Sunday, December 30, 2012

When Indian companies turn acquirers, is wealth created for shareholders of the acquiring firms?

A Sandeep
A. Sandeep, Group Editorial Director, Business & Economy, presents a quantitative study on acquisitions by Indian companies involving both Indian and Foreign targets. Do such acquisitions destroy value (as has been commonly reported by scholars and researchers in the past)? And do market sentiments alone influence the change in market value of buyers, thereby negating the effect of the very acquisitions?

Globally, the outcomes of mergers and acquisitions (M&As) have been analysed at length. However in the Indian context, due to factors such as lack of data availability in the public domain, lack of transparency in deals et al, such studies have been rare. More so, studies discussing the outcomes of acquisitions by Indian companies alone have been the rarest. We developed a methodology to collect and analyse data on acquisitions by Indian companies. We had two scenarios: (a) Indian companies buying Indian targets (referred hereon to as India-India); and (b) Indian companies buying Foreign targets (referred hereon to as India-Foreign). The performance of each acquirer on a certain parameter (market capitalisation) was tracked down and mapped during the pre and post-deal periods. Our final conclusions were arrived at by studying 167 deals involving Indian firms as acquirers. We focused on the importance of using m-cap as a performance indicator. Critically, checks were introduced on whether statistical significance differences exists between the changes in m-cap of acquirers and changes in the standard index (BSE Sensex) under various control environments (like Sensex and non-Sensex acquirers, various time windows et al).

The results we observed turned out to be quite opposite of what studies on acquisition globally have stated – that acquisitions erode wealth for the acquirers’ shareholders. The mirage of synergy playing a role in destroying hopes of acquirers’ shareholders to gain wealth have been identified and proven by a number of academic scholars, consultants and research firms. Most of them use changes in financial metrics (like market capitalisation) to arrive at a conclusion. In the NBER Working Paper titled, ‘Do Shareholders of acquiring firms gain from acquisitions? (2003)’, scholars Sara B. Moeller (Cox School of Business, Southern Methodist University), Frederik P. Schlingemann (Katz Graduate School of Business, University of Pittsburgh) and RenĂ© M. Stulz (Fisher College of Business, Ohio State University), state, “We examine a sample of 12,023 acquisitions by public firms from 1980 to 2001. Shareholders of these firms lost a total of $218 billion when acquisitions were announced. Though shareholders lose throughout our sample period, losses associated with acquisition announcements after 1997 are dramatic.” In another study for The ESRC Centre for Business Research, University of Cambridge, titled, ‘Do takeovers create value? (2002)’, researchers Magnus Bild, Mikael Runsten (Stockholm School of Economics) and Paul Guest and Andy Gosh (Centre for Business Research, Cambridge University Judge Institute of Management), report that, “on average, acquisitions destroy roughly 30% of the acquirer’s pre-acquisition value.” According to James Heskett, Baker Foundation Professor, Emeritus, at Harvard Business School, “Acquirers often end up bargaining for a seat on the loser’s bench.” In his paper titled, ‘Should We Brace Ourselves for Another Era of M&A Value Destruction? (2004)’, he sums up thus, “Research tells us that the short-term value in an acquisition accrues primarily to shareholders of acquired companies. On the other hand, short-term value is more often destroyed than created for shareholders of acquiring organisations. As many as two-thirds of all acquirers fail to achieve the benefits planned at the outset of an acquisition. In the end, M&A is about buying more volume. It is a flawed process, invented by brokers, lawyers, and super-sized, ego-based CEOs. Acquisitions are a macho exercise, not an intellectual one. Think World Wrestling Federation, not a chess tournament.”

In our study, we conclude that acquisitions – whether it be India-India or India-Foreign – create significant value for the acquirers’ shareholders. This brings us to the surprising conclusion that for CEOs of Indian companies, inorganic growth strategy is value-creating.

Also, we tested the influence of the general market movements on the m-cap movement of the acquiring companies in question. Under many-a-situation, T-tests results convinced us to reject our null hypothesis (Ho --> md = 0, where md is the difference between the statistical means of the two samples under consideration. In other words, the null is that there is no statistically significant difference between shareholder wealth change and Index change).

The need for the study was considered more urgent because of the increasing M&A activity in India and the resulting rising exposure of Indian acquirers to M&A activity. In 2000, M&A activity in India stood at $5.4 billion. This rose to $16.3 billion in 2005 ($20.30 billion in 2006, $51.11 billion in 2007, $30.90 billion in 2008, $60.7 billion in 2010) and a higher $34.4 billion in w2011. More critically, outbound M&A deals have also risen over the years. Between 1992 and 2001, Indian companies invested up to $4.97 billion in cross-border M&As (UNCTAD, 2002). This rose to $9.47 billion in 2005 alone and to a higher $31.53 billion in 2010 (though the value fell to $8.81 billion in 2011; source: Grant Thornton and Ernst & Young reports).

This paper is therefore an attempt to filling some present gaps in what has been studied, documented and analysed so far in the discipline of acquisitions in India.


We adopted a systematic approach to the study. Based on past scholarly researches on the subject, the following decisions were taken at the start: 1. Decision on time windows (t-2, t-1, t, t+1 & t+2); 2. Decision on collection of samples (India-India deals and India-foreign deals); 3. Decision on using significance tests.

To collect data, we used databases including Thomson Reuters M&A records and Grant Thornton’s M&A Dealtracker. Only those deals that fell under the category of “acquisitions” were selected (to avoid diluting the focus/object under study by taking a combine of mergers and acquisitions). The deals under study also strictly involved acquirers that remained publicly listed during the post-deal event windows taken.

The outcome of the deals on the acquirers’ shareholders were studied in the following time windows: 1 year (t to t+1; t being date of deal announcement, and t+1 being one year from the date of deal completion), 2 years (t-1 to t+1 and t to t+2; t being date of deal announcement, t+1 being one year from the date of deal completion, t-1 being one year prior to the date of deal completion; and t+2 being two years from the date of deal completion); and 4 years (t-2 to t+2; t-2 being two years prior to the date of deal completion; and t+2 being two years from the date of deal completion).

