Prize catch

Inelegant exhibition of private wealth meets with public scorn as it’s often a thin border between finesse and gaucherie. Jealousy is instant though never admitted except in the form of paraded altruism. If it involves an industry that epitomizes ruthlessness and barbaric greed like Private Equity, it becomes indefensible.

One really feels bad for Stephen A. Schwarzman, the poor little rich guy. He just happened to be the czar of Blackstone group, and had developed a taste for $400 crabs that he ordered regularly. What’s the big deal? You eat $50 hot dog because you draw $ 100 k package. With a compensation of $400 m, is it not par for the course? May be he likes to host $5m birthday parties – can you blame him for bringing his industry into disrepute for that? Too bad. That's no reason why Congress suddenly wants to double the taxes paid by rich guys like him.

“Don’t worry Mr.Schwarzman. You are not alone. David Bonderman of Texas Pacific group has outmillioned you by notching up a bill of $ 7 million on his shindig.”

Senator Charles E. Grassley (R)-Iowa, is certainly jealous. He introduced the now famous “Blackstone Bill” - aimed at taxing carried interest of PE executives at the same rate (35%) as normal income as against 15% (capital gains) earlier. Some call it the Birthday Party Bill.

BTW, that $400 crab - is it the same crustacean they’re talking about? I guess so…

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Bailout is for wimps

While the impact of Rupee appreciation is always arguable, the desirability and effectiveness of RBI intervention has become a moot point of debate.

The stronger Rupee buys more for less. Is that not an advantage? The inflation has come down from 6.7% (Jan 07) to 4.3% now. It is welcomed by bulk importers, acquirers of global companies and travelers. Those who raised forex loans earlier and are repaying now are delighted as less Rupees repay more dollars. Forego the advantage? We are net importers and it benefits the whole nation to have a stronger Rupee and that's preferable any day to a few IT exporters benefiting from weaker Rupee. The ones that worry are the Exporters of services including IT, textiles, processed food etc., the tribe which made a killing earlier when Rupee was the dog. They've had enough rain. Now let others soak it up.

Others argue that in India the correlation between stronger Rupee does not necessarily mean lower inflation. Our three principal imports are Crude, gems and jewellery and capital goods. While crude prices are administered, others don’t feature in inflation index. But crude prices were administered even while our Rupee was weaker and $/barrel was high. The administered pricing enabled us to pay less per litre of petrol - didn't it ? That's two-way street and it blunts the argument.

Look at those who clamor. They are the ones who get least hit - IT fellows that have 20% plus margin. They sit on huge cash cushions (built out of the earlier weaker Rupee days) in the balance sheet, have access to and can afford premium hedging tools like forward cover, currency swap etc., besides natural hedges presented by a multi-currency revenue streams from wider geographical distribution of businesses. Contrast them with some 65% of exporters that come from SME segment - that export at margins of 5-10%. Even a minor rise in Rupee wipes their entire profits out. But it’s the IT that clamors more.

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Frankly the question is not whether RBI should intervene. Ask "how effective will that intervention be" and "to whose benefit" in an increasingly flat world where volatility is the new atmosphere. Wake up and be nimble. Adjust swiftly to currency fluctuations. Asking for bail outs is for wimps.

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In other words

And you thought bribes are par for the course only in the east. Wake up. Elsewhere, they call it rebates.

For the past six years, Advanced Micro Devices has been pleading in a variety of Romance languages for the European Union to take action against rival Intel for alleged abuses of its market dominance, and yesterday the company finally got its wish. The EU's top antitrust regulator has charged Intel with illegal business practices conducted over the years "with the aim of excluding its main rival, AMD, from the x86 computer processing units (CPU) market." Among the alleged offenses: Intel gave rebates to computer makers if they promised to buy all or most of their chips from it; Intel paid computer makers to delay or cancel products that used AMD chips; and Intel sold chips to some strategic customers below cost when bidding against AMD.

Intel has 10 weeks to file an official answer, but for the moment released a "who, us?" response. "The way ... in which competition is played out in this market is through price discounts by Intel and by AMD, and there is nothing unlawful about those discounts," said general counsel Bruce Sewell. "We believe that these rebates are lawful anywhere in the world." Should the lengthy EU process end up going against Intel, the chipmaker could be fined 10 percent of its global revenue for each year it broke the law.

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Naturally Stupid

I am just another naturally stupid guy that had nothing to do with Artificial Intelligence (AI).

But I became a great fan of David Gelernter after reading a few of his lucid descriptions of complex AI concepts that I stumbled upon, mistaking it for philosophy initially. He talks of AI in such a plain language, just as Stephen Hawking glides along deep science concepts in A Brief History of Time. Gelernter believes it’s highly unlikely that a conscious mind will ever be built out of software, and belongs to what he calls as “anti-cognitivists” camp. Here's to sample his style -

"So what is it like to be a computer running a complex AI program? "Exactly like being a computer running any other kind of program".

