Saboteur

by RV Raman

  ‘You can do that?’ Mervyn’s disbelieving eyes had narrowed into slits.

  ‘Well…I’m not a hacker. But some of my friends are. They say it isn’t difficult. They can also listen to your conversations by remotely turning on your mobile phone’s microphone. That’s even better, as your mobile is always with you.’

  ‘Bloody hell!’ Sundar’s hushed whisper cut through the shocked silence like a knife. ‘If I understand Moin correctly, the conversation being eavesdropped upon will travel through our LAN and the Internet. The laptop will emit no wireless signal that this gadget can pick up.’ He gestured towards the device on the table.

  ‘Okay,’ Gautam said, apparently coming to a decision. ‘This is what we’ll do and I need your cooperation for it. No laptops, mobiles, pen drives or any electronic device will enter the conference room during a discussion. No Bluetooth either. Moin, take three of our new laptops and physically remove or disconnect their microphones. They will be kept in the conference room permanently for use during meetings.’

  He picked up his mobile and iPad and rose.

  ‘Starting now, let’s make it a practice to leave our phones, laptops and other devices in our cabins when we come here. Only then can we insist that others do likewise. Okay?’

  Four heads nodded in agreement.

  ‘Good. Let’s take a minute to put them away and come back to discuss the cash situation. Remember, no word of the bugs to anyone other than the five of us. Not even to your spouses or families.’

  They gathered back in the conference room a couple of minutes later to discuss their sudden cash crunch. The only temporary exception to the new rule was Sundar’s laptop, which had the budgets, the actuals and the details of the cash situation. Without it, the discussion couldn’t take place.

  ‘Why were we taken by surprise, Sundar?’ Gautam began, choosing to adopt a mild tone.

  ‘The budget was based on the sales forecast and the associated cash loss. However, September saw sales far above budget and the discount levels have been higher than anticipated. In addition, the incentives and marketing cost reimbursement we pay to sellers have jumped inexplicably.’

  ‘Are you sure there is no error in the calculations of incentives and reimbursements?’

  ‘I went through them for the tenth time last night, Gautam. I also had two others check them independently. We could find no error.’

  ‘The computation is outside the system, right?’ Moin asked.

  ‘Yes. We extract the gap-funded transactions from the system and calculate the incentives and marketing cost reimbursement on my standalone PC.’

  If MyMagicHat wanted to sell goods at prices below what the seller was willing to sell them at, it would have to fund the gap between the two prices. If the seller wanted to offer a refrigerator at ₹12,000, but MyMagicHat wanted to price it at ₹10,000, the latter would have to compensate the seller by paying them the difference of ₹2,000.

  This gap of ₹2,000 was paid as ‘performance incentive’ or ‘marketing cost reimbursement’ at the end of the month. Although there were thousands of such gaps each month for every major seller, MyMagicHat’s systems had no record of them. The computation of ‘performance incentives’ and ‘marketing cost reimbursement’ was done offline on an isolated PC in Sundar’s office, which no outsider could access. It was not even connected to the office network, let alone the Internet.

  ‘What if there were errors in the transactions you extracted?’ Moin persisted.

  ‘I have no way of checking that. A visual inspection didn’t show anything amiss.’

  ‘What kind of errors do you mean, Moin?’ Gautam interjected.

  ‘Oh, I don’t know…just thinking aloud. What if some transactions came twice, for instance? For every duplicate transaction, we would end up paying incentives twice, and reimbursing marketing costs twice. Or, what if prices or quantities were wrong? Then too, we would overpay our sellers. It could be any kind of error.’

  ‘Is that possible?’ Mervyn asked. ‘I thought our systems were foolproof.’

  ‘Software, Mervyn. It can act up any time. You touch it in one place and it misbehaves somewhere else. Our developers are forever tweaking the system.’

  ‘Listen, Moin,’ Gautam said. ‘The first thing you do after this meeting is check out the extracted transactions that Sunder used. Look for duplicates, run random price and quantity checks, check hash totals, do whatever you need to, but get to the bottom of this. Okay?’

