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Received this article in e-mail today. Is this what is presently driving the European market? Would appreciate any comment.
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Forget Y2K. Here comes Euro99.
Europe's new currency brings new headaches. But for investors, there could be a silver lining.
by Michael Brush
By now, you've surely heard more than you want to know about the "Y2K" problem -- that pesky programming oversight that will make computers crash unless the code is rewritten to recognize the year 2000.
Well here's another one: The "Euro99" problem. It's big. It's real. And just like Y2K, there's money to be made. This one, though, is just warming up. The "Euro99" problem arises because the countries in the European Union must begin to convert their currencies to the new "euro" by the start of next year -- 11 months and counting. To date, the problem has gone relatively unnoticed, in part because skeptics have doubted that such a historic change as the elimination of national currencies would ever occur.
"But today, most companies have come to accept that the change will come, and they have started to plan to make their business systems compliant," says Robert Kugel of First Albany Corp., one of the first software analysts in the U.S. to write about the conversion.
It won't be just European companies that have to deal with the headache. Kugel reckons that any company doing more than 15% of its sales in Europe will have to bring their business management software up to speed. "And certainly if you have a presence in Europe, you are in the thick of the problem."
What's more, in many ways, dealing with the euro will be more complex than Y2K,which boils down to adjusting software code to accommodate a four-digit date instead of a two-digit one. Here's why.
During the first phase of the conversion, from the beginning of 1999 to the beginning of 2002, European firms by law will have to use the euro for tax and accounting purposes, even though real-world transactions will still take place in the local currencies. In short, they will have to keep two sets of books.
The problem goes way beyond finance departments. Any kind of business model used to make decisions or measure performance will have to be converted. "Just as there are few people fluent enough to think simultaneously in Fahrenheit and Celsius," says Kugel, "users will not be familiar enough with the new currency to make decisions based on euro information alone." Companies won't be forced legally to make any changes, but Kugel thinks that managers will want to have this wrapped up way before 2002.
To meet compliance during the three-year conversion phase, companies will have to follow a two-step process when converting foreign currencies like the dollar to local European currencies. Instead of converting straight from the dollar to the German mark, for example, a firm will first convert from the dollar to the euro, and
then use the fixed mark-euro exchange rate to get to the mark.
Kugel says there are few solid estimates yet on how much the overall problem will cost to fix, but he says that it will soar to billions of dollars. He expects the problem to be the biggest for mid-sized European companies that don't have large information technology staffs. Bigger companies will suffer too, of course. Many
firms are expected to take advantage of the changeover to scrap their entire software systems and buy new packages that are euro compliant. "There will also be fallout for U.S. multinationals," he notes.
How can you invest in this theme? Kugel recommends looking for companies that offer consulting as well as packaged applications. Four software companies in the field that Kugel likes are Baan (NASDAQ: BAANF), a Dutch company; the Germany-based SAP A.G. (NASDAQ: SAPHY); and the American companies PeopleSoft (NASDAQ: PSFT) and Hyperion (NASDAQ: HYSW).
Three of them look fairly pricey, given the recent run up in tech stocks. So it may be worthwhile to wait for them to pull back. Baan, for example, has a forward price/earnings ratio of 71 compared to a long-term growth rate of 44%. Likewise, PeopleSoft has a forward P/E of 66, compared to a growth rate of 46%. And SAP's 18% growth rate is dwarfed by its P/E of 66. Only Hyperion, with a P/E of 28 and growth rate of 28%, comes out with a ratio of one, a measure often used as a cutoff point when deciding whether stocks are over valued.
When investing in the conversion to the euro system, it is also important to keep the time table in mind. Many firms waited until the last minute to correct their Y2K problems. So you can expect that the biggest amount of spending on the Euro99 issue might occur just before deadlines arrive. There are three phases to the Euro conversion.
Phase I: On January 1, 1999, the euro will become the official "accounting unit" for the first countries that will join the system, and the exchange rates between the euro and their currencies will be locked in. The initial members will be selected in early May of this year. At first, eleven countries are expected to join -- most of the major European countries minus Denmark, Sweden, the UK and Greece. During this phase, payments between countries will be made in the euro, and government debt will be issued in the new currency. Local currencies will continue to circulate.
Phase II: That will change on January 1, 2002, when the euro will be put in circulation. This will require further software system upgrades because of changes in prices and taxes at the consumer and business levels.
Phase III: In the third phase, to begin six months later, all national currencies will be abolished.
When investing in the Euro99 theme, keep in mind that there are some risks involved. Chief among them: Unlike the year 2000, the switchover to the euro can be delayed if political opposition arises. At this point, however, few analysts think this is likely. Second, as with Y2K, some economists speculate that the conversion to the euro could cause enough confusion to cut into economic growth -- possibly
offsetting some of the very gains you had hoped to get from the increased spending to solve the problem. As the French say, plus ‡a change.
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