backdating ways

January 30, 2007

Are you one of those who have lost money due to the backdating of stock options by directors and officers – and wondering what it all means ?  Don’t worry, going by the news stream, you are going to be in solid company.

Apple Computer has concluded an internal investigation into backdated stock options and found that while CEO Steve Jobs was aware of the practice, he did not personally benefit from it.  [ Doesn’t quite cover your ass, Steve ! ]

Admitting for the first time that former officials intentionally priced stock options retroactively and falsified documents, KLA-Tencor today restated its past results to include $370 million in charges related to those backdated options.

These corporate directors and officers engage in a scheme that enable them to award stock option grants to themselves on specific dates corresponding to low stock price trade dates in the past. This ensures that these officers and directors would maximize the cash value of their option grants.

A stock option has traditionally been defined as an incentive given to officers and directors to purchase the company’s stock at a lower price based on the actual trade price of the stock at the time the option is granted. Since the compensation committee within a company’s board of directors determines the fair market value of such options, they were backdated so as to ensure better profits for those who received them.

Dr.Erik Lie of the University of Iowa did a study on the behavior of stock prices before and after option grants, looking at 5,977 option grants between 1992 and 2002. In his paper, he discovered that unless executives were truly clairvoyant in their market timing, they had to be backdating the grants. Essentially, companies were pricing options on days in which the firm’s stock was trading at a low for the week, month, or quarter; thereby almost guaranteeing a large profit for the executives. Who wouldn’t want to name their own price on a bonus or a stock? Unfortunately, the market isn’t run by priceline.com, and the practice of backdating options lowered income levels, thus evading certain taxes and bilking company shareholders out of a considerable chunk of profit.

A detailed article and profile of Dr.Lie as appeared in WSJ is available here, that which appeared in AP is here and a copy of Dr.Lie’s testimony to the US Senate Banking Committee is available here.

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On getting advisors

January 28, 2007

I reserve my posts in this blog mainly for guiding startup entrepreneurs and aspiring Angel investors. I was in one such frame of mind as I wrote mentor metrics.  My accent in that post was what to look for in a mentor while going for one and my last sweeping para was mentors are not a `must’ if you can’t land the right one.  I had also followed it up by startup strategies outlining a few essential guidelines for entrepreneurs who ignored strategy early on.

A while ago I was reading an article written by Chase Norlin in Venture Beat on the importance of assembling an advisory board.  Chase is busy founding Pixsy, a company in the competitive video search industry.  

My redeeming moment came as I was reading the para where Norlin said something similar to what I had said about mentors – which I quote here.  “Keep in mind that not all advisors are equal and they’re all very different, just as every person is different. While their advice is usually intelligent and grounded in experience; it is, nevertheless, just their advice. You’ve got to always follow your own instincts”.  The stress on individual enterprise is unmistakable.

A theory too much

January 12, 2007

I think a financial phrase has no right to exist if it is composed of words which are extremely arbitrary or which cannot be accurately ascertained.  At best, such fluidity can be allowed only in poetry or literature. It can wreak havoc upon businesses as often it would result in distorted valuations of an enterprise.

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Like many other arbitrary financial modeling theories, I am a little confounded by this tenuous concept of “Lifetime Customer Value”  increasingly used by mobile phone service providers and retail chains. Particularly since business can only `hope’ for a customer to last a lifetime ( of your business or that of the customer, it’s not clear yet ! ) even as it’s not certain how long that is going to be.

The lifespan of such theories and their relevance is often determined by the arrival of yet another, more dubious and even deeply confusing theory. Management theorists hog the limelight, make a living by frequent introduction of such questionable concepts and get away with it before its futility dawns on the actual user.  That may be how management theorists get by, but if I can salvage a company from going belly up by blowing this whistle,  I make the day for thousands of shareholders.

It occurred to me while I was looking up this K@W report on the ongoing bidding game for Hutch Essar.   According to this report, the entire valuation of the deal is getting close to $ 20 billion for Hutch Essar, India’s second largest mobile phone services provider, which currently has 22.3 million subscribers and $1.3 billion in revenues.  On the basis of these numbers, the bidder would be paying roughly $1,000 per customer, a tall order since China Mobile’s failed bid last July to acquire Millicom International Cellular SA of Luxembourg, valued its customer at $500 only, a comparable outfit since like Hutch Essar, Millicom is also adding about a million customers a month.  

Wharton marketing professor Peter Fader senses serious disconnects between what he calls the “base behavior of our species” and the valuation assumptions made by both bidders and sellers of companies such as Hutch Essar. The revenue promise held out by Hutch Essar’s existing and projected subscriber base is often seen as crucially linked to how the service is priced and the functionalities it offers. “Here is where the deal makers may be off-key”, says Fader.

Fader suspects the valuation math in deals like Hutch-Essar is far from scientific, basing his assessment on statements in corporate financial documents. “I’ve never seen a case where a company has estimated customer retention — or at least admitted to doing it — in a manner that their shareholders should insist upon,” he says. “They are using very crude estimates of retention; they are assuming that they are constant across customers or over time rather than capturing the huge dynamics that take place there.”  

I am happy that I have some support from a person of considerable academic eminence.  But I am worried about the shareholders of the winning bidder.

Just that the theorists will still be around spinning the next fad.

Why not yesterday…?

January 9, 2007

When I was young I craved for a lot of things. The latest bike, a cool music system, some more money to spend etc.  But all these things happened to me much after my craving had died down unfulfilled. I’ve often wondered, why good things happen so late in life..?  The best part of our life we slog and when we are done and clearly over the hill, it all happens. 

It seems one great rule of life is in the words “so much as you can take.”   

Life descends on us slowly as we can take it.  This is the rule upon which Life works with us. It does not show us everything at once.  If it did, it would destroy us.  Life knows that and does not show you any more than you are able to handle. 

May be, this is how life is configured.  It’s put together in such an amazing way that it appeals to your senses differently depending on how you look at it.  When you are awake, it gives you a hazy picture.  When you shut your eyes and meditate, heck – it’s much more clearer.  You can read the written word and yet if you are not ready for them, those words will not say a thing to you. But if you are open, you will learn something from them. The next time you can come back, read the same words, and learn something more.   Each time you will learn something more. It never ceases to refresh your spirit and instruct your mind and to open and expand your capacity to receive from Life. That is the way Life teaches us truth–as we are able to bear it.

And this is true also of its revelation to us about ourselves. One of the things about Life is that it shows you who you are and who you have been all along. Life is gracious to us that way. It does not just rip the veil off, and suddenly you see the whole ghastly thing. If it did, we would be wiped out. But it lifts it little by little. You shake and tremble and say, “Is that the way I’ve been?”.  You are aghast at the way you have been treating people, and you think, “Thank heavens that’s over!” The next week it lifts it a little higher. You shake and tremble and go through it again and say, “At last we got to the bottom!”. Then Life lifts it high enough for you to see more, and you are wiped out again. But you handle it, little by little. Because, along with the revelation of yourself, dear Life also reveals itself and its adequacy to handle your inadequacies.

Is it not wonderful that it understands us that way and deals with us like that? If it revealed the glories to us suddenly, all of us would be running out to jump into the ocean, to get there as fast as possible. But it lifts the veil only a little at a time, as we are able to bear it.

We may see glimpses of truth Life has for us as we grow up.  Have the wisdom to understand what we get and to search out what we do not understand. 

So that’s it.  We’ll get so much as we can take.  Just wait for life to descend on you. It sure will.

[ P.S – Posted more as a sequel to my previous post “making the VC cut” – almost as an afterthought.  To those who didn’t – you can blame it on Life ! ]