  ‘Will do. I’ll complete it tomorrow if I can’t do all of it today.’ He looked up almost apologetically at Gautam. ‘Today is Friday…’

  ‘Of course! Certainly.’

  A devout person, Moin took Friday afternoons off to do charity work associated with his mohalla’s mosque and the attached NGO. He and a group of friends prayed together and spent several hours teaching children, helping the aged and doing anything their mohalla happened to need that week. Moin worked so hard at MyMagicHat the rest of the week that none of his colleagues grudged him one afternoon off.

  ‘Sorry I forgot about that, Moin,’ Gautam continued. ‘The launch is next Friday, right? How are preparations going?’

  ‘Almost complete. Friday is going to be our big day.’

  Next week would mark the culmination of a year’s work by Moin and his friends. They would be launching an evening computer literacy class for the mohalla children. Countless hours of work had gone into it, in addition to some generous funding, including a substantial sum from MyMagicHat employees and an equivalent amount from Gautam. The classes were to be held in a room attached to the local mosque.

  Gautam nodded and turned to his CFO. ‘Okay, Sundar. Continue.’

  ‘My biggest fear after you told us about the bugs is that word of our cash crunch will get out,’ Sundar said. ‘If that happens, sellers will cut the business they do through us for fear of not getting paid their incentives and reimbursements.’

  Without the incentives and reimbursements, which was how sellers recouped their losses from selling below cost, selling through MyMagicHat would become unviable for them.

  Similarly, logistics operators who delivered goods free of charge were often paid by MyMagicHat. They too would stop delivery if they feared they might not be paid.

  ‘And if prospective investors come to know that we are cash-strapped,’ Gautam added, ‘they will ruthlessly drive down the valuation. If Kantoff holds out for three to four weeks, we will be brought to our knees; we’ll have no option but to give them shares at the price they choose. The entire power equation will be reversed.’

  ‘Customers will walk away too,’ Mervyn added, his tone sombre. His face reflected the turmoil that Nilay’s mind had gone through the previous night. ‘Who would want to patronize an e-tailer that might not be around in the next quarter? All that we have worked so hard to build will come crashing down.’

  Not wanting to add to the despondency that had already built up, Nilay remained silent. Only he and Gautam knew about the larger Project Iskan. If word of that got out…

  He mentally shook himself and tried to get a grip on his fears. Whatever be the implications, they had only one way forward. He decided to change the course of the discussion.

  ‘We can do nothing about the information that has already leaked out,’ he said. ‘Let’s hope it won’t find its way to the media and put it out of our minds. Let’s focus, instead, on things that we can do something about. There are just two things within our control that we need to concentrate on. If we can pull them off, this crisis will soon be history.’

  ‘What are they?’ Gautam asked.

  ‘Among the four of us, we’ll try and stretch the available cash for as long as possible. Each of us knows our costs well. With Sundar’s help, we’ll try to delay cash outflows as much as it’s feasible.

  ‘Meanwhile, Gautam, you could focus your energies on closing the Kantoff deal as soon as possible. And if you can arrange for some bridge funds to tide over any delays on that fr
ont, it’ll be a bonus.’

  ‘Fair enough.’ Gautam was quick to pick up Nilay’s cue. ‘No point in moping over things we can’t control. Let’s do as you suggest, Nilay. However, I would like to understand the details of the cash crunch we’re facing. Let’s hear what Sundar has to say and agree on broad priorities and directions. After that, I’ll leave the cash management to you guys and focus on getting Kantoff through the door. Meanwhile, Moin will check if the gap-funding transactions are okay.’

  Over the next hour and a half, they went through all the details they had at their disposal and chalked out a plan of action. Gautam’s secretary, Rohini, looked in through the glass door a couple of times, but her boss asked her to wait. As the time neared 11 a.m., she could no longer be put off and knocked on the door.

  ‘Vikram Deswani of Kantoff has been trying to reach you and Nilay for over an hour,’ she said. ‘He couldn’t get you on your mobiles. He says it’s urgent – he’s already called four times.’

  ‘Shit!’ Gautam swore. ‘The first person we piss off by putting away our mobiles is the most important man for us today. Apologize to him, Rohini, and put him through here, please.’

