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Saturday, August 07, 2004

getting high on OPM.....

since i'm on an economic bent here i will touch on a recent trend that's becoming more and more apparent.... companies have hit upon a great moneymaker: using Other People's Money to make a quick buck..
to elaborate - company A (usually a listed company) has a stellar year with great profits and cashflow.. at the same time the financial markets are going wild and hungry for opportunity especially given that there aren't too many attractive local investment opps. the board of company A sits around the nice expensive conference table debating how to take advantage of this great climate! buHmood tells buGhazi that they should set up new companies to further profit from the growth. they say hey lets get this shell company (or set it up from scratch), put in a million KD and bring in another 19million from a public offering. now it doesn't matter what this company does/they don't care. they just know that if they dress it up nicely and put a secretary and an office boy at the door it should somehow find its calling and make some money! the fallacy is in the motive. there should be a dual objective of making money as well as making lives easier somehow (inventing a product, providing a needed service,etc). the problem is their brains are blank - or more aptly said they are stuffed with banknotes and notions of more....
now some people may wonder why these companies don't set up a fund and offer it to investors as a pooled vehicle. the following will also explain why the company model is such an attractive proposition:
- they can charge around 5% for setting up a new company as placement and structuring fees. in the hypothetical 20million KD company above - thats a nice million KD (so in effect they've invested their 5% in the company for free).
- no minimum investment limits - kuwaiti law requires that the sponsor of a fund invest 5% of the capital. this does not exist with a new company private placement. they could put in naught and still make money of the fees.
- they can run the company as a small fiefdom (for a while at least) - since they develop and place the company they are in the best position (regardless of their ownership stakes) to influence the management of the company. they can achieve this by not selling too large a stake to any one investor and so have virtual proxy authority over the owner base. this allows them to reward themselves and friends with seats on boards with other people's money! capitalism at its best?
- this is a corollary of the one before - they get to drive the new company's business to benefit their mother company. this creates a bias, a conflict of interest and a violation of fiduciary duties (if they exist) in most cases. if you want to picture it for those of you that know the way govt corruption is in kuwait - its basically the minister that sends contracts his friends' way. a nudge here, a tug there and a few million for the buddy and I.
- the final and probably most important point - the company can be listed (sometimes quite quickly!).\
the end result is that the poor schmuck that put his money in as an ordinary investor (the little guy with 10,000KD of savings) may not see his money back or maybe just some of it because of a bunch of bums that wanted to vacation in st. tropez or st. barts.... he could get lucky but there are more enjoyable ways of gambling (i.e. Monte Carlo and Las Vegas).
i like seeing action and initiative - it makes me think that others are thinking (have you ever realized how little people actually "think"). the problem is its too short term oriented. no one cares about building value. an employee is just there as a warm body and transitory. in short there's no corporate culture to talk about - except on of greed begetting greed.
i will end this on a positive note. there's a budding young generation that's intent on changing things - but will they achieve critical mass before its too late? they're optimistic, talented, motivated (with the right reasons) and hopefully ethical. where there's a will there's a way...


  • Thats what happened in the 80s with the Kuwait Stock Market. So many companies were listed that really had nothing. People were seeing wealth just grow in stocks , and no one wanted to be left out of this. Loans were taken out to buy stocks hoping to make a quick profit then pay back the loan. But in the end people were buying shares in empty companies, and then like a house of cards it all fell when they finally looked behind the curtain.

    I dont reacll who said this but some rich guy from the 20s-30s in the US. He sold all his stocks before the 1929 crash. He said :

    "When the shoe shine boy was telling me stock tips I knew it was time to sell".

    By Blogger nibaq, at Sunday, August 08, 2004 11:25:00 AM  

  • nibaq - i heard the 90's version of the shoe shine story - "when you're plumber is asking for stock tips - its time to get out!"

    By Blogger frigg, at Sunday, August 08, 2004 8:14:00 PM  

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    By Blogger Mama Fusla, at Tuesday, August 10, 2004 12:51:00 PM  

  • mama - i did but it never picked up. will definitely try again, though.

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