Tracking Down The Missing $200 Billion
By Jerry Knight
Monday, April 29, 2002; Page E01
Reviewing this year's annual fiscal exam of Washington business, what's most impressive is what's missing.
In round numbers, $200 billion of stockholders' money.
It's gone -- vaporized in the past year by bad management and a brutally unforgiving stock market that has marked down the values of most of the region's technology companies.
The easiest place to see what happened is in the Northern Virginia Technology Council's Potomac Tech 60 index, which tracks the stock market performance of five dozen major players in the technology and telecommunications industries.
The Potomac Tech 60 index has fallen 40 percent over the past 12 months. The Tech 60 index is structured to reflect the stock market value of the 60 companies, so the 40 percent decline in the index means that's how much the combined stock market value of those companies' shares has declined in the past year.
To translate that percentage into dollars lost, just start adding. The $200 billion total includes the lost market value of AOL Time Warner Inc. and WorldCom Corp., which remain vital to the Washington economy even though they are no longer based here.
The lost market value climbs toward $300 billion when you count all big out-of-town tech companies that are included in the Tech 60 because of their importance to the region. There's been a $32 billion loss in market value at local phone company Verizon Communications Inc., a $35 billion loss at Oracle Corp. and a $10 billion loss at Cable & Wireless PLC.
The decline in stock market value of the region's tech companies is a staggering loss of wealth, unprecedented in the 21 years that the editors of Washington Business have compiled this annual ranking of the region's top public and private companies.
Washington investors took a hit in the spring of 2000 when the tech bubble burst and the Nasdaq Stock Market composite index lost a third of its value in two months, but those losses were largely paper.
Few people bought or sold their stocks in Washington technology companies during that blowout phase of the business cycle. When stock prices reverted to rationality, most local investors were still secure. A handful of flaky Internet companies imploded but Value America Inc., LifeMinders Inc. and the like were never more than bit players in the regional economy.
This time around, we're talking about real companies, real losses, real damage to the finances of corporations, families and the region.
Almost half of the market value lost by local investors was incinerated in America Online Inc.'s merger with Time Warner Inc., which has been declared a disaster by Wall Street. That loss of market value is why AOL last week took the largest write-off in the history of American business, a $54 billion hit. Though previously announced, the write-off sent AOL stock to a new low of $18.72 Friday.
Professional investors began bailing out of AOL months ago, and many of them managed to minimize their losses. But for thousands of AOL employees and loyal local shareholders, the damage could not be dodged. Locked into shrinking 401(k) retirement accounts and now-worthless stock options, AOL employees are suffering painful setbacks to their savings and retirement plans.
And they are not alone. This has been a lousy year to be an employee of any of the many Washington economy's stalwarts where the stock price has plummeted.
The market has marked down the value of the world-wide chain of power plants owned by AES Corp. of Arlington by more than $21 billion. It has pruned $1.7 billion off the market capitalization of US Airways Group Inc. It has devalued the whole telecommunications corridor of Northern Virginia and Maryland's entire biotechnology industry.
Montgomery County's biggest biotech, Human Genome Sciences Inc. is worth $4.9 billion less today than it was a year ago. The market value of Celera Genomics Corp. is down more than $1 billion from a year ago, when the company's contribution to genetic research was enough to attract investors regardless of whether Celera had a viable business strategy. Smaller biotechs have taken comparable hits to their market capitalization: Guilford Pharmaceuticals Inc. is down more than $300 million, EntreMed Inc. more than $200 million.
The revaluation of biotech stocks is both company-specific and part of an industry cycle. Celera's scientific prowess has yet to produce profits, Human Genome Science's experimental drugs haven't panned out, nor have some of those developed by several other biotech companies. But biotech has been through these cycles before. The industry periodically becomes an investment fad, then fades when blockbuster drugs don't develop as soon as expected.
Biotech will be back. Buy-and-hold investors have a fair chance of recapturing some of the billions in market value that have been lost in the last year -- but it could take a while.
