URL: http://cbs.marketwatch.com/archive/19990925/news/current/rebecca.htx

Tech stocks are overvalued And we like them that way

By Rebecca Lynn Eisenberg, CBS MarketWatch Last Update: 8:33 PM ET Sep 25, 1999 SAN FRANCISCO (CBS.MW) — What is Steve Ballmer thinking?

“There is such an overvaluation of technology stocks, it is absurd,” the Microsoft (MSFT: news, msgs) president told a bunch of business writers in Seattle.

“I could put our own company and others in that category,” he continued, temporarily driving down his own net worth a few billion dollars. “I used to believe in the theory of perfect markets,” he whined. “But I no longer believe that.”

Maybe Ballmer just wanted a chance to pick up more shares at lower prices. If he really lacked faith in the value of tech stocks, one would think he would leave his post at the industry’s top company, place all his money in government bonds, and retire.

The truth is, Ballmer, like the rest of us, knows that tech stocks are overvalued. But we like them that way.

Tech stocks, especially Internet stocks, are part self-perpetuating prophesy, part Ponzi scheme. The fact that their valuations are based on future growth is what allows them to grow. As long as investors keep believing in their potential, they will continue to impress.

And, as long as they continue to impress, venture capitalists will continue to pump money into start-ups, fueling the growth of more and more publicly traded overvalued Net firms, getting more and more people rich in the process.

Take Yahoo! (YHOO: news, msgs). A mere Web directory in 1994, the company launched into the public market in 1996 to the tune of an almost $1 billion market cap. Granted, Yahoo!’s shares might have been a tad overvalued at that time, but the company made good use of them.

Yahoo!’s rise

Using its shares as funny money, the company was able to acquire a whole slew of other Internet companies, including Internet directory service Four11, ecommerce software company Viaweb, Web scheduling company WebCal, direct marketing company Yoyodyne, Web communities site Geocities, and Web casting service Broadcast.com.

What emerged from the buying spree is far better than funny: it’s a genuine, valuable Web destination that offers free personalized news, event listings, e-mail and multimedia services for individual users. It also offers one of the Web’s best, biggest and most affordable shopping malls for small businesses who set up with its storefront services.

Best of all, the company actually started to turn a profit. All because of its so-called overvalued stock.

Amazing Amazon.com

Amazon.com (AMZN: news, msgs) is another company that used its so-called overvalued stock to build an Internet empire. Launched in July, 1995 as “the world’s biggest book store,” it hit the public market in 1997, then used its stock, as well as proceeds from its so-called overvalued bond offering in early 1999 to branch out into the music, movie, drug, pet supply and grocery markets.

It also acquired everything from online scheduling company PlanetAll and online price comparison shopping firm Junglee to ecommerce enabling software company Accept.com, Web use tracking library service Alexa Internet and online movie directory Internet Music Database.

As a result, Amazon.com is now a full-service Web store, offering customers the ability to buy just about anything they want for everyone they know. Of course, the site isn’t profitable yet, but take my word: it will be.

And eBay!

Online auction service eBay (EBAY: news, msgs) is yet another Web company that never would have been able to grow so big had it not been so highly valued. Starting out, like Yahoo, as a Web extension of a hobby, the site managed to grow so large simply because it offered such a popular service. And, the more people that use eBay, the more reason new people have to use it – – after all, if you want to sell something online, it makes sense to sell it at the store that has the most customers. No matter how hard all its competitors try, no one has managed to put a dent in eBay’s momentum. That is the value of overvalued stock.

But then there’s The Globe

Of course, not every Web company enjoys the vast success of Yahoo!, Amazon.com and eBay. TheGlobe (TGLO: news, msgs) experienced both the highest first day gain in IPO history, as well as one of the greatest and fastest stock declines. Its problem was not overvalued stock, but rather lack of vision among management.

Instead of purchasing companies with clear value propositions for its users, the company used its overvalued stock to buy things of marginal interest: a half-rate online department store, a content site of dubious interest and a semi-entertaining network of entertainment properties. TheGlobe.com may rise again, and seems to be doing a bit better these days, offering new services for its free homepage customers, but only if it does what Yahoo!, Amazon.com and eBay all did: figure out what its customers want, and give it to them.

TheGlobe.com’s bouncing-ball stock prices teach another lesson about the value of overvaluation: Internet stocks come with a built-in risk factor. They move so far up so fast only because there is always the chance that they will move down just as quickly. The upward movements are justified by the risk of the downward slides.

The end result: overvaluation proves that, unlike Ballmer’s assertions to the contrary, the market is perfect after all. Without overvaluation, there would never be such fast growth. Those who don’t want that kind of upside are welcome to stay out of the game.

