Fin funda - Real Options and Strategy

SAPM cases are most interesting. Every case session enlightens you so much about the real action in world of finance . Would be discussing the the Real Options Case tomorrow.

Real options is the extension of financial option theory to options on real (nonfinancial) assets. In contrast to the valuation of financial options where decision-making it is a matter of shopping for the best deal on a specified contract the valuation of a real option requires that it be identified and specified..

While the Present Value Calculations and standard Discounted Cash Flow techniques are needed as check on strategic analysis, they can not estimate he option value attached to a new/profitable line of business.

According to Myers

"Strategic planning needs finance. Present value calculations are needed as a check on strategic analysis and vice versa. However, standard discounted cashflow techniques will tend to understate the option value attached to growing profitable lines of business. Corporate finance theory requires extension to deal with real options."
Stewart C. Myers, Sloan School of Management, MIT (1984)

So does the market price real options ? Consider this ..

Lucent. - If you used a traditional analysis based on projections of cashflow from current products, Lucent would be priced at just over $4 per share. Since its spinoff from AT&T, Lucent has been trading far above that amount, often in the range of $70 per share. The difference is the capitalization by the financial markets of Lucent's growth options

Amazon.com. - Company went public before becoming profitable and announced in its IPO prospectus that it would not be profitable in the near future. Amazon.com is also a growth option play. A large part of the company's value is its strategy to make strategic investments today that create options - opportunities to possibly make further investments in the future. Enhancing Amazon's value is Wall Street's perception that the company has the managerial abilities to execute these options.

Cable industry (The case for tomorrow) - Laura Martin of Credit Suisse First Boston has used the real options approach to value cable plant.

Real estate - Emphirical evidence suggests that real estate prices reflect development options and research papers such as Quigg (1993) prove it.

The real options approach has and can thus be been applied to water infrastructure, film , industry, technology sectors like telecom, R&D sectors like Pharma, Biotechnology and capacity critical sectors like Power.

Get the real options FAQ here while I wait for Proff Mohanty to shred the case threadbare with his analysis tomorrow (or today its past 5:00 am already;)

Sumantra Ghoshal (1948-2004)

"This is a belief that business and, by implication, both entrepreneurs and managers, are the key engines of both economic and social progress. It is business that creates and distributes most of an economy's wealth, that innovates, trades and raises the living standards of people. So business is and must be a force of good..."

Sumantra Ghoshal (1948-2004)

A tribute to management literature's most prolific and creative writers by the man who succeded him as the dean of Indian School of Business

Achieving dreams - The story of Dr. V

To gradually make this blog impersonal was a conscious choice. But I really want to share what I felt today after the class and more than that the reason for it.

Am still looking for words - impressed (not good enough), proud (yes, but only partly correct), motivated .(yes indeed), but more than everything else humbled and touched.

Here is this one man who had a dream, a vision - to eradicate needless blindless and with it he had, a dedication to pursue that dream. Something that made Aravind hospital a case study in Harvard Business Review. A business model to serve people but one that is self sustaining and growing. A business model that does not rely of donations. It serves the community and does that from its internal accruings and efficiences. A man who has involved three generations of his family in serving people. I salute you Dr Govindappa Venkataswamy. The man whose name all those mangement professors could not pronounce and just called him Dr V. The man who has done 100,000 successful eye operations with his cripled hands.

I can't show others the video that I saw, the this link -The vision of Dr V covers the facts of the case.

What started as a 40-bed hospital in little-known Theni near Madurai has become a global centre for excellence in eye surgery - the Aravind Eye Hospital. It now boasts of a 5,500-bed setup spread across five hospitals in Theni, Madurai, Coimbatore, Tirunelveli and Pondicherry. What's even more amazing is that this fast-growing, sustainable model has been possible despite the fact that two-thirds of the patients at Aravind are treated free of cost.

Someone said this 'success and growth story' is something they should show to all b school grads. Can it help ?. Is it motivating enough when all efforts are going into selling soap or working on excel sheets. This is not something you can teach, it can only come from within.

Thanks a lot Prof Prabhu for sharing this with us.