In order to understand the outcome, we went with the most widely-held view that since the CEO is the public representation of the company, his performance is displayed in the company’s stock performance, and whatever deal-making happens, should be in the interest of maximising shareholder wealth. Therefore all changes in post-deal performance should be reflected in the company’s market capitalisation, a view also adopted by G. Wan Ng (2007), Martin Sikora, Wharton School of Business (2005), Holthausen (2005), Mauboussin (2010), Moeller, Schlingemann and Stulz (2003), and many more scholars in their respective works.

To test for significant differences between means of two sets of samples, we conducted T-tests in order to verify whether it was actually the general rise/fall of market trading sentiments that contributed to the rise/fall in the shareholder wealth of the acquirers [a practice adopted by researchers like Moeller, Schlingemann, Stulz (2003), Maditinos, Theriou, Demetriades (2009), Gersdorff, Bacon (2008), and others]. We took a precision ceiling of 95% in the process (the alternative is two-tailed and represents a 95% Confidence Interval, C.I.). The assumptions underlying this paired sampled t-test are: 1. Observations collected are independent of each other; 2. The data points are normally distributed in the population; and 3. The null hypothesis follows the strict form of “neutral/control” hypotheses used in statistical studies, and corresponds to a general or default position.

There is a spike in deal making during times when markets experience a boom (Mauboussin, 2010). Our intent was to include “normal economic” circumstances. The choice of sample collection years was therefore taken between 2001 and 2006. The reason being that first, it gives us a reflection of a large number of “normal, recent business” years to collect samples from. Second, it takes care of the exclusion of the effect of post-bubble in the Information Technology sector and the pre-bubble period and slowdown in the Indian economy – which can be understood by the very fact that M&A activity in India rose abnormally from $20.30 billion in 2006 to $51.11 billion in 2007, and then fell to $30.90 billion in 2008 before plunging to $16 billion in 2009 – the year slowdown struck the global economy – thereby giving us “normal business years” as time range to collect data from.

Findings and Observations

1. Market capitalisation change test Our findings of the tests that give a measure of shareholder wealth change in the case of India-India deals are shown in Table 2, and those for India-Foreign deals are shown in Table 3.We find that shareholder wealth is created when Indian companies turn acquirers, irrespective of whether the targets are foreign or Indian companies. Our analysis reveals that in the case of both India-India and India-Foreign acquisition samples, m-cap of acquirers rise, thereby going against observations made globally. In the case of India-India deals, the sample of 76 acquisitions create value under all four event windows: t-2 to t+2, t-1 to t+1, t to t+1 and t to t+2. There is more shareholder wealth created during the first year post-merger (t to t+1) as compared to two years post merger (t to t+2). Maximum wealth is created during the largest event window of four years, t-2 to t+2. Deal size-wise findings are quite similar. In Level 1 (value < $10 million), Level 2 ($10 million = value < $50 million) and Level 3 deals (value > $50 million), the highest appreciation for the acquirers’ shareholders are noted for the event window t-2 to t+2. This event window also corresponds to the highest average (per buyer) increase in shareholder wealth created by acquirers. Interestingly, the effect of the acquisition is also found to be higher in the first year post-deal, as compared to two years post-deal.

In the case of India-Foreign deals, the sample of 91 acquisitions create value under all four event windows. In Level 1 (value < $50 million), Level 2 ($50 million = value < $250 million) and Level 3 deals (value > $250 million), the highest appreciation for the acquirers’ shareholders are noted for the event window t-2 to t+2. The favourable effect of the acquisition is found to rise as a function of time over the two years following the deal, with rise in m-cap of acquirers being higher in the t to t+2 period when compared to the t to t+1 time frame. 2. Significance testsAfter measuring changes in shareholder wealth, we proceed to check whether the acquisitions might actually have ‘any’ role to play in the changes in m-cap of acquirers..

For four different event windows, we checked for the significance in difference between the sample means of two given samples:
(1) The change in market capitalisation of acquirers during a certain event window (t-2 to t+2, t-1 to t+1, t to t+1 and t to t+2); and
(2) The corresponding change in Sensex during the same event window considered in (1) above.

T-test on India-India deals

The Sig value (p) turns out to be less than a (0,05) in all the four event windows therefore we reject the null hypothesis. Also, the critical value of t arrived at does not fall between the critical range (tc). Therefore, we reject the Null in favour of the Alternate hypothesis. We conclude that there exists a significant difference between the means of the change in the two variables. Therefore, the change in m-cap is influenced by factors other than the change in Sensex, and one of the possible influencers could be the acquisition of a target.

In order to understand whether the inclusion of Sensex companies in the buyer group in the India-India analysis influenced our Significance test results, we divided the buyer group into two segments, depending on their inclusion in the Sensex during the announcement of acquisition.

Acquirers belonging to Sensex: Only in one time window (t-2 to t+2) was the null rejected. Therefore in a majority (75%) of event windows, it was proven that there exists no significant difference between movement of the Sensex and acquiring companies. The results turned out as expected.

Acquirers NOT belonging to Sensex: Null is rejected in all time windows. We conclude that in all four windows, there exists a significant difference between the means of the change in the two variables. Therefore, the change in m-cap is influenced by factors other than the change in Sensex, and one of the possible influencers could be the acquisition of a target.

T-test on India-Foreign deals

The Null is rejected in two (relatively shorter) event windows: t to t+1 and t-1 to t+1. We conclude that in these above stated intervals, the change in m-cap of acquirers is influenced by factors other than general market movement/sentiment, and therefore the very acquisition could be an influencer.

Acquirers belonging to Sensex: Only in one time window (t to t+1) was the null rejected. Therefore in a majority (75%) of event windows, it was proven that there exists no significant difference between movement of the Sensex and acquiring companies.

Acquirers NOT belonging to Sensex: Null is rejected in a majority of time windows (75%; except in t-1 to t+1 event window). We conclude that in a majority of these event windows, the acquisition could have caused the change in m-cap of acquirers.


Friday, December 28, 2012



I think entrepreneurship is our natural state – a big adult word that probably boils down to something that’s much more obvious like playfulness.
Sir Richard Branson
Founder, Virgin Group

Entrepreneurial zeal can be fuelled by several innate desires. It could be about value creation, a love for a particular industry, a passion for contributing to society, testing your ‘personally defined’ limitations or even about building a name you can leave behind when you are gone. When we are talking about Virgin Group Founder Richard Branson, the above quote perhaps summarises his main driving passion best. His secret, at the cost of sounding overtly simplistic, is that he is an entrepreneur who loves entrepreneurship itself!