For Ballmer, actions speak louder than words. The Internet stock market might be risky, but it’s a game that Ballmer seems happy to play.

Rebecca Lynn Eisenberg of San Francisco writes her column on Internet issues for CBS MarketWatch. —

-Ian.

Ian Andrew Bell wrote:>
> Hey, guess what? Ed’s on holiday!
>
> I suspended him from posting. Someone remind me to turn it back on on Aug
> 23rd.
>
> -Ian.
>
> Ed Hargrave wrote:
> >
> > I will be out of the office until August 23, 1999.
> > If this matter is urgent. please contact Mike Antoniak
> > at 604.473.9883 or mikea [at] microserve [dot] ca.
> >
> > Best Regards,
> > Ed Hargrave
> >
> > >>> “foib [at] egroups [dot] com” 08/13/99 14:27 >>>
> >
> > I will be out of the office until August 23, 1999.
> > If this matter is urgent. please contact Mike Antoniak
> > at 604.473.9883 or mikea [at] microserve [dot] ca.
> >
> > Best Regards,
> > Ed Hargrave
> >
> > >>> “foib [at] egroups [dot] com” 08/13/99 14:25 >>>
> >
> > I will be out of the office until August 23, 1999.
> > If this matter is urgent. please contact Mike Antoniak
> > at 604.473.9883 or mikea [at] microserve [dot] ca.
> >
> > Best Regards,
> > Ed Hargrave
> >
> > >>> “foib [at] egroups [dot] com” 08/13/99 14:24 >>>
> >
> > I will be out of the office until August 23, 1999.
> > If this matter is urgent. please contact Mike Antoniak
> > at 604.473.9883 or mikea [at] microserve [dot] ca.
> >
> > Best Regards,
> > Ed Hargrave
> >
> > >>> “foib [at] egroups [dot] com” 08/13/99 14:22 >>>
> >
> > I will be out of the office until August 23, 1999.
> > If this matter is urgent. please contact Mike Antoniak
> > at 604.473.9883 or mikea [at] microserve [dot] ca.
> >
> > Best Regards,
> > Ed Hargrave
> >
> > >>> “foib [at] egroups [dot] com” 08/13/99 14:18 >>>
> >
> > http://cbs.marketwatch.com/archive/19990813/news/current/irid.htx
> > http://www.news.com/News/Item/0,4,40492,00.html?st.ne.fd.mdh.ni
> > http://www.news.com/News/Item/0,4,40407,00.html?st.ne.ni.rel
> >
> > -Ian.
> >
> > –=–
> >
> > Chapter 11 filed against Iridium
> > Interest payment of $90 million due Sunday
> >
> > By Debra McGarry, CBS MarketWatch
> > Last Update: 4:42 PM ET Aug 13, 1999
> > Movers & Shakers
> >
> > WASHINGTON, D.C. (CBS.MW) — A group of investors filed an involuntary
> > Chapter 11 bankruptcy
> > petition against financially troubled Iridium World Communications on
> > Friday, two days after the
> > company defaulted on over $1.5 billion in loans.
> >
> > “It became clear to the various parties at interest that a Chapter 11 filing
> > was inevitable and, unless
> > drastic action was taken, the company’s assets could be at serious risk,”
> > said Talton Embry of
> > Magten Asset Management Corporation, a member of the beleaguered company’s
> > steering
> > committee, in a statement.
> >
> > Iridium (IRID: news, msgs) has 20 days to respond to the involuntary
> > petition and can continue to
> > operate its business in the ordinary course.
> >
> > On Wednesday, Iridium said it defaulted on more than $1.5 billion in loans
> > after failing to meet
> > customer and revenue growth targets required on an $800 million loan, the
> > third extension of which
> > expired Wednesday.
> >
> > The expiration triggered the default on that loan and another for $750
> > million. Iridium did not seek
> > another extension, spokeswoman Michelle Lyle told Reuters.
> >
> > The default also delivered a blow to Motorola (MOT: news, msgs), Iridium’s
> > 18 percent owner, and its
> > loan guarantor. Motorola shares gained 5 1/4 to close at 93 amid an overall
> > market rally.
> >
> > Motorola issued a statement on Thursday in which it reiterated its support
> > for Iridium, its operations
> > and gateways and all current and future subscribers. However, Iridium’s
> > largest shareholder said its
> > “willingness to participate in providing additional financial support
> > depended on a substantial degree
> > of participation in a financial restructuring by all other relevant parties
> > with a significant financial
> > interest.”
> >
> > Motorola is the guarantor of the $750 million loan in default. The other
> > $800 million loan is secured by
> > Chase Manhattan Bank. According to Motorola, creditors have been working on
> > plans to restructure
> > Iridium’s debt.
> >
> > The default has hit additional investors, namely Japan’s Nippon Iridium, the
> > second largest
> > shareholder after Motorola. Japan’s Kyocera (KYO: news, msgs) and
> > long-distance phone service
> > provider DDI Corp. are the major shareholders of Nippon Iridium. See full
> > story.
> >
> > “It’s in every investor’s interest to keep them (Iridium) out of bankruptcy,
> > because bankruptcy shrinks
> > the size of the pie available to Motorola, banks, and bondholders,” analyst
> > Armand Mussey of Bank
> > of America Securities told CBS.Marketwatch.com on Wednesday.
> >
> > Once Iridium missed its first customer subscription projections, it had less
> > revenue available for
> > advertising, which resulted in the company missing its revenue and
> > subscription projections even
> > further. “Then they have so little money left over that the banks start
> > coming after them and
> > meanwhile all the interest on their loans keeps accumulating,” Mussey said.
> >
> > On Aug. 15, Iridium must meet a $90 million interest payment on its $1.45
> > billion in bonds. The
> > payment was originally due July 15, but Iridium exercised a 30-day grace
> > period.
> >
> > Trading in shares of the struggling satellite communications company were
> > halted amid a 1 3/16 slide
> > to 3 1/16 on volume of of almost 5 million shares.
> >
> >
> >