Of strategy through movies and arbit stuff

One of my favorite courses this term is winding up. Strategic Management or Corporate Strategy and Policy as the gentleman teaching us, Proff Ganesh Prabhu likes to call it. He is really an amazing professor. Learnt a lot about real life companies, analyzing their environment, their strategies and also how to deduce and solve their problems. More than three hour session today and no one is complaining. How can we if he decides to give us a lesson or two in hostile takeover and principles of shareholder wealth maximization with a movie - Other People's Money This review describes this Derry Devito comedy as a business essay. Danny Devito plays the role of short greedy weird Larsen Garfield. The star cast includes Penelope Ann Miller and Gregory Peck. Danny takes over undervalued companies and makes money by liquidating them. His next target is New England Wire and Cable Limited. The company is unlevered and would fetch 2.5 times its share price even if sold as scrap. But the owner ofcourse do not want to loose the company.

That reminded of the just failed takeover attempt by Philip Green Of Marks and Spencers. Three bids which were rejected by the Marks and Spencers Management. The shareprice did fall after te takeover bid failed as this article states, but according to analysts the company gained overall because of the measures that the bid prompted chairman Stuart Ross to adopt. Plan to look for more info and financial data about the case when I get some time. Useful links and contributions are most welcome.....

Anyway in the class discussion the proff said management puts their careers in stake in an organization and hence it is probably not unreasonable on their part to expect something more than ordinary shareholders. He justified the expectation of some extra compensation expected by management in case of takeovers etc and how that would increase efficiency by increasing their stake in the system. Would it? Am not sure actually. If that were the case Enron, Arthur Anderson would not have happened. After all isn't is an accepted and logical conclusion these days that ESOPs more often than not lead to artificial inflating of stocks prices. Wanted to argue/discuss but then it was almost 10 pm and junta looked as if it needed food so gave up the temptation for CP :) ..Peer pressure works...;)

YourManinIndia.com - For anything you need in India and WTO

YourManinIndia.com - For anything you need in India - A TTK Service A new concept. This site provides services to Indians living and working outside India for what they want to do but could not. Starting from buying,selling , renting real estate to providing legal advice to filing tax returns to taking care of their old/sick parents. The service was covered by BBC today which made me go and check out their website. ET too covered it a few days back. Accomplishments enough for a website that was started just four months back. Entrepreneurship needs creativity indeed.

By the way, more WTO, It seems Brazil, Australia and other developing countries won a big battle which one court ruling that the EU subsidies to sugar farmers were illegal. BBC has been playing the story for last two hours not missing to mention that the ruling is confidential ( hmm ? funny eh?). The Brazilian official too couldn't hide(intentionally displayed ??) his happiness though he said , "Umm Its confidential, we can not talk about it, BUT we are satisfied" ;)

WTO gets a breather

One day past the deadline of July 30, the world leaders decided to give WTO a extension. The developed countries apparently promised to get rid of agricultural subsidies, the biggest concession so far. So the european union and US have fallen in line.Though the developmnet is being hailed s big step forward for developing and third world countries, do not jump to conclusions - There is a lot of read between the lines. Apparently the agreement does not talk about any numbers or deadlines. Many subsidies have been excluded - the countercyclical subsidies of USA, the rich can still protect their sensitive, and the pooor their special products. The poorest countries on the other hand have been relieved of the tarrif cuts, another dilution in the agenda.

The saving grace - the deadline for Doha round of negotiations has been extended to next year. More time to persuade people, opportunity to talk to an American president who is not immediately burdened by an election an ofcourse people ready to compromise atleast in principle - the rich countries ready to pay a price for developing markets.

Full analysis in this Economist article

From the playground to the podium

From the playground to the podium
Interesting article this on Presentations.com. It talk about things that men and women can learn from each other. It starts with the old quote, "When a man gets up to speak, people listen, then look. When a woman gets up, people look; then, if they like what they see, they listen." (could help mentioning it here). Anyways it continues with some examples to suggest how gender sterotypes are not completely baseless. There is this to reference to a book by Judy Tengly, "GenderFlex :Men & women speaking each each others language" , which says presentors should customise their approaches to appeal more to the opposite gender in the presentions. (The book of course was controversial - am planning to look for it).

The article says men would be better if they emulate the inclusiveness of female interactions and the give and take of their politics. According to another author, women tend to be better at striking a dialogue and hence draw the audiences in to the presentation.

Men on the other hand have voices that work in their favour. The article refers to something I have seen so very often , the tendency of women to raise their voices into a little girl pitch, which lowrs their credibility.Male voices are definitely more authoritative than women. Men tend to use fewer words while women tend to qualify statements & digress. No wonder men are believed to be decisive. The article furthur talks about how a man tends to downplay his doubts (true true so very true ..) and a woman her certainity.