When my office caught up finally with him, to question him on his definition of what makes a cult entrepreneur, we had to also keep in mind that this was a man who had regularly written for 4Ps B&M for a long time preaching exactly that. Entrepreneurship is an affair that, for Branson, began even before he started the Student magazine at the age of 16, because he had already dabbled unsuccessfully with selling budgerigars and Christmas trees by then. From its inception in 1970 to today, the group operates nearly 400 businesses across mobile telephony, travel, financial services, leisure, music, holidays and health & wellness; with total revenues at around $21 billion in 2011. This means that the Virgin group has incubated nearly 10 ventures every year on an average!

Yet, you would not find Branson anywhere among the top echelons of the world’s richest. As per the Forbes’ Billionaires’ rankings for this year, Richard Branson’s net worth was estimated at around $4.2 billion in March 2012, and he was ranked #255 in the overall rankings. The same goes for their flagship company Virgin Media, which posted annual revenues of $6.1 billion in 2011. It was ranked #359 in the Fortune 500 list for 2010, dropped further to #374 in 2011 and dropped out of the list in 2012 altogether. But if you are mustering up a list of the world’s most iconic CEOs, I am willing to bet that Richard Branson will figure in the top ten in terms of recall. This is just one of the several inherent contradictions that have gone on to define both the man and the multi-billion dollar business empire that he runs.

Is being outrageous a great branding ploy? If CEOs want to give it a shot, Branson is certainly the global benchmark, by all yardsticks. His publicity stunts are legendary; be it appearing for the Virgin Atlantic launch in pilot’s uniform, coming out in a bride’s dress with make up for the Virgin Brides venture, driving a tank up Fifth Avenue and destroying the Coca Cola sign at Times Square or jumping off the Palm’s Hotel Casino to celebrate the launch of the first Virgin American flight. His hot air balloon flights across the world are celebrated in aviation (and business) history. “Virgin Atlantic Flyer” happens to be the largest hot air balloon ever to take flight and it also broke a new record by being the fastest to traverse the Atlantic. When he came to Mumbai this year, he was quite a spectacle in traditional Indian dress on top of the common yellow & black Mumbai taxi. Branson has embraced the unconventional several times and often at great risk. The Sex Pistols is a remarkable case in point. The punk band had come up with a politically incorrect version of “God save the Queen” in the 1970s and faced a great deal of censure, with even their recording company A&M giving up on them. At that time, who else would dare to sign them up but Virgin Records? Not just that, Virgin, along with the band’s manager Malcolm McLaren, hit upon a novel idea to make the band play their anti-establishment number while on a ride across the river Thames and opposite the British parliament! Branson has often rubbed British Airways officials (the airline whose monopoly Branson sought to break when he launched Virgin Atlantic) on the wrong end. Off late, British Airways CEO Willie Walsh claimed that Branson is about to give up control of Virgin Atlantic, which posted a revenues of £2.74 billion and an operating loss of £80.2 million in the financial year ending February 2012. In response, Branson has publicly challenged Walsh and BA. He claims that if Virgin Atlantic closes down within five years, he will pay £1 million to BA staff, and BA must do the same for his staff if the airline survives (Walsh countered with a ‘knee in the groin’ wager).

Branson has a distinct preference for industries where Virgin can potentially disrupt the status quo. Conversely, he defies the concept of core competence in branding and says that Virgin is a ‘way of life’ brand, which he has deployed across businesses. Indeed, the man’s voracious appetite for risk (he is planning, quite seriously to take thousands of people into space as well as to the bottom of the ocean in the near future) and for overstretching himself in the public domain has contributed a great deal to what he is today. But there are other key aspects to the Branson magic. Arguably, the foremost among them is his managerial philosophy that puts employees first and customers second. Branson firmly believes that if employees are kept happy, they will, in turn, do what’s best for the business and its customers. In his interaction with my team, he described the key qualities of a successful entrepreneur, “Every entrepreneur should possess qualities of positive attitude in terms of understanding and solving employees’ problems, meeting their evolving needs on the professional front by communicating with them very often, being very transparent in terms of explaining the company’s new ideas of business strategies & policies, and seeking their opinion and telling them what is expected from them professionally to gain a competitive edge.”

There is the obvious catch when you are so dangerously prone to living on the edge. The competition with British Airways was a serious drain on Virgin Atlantic’s finances. Richard Branson had to sell off Virgin Records, one of his most cherished ventures; for $1 billion to Thorn EMI, so that the proceeds could be invested in Virgin Atlantic. Perhaps the greatest debacle has been Virgin Cola, which was slated to compete with the likes of Coca Cola and Pepsi. The same was the fate of Virgin Clothes, and a lot of other businesses like Virgin Wine, Virgin Money, Virgin Vision, Virgin Vodka, Virgin Vie, Virgin Jeans and Virgin Brides failed to live up to expectations. He will also be exiting the railway business in UK by the end of 2012. Amidst these failures, Branson has defiantly stuck to his core philosophy with any new venture, which is, “S**w it! Just do it!” One of his key role models was a guy who failed (Freddie Laker, who was unable to dislodge British Airways with his low cost transatlantic airline). That says a lot.

However, he also believes that risks should be calculated ones and one must take care of the downside. For instance, when he started Virgin Atlantic, he bought a second hand plane from Boeing and kept the option of returning it if the business did not succeed. This way, he would only lose around six months of Virgin Records profits. He comments to my team on risk taking, “An entrepreneur is expected to keep tabs on the daily occurrences and changes in the industry where he functions. This is, so that it allows him to minimize risks involved in a future course of action, make higher profits than otherwise and make his company a tough competitor to beat.” Also, the group businesses are managed so that even if any business fails, it does not affect the others severely.

