The retrospect analysis of the financial events provides investors, economists and financial advisors with precious knowledge and experience. The famous financial crises, like Tulip-Bulb Craze, the South Sea Bubble, and the Wall Street Crash of 1929, speculative Movements from the 1960s through the 1990s (the “Tronics” boom, the conglomerate boom, the Bubble in Concept stocks, Nifty Fifty, the biotechnology and property bubbles) should have become the preventing pitiful examples of people’s dull and greed. However, the previous crises did not teach the investors, governments and publicity the essentials on financial decisions. The largest bubble of all – Internet Bubble or famous overvaluation due to dot-com boom – suggests that the psychological factors play the pivotal role in influencing the investing decisions.
This paper researches the historical prerequisites, the enormous rise and detrimental fall of the World Wide Web. Besides, the paper gives special attention to the reasons of the crisis, the possible factors that could have prevented the bubble and the companies that were involved in dot-com practices.
The History, the Economic Environment and the Essentials of the Internet Bubble
The early 1990s were marked by the availability of the Internet to the public. The adventure of the World Wide Web and the first release of the Mosaic web browser in 1993 were the first prerequisites for the further popularity of the internet. People start using internet connection for private messaging, chatting and downloading the web content. This trend found its reflection in immediate internet-activity of businesses. Amazon.com was created in the 1994 as the first online books’ retailer. In 1995, the eBay started the business operations as the first internet auction. The dot-com boom was a speculation in the shares of starting internet companies called “Dot-coms”. During this period, hundreds of new internet-based companies were created and evolved at unreasonably fast pace. The practices of the online companies included the simple adding of a “.com”-end or an “e”-prefixes to their names that meant the associated rise in stock prices. Mike Masnick gave the sound name for such a situation. He argued that the overvaluation of stock of the “e-” and “.dot” companies was the result of the “prefix investing”. The relatively low interest rates in 1998-1999 allowed the massive start-up possibilities of the dot-com companies. Most “dot-com’s” were running on the basic principle of “get big fast” that included performance at a net loss level with an aim to win the loyalty of the customers’. At the pick level of the Bubble, it was possible to announce the IPO of the stock and increase the market value of the stock immensely. As a result, the NASDAQ stock index floated from 600 points in 1996 to 5,000 points in 2000. However, it is obvious that in the long run, the market value of the firm tends to its intrinsic value. Consequently, the real value of non-profitable “dot-com” was far smaller than the skyrocketed price of the overvalued stock. The reality told that people with poor education and knowledge, without any consistent business plans and development ideas, ran most “dot-com” businesses. The only aim of performance was to raise the stock value. The main economical prove for such a dull behavior was the idea of “The New Economy” according to which the inflation and the recessions were impossible. The theory suggested the classical financial methods of evaluating the investment portfolio were irrelevant to the new, internet-based environment. The result of the Internet Bubble was the abrupt decline of the stock prices and the bankruptcy of the most “dot-com”.
The Top-Reasons Contributing to the Deployment of Crisis
So, what were the primary reasons for the speculative Internet Bubble? In fact, it is essential to mention that the crisis occurred due to the synergetic effect of the few factors.
The main factor that contributed to the Bubble was the enormous increase in stock prices. The composite NASDAQ stock index has risen from around 600-650 points in the early 1996 to the picking 5132,52 points in March, 2000. The growth of the index was caused by the extreme overvaluation of publicly traded companies specializing on e-trade, software-development and other internet-based activities.
Another contributing factor was the investors’ confidence that the “dot-com” companies would become profitable. Here, the essential role was laid upon the IPOs. Besides, “dot-com” paid the employees in stock options, making the regular clerks millionaires and organizing the luring celebrations of their increasing IPOs. Investors believed in promises and increased investments’ portfolios.
It is important to mention that individual speculations have also played the vital role in enhancing the Bubble to the unprecedented levels.
What is more, the internet-companies were treated as the technological innovation and often were awarded the privileges in the form of tax-exemption or government subsidies. The venture capital was one of the key causes of Internet Bubble in late 1990s.
