Lucas Romriell of SP Advisors -
From about 2006 to late 2007, I headed up the sales desk for one of Ukraine's biggest share placement agents for local companies. True, we never had any "real" IPOs. Mostly we did private placements for little companies from regional cities. The management of several of these companies were fascinated that we could get money for them and they did not have to pay it back. I distinctly remember the wide-eyed expression in the eyes of a doctor in charge of a small medical clinic as one of our banker's told him he could sell 20% of his company at a ridiculous valuation and then he could "just keep the money" - minus our fee of course.
Most of us were very young. If I remember correctly, our CEO and founder was barely 30. Like most of our staff, I was in my late 20s and eager to make some money. I knew virtually nothing about stocks and markets. I could speak fluent English and wear an expensive suit and tie. That was my job. My poor grounding of the fundamentals of company valuations was almost an asset to my employer.
We sold banks at 4x book value. We even once tried to sell one at a multiple of 6x. We sold overpriced real estate developers, a sugar company that would eventually specialise in stealing from itself to make up for managerial incompetence, a pharmaceutical company with no intention of ever putting the capital we raised to work, and - our crowning achievement - an electronics retailer at 100x projected earnings. What was that Facebook valuation again?
Investors who protested against our high valuations "didn't understand." Ukraine was different. It was a frontier market poised to grow. Economic projections and cash flow estimates could not reveal an accurate picture of surging power of this future Eastern European juggernaut. Much, when I come to think of it, the same way that investors annoyed at the price of Facebook were told they do not understand how the company will capitalise on the future of social media.
In mid-May, another group of ambitious 20-somethings, led by opportunistic bankers, came to market. They took a promising young company to market with much fanfare and hype. Just as investors lined up in 2006 to be part of a new emerging market, so investors lined up to be part of a new emerging social media business. 900m users and endless possibilities! What could go wrong? The multiple it was floated at was high, but surely that only reflected the incredible growth potential. Those who did not believe simply failed to grasp the story. The bankers, seeing the opportunity, boosted the offering by 25%, according to a recent Bloomberg article.
Usually, the share price of our over-priced companies would tank or languish unchanged for years on end. They never rose without pressure from our brokerage. Usually, when management would see how well the deal had done they would ask to sell a few extra shares. I think we increased the size of every offering, regardless of how poorly the issue went. Years later, I even learned that bankers from our company had, months in advance, bought shares in some of the structures we were to sell.
The verdict is still out on Facebook, but at its current price the company has a lot to prove and investors are none too pleased. Unlike Facebook, no one really noticed what we had done. Our deals were so small and peripheral to most fund managers that they would just let it slide. It would take years for them to realise how a bunch of 20-somethings had stuffed their portfolios full of expensive lemons. We took so much value off the table that there was nothing left for the investors.
I left at the end of 2007. I thought I had seen it all. As my understanding of financial markets grew, there was no way I could continue. I left, my conscience wracked with guilt, though I cannot say I felt compelled to give back all the money I earned. I lost some in bad investments, so I guess there is a little justice.
I considered using my online brokerage account to put in a little bid for Facebook. "Surely, investors will overlook the glaring fundamental problems with the valuation and bid it up," I thought. The company is a household name. Then it hit me. "100x earnings? Where have I heard that before?" I had seen it all. And one day, we will see it all again.
Lucas Romriell is Director of New Business at SP Advisors, a company providing business advisory and intelligence services for Ukraine, Georgia, and other parts of the post-Soviet space
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