Ultimately, like all truly successful entrepreneurs, Branson believes that a line has to be drawn on wealth creation and the ultimate aim is to give back. On Mallya’s continuing problems, he recently told a leading Indian TV channel that rather than being criticised, Mallya should be credited for all the efforts he is making to rescue the airline and that perhaps he (Mallya) was ahead of his time in the Indian market. But most notably, Branson pointed out that flamboyance might be one thing that Mallya would regret. He feels that entrepreneurs must earn respect for what they do for society and not necessarily for their material possessions. In fact, a major portion of Branson’s time and energy goes into philanthropic ventures. He is a trustee at a number of foundations and he decided to pool the energies of Virgin’s charitable foundations globally in 2004 towards the Virgin Unite initiative, which is aimed at tackling global problems like AIDS, TB and Malaria. He has also been active in global policy circles on the war against drugs, which he feels should focus on rehabilitation rather than prohibition.

Be it with adventure trips in a hot air balloon, investments in space travel or anti-AIDS programmes in South Africa, Branson’s life personifies one over arching message. A true entrepreneur should always be ready and willing to take up new & challenging ventures and move beyond his comfort zone to create circumstances to be able to take it up successfully (and manage the downside risk). And once you find a person who is more capable than you to take the business ahead, you should drop it like a hot potato and move on to the next exciting business prospect demanding your attention.


Sunday, June 17, 2012



Jimmy Wales, Founder and Member of the Board of Trustees, Wikimedia FoundationWhen Jimbo ‘Jimmy’ Wales, co-founder Wikipedia, first got back to my office communicating that he was eager to talk, I hadn’t yet conveyed to him that I considered him a cult entrepreneur par excellence. It’s not that I quite agree with Wikipedia’s editorial policies (on which Wales’ personally holds little or titular control) – far from it, I perhaps would be their harshest critic – but the social promise that the model has fulfilled till now and holds for the future is reason enough to catapult this sincerest 45-year-old American into my topmost list of legendary innovator entrepreneurs.

When Brin and Page took their dorm room data mining experiment beyond the confines of Stanford, the world learned to associate search with Google. And when Jimmy Wales brought in his bold venture enabled by ‘open editing’ in 2001, free information in the Internet space about any company, individual, event, entity et al rapidly started becoming synonymous with Wikipedia, and the world of encyclopedias shrunk by hitherto unimaginable proportions. Type a search key on Google today, and you will, with rare exceptions, encounter a Wikipedia article on the term right up there in the rankings. And that is really a testimony to the kind of power it holds among the Internet audience as a reference tool.

Wikipedia, which derives its name from the word ‘wiki’ (a website whose content can be edited through a simplified mark up language or a rich text editor), was anti-establishment at its very core, and one would not be surprised at the same, if one were to closely examine the credentials of Jimmy Wales himself. Disdain for what passes off as convention and a passionate search for freedom have been part and parcel of Jimmy’s character, whose initial schooling happened in a oneroom schoolhouse, which was run by his mother and grandmother. His most pleasant memory of that time is the Montessori influence on the school, which meant that he could spend a lot of time studying anything he felt like. And perhaps his most unpleasant memory was how bureaucrats and high school inspectors used to constantly interfere in the school’s functioning.

His most recent war against the establishment is one where he was joined by most of the prominent websites of the world – the war against the SOPA (Stop Online Piracy Act) and the PIPA (Protect IP Act), Acts which could expand the US government’s power to curb copyright infringement and piracy and act against websites that are dealing in counterfeit goods – critics mention these Acts are just another way to gain ill-thought control over the net; Wales tells us that these Acts are “fundamentally flawed”. Wales has firmly protested against the attempts by the industry, particularly the movie making industry, to back such legislations through all means possible. He famously proclaimed to Hollywood recently that it was doomed and not because of piracy, but because of a growing trend of collaborative story telling and filmmaking. He told us, “The solution to problems of piracy cannot lie with any form of censorship. It’s really as simple as that. Any law which makes it possible to shut down or significantly damage (through withdrawal of access to markets) a website without due process of law must be opposed.”

Wikimedia Foundation Report, FY 2010-11
He also laments the recent attempts by the Indian government to act against online firms in particular, “The IT industry in India is maturing to the point that the next great consumer Internet start-ups – the next Google, the next Facebook, the next Wikipedia - could come from India. All of this is destroyed, utterly destroyed, if India imposes censorship on the web.”

I consider Jimmy Wales, like most iconic entrepreneurs in business history, as a genius, albeit one with a very unconventional perspective towards life. After completing college, Jimmy went on to attend the finance PhD programs at both Indiana and Alabama, but did not write the dissertations in either, because he was ‘bored’! However, he did make a lot of money in the market through very intelligent speculations on forex and interest rate fluctuations. Then he took his life-changing decision to quit the financial realm and become an internet entrepreneur with Bomis (acronym for Bitter Old Men In Suits), a website targeted towards males and featuring user-generated webrings around popular search terms among that target audience.

Jimmy’s passion for freedom has pretty much guided his perspectives and actions throughout his life. He was deeply influenced by noted author Ayn Rand and her philosophy of objectivity, individualism and capitalism. He closely identifies himself with Howard Roarke, the main protagonist of The Fountainhead (arguably Rand’s most popular work), an architect who embodies these very philosophies, in particular the value of having great ideas and pursuing them to fruition.

Using the funding from Bomis, Jimmy moved on to the web encyclopaedia project he was most passionate about, with Nupedia. In this version, articles were supposed to be written by experts and each article was to undergo an exhaustive peer review process to ensure that credibility was at par with encyclopaedias. But seeing how slow the process was, Wales and Larry Sanger (editor- in-chief of Nupedia) jumped upon the idea of making the whole project a ‘wiki’ called Wikipedia and enabling independent editors to contribute to articles as they were being written.

Wikipedia was launched on January 15, 2001. Volunteers jumped on the wiki bandwagon almost immediately – though not a quarter as high as the numbers one sees now. Yet, the improvement in quantity over Nupedia was dramatic. While Nupedia approved 21 articles in its first year, Wikipedia had completed 18,000 plus! Of course, Sanger later opposed the change in focus by Wales towards Wikipedia and its rather simplistic editorial policy – due to which Sanger ultimately quit. This was quite similar to the turf war at Apple between Steve Jobs and Steve Wozniak (whose interview with my office was covered in my previous editorial), leading to Wozniak leaving Apple. The difference here being that I actually consider Jimmy Wales the Wozniak of the duo. And that’s because of the uncanny similarity in one particularly sparkling attitude. While Woz wished to give away Apple’s computers for free (an idea which Jobs opposed), Jimmy Wales has always wanted to give away Wikipedia’s knowledge for free – and has succeeded like nobody else ever could. If Jobs was the autocratic head of Apple, Wales is the epitome of community decision making, where leave critical policies, Wikipedia is more or less managed everyday by thousands of independent volunteers who are not even paid by Wikipedia.