Last but not the last ...."Good planning separates the women from the girls, the strong from the weak, the confident from the fearful, and the men from the boys." (Phyllis Mindell, How to Say It for Women , Prentice Hall Press, 2001)

Birthday Wishes

This is one birthday I can not forget
Happy Birthday

Loans for TCS IPO

Well this is radical. I went to Bishtupur (the popular market here in the Jamshedpur) this evening and from a moving auto saw two men holding a banner which read Loans available for TCS IPO. Couldn't see the name of the bank whose initiative it was but never the less its amazing in more ways than one. 

-> The banks seems have become really aggressive. How often would you found them jumping at opportunities like this.

-> Indian advertising is reaching out to make an impression in all nooks and corners of the country. Earlier I   Thought you could find such advertising only in hep places in metros (Multiplex complexes in Delhi for example)

-> Last but the not the least, the days of IPO are back. Another good sign for stock market. While at work back in May in remember how one company asked the underwriting firm (my summer internship co) to go slow with their IPO after the stock market crash. Maybe they too would have come back now. Thank you TCS, its good for you too.

->What is also evident is that retail investor is focus of everybody's attention. He is expected to be interested in and important enough to provide an opportunity big enough for launch of schemes targeted at him

Good days ahead for all three kinds of players here if these expectations are meet.
Searched the net to come across this article:  India's Uco Bank Extends Finance for TCS Float

The 9/11 investigation report is out too

NDTV.com - US welcomes 9/11 report Interesting coincidence (?) this. My watching of the movie coincided with release of this report which blames the 9/11 attack on "failure of imagination" (gosh really interesting terms these - open to interpretation :). Well the report blames US government, the institutional shortcomings but spares the US president. Coming in the wake of impending November presidential elections, this is definitely a relief for republicans and Bush Junior. As I listened to BBC news no wonder Bush welcomed the report and talked about fast implementation of the recommendations of the commission. As did the Democratic presidential candidate John Kerry. So just as it happens in India I guess there is just going be a lot of talk and little or no walk with both sides trying to cash in on the report in elections.

Its 5:00 am, am far from sleeping. Its high time I get my body clock in order & catch up on some studies. As the yahoo status message of a friend states..from tomorrow change ;)

Tomorrow is the only day in the year that appeals to a lazy man. ~Jimmy Lyons

Fahrenheit 9/11 - About freedom of expression and corruption.

I have become a total nocturnal animal. Its 6:00 am and I have just finished Farenheit 9/11. The movie was thought provoking. That the US interests in Iraq were oil is wide known but movie made me think about something else. Some time back in a curruption index ranking India was ranked 83 among 133 countries. Tried to look for USA, it was way up at no 18. Am still wondering is this too is a case of halo effect (or arm twisting ?) for a developed nation. No this is not to say I believe everything that is depicted, infact the political associations and message of the movie seems to be too obvious. But never the less, the even if half of it happened, its enough to change my view that politicians in our country seem to be the worst lot.

But I can't deny one thing, in India you could not have had public screening of such a movie. In no way could it have CNN.com - 'Fahrenheit 9/11' breaks records - Jun 27, 2004">broken records. Infact the wounds of tehelka are still fresh. The largest democracy of the world is definitely is not open to criticism or people pointing fingers at the skeletons in its closet

Sony and BMG - The german japanese marriage

The two strategy courses really intererst me this term. For example the news of the upcoming merger of Sony and BMG. Together they command would 25% industry share (second largest after Universal). With the top four players cornering 80% of the market share, no wonder the independents and other small players are crying foul about the BBC NEWS | Business | Sony and BMG merger backed by EU">EU approval of the merger. All might not be good for small consumers as the companies together will be able to crack down better of piracy and cheap music, the major problems faced by music industry. The merger is still undergoing antitrust review in the US though.

Technology Companies test the market

The IT success story had been watched the world over. Google created ripples earlier this year by launching the gmail service that redefined the standards for free email services.(That reminds me my two invites are still open). The company has now filed $2.7 billion IPO. The IPO is being handled by Morgan Stanley and Credit Suisse First Boston but, what is interesting is Merrill Lymch pulled out of the IPO citing poor profit potential. This unofficial site discusses the IPO. Analysts advise investors to buy it and then sell ASAP considering the possibility of hyped valuations.

On the Indian scene after last two years of dilly dallying, TCS is finally coming to the market. The company has already submitted its red herring prospectus to SEBI. Last heard it was supposed to be priced around Rs 800/share. Unofficial word says the company plans to launch its IPO on July 29, which coincides with be centenary celebrations of the group.

