Am I Glad That's Over
Internet Bubble Broke Records, Rules And Bk Accts
07/14/2000
Dow Jones News Services
(Copyright © 2000 Dow Jones & Company, Inc.)
By Wall Street Journal staff reporters Greg Ip, Susan Pulliam, Scott Thurm and Ruth Simon
"The world has gone mad."
The thought flashed in the mind of Internet analyst Lise Buyer one morning in November 1998, as she and colleagues at Credit Suisse First Boston stared at a stock-quote machine. They were, Ms. Buyer recalls, agog at the trajectory of the initial public offering of theglobe.com, a collection of community Web sites. Theglobe.com had puny revenues and heavy losses. CSFB bankers didn't think the company was ready to go public. Yet theglobe.com's stock, offered at $9 a share, instantly soared to $97, briefly giving the company a market value of nearly $1 billion.
Crazy - but there was a message to the madness. CSFB soon scrapped some of the rules it had used to gauge whether a company was ready for the big time, and took public no-profit Internet plays Audible Inc., Autoweb.com Inc., CareerBuilder Inc. and others arguably just as slight as theglobe.com ever was. Today, Audible trades at 54% below its offering price, Autoweb is down 86% and CareerBuilder is off 69%. Theglobe.com closed yesterday at $1.8125, or $3.625 before a split. Theglobe.com declines to comment on its IPO but asserts that the company is "committed to achieving profitability." Its underwriter, Bear Stearns & Co., very much believed in theglobe.com at the time, a spokesman says, noting that it traded above its offering price for months.
The Great Internet Bubble may be starting to fade from many memories, but the fallout blankets the landscape. This craze, after all, ranks among history's biggest bubbles. Investment bankers, venture capitalists, research analysts and investors big and small, through cynicism or suspension of disbelief, financed and took public countless companies that had barely a prayer of prospering. Rarely have so many people willingly put prudence on hold to enter a game most were sure couldn't last. "We all knew we were going to get a big kahuna correction at some point," says Jay Tracey, former manager of the Oppenheimer Enterprise Fund.
While the Nasdaq Composite Index has clawed back half of its 37% plunge between March 10 and May 23, Internet stocks as a group, valued at $1.4 trillion at their March peak, have lost 40% of that - erasing almost as much paper wealth as the 1987 crash. Even former stalwarts like Amazon.com trade at a third of last winter's highs. Though investors are slowly warming again to Internet IPOs, almost half of existing Internet companies now trade below their IPO price.
The question is: What brought on the mania? Some answers lie in the murky realms of mob psychology, the human capacity for denial, the get-rich-quick mentality - factors in speculative frenzies since the days of the tulip. But to an unusual degree, the Internet bubble was a product of basic avarice and tactics that smacked of the boiler room. From Wall Street pro to fledgling day trader, all joined hands in a giddy game of lowering standards, pushing out IPOs and trumpeting prospects, with little regard for a company's true long-term - that is to say, more than three months' - outlook.
"People were throwing money at businesses that wouldn't pass simple due-diligence screens five years ago," says venture capitalist Jim Breyer of Accel Partners. "People overlooked almost all business fundamentals and drove valuations into the stratosphere."
Many investors have made good money, but many got clobbered. And the pros? They made billions, and most of them wound up winners even after the bubble burst.
People were certainly warned. Every IPO prospectus was drenched in warnings and risk factors, but most investors breezed past them. When the hype crossed the line into manipulation or other wrongdoing, the Securities and Exchange Commission usually stepped in. But most of the time, regulators could only stand by and warn investors about the risks of playing a completely legal game.
There is no denying the enormous business opportunity or the huge changes represented by the Internet and information technology. Some of the companies that emerged from the Internet upheaval will almost certainly mature into enduring, valuable enterprises, as the rebound in a handful of Internet leaders in recent weeks seems to bear out.
Yet with the true potential came some truly cynical actions driven by a willingness to see what the market would bear and the investor buy - i.e., a bubble.
Here's how some of the pivotal players stoked one of the hottest stock-market crazes in history.
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These have been heady times for investment bankers. Just since theglobe.com's IPO - an event many cite as a line of demarcation between raging bullishness and outright bubble - Goldman Sachs Group Inc., Morgan Stanley Dean Witter & Co. and Credit Suisse Group's Credit Suisse First Boston each pocketed more than $500 million in IPO or secondary offering underwriting fees, according to Thomson Financial Securities Data. It was the most lucrative hot streak investment bankers have ever seen in a single sector.
It wouldn't have happened if bankers hadn't changed their rules. For instance, way back at the beginning of 1999, CSFB had a rule of thumb that a company needed at least $10 million in revenue in the 12 months before its IPO. (Profits were no longer critical; Netscape Communications and Amazon.com, two early IPO meteors, had proved that.)
Flying over Thailand on his way to meet a client in January 1999, CSFB Internet analyst Bill Burnham piped into a regular Monday morning teleconference during which a spirited debate had emerged over whether the rule should be canned. The bank was losing clients - and fees - to competitors. "Everyone realized the entire market was doing deals like this," Mr. Burnham, now a venture capitalist, recalls. "Companies we had relationships with but didn't have any intention of taking public anytime soon announced, `Hey, if theglobe.com can go public, we can.'"
No formal decision on relaxing the guideline was taken at the time, but soon CSFB's bankers concluded that if they really liked a company, they could take it public with $10 million in annualized revenues - in other words, just $2.5 million in the previous quarter, regardless of revenue in earlier periods. "It was emblematic to me of the competitive devaluation of underwriting standards that went on and reached a crescendo in the first quarter of this year," Mr. Burnham says.
One company that wouldn't have fit CSFB's old standard was CareerBuilder, an online recruitment firm. Before CareerBuilder's IPO in May 1999, its prior 12 months' revenue was just $8.8 million. But revenue in its last quarter was $2.8 million, or $11.2 million annualized. After CSFB took CareerBuilder public at $13, it traded as high as $20 but has since fallen to $4.0625.
Bill Brady, CSFB's head of global corporate finance for technology, says CareerBuilder remains a great company that is meeting expectations. He says he doesn't regret any of the deals CSFB has done in the past 18 months. Some, like Commerce One Inc., didn't fit the old standard either, but were successes. Still, he acknowledges that he thought that the prices many stocks hit after their IPOs were irrational, even as CSFB brought similar companies to market.
Other investment banks were priming the IPO machine, of course. Alan Naumann, chief executive of Calico Commerce Inc., says that for nine months before the business-to-business e-commerce software company went public last October, he had 15 different investment banks courting him with regular phone calls.
"The pitch to Calico was, `Other companies are going public with smaller revenues and fewer customers - we think you're ready. You've got $2 million in sales, go for it,'" he recalls. Calico held off, and eventually it picked Goldman Sachs as its lead underwriter. It went public at $14, shot above $62 on the first day, but has since slid back to $17.375 a share.
Mike Yiu, a software developer in Los Angeles, paid an average of about $58 a share for 1,100 shares of Calico between late October and early January. Mr. Yiu sold about 900 of his shares in April at about $19 a share and the remaining 200 last month at about $16 a share, for a total loss of more than $43,000. The timing of Calico's IPO was "perfect," Mr. Yiu observes. But "we got burned."
(END) DOW JONES NEWS 07-14-00 |