With Wales’ vision, Wikipedia has become the exemplar of Jimmy’s vision to bring “the sum of all human knowledge” free of cost to every human in the world. Wales professes a belief in decentralisation of knowledge, which was the guiding philosophy of the Wikipedia project. “I always do the most interesting thing I can find to do,” says Wales to us. And Wikipedia has been one massively interesting thing to do.

Today, Nupedia is extinct, but Wikipedia is no pushover in the numbers game by any stretch of imagination. With over 100,000 active editors globally as reported in the annual report for 2010-11, the Wikimedia Foundation (which officially runs Wikipedia) received funding of around $23 million that year. By the end of 2010, 3.5 million articles had been published on the English version of Wikipedia (currently over 3.9 million in English & 21 million in total for all 282 language versions), and the site got its 1 billionth edit during the year. On a trailing three month average basis, around 13.9% of global internet users access Wikipedia. org as per statistics from In comparison, the figure for Google (the number 1 site in terms of web traffic) is 49.77% and for Youtube is 32.69%. But compare the paid staff of Wikipedia, which is around 139 people as on date in comparison to Google, which had 32,467 employees by the end of 2011, and you get the real perspective.

There are inherent contradictions in the model, but one beats the rest by a huge margin. Nupedia was supposed to base itself on advertising, but Wales has shunned advertising for Wikipedia. Wales has stood by his stand that advertising would not allow the content on the site to stay neutral and the current mode of targeted advertising is a violation of the privacy rights of an individual. He asserts to us, “I see no problems with our revenue model. People have been asking that question for years, and we continue to be more and more successful with it.”

Wikimedia Foundation report 2010-11
Clearly, one can argue that advertising on the website would increase the revenue base phenomenally and expand the possibilities for the site, especially ramping up an in-house team to counter- balance the thousands of volunteer editors across the world, whose credentials are quite hard to ascertain. Definitely, credibility of data and bias remain an issue even without following an online advertising-based model – issues which Wikipedia itself accepts officially – and the freedom provided to these contributors has to be consistently guarded against misuse.

But to be honest, the bigger promise for Wales – and perhaps various nations – in the future is Wikiversity, a project similar to Wikipedia set up by the Wikimedia Foundation. Wikiversity offers structured teaching in various subjects and topics “to foster learning”. While countries like India are struggling in spreading the reach of university learning centres due to the costs involved in setting up technology and learning networks through vast geographic expanses, Wikiversity offers a readymade university-like learning platform on the Internet; and the best part is that it is all provided free of cost. In other words, governments could use Wales’ Wikiversity platform completely free of cost to teach university subjects through the Internet – and even formally certify the students undertaking such distributed learning post formal tests. Imagine the potential such an idea holds in increasing literacy rates and in reducing poverty globally. And for this very Wikiversity concept, if not for Wikipedia itself (for which Jimmy has been praised ad nauseum), I consider Wales one of the world’s leading social entrepreneurs, in the same league as the contemporary persona of Bill Gates.

“The original vision statement for Wikipedia still sustains me, ‘Imagine a world in which every single person on the planet is given free access to the sum of all human knowledge’.” When Wales mentions this, it teaches me again how passion has almost nothing to do with making money. He’s my new benchmark in the world of cult entrepreneurs – gentlemen, let’s give a hand to Jimmy Wales; he’s making a bigger difference than many nations.


Tuesday, April 17, 2012



“A true entrepreneur doesn’t start with all the money in the world. When we started Apple, we had golden ideas but no money. That is true entrepreneurship...” Steve Wozniak

Besides being referred to as one of the co-founders of Apple, much is not talked about Steve Wozniak. In the present times, all that most know about him, if at all, is that he stays as of now in Los Gatos.

There are entrepreneurs who walk with a vision that stretches out into generations. Then there is the most unbelievable cult of visionary innovators who walk with an idea to create temporary monopolies and break march the second they feel they are done with their current experiment and that the lot of leaders whom they trained can handle the war well. Woz incredibly belongs to the latter group, ready to live an entrepreneurial dream purely for the sake of his passion than for anything else; and ready to hit the road in search of the newest entrepreneurial high every moment.

When Janet (Woz’s wife) first wrote back to my office last month, Steve was putting up at the MGM Grand in Vegas, and had just completed a nine hour-long drive from Gilroy (California) to Vegas. “Right now, his schedule is so full with travel and speeches,” she said. He was there on a quick break before his packed season was to kick-off. His diary for the next five days included two days of driving and three days of judging high-school robotics in Nevada. In the past half-a-month, I had tracked this multimillionaire through more than a dozen destinations across three countries, where he had been delivering speeches at educational institutions, sharing his vision with young entrepreneurs, egging on the innovation spark in budding minds – in short, the man was firmly and passionately embedded into sharing all that he knew with all the people around him that could benefit. I cannot imagine a more altruistic form of entrepreneurship – where a professional, without any qualms, gives up all the cards that he holds to help the other guy, whoever, win. A true teacher!

Over the time that I researched him, Woz’s answers to my queries made me realize that behind the geek who was technically ‘the’ creator of Apple’s computers during the 1970s and 1980s, lies a legendary entrepreneur who doesn’t like hogging the limelight. He never did. And from Woz, what I believe is the primary CEO-nurturing lesson that true entrepreneurs of the modern age should internalize is – encourage and spearhead the ideation processes and initial stages of product-making, and once you’ve found your optimally utopian CEO (or one who comes closest to that), give complete independence to your CEO to finally shape, market and sell the produce. Even if you’re gone tomorrow, your CEO and his successors should be trained well to adopt the company as his and take it forward responsibly – with shareholders to serve. Shy but determined, Woz was a creator of many-a-marvel, and the independence that he gave Jobs in executing the selling and marketing strategies is what I believe gave the primary cementing foundation to Jobs’ character and in Jobs becoming the greatest marketer and CEO in the world. And this effect had started much before Apple was even born (to be precise, five years before, with the invention of the ‘Blue Box’ – an instrument to make free calls – which these two tech wizards made; I’ve given more details later).

