Big deals

Strategies adopted by issuers of capital and e-commerce sites
to attract buyers have many similarities

By Mohan Sule
Very few companies can claim to earn US$100 million (Rs 600 crore) in 10 hours. The success becomes even more noteworthy if the entity has been in existence for slightly more than a half-a-dozen years. There have been instances of trailblazing companies burning out later, particular in the telecom, aviation and consumer durables space. The reasons include inability to manage the sudden growth, going off the course with wrong calls or the consumers losing attention and latching on to the next promising idea. Therefore, the latest phenomenon of user-visits bringing an e-commerce site to a standstill due to the inability to cope up with the rush, not surprisingly, has triggered opposing views. On one side are those who feel vindicated that India is taking to e-ecommerce rapidly, with falling prices of smart phones and charges for data downloading fueling the habit. The other argument is that the novelty factor of online shopping could wear out soon. Technical glitches and complaints about pricing are signs of buyers’ disappointment and disillusionment. Both opinions, nonetheless, signal that there is much in common in the way companies woo consumers and investors. The first is that it is not necessary to think out of the box to set the cash register ringing. The practice of offering hefty discounts is not new. Several business-to-consumer companies do it all the time. Law enforcing agencies have had to be called to control crowds at huge sales organised on national holidays. In the US, buyers queue up in freezing winter to rush in at midnight to grab goods of throwaway prices on Black Friday, which flags off the Christmas shopping season. What is required is packaging and marketing. The surest way for issuers of capital to create a buzz is by placement of shares with qualified institutional investors on the eve of primary-market debut. Presence of big-ticket investors is taken as a confirmation that the company is on the right track.

The second similarity is the value-for-money offers. Many offline outlets have protested that often items are sold online at less than the landed cost of imports. Pricing becomes a deciding factor during a slowdown. Reasonably priced IPOs have succeeded even in a dull market. Getting the pricing correct means issuers do not have to depend schemes such as safety nets and market making to pull in subscribers. It is important for digital malls to stay away from tricks such as bumping up prices and undertake a token gesture of slashing them later. A distinguishing feature between two companies in an industry is the degree of confidence that they can instill in the stakeholders. Consumers come to equate quality and after-sales service with the brand. Those with transparent corporate governance practices will find it easy to raise funds at attractive valuations in the market. At the same time, adventurism can prove fatal. E-supermarkets in the US are accused of deploying algorithms to alter prices depending on the visitor’s shopping history, which reflects their purchasing power. Indian companies diversifying into unrelated areas such as aviation and telecom have had to suffer massive erosion in value. Window-dressing of accounts, changing accounting policy and reluctance to share setbacks with investors have also cost companies dearly.

Earmarking special days is also an exercise in brand building. This is observed in the capital market, too. Stocks tend to go up on the eve of board meetings called to mull corporate actions. Listed companies have to utilise cash prudently, either capitalising it through a bonus issue or funneling it for capex, to communicate to the market that the company is in good health. Discounting also reveals if a company is relying on volumes to gain share. Many of them have to turn to debt or dilute capital to crank up production without any buffer for a slowdown. The market rewards those with a good operating profit margin. Companies have to streamline processes to make and sell products with a minimal mark-up or convince investors that the premium justifies the outlook. The success of big-deal days also implies that sellers have to create opportunities. Commodity producers, in particular, have to protect from cyclical downturns by widening the customer base. Asset-light stocks are preferred during slowdowns. Another important inference is that there can be different classes of consumers for the same product. Small investors are in for the long haul and are concerned about dividend payout, while institutional investors would look for capital appreciation. Balancing the different pulls of the market is indeed a tough call for companies looking for buyers of goods and equity.