What's The Big Idea?

Hold on. What’s happened to those hard-nosed investment bankers, who played hardball with their prey till the little fellows slashed prices? Why are they playing fairy godmother to every dotcom start-up which happens to come their way? If anything, bankers are happy that they’ve got their clients what they believe is a good deal, even at these crazy price-earning (P/E) multiples (a multiple of 385 for the indiaworld deal). Hear out Sanjiv Agrawal, head, valuation and allied services at Ernst & Young, and the man who valued indiaworld: "If you look at the benefits that Satyam gets out of purchasing indiaworld, they actually got it quite cheap."

Just how’s that? What happened to the age-old method of valuing a company on the basis of its assets, looking at its current and projected turnover and giving it a multiple of two or three at best, and setting a price? That is, a profitable manufacturing company with Rs 5 crore as assets and a Rs 10-crore turnover, growing at 20 per cent annually, would fetch Rs 30-40 crore.

Well, these methods don’t work in the dotcom business. Says Rohit Bhasin, executive director, financial advisory services at PriceWaterhouseCoopers: "With so many imponderables on e-commerce, it’s difficult to forecast future cash flows. So you can’t use revenue multiples." Also, most dotcoms are in the red and have no physical assets as such. Even if e-commerce does take off, nobody knows in what industries, and with what margins. Will e-banking happen first, or e-retailing, or maybe e-travel? Then the Yahoo!s and msns which are developing India-specific portals. How will their entry affect the Indian dotcoms? So how do you value them?

The real key is the NASDAQ in the US, the bourse that’s home to the big dotcom stocks. Just let the NASDAQ take the bet, and go with it. "If you believe the NASDAQ is correctly valued-and it’s booming now-you use that as a benchmark to value your own dotcoms," says Sanjay Sakhuja, partner, Arthur Andersen. Take the Satyam-indiaworld deal. Prior to it, Satyam’s two businesses-it’s an Internet service provider (ISP) with revenues of Rs 42.39 crore ($10 million) up to the third quarter of fiscal 2000, and a few portals with 4.5 lakh page views per day-were valued through market capitalisation on the NASDAQ at $1.5 billion. Typically, ISPS command a price six or seven times greater than their revenue. So, of the $1.5 billion market cap, only about $70 million can be attributed to the ISP service. But let’s get conservative, and say that investors ascribed equal value to both businesses. That would mean that 4.5 lakh page views that Satyam managed daily were valued at $1,500 per page view. That’s among the highest in the world (obviously NASDAQ investors believe that Indian netizens are as lucrative as those in the US). Each Yahoo! page view gets a valuation of $200, an Infoseek page view manages $50, while at the top of the heap, China. com commands a valuation of $860 a page view. In this context, indiaworld’s monthly 13 million page views-mostly by NRIS-got valued at a fairly reasonable $250 a page view. Satyam investors seemed to agree. From $1.5 billion before the acquisition, Satyam’s market cap stands at $4.5 billion today.

indiainfoline.com Live reports from the bourses and a facility that allows the visitor to track the value of his share portfolio has turned ex-Lever executive Nirmal Jain’s eight-month-old baby into arguably India’s most popular financial news website.

While everyone’s bullish on the market now, there’s some element of caution advised. For, don’t expect all sites to command such valuations. While funding dotcoms, venture capitalists use the thumb rule that nine of the 10 ventures they fund will die out. It’s that one venture-which is how indiaworld should be looked at-which more than pays for the nine failures.

hungama.com Started less than a year ago by former equity researcher Neeraj Roy, youth and entertainment site hungama.com today claims 40 million page views. Secret of success? "Ease of use and user-friendliness," feels Roy.

Another reason why companies like rediff, indiaworld, or for that matter Contest2Win command such high values is because they’ve been in the business longer than most other dotcoms today. "As your dotcom business becomes older, and your business models get proved in practice, the risks decrease and valuations increase," says Bhasin. That is why start-ups initially use some of their own capital and then gradually infuse more in little bits rather than going the whole hog upfront. As the company grows in size, it needs to part with lesser equity for more money. In December, rediff placed 15 per cent of its equity for $15 million. Today, it might command triple the price for the same amount of equity. Says Venkat Ramaswamy, director, Edelweiss: "Even if you know you need a certain amount of funds over a certain period, companies stagger the funding to get better valuations." It is at this initial start-up stage that business models, quality of promoters, market size, competition and site features matter. For, that’s when during valuation venture capitalists are looking to see the staying power of the dotcom. Soon enough, it all boils down to a page view business.

So, how long will it stay like this? Or are we seeing another extraordinary delusion of society akin to the tulipmania which swept the Dutch society in the 17th century, where one tulip bulb at times fetched a price equivalent to that of acres of land and there was speculative trade in tulips on "tulip exchanges" before it all went bust? "As long as the NASDAQ stays this way, so will valuations. There will be a correction on the NASDAQ-how much and when-who knows," says Sakhuja. Net, net: dream big alright, but watch your back.