In Jobs’ biography (‘Steve Jobs’ by Walter Isacsson), recalling his first interaction with Woz, while sitting on the sidewalk in front of Bill Fernandez’s home (Woz’s Homestead High School friend), Jobs had concluded: “Woz was the first person I’d met who knew more electronics than I did. Woz was very very bright.” He was. He is still. Very.

Woz’s father (Francis) was a rocket scientist at Lockheed Martin, and a proud passout of the California Institute of Technology. Since he was a child, Woz would spend hours gazing at circuit diagrams and enjoy hearing about the power of transistors and diodes from his father. While in the fourth grade, Woz made an intercom system, connecting his friends’ bedrooms in six households in the neigh-bourhood. He started making calculators when he was in the eighth-grade. And by the time he moved to the penultimate year of high school, he had started played pranks with his creations. Such was his madness when it came to experimenting with new electronic equipment that he was even sent to a juvenile detention centre for scaring his school principal with a fake electronic bomb. His excitement didn’t bend before law. In the one night he spent there, he taught fellow prisoners how to conduct electrical current on to the prison bars!

He was born a hardware guy, and though his pranks were not marketable, they were definitely signs of a genius entrepreneur-inventor in the making.

If a film could be made, the two Steves would have unique titles. While Woz would be the Entrepreneur-Creator-Ideator, Jobs would be the CEO-Innovator- Marketer. For many years, the duo worked together, but at every stage until Woz left Apple in February 1987 (he ceased to be a full time employee at Apple a year after Jobs was forced out of the company), Woz played the role of the visionary creator, while Jobs acted his part of being the visionary marketer to the hilt. That Jobs was under no undue pressure from Woz and acted on his independent will as the master marketer and head of the Macintosh division for Apple is apparent from not just the manner in which product creation and selling were masterminded independently by Woz and Jobs respectively during the first 12 years of Apple (when the two worked together) but also by the manner in which the advent of John Sculley as Apple’s new Chief in 1983 disturbed Jobs’ independent psyche, so much so that Jobs organised a boardroom coup to oust him [The coup backfired].

The Blue Box: The first revenue-generating product that the duo created was the Blue Box (September 1971), which replicated tones that routed frequencies on the AT&T network thereby enabling callers to make toll-free calls across the world. Woz masterminded the product. He got the idea from a magazine article, and turned it into a potent mix of mischief, oscillators, and wizardry. From calling the Ritz in London to speaking to a bishop at the Vatican at half- past-five in the morning, both the entrepreneur and the master marketer got their product tested. Then it was time to mint some money. Jobs, true to the marketing stamp, decided the pricing of the Blue Box. Woz allowed Jobs to experiment his pricing skills and bloom as a marketer during those early years. [Remember: Woz was 21 years old and Jobs was only 16 then.] The cost of making one unit was $40, therefore Jobs decided that they should sell it at $150 to make good profits. They sold about 100 pieces and made net profits to the tune of $11,000 – big moneys for a start. Lesson #1: As an entrepreneur, if you find your CEO competent, even if his age is lower than the industry standard, trust him. Of course, there will always be stock taking sessions – but these should neither be oppressive or daily.

Success #1@Apple: In early 1975, after Jobs returned to US from his soul-searching trip to India, Woz and he got back. During one of the meetings at the Homebrew Computer Club which Woz attended on the evening of March 5 that year, he saw a demonstration of the Altair 8800 (a microcomputer design based on the Intel 8080 CPU design). The circuit layout of the microprocessor gave Woz an idea to create a personal computer. He recalls, “This whole vision of a personal computer just popped into my head. That night, I started to sketch out on paper what would later become known as the Apple I.” The enterprising Woz, on his own, had masterminded the creation of the world’s first personal computer. Says he, “Usually, entrepreneurship involves creation and engineering. Bright engineers get ideas and become entrepreneurs to bring them to fruit.”

On June 29, 1975, the first prototype of the Apple I PC was done. What next? It was the free-spirited Jobs’ turn to take responsibility of raw materials procurement and sales thereafter. He sourced some Intel chips (for free!) and gave presentations to clients on behalf of the shyto- talk Woz. Interestingly, had Woz gone ahead with the selling act, he would have sold-off all units of the Apple I for free! He wanted to. Says the true to nature altruistic Woz, “The theme of the [Homebrew Computer] club was ‘Give to help others’. I designed the ‘Apple I’ because I wanted to give it away for free to other people.” Jobs certainly wasn’t one to endorse the entrepreneur’s idea of philanthropy. He was a CEO and marketer with an overwhelming understanding of his business’ potential.

Steve Jobs sold the Apple I at $666 a piece – a margin of over $300 per piece. Their first order was 50 units from the Byte Shop in California.

Success #2@Apple: The Apple II went on sale on June 5, 1977. Like the previous version, this one had Woz’s touch of brilliance. He had designed it keeping in mind the evolving needs of Apple PC users. The Apple II had better colour and sound, storage capabilities, a faster microprocessor and became a best-seller.

Its sales rose from 2,500 units in 1997 to 210,000 by 1981, the year which practically was Woz’s last active year as an entrepreneur at the company. But the Apple II wouldn’t have earned fame had it not been for Jobs’ own touch of brilliance as a sales guy. This is what Isaacson writes in his book, “To make the Apple II successful required more than just Wozniak’s awesome circuit design. It would need to be packed into a fully integrated consumer product and that was Jobs’ role.”

With the Apple II, Jobs put his father’s advice (of making even the unseen parts in a product look perfect in terms of craftsmanship) into practice. Then there was the marketing expenditure, which Woz allowed Jobs to go ahead with. It was the first West Coast Computer Fair in April 1977, and Jobs wanted to grab the booth right opposite the hall to make an impact. That cost Woz and Jobs a huge $5,000. Woz didn’t stop him. Woz thoroughly know that having a great product wasn’t even half the job done. One had to convince people to buy it. It worked. Exemplifying this thought process was what ensured that Apple II sold almost 6 million units for the next 16 years.

Lesson #2: As an entrepreneur, never fall into the trap of believing that the best product can win purely on quality. That almost never happens. Believe in the power of advertising and marketing, fanatically.