  He pulled the desk phone towards him as Rohini hurried out. A minute later, the desk phone purred.

  ‘Sorry, Vikram,’ Gautam said, once Vikram was patched through. ‘We were in an emergency meeting and had put away our mobiles. I believe you called a few times. My apologies.’

  Gautam grimaced and made appropriate noises as Vikram vented his spleen. But once that was over, his expression turned grave and his eyes darted to Nilay a couple of times.

  ‘One moment, Vikram,’ Gautam now said. ‘Let me check with Nilay.’

  He covered the phone and turned to his colleague.

  ‘When did Puneet leave office last night, Nilay?’

  ‘Around 10.20 or 10.30. In fact, we left together.’

  ‘Did you drop him off?’

  ‘No. He was waiting for a car when I last saw him.’

  Gautam relayed the information to Vikram.

  ‘Okay, we’ll wait for you,’ he said. ‘Come when you can… Doesn’t matter, Vikram… Afternoon is fine… Okay… ‘Bye.’

  When he hung up, Gautam’s face was grim.

  ‘They can’t find Puneet,’ he said in a low voice. ‘He’s missing.’

  Chapter 4

  Four thousand kilometres away, three men were seated for lunch at a restaurant in Hong Kong’s Four Seasons Hotel. Across Nigel Tammer, Kantoff Capital’s grizzled founding partner, sat Han Tuen of FVG Tech, a niche venture fund. Beside Nigel was Jason Letang, Kantoff’s local vice president in Hong Kong.

  FVG Tech was among the early investors in MyMagicHat and had participated in Series C and D – the third and fourth rounds – of the e-tailer’s fund raising. A part of their agreement with the e-tailer was that FVG Tech could start selling their stake after two years if they so wished. That was what Tuen was attempting to do now – sell a part of his stake to Kantoff.

  The first fifteen minutes had been spent exchanging small talk and making their way through lunch. No real business had yet been discussed, but Nigel waited patiently. The purpose of this meeting was a single matter of detail, but an all-important one.

  ‘Have you heard from Vikram Deswani yet?’ Tuen asked casually, while his knife and fork were busy with the food on his plate. Nigel was Vikram’s boss.

  ‘Not yet,’ he replied smoothly. ‘We should hear from him today. They would have concluded the DD yesterday.’

  ‘Any surprises?’

  Nigel’s grey eyes flicked up to Tuen’s placid face. ‘Should there have been any?’

  ‘No. Just that your DD has taken longer than expected. Your guys have spent a lot more time on it than anyone did in the past. I was wondering if that was because of certain concerns.’

  Nigel’s eyes lingered on the smooth, clean-shaven face for a moment before returning to his own plate. Tuen, he knew, kept close tabs on every one of his investments. MyMagicHat would be no exception. Though he kept a low profile and was secretive, Tuen was one of the sharpest venture capitalists Nigel knew. His ability to suss out opportunities was legendary. He had made the investment in MyMagicHat even before the private equity community had become aware of the e-tailer’s existence.

  ‘I hope not,’ Nigel said.

  ‘I would have been taken aback if you had found surprises,’ Tuen continued, piloting the conversation towards the purpose of the meeting. ‘There have been three DDs in the past year and a half and all of them have come through clean. Our experience at the board, too, is that Gautam keeps a clean set of books.’

  ‘How active has FVG been on the board?’ Jason asked abruptly.

  ‘We are financial investors, just like you guys will be. We know nothing about running e-commerce businesses, particularly in India. We leave it to the management and they’ve done a great job so far.’

  ‘Why don’t you stay invested, then? You say you expect the share price to continue rising.’

  The role Nigel had assigned him was to ask blunt, even brash, questions.

  ‘We are an early-stage investor, Jason, a venture fund.’ The Chinaman smiled pleasantly at Jason. ‘Two years is a good time to begin exiting an investment. We have achieved our investment objectives at MyMagicHat. Besides, we are not exiting completely. This is only a part sale – a quarter to a third of our holding, depending on how much you decide to pick up.’

  ‘How much we buy will depend on the final price.’

  They had arrived at the purpose of the meeting. The foppish young man’s brashness drew an indulgent smile from the seasoned Chinaman.