Of course, we can't know literally what it's like to be a computer executing a long sequence of instructions. But we know what it's like to be a human doing the same. Imagine holding a deck of cards. You sort the deck; then you shuffle it and sort it again. Repeat the procedure, ad infinitum. You are doing comparisons (which card comes first?), data movement (slip one card in front of another), and so on. To know what it's like to be a computer running a sophisticated AI application, sit down and sort cards all afternoon. That's what it's like.

The computer's routine never varies: grab an instruction from memory and execute it; repeat until something makes you stop.

If you sort cards long enough and fast enough will a brand-new conscious mind (somehow) be created? This is, in effect, what *cognitivists* believe."

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He amazes me with his lucidity. Aren't you too...?

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Trumping schmoozers

Last night I swore I’ll never go for another social do. I would prefer a one-on-one anyday.

Pseudo networkers chased everything in flesh. People with a cocktail in one hand sloshing through the ball room, passing out business cards in gay abandon. Was that networking or carpet bombing to snare future clients? To me, it smacked of cheap, predatory behavior.

At one point, I had a handful of business cards that I could no longer hold. I stepped out, sifted out a few I found interesting and trashed the rest. A guy saw me doing that and I was glad he did. At least someone got the message.

Few minutes later, this chap walked across to me and said – “yeah, I liked what you did. People should know how to connect”. But before I could react, he said “ By the way, I am Rahul and I work for….. Here’s my card…May I have yours?”

That’s when I made up my mind. Never….never again !

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Zander's problem

Motorola’s CEO Ed Zander has a problem…. He’s fast running out of excuses. He’s now getting used to a new game of taking the flak - "there weren't many really new 'wow' products" in the company's portfolio in the first half of 2007” he said on Thursday. His company posted a $28 million second-quarter loss as continuing weak sales resulted in its first back-to-back losses in five years.

Coming from Private Equity industry that is quite unforgiving on non-performing CEOs, Zander will have a tough time defending letting Motorola slip to the third position in the world handset market behind Nokia and Samsung.

Carl Icahn had seen it coming perhaps. Time to prepare the three envelopes, Mr.Zander ?

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Now we tinker, now we don't

When we mindlessly tinker with the substratum of any structure, it leads to disaster – Rule. The Mumbai building collapse is just the latest testimony. Back in 2000 when companies bought expensive IT applications and tweaked their business processes to suit it, I had the same kind of feeling. The myth soon got shattered when cash registers failed to ring and more cheques got cut than came in. If that led to a bubble burst, it gave us some lessons too. Technology can accelerate most things for us – even plunging headlong into disaster, but it can’t map our mind forever and auto pilot. The command has to be ours.

Looking at the communities (Blogosphere, Linkedin, Facebook) that get built in UGC enabled Web 2.0 applications, I am tempted to make an exception to this rule. The parallel Digital Democracy that cuts across physical borders is an opportunity to build a new kind of international understanding, not politician to politician, great man to great man, but citizen to citizen, person to person. Anything that enables a large global community (in excess of 6 billion) to work together on this planet cutting across borders, race and ethnicities, is always welcome - so long as it doesn’t call for H1-B or L1 visa, no profiling or finger printing excesses… It's a chance for people to look at a computer screen and really, genuinely wonder who's out there looking back at them.

As of now, the results are dramatic. There’s always the prospect of some expert out there on any topic. A support for anything from some far away corner of the world. Wait a minute… has it not been the way we humans were originally designed to function? Of course, yes – if so I am just revisiting the rule, not making an exception. Am I not ?

But that was before we fenced out earth into fragments of geographies as if we founded it…Perhaps the first instance of tinkering with the substratum !

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Leave the barn door open

Recently Deepak Parekh cautioned investors against the increasing trend of setting up India focused Special Purpose Acquisition Companies (SPACs) for raising funds on the AIM. After all round-tripped liquidity has always been scorned at and is not new to stock as well as realty markets in India. It's good to keep a watch always over the nature of money that's coming in. We don't want drug money laundered here.

But that's what it should be, a watch. Not blocking entry for legitimate portfolio investments where we need them badly. Wealthy portfolio investors round-trip investments because the door is bolted from inside. Why not leave the barn door open for funds to come back to, say, fix our infrastructure? Regulators like SEBI should focus on veracity and completeness of disclosures with an eye on the source and end use of funds. If the purpose is served well, let them take some tax benefits by all means, who cares. Let Funds come in initially with accredited investors who know what they are letting themselves in for. If that works well, broaden the investor base by allowing retail to join in.