Telecom is another matter. As is pointed out elsewhere in this issue, several telecommunications companies have simply gone away in the past year. Others are likely to be gone by next year when -- finally -- the industry restructuring is expected to be completed. This could be the last year for Talk America Holdings Inc., Startec Global Communications Corp., Network Access Solutions Corp., E.Spire Communications Inc., US Internetworking Inc. and maybe some others.
Stocks of telecommunications and Internet start-ups started sliding when Nasdaq collapsed, and they never really stopped. So shareholders in those companies took their losses early. Many of these companies gave up the majority of their remaining market value in the past year, but by then they had already lost so much that there was little left to lose.
It's the best and the brightest of telecoms that have been losing the big money in the past year.
Verizon Communications has vaporized almost $32 billion worth of shareholder value in the past 12 months -- $5 billion of that in the past week. Verizon is a blue-chip stock, a Baby Bell, a market-dominating former monopoly that actually pays cash dividends to investors. When the stock market starts dumping on companies such as Verizon, you know the telecom crisis is entering its final stage.
Yet Verizon remains a solid citizen compared with WorldCom, the ailing Mississippi phone company that owns MCI Group, the granddaddy of long-distance phone competition. WorldCom investors have lost nearly $45 billion in the past year as the value of the company's outstanding stuck has shrunk from $54.5 billion to less than $10 billion. The ploy of creating a separate tracking stock for the MCI division has done nothing -- except make investors wish MCI had never been sold to WorldCom.
Linking up with WorldCom has been no better an idea for Digex Inc., the Maryland company that is one of the biggest in the Web hosting business. The market value of Digex's stock was close to $900 million a year ago, now it's under $60 million.
About $15 billion in market value has been vaporized at Nextel Communications Inc. and XO Communications Inc., the two companies originally bankrolled by telecom magnate Craig McCaw. XO is in what has proven to be the worst sector of telecommunications -- providing phone and Internet service to corporations. Valued by the market at close to $8 billion a year ago, you could buy all its stock today for $26 million. Not that you'd want to -- the stock is expected to become worthless after XO goes through reorganization in bankruptcy.
Nextel also has lost more than $7.5 billion in market value in the past year, but its outstanding shares are still worth about $4.3 billion. Nextel is prosperous by the standards of the mobile phone industry because it caters to business customers with its phones that double as walkie-talkies.
Brutal as the stock market has been in slashing the value of telecom companies, it has been even nastier to the two big local makers of communications equipment, Ciena Corp. and Corvis Corp. As orders for the hardware they make have dried up, so have their stocks. The market value of Ciena has eroded from $17.4 million to $2.5 billion in the last 12 months. That's almost $15 billion gone in a flash. Corvis had a market capitalization of $2.8 billion a year ago; today it's about $365 million. That's less than the cash Corvis had in the bank on March 31.
The massive loss of market value by technology companies based in the region is not apparent when you look at the Washington Post-Bloomberg regional stock index, which tracks the market performance of companies based in the District, Maryland and Virginia.
The regional index is up about 7.3 percent over the past 12 months. To a large extent that's because of the big gains in the stocks of financial institutions, non-technology companies and government contractors that are benefiting from the war on terrorism.
But another factor is the way the index is calculated. It's based on a simple formula: one share of every one of the publicly traded companies in the three states. That means that high priced stocks, such as the Washington Post Co. at $629.75 a share or NVR Inc. at $365.40 have more influence on the index than low priced stocks.
The NVTC Potomac Tech 60 index, on the other hand is one of many indexes that are weighted to reflect the market value of the companies included in the index -- the bigger the company, the more influence its stock has on the index. (The Dow Jones industrial average also works that way.) The Tech 60 Index has been hitting new lows day after day because it is not struggling start-ups that are suffering now, it is big companies with thousands of employees and multibillion-dollar market values.
The latest big loser in that index is VeriSign Inc., the California company that bought Network Solutions Inc., the Internet address registration service based in Herndon.
VeriSign told investors Friday morning that registrations of domain names are slowing down and so is its computer security business. By the end of the day 350 VeriSign employees in Northern Virginia had lost their jobs, the stock had plunged from $18.24 a share to $9.89, and VeriSign's stockholders had lost $2 billion in market value.
© 2002 The Washington Post Company
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