  ‘You have the price, Jason. What you invest directly into the company will be at ₹386 per share. What you buy from us is at ₹363 – a good 6 per cent less.’

  ‘Yes, but is that best for the company? MyMagicHat gets no fund infusion if we buy your stake.’

  ‘We are selling it anyway, my friend, to you or to someone else. It’s your call whether you want to buy or not. If you do, your investors will get a 6 per cent return on day zero, as soon as we conclude our deal. What will make your investors happier – ₹386 per share or ₹363?’ Tuen’s smile widened. ‘If I remember right, your fund’s hurdle rate is 8 per cent. With a 6 per cent advantage, you will start clawing back your carry within a month.’ The ‘hurdle rate’ was the minimum rate of return a venture fund had to achieve before the fund managers could claim their share of the profits. The fund manager’s profit, in industry parlance, was called ‘carry’.

  Nigel suppressed a smile. The veteran had brushed aside the younger man’s specious argument. Both parties knew that Kantoff Capital was keen to invest in the unicorn. Their investment committee had already cleared the deal. Getting a part of it at 6 per cent less was indeed welcome.

  They continued sparring for another fifteen minutes, after which Tuen pushed away his plate, sipped his coffee and came to the crux of the discussion – something Nigel had been waiting for.

  ‘I’ll tell you what,’ Tuen said, looking Nigel squarely in the eye. ‘You are considering buying 22 million shares from us. If you pick up our entire offer – 26 million shares – I won’t have to find another buyer for the remaining shares. That’ll save me time and money. Then I think I will be able to convince my colleagues to make a better offer.’

  Nigel appreciated the logic. Tuen’s time, much like Nigel’s own, was money. It was better to seal a single deal at a slightly lower price than seek two deals at a higher price.

  ‘And what would that offer be?’ Nigel asked.

  ‘Not sure…maybe around ₹359? I will have to clear it with my colleagues.’

  Nigel wasn’t fooled; Tuen didn’t need to clear it with anybody. He was making the final offer. Every three-and-a-half rupee drop in price meant an additional 1 per cent return for Kantoff. Nigel now had to take it or leave it. He made a quick mental calculation. That would mean a 7 per cent discount on MyMagicHat’s offer. H
e decided to push one last time.

  ‘Make it ₹355, Han.’ Another 1 per cent margin for Kantoff.

  Tuen stared at Nigel for a long moment, his face inscrutable. Abruptly, it split into a broad grin that revealed the Chinaman’s crooked teeth.

  ‘All right, you darned pirate, you win! You’ll rob me of my home one of these days! ₹355 it is. Shake?’

  Tuen extended a pudgy hand and Nigel took it gladly. After all, they were old friends and negotiations between friends were always awkward.

  ‘That will be the day, Han!’ Nigel retorted. ‘The day I take one cent more than you intended giving. Rob you indeed!’

  ‘I’ll send you the draft agreement today,’ Tuen said, rising to his feet. ‘We have three days to ink the deal.’

  Back in their office, Nigel issued instructions.

  ‘Structure the MyMagicHat deal as three transactions,’ he directed a surprised Jason. ‘One to buy FVG’s stake, the second to invest directly into MyMagicHat and the third to participate in Project Iskan. $140 million, $250 million and $250 million.’

  ‘Project Iskan?’ Jason asked. ‘What’s that?’

  ‘Ah! An audacious move Gautam is planning. If it works, it should catapult MyMagicHat into the big leagues and double the value of our investment.’

  ■

  The idea behind Project Iskan had been Nilay’s. It had come to him six months ago on a flight back from Singapore, when Gautam was recounting some of his discussions with institutional investors.

  ‘The Enterprise Value – or EV – of e-tailers at this nascent stage of the industry is largely speculative and dependent on two things,’ he had said. ‘Scale of the company and the projected size of the Indian online retailing industry.’

  The traditional way of valuing a company – the discounted cash flow method – involved an analysis of its projected revenues, costs and profits over the next five to ten years. But this couldn’t work in the e-tailing industry, as no company made a profit. In fact, they incurred such huge losses that traditional valuation methods were rendered unusable.