I suspended him from posting. Someone remind me to turn it back on on Aug 23rd.

-Ian.

Ed Hargrave wrote:>
> I will be out of the office until August 23, 1999.
> If this matter is urgent. please contact Mike Antoniak
> at 604.473.9883 or mikea [at] microserve [dot] ca.
>
> Best Regards,
> Ed Hargrave
>
> >>> “foib [at] egroups [dot] com” 08/13/99 14:27 >>>
>
> I will be out of the office until August 23, 1999.
> If this matter is urgent. please contact Mike Antoniak
> at 604.473.9883 or mikea [at] microserve [dot] ca.
>
> Best Regards,
> Ed Hargrave
>
> >>> “foib [at] egroups [dot] com” 08/13/99 14:25 >>>
>
> I will be out of the office until August 23, 1999.
> If this matter is urgent. please contact Mike Antoniak
> at 604.473.9883 or mikea [at] microserve [dot] ca.
>
> Best Regards,
> Ed Hargrave
>
> >>> “foib [at] egroups [dot] com” 08/13/99 14:24 >>>
>
> I will be out of the office until August 23, 1999.
> If this matter is urgent. please contact Mike Antoniak
> at 604.473.9883 or mikea [at] microserve [dot] ca.
>
> Best Regards,
> Ed Hargrave
>
> >>> “foib [at] egroups [dot] com” 08/13/99 14:22 >>>
>
> I will be out of the office until August 23, 1999.
> If this matter is urgent. please contact Mike Antoniak
> at 604.473.9883 or mikea [at] microserve [dot] ca.
>
> Best Regards,
> Ed Hargrave
>
> >>> “foib [at] egroups [dot] com” 08/13/99 14:18 >>>
>
> http://cbs.marketwatch.com/archive/19990813/news/current/irid.htx
> http://www.news.com/News/Item/0,4,40492,00.html?st.ne.fd.mdh.ni
> http://www.news.com/News/Item/0,4,40407,00.html?st.ne.ni.rel
>
> -Ian.
>
> –=–
>
> Chapter 11 filed against Iridium
> Interest payment of $90 million due Sunday
>
> By Debra McGarry, CBS MarketWatch
> Last Update: 4:42 PM ET Aug 13, 1999
> Movers & Shakers
>
> WASHINGTON, D.C. (CBS.MW) — A group of investors filed an involuntary
> Chapter 11 bankruptcy
> petition against financially troubled Iridium World Communications on
> Friday, two days after the
> company defaulted on over $1.5 billion in loans.
>
> “It became clear to the various parties at interest that a Chapter 11 filing
> was inevitable and, unless
> drastic action was taken, the company’s assets could be at serious risk,”
> said Talton Embry of
> Magten Asset Management Corporation, a member of the beleaguered company’s
> steering
> committee, in a statement.
>
> Iridium (IRID: news, msgs) has 20 days to respond to the involuntary
> petition and can continue to
> operate its business in the ordinary course.
>
> On Wednesday, Iridium said it defaulted on more than $1.5 billion in loans
> after failing to meet
> customer and revenue growth targets required on an $800 million loan, the
> third extension of which
> expired Wednesday.
>
> The expiration triggered the default on that loan and another for $750
> million. Iridium did not seek
> another extension, spokeswoman Michelle Lyle told Reuters.
>
> The default also delivered a blow to Motorola (MOT: news, msgs), Iridium’s
> 18 percent owner, and its
> loan guarantor. Motorola shares gained 5 1/4 to close at 93 amid an overall
> market rally.
>
> Motorola issued a statement on Thursday in which it reiterated its support
> for Iridium, its operations
> and gateways and all current and future subscribers. However, Iridium’s
> largest shareholder said its
> “willingness to participate in providing additional financial support
> depended on a substantial degree
> of participation in a financial restructuring by all other relevant parties
> with a significant financial
> interest.”
>
> Motorola is the guarantor of the $750 million loan in default. The other
> $800 million loan is secured by
> Chase Manhattan Bank. According to Motorola, creditors have been working on
> plans to restructure
> Iridium’s debt.
>
> The default has hit additional investors, namely Japan’s Nippon Iridium, the
> second largest
> shareholder after Motorola. Japan’s Kyocera (KYO: news, msgs) and
> long-distance phone service
> provider DDI Corp. are the major shareholders of Nippon Iridium. See full
> story.
>
> “It’s in every investor’s interest to keep them (Iridium) out of bankruptcy,
> because bankruptcy shrinks
> the size of the pie available to Motorola, banks, and bondholders,” analyst
> Armand Mussey of Bank
> of America Securities told CBS.Marketwatch.com on Wednesday.
>
> Once Iridium missed its first customer subscription projections, it had less
> revenue available for
> advertising, which resulted in the company missing its revenue and
> subscription projections even
> further. “Then they have so little money left over that the banks start
> coming after them and
> meanwhile all the interest on their loans keeps accumulating,” Mussey said.
>
> On Aug. 15, Iridium must meet a $90 million interest payment on its $1.45
> billion in bonds. The
> payment was originally due July 15, but Iridium exercised a 30-day grace
> period.
>
> Trading in shares of the struggling satellite communications company were
> halted amid a 1 3/16 slide
> to 3 1/16 on volume of of almost 5 million shares.
>
>
>