Of course, all this doesn’t mean that one can’t disagree at the top. Even when it came to execution and people management, Jobs was particularly stubborn, as Woz says, “Steve was too tough on people. I wanted our company to feel like a family where we all had fun and shared whatever we made.”

After surviving a private plane crash in 1981, it was only in 1983 that Woz returned to Apple. This time however, he sensed the change in Jobs’ orientation towards work. Woz tells us, “Steve was one of the greatest. He didn’t do the engineering but he understood it better than pure business types. I was his ‘key’ in the early days. In later times, it was clear that he had understood the importance of all the departments of a large company. From then on, Steve became a great CEO but it wasn’t the same. That’s why it’s confusing as to whether the word ‘entrepreneur’ applies to this latter phase [of Jobs].”

Woz stayed with Apple till 1987. In the between, he earned his undergraduate degree in 1986 from UC Berkeley under the pseudonym “Rocky Clark” (Rocky being his dog’s name and Clark his former wife’s maiden surname). Post that, he tried his hands at encouraging technological start-ups, and still continues to do so. He has been quite successful with ventures like Acquicor Technology and Fusion-io. Woz’s close association of a decade with Jobs was critical in making Steve Jobs the great visionary CEO and Marketer. Woz was the cushion with brains and a creative acumen, Jobs was the hedge-hammer with a love for profits, and making ordinary objects beautiful and sellable.

Chances are, had Woz continued playing the seasoning role on Jobs, Jobs wouldn’t have had the bitter Sculley days in his biography. But that clearly wasn’t to be, because Woz was an entrepreneur who loved to break march as soon as his initial idea had won trust. He wasn’t the one in it purely for the love of money – and when he had had his share of the happiness quotient, he moved on! Whatever said and done, Woz’s association with Jobs was meant to be just that long.

If you ever chance upon him walking through Blossom Hill Park with his two pet dogs (which he does quite regularly whenever he is home in Los Gatos), or getting his hair made at his favourite ‘Curl Up and Dye’ salon at Gilroy, you’ll never suspect that he’s the co-founder of the world’s most valuable company – that’s how down-to-earth he is.

Respect is what we must give him, for choosing passion over money, choosing life over fame. This is why he walked away from Apple. In a decade since Woz and Jobs started Apple, the company’s sales had risen to $346 million by 1987, and Woz would have known that sticking around would not only keep him on the headlines of media outlets but also get him more money than one could have imagined. But he did walk away.

Lesson #3: Always choose passion over money; success will be longer lasting and more satisfying.

I might not have been able to do that myself. Perhaps the only commonality between Woz and me is our choice of music – he loves listening to Dylan and Counting Crows; so do I. For trivia’s sake, he still is an owner of Apple apart from getting around $125,000 a year as an employee – which is peanuts given what he’s worth as a person; for me, his character is worth more than all the trillions that one could churn up in market capitalization!

He’s the cult entrepreneur all CEOs should listen to, to get their bearings sparklingly right. Well, there are some things that money just can’t ever buy – Woz is at the top of that list.


Friday, February 24, 2012



This happened a few years ago when I was talking to Ted N. R. Narayana MurthyTurner at a function where a few new members were being inducted into the United Nations Foundation’s board of directors. Our conversation was pretty soporific, as can be expected of such functions where one is loathe to utter politically incorrect statements. Ted suddenly stopped an individual who was passing by, and introduced him to me, mentioning, “Meet the newest board member of the UN Foundation, Narayana Murthy.”

The incident remains in my mind purely because of the fact that that was my first meeting with the legendary cult entrepreneur Narayana Murthy. Years later, talking to Murthy on critical issues of entrepreneurship, I realized that here was one individual who would be considered one day soon - if not already - the father of India Inc. The commitment, sincerity and dedication that Murthy has shown to not just Infosys but to the nation, in terms of bringing India on the world map and ensuring that the fruits of India’s development flowed down to the lower sections, is without argument in the league of the likes of JRD Tata.

For an entrepreneur, whose company has scaled unprecedented heights to become one of India’s most profitable companies in a remarkably short span of time, the values that have driven N. R. Narayana Murthy, now Chairman-Emeritus, Infosys in his entrepreneurial journey are quite counter intuitive – they are, in fact, values that the Indian middle class would relate more to, rather than the corporate honchos who have defined Global Inc. throughout history. These values were indeed a part of his upbringing in a middle class Kannada Madhava Brahman family. He grew up to learn that an uncompromising focus on education and respect comes before everything else.

InfosysAnd if you had some acquaintance with Murthy in the initial years of his career, his life seemed like an immaculately planned middle class growth path even then – with the expected ingredients of academic excellence, linear growth and the much cherished job security; in short, nothing extraordinary. He completed his B. E. in Electrical Engineering from University of Mysore and his M. Tech from Indian Institute of Technology. Moreover, Murthy was a socialist at heart, and seemed hardly the kind of person who could set up a multi-billion dollar global IT company.

But a few unexpected experiences changed Murthy’s mindset tremendously, and unleashed the technical brilliance and entrepreneurial dynamism that have been part of his personality since. The first was a meeting with a famous American computer scientist when he was a graduate student in Control Theory at IIT on the future of computer science. The meeting was so insightful that Murthy got committed to computer science for life. Secondly, a trip to Europe convinced him that rather than his cherished Leftist ideologies, capitalism & entrepreneurship were the most practical solutions to India’s poverty problems.

His first venture Softronics was a failure and he terminated it fairly quickly. But the learnings from that venture helped him immensely when he exited en masse with his team of engineers from Patni Computers and a loan of Rs.10000 from his wife Sudha Murthy, to form Infosys in 1981. They were – a) you are a successful entrepreneur only if the market is ready for your idea and b) it is important to have a team that has a common and an enduring value system. The consequence of the first was that Infosys was keenly focused on exports from the beginning since Murthy had realised that the Indian market wasn’t ready. And the consequence of the second was that he carefully chose his A team, the team that we all now know as the seven co-founders of Infosys. These co-founders made up their mind since the beginning that they would seek respect first from all stakeholders by adopting the highest standards of business excellence, and that money would then flow in automatically. Murthy himself additionally drove home the firm belief in equity, and gave all his colleagues 15% equity in the company, even though they were just engineers with 1-1.5 years of experience; a decision that would arguably not find any precedent in business globally.

