March - 2001 - issue > Cover Feature

Advertising agency Rediffusion launched its Internet arm in 1995. Even by international standards, it was definitely an early mover in the Web portal space. “We were just having fun with new media,” says Ajit Balakrishnan, founder and CEO of Rediff.com. “We had no grand plans or ambition.” Come 1998, the Rediff team was in for a surprise -- the Internet had taken off. “What we had been doing for fun suddenly became fashionable,” he recounts. “I was quite surprised to see the media blitz and hysteria.”

The Euphoria
Out of the blue in early 1998 Balakrishnan got a call from investment bankers at Solomon Smith Barney, who requested a personal meeting. The CEO had no idea why until after the meeting actually began. Balakrishnan was surprised at the amount of information, the “formal looking,” bankers wanted from him. At the end of the meeting, they asked, “Have you ever thought of an IPO on the Nasdaq?” Balakrishnan's response was, “No, never. Are you kidding me?” He told them he had not even thought of doing an IPO in India, let alone the US. The entire Rediff management took the news with a lot of humor and a pinch of salt. “After all, I was not a giddy eyed teenager,” recalls Balakrishnan. “I even told them I could introduce them to others who were better candidates for an IPO.”


But the matter would not rest. Over the next few months, persistent investment bankers continued to knock on Rediff's door. But it took a lot of work to convince Balakrishnan. Analysts and bankers pushed Rediff. Where was the harm in it? Contrary to every instinct, Balakrishnan decided to give it a shot. He had hoped to develop the business before considering an IPO, explaining that he “was deeply skeptical up until the last day.” Weren't companies with business models far less developed than Rediff pursuing IPOs in the US? But the decision to go ahead was made by the board. Presentations from eight to ten leading bankers, including Goldman Sachs, were carefully screened. The company's valuation was pegged at $600-$700 million, leaving Balakrishnan even more apprehensive and doubtful.


The bankers assured Balakrishnan they were rarely wrong. Its IPO raised about $55 million in June 2000.

The Pressures
Of course, it can be stressful to manage a public company. The company, the CEO, and the management are always in the fish bowl, and every move is observed and evaluated by impatient shareholders. Perhaps, but what some call “intense scrutiny,” Balakrishnan calls “essential feedback,” which is very useful for Indian companies that have until now not competed in international markets. “Yes, there is pressure to perform but that makes you strive to perform the best you can,” he says. Now that it's all over and done with, Balakrishnan has no regrets about going public, though he recalls how nerve-racking it was at the time. “It’s a tough balance - too early, and your business or business model is not mature enough; too late, and you miss the Internet boat.” Though it was a tough call, Balakrishnan is sure they did not go wrong.


He adds, “For a company with sound fundamentals, Indian or US, going public is a good strategy - as early as the market allows you.” And besides the usual tangible benefits of being a public company, Balakrishnan points out, “A privately held company just does not have the inputs and guidance we get from our fund mangers/investors. They bring to the table so much wisdom and expertise.”

Nasdaq vs. BSE
Several factors led Rediff to choose the Nasdaq over the Bombay Stock Exchange. For one, though the Indian market has grown tremendously, there are just not enough fund managers there who can give you all you need to know, Balakrishnan says. Secondly, for an appropriate price discovery, it helps to IPO in the US. This is especially true if you are in the technology space, where it is difficult to asses the true worth of a company unless you are in the US or a few other developed markets like Europe, Tokyo, etc.


On the negative side, the US disclosure requirements are very stringent. That can work against some Indian companies, which are only just beginning to learn the new transparent ways of doing business. He cautions companies to remember that the GAAP accounting standards in the US are very different. Also, corporate governance and the role of a CEO are very different from a traditional Indian company. For instance, the Rediff compensation committee does not include the CEO, an unheard of thing in the old economy.

Blood Bath on the Street: How Many Bodies?
But US markets can also be quite a roller coaster ride. Rediff's stock has taken a severe beating since listing last June. Shares are trading at near record lows, far below an all-time high of $28. But despite a drop from a $700 million valuation to the current $116 million, Balakrishnan is not disheartened, because he believes current valuations are more realistic and not artificially inflated by the market. “There was a period of unnatural hype, and it was bound to end.” Balakrishnan insists the dismal stock performance is not a reflection of the company's future because “the philosophy of Wall Street is one of instant gratification.” He adds that the unrealistic expectations of the Internet players were bound to get corrected, sooner rather than later, because great businesses are not built overnight.


“If you are serious about a business you keep doing what you think is right, irrespective of the price your stock is trading on that particular day,” he adds. “I have lived through many cycles of ups and downs. I pushed my bankers to price the share at $12 when we decided to go IPO, because I could foresee that the hype was bound to wear off. But the market correction has been even steeper, so all we can do is deal with it.” The CEO says he feels somewhat cushioned from fluctuating stock prices, mainly because he's not a speculator and is in it for the long haul. “Valuations -- good or bad -- do not affect how we do business.” Investors feel the same way, he notes. In fact, almost all of the original investors are still with Rediff. And, on paper at least, they've made money. “Even at the current low price, it is still a 100 percent growth from the time they invested,” he says.


One exception is investor Intel Capital, which sold its equity to Warburg Pincus, reflecting a possible loss of faith in the pure-play Internet e-commerce and content sectors.

The Future
Rediff's post-IPO plans center on growth and expansion in the US and Europe. In addition, the company wants to overcome regional language barriers. It is introducing e-mail services in 11 languages in India. It will then extend services in other languages, including Japanese and some Scandinavian languages. It is also making an effort to be available through WAP phones, PDAs, etc. , and focusing more on e-commerce than advertising.