-Ian.

–=–

Chapter 11 filed against Iridium Interest payment of $90 million due Sunday

By Debra McGarry, CBS MarketWatch Last Update: 4:42 PM ET Aug 13, 1999 Movers & Shakers

WASHINGTON, D.C. (CBS.MW) — A group of investors filed an involuntary Chapter 11 bankruptcy petition against financially troubled Iridium World Communications on Friday, two days after the company defaulted on over $1.5 billion in loans.

“It became clear to the various parties at interest that a Chapter 11 filing was inevitable and, unless drastic action was taken, the company’s assets could be at serious risk,” said Talton Embry of Magten Asset Management Corporation, a member of the beleaguered company’s steering committee, in a statement.

Iridium (IRID: news, msgs) has 20 days to respond to the involuntary petition and can continue to operate its business in the ordinary course.

On Wednesday, Iridium said it defaulted on more than $1.5 billion in loans after failing to meet customer and revenue growth targets required on an $800 million loan, the third extension of which expired Wednesday.

The expiration triggered the default on that loan and another for $750 million. Iridium did not seek another extension, spokeswoman Michelle Lyle told Reuters.

The default also delivered a blow to Motorola (MOT: news, msgs), Iridium’s 18 percent owner, and its loan guarantor. Motorola shares gained 5 1/4 to close at 93 amid an overall market rally.

Motorola issued a statement on Thursday in which it reiterated its support for Iridium, its operations and gateways and all current and future subscribers. However, Iridium’s largest shareholder said its “willingness to participate in providing additional financial support depended on a substantial degree of participation in a financial restructuring by all other relevant parties with a significant financial interest.”

Motorola is the guarantor of the $750 million loan in default. The other $800 million loan is secured by Chase Manhattan Bank. According to Motorola, creditors have been working on plans to restructure Iridium’s debt.

The default has hit additional investors, namely Japan’s Nippon Iridium, the second largest shareholder after Motorola. Japan’s Kyocera (KYO: news, msgs) and long-distance phone service provider DDI Corp. are the major shareholders of Nippon Iridium. See full story.

“It’s in every investor’s interest to keep them (Iridium) out of bankruptcy, because bankruptcy shrinks the size of the pie available to Motorola, banks, and bondholders,” analyst Armand Mussey of Bank of America Securities told CBS.Marketwatch.com on Wednesday.

Once Iridium missed its first customer subscription projections, it had less revenue available for advertising, which resulted in the company missing its revenue and subscription projections even further. “Then they have so little money left over that the banks start coming after them and meanwhile all the interest on their loans keeps accumulating,” Mussey said.

On Aug. 15, Iridium must meet a $90 million interest payment on its $1.45 billion in bonds. The payment was originally due July 15, but Iridium exercised a 30-day grace period.

Trading in shares of the struggling satellite communications company were halted amid a 1 3/16 slide to 3 1/16 on volume of of almost 5 million shares.