The new economy was supposed to have a new set of rules. Interest rates didn't matter. Technology sp...
The new economy was supposed to have a new set of rules. Interest rates didn't matter. Technology spending was compulsory, not cyclical. The economy's top line was to have no impact on corporate America's bottom line.
Alas, it turns out that the new economy doesn't dance to a different drummer after all. Instead, it cha-chas to the same beat as the old economy, only at a different speed and intensity.
Where are all the new economy prophets now? In the first quarter of 2000, when the Nasdaq Composite Index was trading in the rarified atmosphere above 5,000, the tech gurus said higher interest rates would have no impact on start-up companies. Why? With so much venture capital in hot pursuit, the idea of borrowing money the old-fashioned way, paying a rate of interest for it, was strictly for wimps. Internet CEOs paraded through the Bloomberg newsroom, waxing poetic about their business plans, touting a new metric, ROV (return on vision).
A sock puppet was going to make pet-food sales on the internet a lucrative proposition for Pets.com, which closed up shop last month and went into voluntary receivership. Vision? Yes. Return on it? Hardly.
"The grocery business is the lowest-margin business around," says Bob Barbera, chief economist at Hoenig in New York. "With dog food, if you double bag you lose money."
Then there was Garden.com, which had the misfortune of being on the right side of the tulip trade some 360 years too late. Don't forget Priceline.com, a name-your-own-price ticket seller, which at its peak had a market capitalisation of $17.4bn and is now valued at $374m. "A reseller of plane tickets had a market cap three times that of American Airlines," Barbera says.
During the frenzied technology rally in the fourth quarter of 1999 and first quarter of this year, reason was tossed aside in favour of hype. The stable of technology analysts pooh-poohed the idea that higher interest rates mattered when by rights they should matter even more for a company with no earnings. That's because the present value of any future earnings stream falls when the interest rate rises.
Denial begat anger begat bargaining. Okay, so maybe higher interest rates do matter when it comes to valuing a stock price, but tech spending would be untouched by higher interest rates. So important was productivity-enhancing information technology to a company's bottom line, in fact, that businesses would keep investing even when demand in the economy at large slowed. According to this line of thinking, technology spending is as inelastic as petrol and food purchases in the short run.
History doesn't support the premise that the technology in vogue at the time can rise above the vagaries of the business cycle. Rather, every slowdown has seen the technology-heavy Nasdaq slide and demand fall. Only grudgingly did the grieving process move through denial to anger and bargaining. The economy could and would slow, along with sales, but companies would produce strong profits by cutting costs.
One by one, industry leaders in the area of computers, semiconductors, fibre optics, networking and telecommunications equipment reported or warned of slower revenue and profit growth in the second half of this year and into next year.
Bargaining gave way to depression. Last summer, influential Morgan Stanley internet analyst Mary Meeker conceded that most online companies were overvalued, but 13 of the 15 companies she follows are rated "outperform." On 28 April, Merrill Lynch's internet wunderkind, Henry Blodget, predicted the share price of online retailer Amazon.com would rise 60% in 12 months. While there are still five months left to go, Amazon has fallen 50% since then. Clearly acceptance is still a way off.
With access to capital through initial public offerings or junk bond sales denied or the price too costly, technology companies have less to spend on what else? technology. "They eat their own," Barbera says.
Caroline Baum at Bloomberg, New York
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