Infosys revenue growth under Narayana MurthyEven if the idea was right, anyone in his right mind at that time would have been quite convinced that the time and place was horribly wrong. They were planning to export software, but they were still operating from India, where the environment for business was far from ideal in those days. They had to import their first computer and MNC banks were not ready to lend them money for the same since they were start ups. Taking a telephone connection and even importing a computer took 2-3 years. There was no data communication and they used to fax source code (imagine what a client would have felt!) to the US. Six of Murthy’s colleagues went to the US to bypass the constraints in India and interface with clients. RBI approvals for overseas travel took 8-10 days, and if you got any foreign exchange earning, 50% went to RBI. Murthy, in fact, convinced clients to send him money on the 28th or 29th of every month. It was then that he could send his overseas colleagues their maintenance allowance after giving 50% to the RBI.

Profit growth under Narayana MurthyThrough all these difficulties, Murthy held steadfastly to the belief that his idea was right, and the value that his company was providing to customers was world class. And he was confident that the difficulties would ultimately give way. However, amidst a difficult initial decade (Infosys grew from an annual turnover of $14000 to $2 million between 1981 and 1991) members of his team lost hope, and found themselves drawn towards a $1 million offer that was made for the company in 1989. Murthy placated them and assured them that the future was going to be much better. He even offered to buy out their stake.

However, even Murthy would not have comprehended the not-so-small mercy that India Inc. had in store in the form of liberalisation in 1991. Infosys truly found its bearings in the new and far more enabling environment. A view at some numbers will help put this in perspective. When Murthy stepped down as CEO, revenues of Infosys stood at Rs.26.03 billion compared to Rs.290 million in 1994 (Infosys got listed in 1993). That means a CAGR of a mind boggling 75.44%! Profits were even better at Rs.9.58 billion in FY 2001-02, a CAGR of 77.79% during the same period.

As he took the company on its new trajectory, Narayana Murthy’s leadership skills were put to test time and again, and so were his value systems. In 1994, for instance, one of their largest customers GE wanted to renegotiate rates. Murthy refused and the contract was terminated, which led to a severe cash problem as GE contributed a huge 25% of Infosys’ revenues at that time (in fact, that’s when Infosys decided that it would always keep enough cash for one year’s salaries in its reserves, a diktat it follows till date). Besides, Murthy has stood by the belief that benchmarking oneself with the global best is a necessary end, as that enables you to compete in global markets and also provide world class products to your domestic market. In that spirit, he inculcated a culture of innovation across the board at Infosys. Everyone had to innovate, be it a business head in the cabins or a sweeper on the floor, and his benchmark for the same was – think of ways in which you can perform your roles faster, cheaper and better than you do them today. Another aspect that reveals Murthy’s obsession with ensuring sustainability was his approach towards derisking. For instance, he and his successor Nandan Nilekani never travelled together on the same plane! Even the listing on NASDAQ signified two very prominent aspects of Infosys DNA – great ambitions and also the willingness to embrace the highest global standards, especially in terms of corporate governance. Under him, the Infosys Leadership Institute was set up, which ensures a steady pool of next generation leaders in the company, who can be promoted to senior positions when necessary.

Infosys stock price growth under MurthyInfosys innovated time and again to ensure the respect of its clients. From 1992 itself, the company decided that rather than looking for short term gains, it has to build an institution for the long run. They invested in building state of the art physical infrastructure, attracting the right talent, embracing the latest trends in transparency and accountability (finance) and continuously enhancing productivity and quality standards. The sales team also innovated on ways to improve client satisfaction and deliver value. One of the most important innovations that Infosys brought in at that time was the global delivery model, and it was conceptualised and implemented by Murthy himself. The model is now immensely valued by clients as it enables Infosys to deliver its solutions from multiple locations across the globe and also enable round the clock implementation. Even today, Infosys earns around 98% of revenues from repeat customers.

In rough times and smooth, Murthy mostly remained his calm and humble self. He has believed in taking advice from all team members before taking any decision. But he also believes that when it comes to taking the final call, the leader has to trust himself. Today, it seems hard to believe, but when Infosys launched its IPO in 1993, the issue, which was launched at an offer price of Rs.95/share (it opened trading at Rs.145/share), was actually undersubscribed (how we wish we had a functional time machine!). The saving grace was Morgan Stanley, which acquired 13% stake in Infosys at that price. For posterity sake, the Infosys share closed at Rs.3557.85 on March 31, 2002, the month when Murthy exited operational responsibilities as CEO but continued as Chairman, hence growing by 37.45 times its IPO price. The Infosys share was trading at Rs.2225.40 on August 19 last year (Murthy stepped down as Chairman on August 20), with multiple splits en route. If you invested Rs.9500 for 100 Infosys shares in 1993, your investment would have been worth Rs.28.48 million (adjusting for the splits), a capital appreciation of 299743.37%! And add the regular dividends to that too.

One is reminded of the famous quote from Mahatma Gandhi, “My life is my message.” The success of a cult entrepreneur is driven by his passion and zeal for a vision, a passion that transcends short term blips, analyst forecasts, quarterly shocks, economic malaise, et al. For Murthy, his personal ‘larger than life’ vision (apart from the Infosys’ vision) was linked to eradication of poverty. Unlike the anti-capitalist mindset that prevailed in the 1980s, Murthy was convinced that entrepreneurship and capitalism are the ways to take India ahead. He calls Infosys his experiment in entrepreneurship. Even when he moved on from Infosys, he decided to devote his energies to fostering entrepreneurship in India, which led to the formation of his VC firm Catamaran Ventures.

Murthy not only set new standards in wealth creation, but also in terms of wealth distribution. The company distributed 27% of its equity among employees after its IPO, which was valued at Rs.5 trillion. Narayana Murthy has slowly and steadily given a huge portion of his wealth to charity through the Infosys Foundation led by his wife, and has believed in giving up equity as well over time. As on December 31, 2011, the entire shareholding of the Murthy family in Infosys was just around 4.37%. Perhaps the greatest learning that Narayana Murthy would like all entrepreneurs to take up is that the power of wealth creation is secondary only to the power of giving it away. And yes, his life has been a true epitome of this message.