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The final days: Net bubble to burst on November 8

The final days: Net bubble to burst on November 8

The Internet stock bubble will burst on Monday, November 8, 1999. Or so I've been predicting since April. Judging from my mail, many of you resent my making such an unhappy and excessively precise prediction about your Internet holdings.

True, Wall Street is off my beat. And true, picking an exact day is foolhardy. It's just that I can't resist sharing this hunch.

Recently, I've received a stream of offers to buy `friends and family' stock in upcoming initial public offerings (IPOs). Aha!

Wall Street is rushing to get another batch of companies public before the bubble bursts. About 25 of the 50 companies in the IPO hopper are Internet companies.

Being designated as a company friend means that you can buy a limited amount of stock at the IPO price before the stock is traded to the public. It also means you can sell immediately, unlike the company's early employees and investors whose stock is generally locked up for six months - investment bankers don't want those insiders selling into a new market.

So, with Internet issues now routinely popping well above IPO prices in their first few hours of trading, being a friend is an easy way to make a few thousand dollars in a few hours.

Because I write this column, give speeches, and organise conferences mostly about the Internet, I do not allow myself to make investments in stocks except through a blind trust. So, I decline to be an IPO friend. More journalists should do the same.

John Shoch is an old-fashioned venture capitalist and a friend of mine. He believes it's the job of a company's investment banker to price its stock to move up 15 per cent in the days following an IPO.

When a stock runs up much higher than that, it means that the banker has failed the company.

The money that goes to friends from selling stock soon after an IPO should actually have gone into the treasury of the company and would have if the banker had set a higher IPO price.

Friends are not the only beneficiaries of underpriced IPOs. Favourite customers of banks also benefit. Despite what they say at road-show dinners, these customers often `flip' new issues - buy them and then sell them, all in the same day.

And then there are the bankers themselves. They get a commission for selling IPO shares - 7 per cent as I recall from 3Com's IPO - so you'd think they'd want the IPO price as high as the market will bear.

But banks want their buy-side customers to make killings on IPOs and, oh, by the way, to make killings themselves. They buy shares in their own IPOs and sell into the run-up.

It's too much in a banker's interest to underprice an IPO. The dirty deed is typically done on the eve of an offering. The young company, which goes public only once, finds itself surrounded by Wall Street, which goes public all the time.

Shoch has a proposal. Companies should make IPO agreements with bankers so that when stocks run up, say double, lockups expire.

This would better match supply and demand for new stocks, dampening the rollercoaster ride and shifting gains from speculators toward investors.

What's wrong is that Internet stocks have become a Ponzi scheme. Eventually, Ponzi schemes run out of suckers. When they do, Wall Street heads for the Hamptons.

The least sophisticated investors, the public, the greater fools, and heavily armed day traders are left holding the bag. Don't be one of those.

Now, as much as I worry about you, I worry even more about the Internet.

After the stock market bubble bursts on November 8, and Wall Street wakes up with a long-term hangover, how are Internet companies going to get properly financed?

Internet pundit Bob Metcalfe invented Ethernet in 1973 and founded 3Com in 1979. Send e-mail to metcalfe@idg.net or visit www.idg.net/metcalfe


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