The Missing Measures that Could Have Prevented the Internet Bubble Burst
The “dot-com” bubble could have been prevented if the financial analysts and economists would foresee the problematic consequences that were the result of the lack of traditional support for the tremendous stock price-growth. The economists seem to overlook the basic financial ratios, like P/E (price to equity) ratio, the internal growth ratio and other important indicators. The theory of “The New Economy” influenced the public opinion and changed the traditional profitability assessment measures into the high expectations in technological development.
Moreover, the public thought was encouraged by the influential publications in business magazines, such as Forbes or the Wall Street Journal who promoted “dot-com” investing. Thus, the Bubble could have been prevented if the major media giants acted as an alert rather than as a catalyst.
Finally, the Bubble would have no chances to grow without governmental support, beneficial economic environment (excellent start-up possibilities) and the technical rush and internal competition of the states that facilitated tax-free incentives and favorable business laws. Thus, the authorities could have noticed the exaggerated figures and introduced the preventing legislative measures.
The Analysis of the Major Market-Players who Won and Lost on Crisis
The burn of the Bubble that started after the March 10, 2001 and continued until autumn revealed the truth of the inflated prices. Hundreds of companies and individual investors lost their money and went bankrupts. Nevertheless, few companies recovered and continued their business activity. Jean Folger provides examples of the most successful companies that managed to recover after the unprecedented fail of the stock price (see Appendix 1). For instance, Amozon.com, e-Bay and Priceline.com managed to improve their financials by offering new products and re-branding. It is important to understand that the winners of the Internet Bubble were the investors, who organized their run-ups by investing the relatively small amounts into the equity and sold their business at the peak of the Boom. For example, in 1995, Tom Hadfield who set up a small Internet website providing live score updates – Soccernet. The company was sold in 1999 at ?40,000,000.
Most companies failed. For instance, Pets.com, the company that actively sold pet suppliers went bankrupt in November 2000 resulting in $30 million loss for investors. Many companies that specialized on network equipment were also much damaged. After the years of financial treatment and a set of accounting scandals, Nortel Teleworks declared bankruptcy in 2009. Another example of “dot-com” boom is the Cisco. In March 2000, the company has a market capitalization of more than $500 billion. The stock of Cisco declined by 86%; consequently, resulting in $70 billion market capitalization. Nevertheless, it is still one of the most valuable companies in the world.
The history of economic crises and bubbles suggests that investors tend to be the victims of castle-in-the-air theory. The theory makes an emphasis on public opinion, possible technological enhancements and other irrelevant to financial calculations data in investment decisions of the analysis and investors. “Dot-com” bubble is yet another example of people’s irrationality and speculative character. The availability and popularity of the internet among the personal users, the massive technological development of the online-retailers and the associated support of the authorities influenced the rapidly inflating stock prices of the ”dot-com” companies – the newly set up internet-based firms that used the prefix “e-” or the end “.com” in their names. Since 1993, the market value of “dot-com” start rising at a fast pace. The companies celebrated their high IPOs and the growing value of their stock. This value was created artificially and was never relevant to the associated profits or financial sustainability of the “dot-com”. When the Internet Bubble burnt in March 2000, thousands of investors lost millions and hundreds of firms, like Pets.com, declared bankruptcy. However, those wise investors who understood the nature of the bubble had chances to increase their wealth by selling the shares at skyrocketed price before the fail, as the owner of the Soccernet did. The “dot-com” bubble was the result of the detrimental synergy of misleadingly treated psychological, economical and governmental factors. What if the authorities paid more attention to the truth of financial analysts? What if the media insulted on the tricky nature of newly invented run-ups? What if the CEO’s of the “dot-com” directed the earned capital on the technological advancement and further development rather than on simply improving the IPOs? There are too questions with “What if” in this event that pose a few more dots on the “dot-com” story. However, the main question is whether the Internet Bubble became a teaching example for modern run-us, who seem to coming back to the same experience.