How to be a multi-millionaire - version 3.0 BY M.SHANMUGAM

Published: Saturday March 8, 2014 MYT 12:00:00 AM
Updated: Saturday March 8, 2014 MYT 7:31:53 AM
How to be a multi-millionaire - version 3.0

BY M.SHANMUGAM

NASDAQ is seeing a revival of the tech boom. The last time it happened in the year 2000, any company with the name ending in “.com” saw its share price run well ahead of fundamentals – if there were any in the first place.

The DotCom boom produced many millionaires and a much bigger pool of investors who got burnt by putting money into companies that failed in the following year.

This time around, the buzz surrounding tech stocks are related to nimble start-ups that employ a few people who come out with applications that shake the mobile Internet space.

Leading the pack is Facebook buying WhatsApp, the company that invented the free messaging technology for smart phones over mobile Internet, for US$19bil. It is a deal financed by Facebook shares.

WhatsApp employed 55 people – meaning the value per employee, if the amount is shared out evenly, is US$345mil. But that obviously is not the case as the bulk of the shares go to the two founders of WhatsApp.

However Facebook has offered each of the WhatsApp employees some US$55mil worth of restricted stocks of the company if they stay on.

There are other similar deals that have been transacted the last two years, turning the employees into multi-millionaires overnight.

Softbank paid US$1.5bil for a 51% stake in Finland’s Supercell, a company that makes games for mobile Internet users. Supercell had 132 employees at the end of 2013, meaning each of them were worth US$11mil.

In 2012, Facebook acquired Instagram a company comprising 13 employees for US$1bil – a deal that valued each employee at some US$77mil.

Malaysia has not produced the start-ups that have shaken the mobile Internet world, although we have a few aspirants eyeing a listing on the Nasdaq. MoLAccess Portal Sdn Bhd is amongst them.

However we have more than a fair share of our own versions of “WhatsApp” or “Instagram”, that is, small and nimble companies with a few employees that have made plentiful returns.

The difference is, instead of innovation and technology, what these companies have are people with connections to decision makers in and outside the country and sound knowledge of how the capital markets worked.

This combination is the key to making millions in this part of the world.

In the 1980s, the trend was to get contracts – preferably from the government – and to flog it off to contractors for a handsome profit. In the 1990s it was all about privatisation and long-term concessions from the government.

The most lucrative of them were concessions to build and operate power plants and water treatment plants because it used to be awarded to privately-owned companies.

For instance a power plant concession with a power purchase agreement sealed with Tenaga Nasional Bhd, is worth more than RM800mil. The company operating and maintaining the power plant is worth another RM800mil. These are estimates based on transacted prices disclosed by listed companies.

Without a single ounce of experience but loads of knowledge about how the finances work, a firm with a handful of employees that lands itself with a licence to build and operate a power plant is worth a cool RM1.6bil.

Not bad for a firm that probably employs fewer than 100 people, including the tea lady and office boy.

But over the years, concessions and contracts awarded to individuals and listed companies had drawn so much scrutiny and glares from the public that the government has decided to tender them out through a competitive process.

In the last four years, one of the routes to becoming a multi-millionaire without drawing much attention is to win a mandate to raise funds in the debt market by issuing bonds backed by guarantees.

Bonds are debt papers that give investors a coupon of a between 3.5% and 6% or more, depending on factors such as the maturity period, the underlying assets backing the bonds, and the issuer.

The higher the coupon rate, the more risky the bonds.

The best debt papers normally are those that come with guarantees. In particular, investors fancy a guarantee from the government or a related agency.

The key is to find a reason to raise the money. Normally, if it is for an investment with a foreign party in Malaysia, it does not need much justification since the beneficiary is the domestic economy.

To raise funds to facilitate the investment, the agency raises long-term funds, preferably with a maturity of 25 years or more.

The papers are much sought after because of the guarantees. Distribution is easy and the advisers make a pile along the way.

For instance, a 25-year government-guaranteed paper with a coupon of 5% will find ready buyers prepared to accept a 4% yield.

The spread between coupon rate and the yield of 1% – better known as 100 basis points – is the clean profit for those arranging the transaction.

There may be several layers involved in distributing the papers but everybody makes a handsome profit along the way.

Bond traders estimate that for every RM1bil raised for a government-guaranteed paper with a tenure of 25 years and coupon rate of 5%, the persons or firm distributing or selling down the debt papers could easily pocket a total of RM125mil. So for RM10bil debt paper, the amount is estimated at RM1bil or more in fees and commissions.

Now comes the best part. After raising the money and if there is no use for it in the immediate term, the bond issuer simply parks the funds in a foreign fund that gives a return exceeding the coupon rate.

If the coupon rate is 5%, to justify the fund-raising exercise, the returns must be higher.

Nobody pays much attention to the mandate of the fund manager handling the funds. As long as the returns are higher, the question of mandate and recoverability would only come in 24 years when the bonds are near maturing.

By then, the deal makers would have long gone, taking their millions with them and probably multiplying the money.

So if you can’t find employment in the next start-up that can write the program that revolutionises the mobile Internet world, then identify the firm that is going to do the next biggest debt market deal.