Regulated or not, smart money will always chase opportunity. You can keep watch, but do just that. Don't go for their jugular....That said, already there are several active India focused SPACs - that don't have a web presence. I am linking their SEC filings that are available for reference - East India Company Acquisition Corp [regd], Global Services Partners Acquisition [GSPAC] [EDGAR], Millennium India Acquisition Company [EDGAR] and Phoenix India Acquisition Corp [EDGAR]

Markets thrive on liquidity – never choke them… We've just gotten rid of that habit. Don't hurry to get it back...

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The iPhone economics or is it ATT shackle

I am hearing this word `oligopoly’ more often now. Yesterday when I came across it, I curiously brushed up on my Economics. Today I heard it again as iPhone came in for some Capitol criticism.

Buying iPhone would mean sticking with ATT wireless is old news. What strikes its owners now is the $ 175 early termination fee that a customer will have to pay AT&T if he quits the network before 2012 – despite reducing iPhone to an expensive paperweight minus the service.

Timothy Wu, a law professor at Columbia University and commentator on technology issues, described the cell phone industry as "spectrum-based oligopoly" where customers have given up their property rights.

"Imagine buying a television that stopped working if you decided to switch to satellite," Wu said. "Or a toaster that died if you switched from Potomac Power to ConEd."

The more we think we’re liberated, the more we’re shackled….

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Zero summing outsourcing

“And don't pack my suitcase, I'll be back
And don't take my pictures off your wall
Oh, did you hear me?”

Even as PHIL COLLINS was crooning in, I was looking outside the window. A young boy was sitting under a coconut palm barely aware of the risk to his life from the bunch on top. Wanted to tell him a guy called Issac Newton has patented gravity sitting under a much safer tree. Wasn’t too sure IP mattered to this one…

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The rain had stopped and felt like a walk. Picked up a newspaper on my way and the headline screamed "Reverse outsourcing." Oh, really ? That seemed quite funny. Reading about that in India - arguably the world’s outsourcing hub, seemed a bit ironic. Naturally we expect the tide to turn too...

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Know one thing for sure. I won't be rankled like those anti-outsourcing crusaders... I just imagined a wide grinning Lou Dobbs ...

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"Thanks a million, Lou.... for giving me an idea for my own local show, some day..."
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The end of leverage ?

Blackstone Group units, ever since its debut at the US markets on June 22nd, had been closing below the $31 price the private equity giant fetched in its IPO, as investors fretted the private equity boom may have peaked. Some observers attributed the recent weakness to concerns about Blackstone's (Charts) lofty valuation, and a bill in Congress that would raise the tax rate on the profits of publicly traded PE firms to 35 percent from 15 percent.

Normally many in the PE industry would dismiss these concerns as unfounded. In fact the industry had grown exponentially even as its critics were working overtime. For them availability of cheap credit by way of leveraged debt to finance those buyout deals and infuse funds into the working capital of portfolio companies was what mattered. But now the worry is precisely that – cheap credit has been drying up owing to rising interest rates.

Sensing a shift in the economics of the industry, creditors around the world have started questioning the easy money offered to PE firms, which feed off risky types of debt. The prospect of dwindling returns makes buy-out firms reluctant to club together to buy the big companies they covet; banks, meanwhile, are growing wary of offering their own capital as “bridge” finance.

Well, it’s not yet time to sing a requiem to PE boom. But if interest rates keep heading northwards, it could soon be a contagion. PE is inevitably a “feast and famine” business: when one fund can raise a lot of capital, they all can. It helps turn illiquid bank-dominated debt markets into highways for delivering cheap credit. But the key word is “cheap credit”… something that’s drying up fast.

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The Indian illusion

"If the United States continues to outsource jobs to India in increasingly large numbers, people will begin to feel insecure and may very well seek more protection against what they view as unfair competition," said Hillary Clinton via satellite to the attendees of Global IIT conference in San Francisco.

To her I would say this. “Tell your countrymen not to worry, Hillary. Indians are digging their own graves by a combination of over-hyped productivity, wage inflation, rising attrition and low supply of skilled engineers. To that you add economic benevolence offered by a rising rupee, rising costs of real estate and power (as and when available!). They won’t stop until cost arbitrages are wiped out completely and Americans and their jobs are together again.”

P.S. - Not kidding....Ms.Clinton had planned to appear in person, but organizers announced Thursday she would deliver her remarks via satellite. The attendees were promised if they handed in their business cards they would be returned with a Clinton autograph.

Trashing culture

When city planners, builders and the architects forget the grain of people’s values and aspirations, the end result would look like Gurgaon - a city trying hard to shake off its small-town past and embrace modernity and a globalized economy.

Misguided attempts to ape the West have robbed Gurgaon of local aesthetics or any individual character. “Whatever happened to cities with a character? Delhi has a character, Mumbai definitely has one, so does Kolkata. Gurgaon looks nothing like a normal Indian city, at least not in the way its buildings look” – says Ravi Tej Sharma in Business Standard.

