It is widely known that the main reason behind the stock krash of 2001 was the lack of sound business models supporting the growth of tech, and mostly Internet stocks. In 1999 and 2000 any company with the name ".com" in it, got premium valuation on the stock exchanges. My ex-boss made a fortune with Year 2000 computing conversion systems (Y2K). It appeared a scam, nothing happened except on 2-3 elevators on the planet on January 1, 2000. My ex-boss diversified by acquiring 50 tech firms in unrelated computing sectors. He had no decent business model. The stock went to $60 to $3 and was acquired around $4.75 around 2002. During the tech bubble, most of the stocks, even the poorly managed, got huge market upside. It was easy to buy new firms with stocks with huge paper value and almost no cash. Due diligence was often discarded for "instincts". Because a target offered the ex-boss $6 per share for his firm, he thought that offering him $4.75 per share right away was a good idea. The owner of the target declined. With the help of the CFO I found with some basic financial analysis that the financial projections from the firm (so truely over-optimistic) gave a valuation below $1 per share. In fact the firm with a ".com" in the name went bankrupt 2 years later.
The tech firms which passed through the deep recession of 2001-2002 were the ones with the strong business models. Amazon with its e-commerce powerhouse evolved into a cloud-computing powerhouse and with high digital sales. eBay prospered as an electronic exchange. Pets.com went bankrupt with no decent business model. Several telecom Competitive Exchange Locals Carriers (CLEC) went bankrupt in Canada and USA because they had a me-too business model with no real strategic sustainable advantage. The same thing is happenning right now with "me-too" Groupon competitors.
For more analysis on the need for a strong business model you can read in the coming months the chapter : "Rethinking North American telephony business models in the age of turbulence" in the book "Telecommunications: Regulations, Technology and Economics" by Nova Science Publishers.
Authors: Louis Rhéaume, TELUQ-UQAM and Dr. Yves Rabeau, UQAM.
www.novapublishers.com
Bloomberg made a good point that in social networks there is a big Internet bubble emerging with high valuations such as Facebook, Zynga, Groupon and Twitter. The one with the weakest business model is Twitter, which is still experimenting with a coherent business model.
Louis Rhéaume
Infocom Intelligence
louis@infocomintelligence.com
A blog on the convergence of info-communications industries: communications, computing, electronics, entertainment, publications and education. Strategic, technological and financial analysis. English and French blog. Cette chronique traite de l’évolution des industries de l’information et des communications et couvre des aspects stratégiques, technologiques et financiers, comme l’économie du savoir et de l’innovation. L’auteur est Associé principal de Infocom Intelligence.
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