Investment Banker's Forecast: Stock Crash Looms
By Gavin McCormick
T.L. Stebbins acknowledges that he's an "old school" investor -- after all, he's been in the game since 1965, with more than three decades at the Boston investment firm of Adams, Harkness & Hill, where he's the managing director of corporate finance.
So perhaps it's generational bias that leads Stebbins to describe some of his firm's recent Internet investments as "irrational," based upon nothing more than hype and a desire for quick profits.
In any case, Stebbins isn't buying into any talk of a "new investment paradigm" that will keep the market soaring into the stratosphere. In fact, he sees a crash just around the corner.
"The market is as fragile as I've seen it in 35 years," Stebbins told more than 100 attendees who filled an MIT lecture hall Wednesday for a seminar sponsored by the MIT Enterprise Forum of Cambridge. "The end will come with a bang. I think the first quarter will be great for our business, and then everyone should run for the hills."
To demonstrate his point, Stebbins described a recent AH&H investment for his audience, made up largely of fledgling Internet entrepreneurs clearly made nervous by the gloomy prognosis.
Stebbins told of visiting the offices of a Net start-up (no names mentioned), which he said was filled with people "wearing T-shirts with crude slogans and more body piercings than I care to see." There, the firm's young founder "gave me a business plan that I know will fail. This company can't make money fast enough to acquire all the customers it needs to succeed. And then he tells me the company will be worth more than $400 million."
Stebbins stifled a laugh and ended the meeting cordially. He felt only "slightly unpleasant" when a Morgan Stanley rep walked in as he was leaving.
Upon returning to his office, Stebbins was confronted by a senior AH&H client executive who represented Fidelity Investments. Fidelity, said the executive, shoving a finger into Stebbins' chest, wanted to invest in high-flying Internet companies, and AH&H had too few in its portfolio. "We're starving up there," Stebbins quoted the exec as saying. "You'd better get some Internet product, fast."
The upshot: "A week later I'm back at this kid's Internet company, and I'm telling him his business is worth not $400 million, but $600 million."
AH&H ended up joining Morgan Stanley as co-leads on the company's initial public offering. On the first day of trading, Stebbins said, Fidelity "bought the maximum amount of stock they could, then flipped it in a nano-second" as the stock soared upward, resulting in a tidy profit.
"These are all highly professional, experienced people, and none of us made a rational decision on this deal that we foisted on the public," Stebbins said. "Fidelity didn't. Morgan Stanley didn't. We sure didn't.
"The market is full of this," he continued. "We're dealing today in perceptions; we're saying, 'What's going to sell?' IPOs have become a branding event; as soon we make an investment, the value of the company doubles. Then we build a perception that it's a good long-term play. But we're not building the long-term value of these companies. It's a serious example of the 'the ducks are quacking, let's feed them' phenomenon. And as an industry, we will continue to feed investors only so long as the market stays strong."
Rick Burns, a general partner at the Waltham venture capital firm of Charles River Ventures and a fellow MIT panelist, seconded Stebbins' opinion. Burns said his firm remained "very bullish on the (technology) industry, but bearish on the market."
Burns said, "The market is absolutely near the top and will come crashing down. And when it does, a lot of people are going to get hurt. The retail dot-com model, for instance, is simply not proven. Not enough people are asking if the businesses can earn money over the long-term. We'd all be healthier if everyone just geared back."
One of the market's problems, as Stebbins sees it, is that the growth of online trading houses like eTrade has weakened the influence of traditional brokers. And those brokers are spending almost all of their time focused on companies with huge valuations.
The result: little "after-market support" for firms whose stock prices remain below the stratosphere. A few years ago, brokers spent a lot of time encouraging clients to invest in solid businesses with stock prices that remained middling; over the long haul, such support helped a lot of deserving companies survive and thrive. But that type of help isn't forthcoming today, Stebbins said.
And check the trading volume on the companies with stellar valuations, he continued: "Ninety percent of the volume is by the three underwriters and a few wholesalers. The situation is very fragile; there's no center, no broad distribution. And that after-market support won't be there when the crash comes. When the bulge firms say it's no longer profitable to play, things will get very interesting."
But for the moment, optimists can rest easy, Stebbins said. After all, "the ducks are still quacking."
January 13, 2000
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