Joseph Schumpeter must be turning in his grave. The idea behind his concept of “creative destruction,” is that every innovation and new idea undermines the existing cultural and technological order of things. But would he have foreseen an effect like this?....I doubt.

In their hurry to monetize the realty boom, builders build what’s on demand, that 99% of the population finds agreeable. Too bad the other 1% just happens to be the people in the neighborhood where you're building. While your designs may be visually stunning, chances are that is all they are.

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Fencing out

After writing this column in New York Times, Ken Davis may have helped himself to a chuckle. After all, he bared the underbelly of American attitude towards immigrants over the years.

Quoting a xenophobic Ben Franklin for an opener, Davis made it clear that the [anti-immigrant] sentiment did not emerge from the rancorous debate over the immigration bill defeated last week (the bill was so bad that even the Congress couldn’t pass it!) in the Senate. It was neither the lament of some guest of Lou Dobbs show nor that of a Republican candidate intent on wooing bedrock conservative votes. It was from vintage America. Excerpts -

“As Americans celebrate another Fourth of July, this picture of American intolerance clashes sharply with tidy schoolbook images of the great melting pot. Why has the land of “all men are created equal” forged countless ghettoes and intricate networks of social exclusion? Why the signs reading “No Irish Need Apply”? And why has each new generation of immigrants had to face down a rich glossary of now unmentionable epithets? Disdain for what is foreign is, sad to say, as American as apple pie, slavery and lynching.

That fence along the Mexican border now being contemplated by Congress is just the latest vestige of a venerable tradition, at least as old as John Jay’s “wall of brass.” “Don’t fence me in” might be America’s unofficial anthem of unfettered freedom, but too often the subtext is, “Fence everyone else out.”

Logical? I had always held politicians normally don't like getting too far out on an issue. John Kennedy didn't when it came to civil rights, for instance. History is not all that bunk….

Don't screw up

Tata group, unlike many other Indian business houses, is trusted and widely respected in India. It is known to be deeply into philanthropy and takes its CSR seriously. It runs several charitable, educational and scientific trusts and institutions including TIFR, TISS, Tata Memorial Hospital that aid social and community development in a big way. The city of Jamshedpur is powered by Tata Steel and it stands in stark contrast to the poverty stricken state of Jharkhand to which it belongs.

So when Ratan Tata decided to bankroll ($80 mm) the HPC project mooted by Dr.Narendra Karmarkar late last year, the whole nation felt proud and patriotic. Dr.Karmarkar was to lead a team of scientists who are part of an ambitious project to create India’s answer to the newer, faster supercomputer. It’s a race that involves all the major superpowers in the world — the US, Japan and China – that were betting millions of dollars to push up super computing speeds to over 1,000 tera flops (one peta flop). Experts say once this new supercomputer is ready, it will open up an exciting new range of applications in biotechnology, defense and even weather forecasting.

But this morning, the headlines blared something else. Hinging on IP issues, Dr.Karmarkar is opting out of it. The report says Dr.Karmarkar wanted it to be a socially relevant project, while TATA group wanted to just play a VC role. VCs may be loath to extra ‘philanthropic’ baggage imposed on them by the inventor, but do we need tell TATA about the merits of long term investment? Considering the significance of this project and its long term benefits, we want both of them to reconcile and find a middle path.

Rarely do we get a combination like this. For heavens’ sake, don’t screw up….

Steakhouse opulence

In what could probably go down in history as one of the most extravagant dinner at a New York steakhouse, two investors (Mohnish “who” Pabrai and Guy “who” Spier of Aquamarine “what” Capital Management LLC) blew everyone else out of water in a charity auction and put in the winning bid of $650,100 to break bread with billionaire Warren Buffett. By the time they finish that dinner, the “who” and “what” would be long gone.

Frankly, when I had earlier felt auctioning to be the ultimate acid test and the best valuation model, I never expected it to be endorsed so quickly by these star fund managers.

Pabrai will pay two-thirds of the winning bid — about $433,000 — while Spier will pay the other third, about $217,000. His *investment* rationale (you can call that!) - Pabrai attributes much of his own investment success to learning from Buffett and a few other investors. He is the author of the book “The Dhando Investor”.

Another way of looking at it is a beneficiary who chose to repay a debt of generous gratitude for having immensely gained from Buffet logic. [Pabrai manages about $600 million for Pabrai Investment Funds in Irvine, Calif., which follows value investing approach]

Not everyday that you get to dine with a Warren Buffet, a man so rich, he had to hire world’s richest man to spend his money.

Buffett once said “I was wired at birth to do something that pays like crazy.” To dine with someone like that, you ought to do crazy things too….

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