The Budget

The Economic Times article does not mention how much is the excise duty on computers. If you have similar problems access the full text of budget here

Anyways what affects people like me majorly

- The 8% excise duty on computers has been removed. My new computer should cost Rs 2000 less atleast.
- The collateral requirement has been waived for educational loans up to Rs 7.5 lakh from Rs 4 lakh (Doesn't help much. Banks did not follow this anyway)

Anyways this is what I could make of the budget, trying to address the concerns raised by Stephen of Morgan Stanley.

+ Plans to make procedures for registration and operations simpler and quicker for FIIs
+ Investment ceiling for FII's in Debt funds has been increased from US$1 billion to US$ 1.75 billion;
+ As far FDI is concerned, caps have been raised in Telecom (74%), Insurance(49%) & Aviation(49%)
- Disinvestment targets for 2004-2005 reduced to Rs 4000 crore
- Profit making PSU's not to be sold
+ If your taxable income is below 1 Lakh no tax (Rs 9000 saved/year)
? Non Resident Deposits no longer welcome(interest to be taxed)
+ Reasonable Fiscal Deficit at 4.4% of GDP

Capital Gains Tax
- Long term capital gains tax abolished
+ Small investors - Short term capital gains taxed uniformly at 10%from earlier 10%/20%/30% regime.
These two apparently led to the a lot of selling pressure from small investors.

- Transaction tax on all securities (15 basis points)
This one sent the capital markets on a nosedive. Would majorly affect big players, brokers and mutual funds who churn their portfolios often. More so beacuse its across the board and cannot be escaped. (Future and Options and bonds included).The FM also planned to put an end to bonus and divident stripping. No longer can you make a killing by those bonus shares. I hope dad has booked some of his profits.

All the direct taxes of course need to be approved by the parliament first.The criticism of the budget is though it promised "Growth, Stability and Equity", And it does seem to be satisfy the last two of its objectives , the growth part seems to be meant for certain sectors like agriculture

Anyways here it direct from the horse's mouth. An interview with Mr Chidambaram after budget

Controversy Sells ?

Well I wonder if that's a question. But it came up again in class during the discussion of ethics at workplace . The professor referred to increasing reporting of interpersonal abuse in the media as proof of its increasing clutches on our society.

I think the reality is different. With survival pressures heating up in all sectors. Organizations are thinking of ways to sustain and grow their market share. Strategies like innovative advertising, new products, added functionalities etc do not work in case of newspapers websites and other such means of communication. For a newspaper TOI (Times of India) defied the assumption that you can not anything innovative to it by 'giving readers what they want'. (Check out a previous post here).It today is the market leader. If I look around, the same phenomenon exists everywhere. Talk of websites like Indiatimes. All those who have learnt that you can't sustain by catering to the elitist customer. Post a controversial news/spicy photo/article and the no of hits to your sites multiply many times. Catering to people who want celebrities and other such news on page three is a thing on the past. Now such articles occupy their proud place on front page. The increase in no the hits or circulation once you publish something is definitely worth it, seems to be the consensus. Parveen talks about an incident reflecting this in his blog.

This is one issue I have told many people about...So here it goes again...

We had this Kamasutra sex survey a month ago, the results of which were published in many leading magazines.The Times of India had published them too, in the front pages of its supplement, The Hyderabad Times. The next day, a guy wrote a letter to the editor. I don't remember it verbatim, but I'll try...

"Sir, Nowadays we have been seeing that the Times is publishing more non-news items than news items...Many people in my organization are thinking of stopping the newspaper, since there are kids at home who read the same stuff...I don't think you should have published such stuff in the main pages...."

The reply from the editor was..
"Dear Reader, Thanks for your valuable opinion. May we suggest, our esteemed sister publication, "The Hindu"

The message being there is no moral dilemma what so ever. No wonder most of our class is circumspect about the media. We have learnt not to take things at face value.

Thomas Jefferson, the third president of USA and a co author of Declaration of Independence wrote in a private letter, "I have sworn upon the altar of God eternal hostility against every form of tyranny over the mind of man". His opinion of newspapers was

" The advertisement is the most truthful part of a newspaper."
" The man who reads nothing at all is better educated than the man who reads nothing but newspapers."

Anyways coming back to the issue the professor raised, I think increasing reporting reflects something else, that there is increasing awareness, that what was under the carpet is being talked about and rectified. That hence is a reason for hope, a step forward
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People everywhere confuse what they read in newspapers with news. A. J. Liebling (1904 - 1963)