The Economics of Net Stocks

All this money’s meant for the Net–eiya,

eiya,

ohhhMoney for e-commerce, money for Web developers, Money for ISPs, money for content creators,

Lots of money for Web-related ventures, Venture capitalists had lots of money–eiya,

eiya, ohhh







It’s the latest buzz in the country. No, it’s not the Net, it’s not some breakthrough in technology 


either–it’s the market capitalization of the Internet-related companies, and the unbelievable amount of money available for investment in any Net-related business.

Sometime in September, I was speaking to the promoters of a peripherals distribution company that went defunct in 1997, but continued to be listed on one of the stock exchanges. The company owned nothing. No land, no operations. Despite doing no business, they continued to be listed in the hope of starting something new under that name. Earlier this year, they decided to jump on to the Net bandwagon. Though they were still to decide what they would actually do, they went ahead and renamed their company from, let’s say, ABC Peripherals to ABC Internet Services. A smallish announcement was made to this effect, and their stock price moved up by Rs 15 on the first day itself. No company, no operations, and the stock price moves up on the first day after just a change of name. Okay, Rs 15 sounds low as compared to the “Bata pricing” deal of Rs 499 crore in the Indiaworld-Satyam case. But to my mind what these two and many similar cases seem to have in common is a clear lack of logic. That is, the value that’s being assigned to the Net-related operations seems to be way above what the returns can command over the next five years. 

In the first case, there’s no operation and the price shoots up by Rs 15. For the Indiaworld—Satyam case, there’s no doubt that Rajesh Jain has put in a lot of sweat. He’s also known to be one of the nicest people in the business. He’s run his operation with very little promotion or noise. Yes, he did have a traffic of 1.3 million eyeballs, a turnover of Rs 1.3 crore last year, and a profit before tax of Rs 25

lakhs. He also has content-solid sites. But does all this put together justify a cash deal of Rs 499

crore? So what did Satyam see in this deal to pay an amount which, I assume, is not too large for them? The profit that Indiaworld achieved last year? The eyeballs that they have? The fact that Satyam’s own stock price would increase as an effect of this deal?

Rediff.com, I’m told, is valued at $150 million–that’s a whopping Rs 600

crore. Not surprising anymore, considering that Indiaworld and Co have made a killing of Rs 499

crore.

Here’s another case in point. Just a year ago, when I was involved with a Website operation, I had two reputed venture capitalists hounding me to let them buy into our site. Since I wasn’t familiar with this aspect of the business, I decided to check with one of them on what basis they would value our operation. I was surprised to know that the valuation would be done on the idea (sounds fair), the people involved with it or their perception of these people, and a few other parameters which were simply not quantifiable. I admitted to them, frankly, that we ourselves didn’t see much money coming out of the venture for the next five years. To my amazement, their response was that they too didn’t see too much money for the next five years. So why were they in it? Their response was that they would exit out within four to five years, when the valuation would have reached their expectations.

Exit or sell out to another one like them, so that the chain of high and higher valuations would continue? Let’s be clear about one thing. Sooner rather than later, the genuine investor, who invests because he’s been led to believe that Net-related ventures are the future, is going to demand his pound of flesh. And with the kind of valuations that have been happening, very few organizations will be able to service this investor’s demand. That’s not to say that there is no future. Of course, there is one and that too a very bright one. But if all of us believe that it’s going to take at least five years for Net companies to become profitable, and that currently 1.3 million eyeballs and Rs 25 lakh can be considered good profit, is this the correct time to value portals at such fancy sums? Rs 499 crore kept in a government saving scheme, would double in about seven years or less. Hence, a venture that’s been perceived to have a solid future because of a profit of Rs 25 lakh and 1.3 million eyeballs in the current scenario will need to service investors’ money equivalent to Rs 1,000 crore in the next seven years. Will this be possible in a country where a majority of areas lack basic infrastructure? Or will those who diluted equity be blaming the third-party projections of high Internet penetration, which are conveniently used to raise funds today? Will all this lead to the scam-like situation that the finance industry went through a few years ago?



Can the industry leaders please share with us as to how a non-profitable company is being priced at hundreds of
crores? Can someone tell our readers how this money’s going to be serviced, and when the investor will actually see the returns that he believes he’s supposed to get in the form of dividends?



Till we get some logical answers from one of our leaders, I’d like to dedicate a song to the venture capitalists who make it all happen. 

For they’re jolly good fellows, for they’re jolly good fellows.