Tuesday, July 9, 2013
the last book I ever read (dot.con: How America Lost Its Mind and Money in the Internet Era, excerpt three)
from John Cassidy's dot.con: How America Lost Its Mind and Money in the Internet Era:
With demand for Internet-related companies increasing, the investment bankers set about increasing the supply. The first candidates were the Internet service providers, which were enjoying strong growth. In December 1994, Netcom On-Line Communications Services, an ISP based in San Jose, issued 1.85 million shares in a stock offering organized by Volpe, Welty & Company, a small investment bank based in San Francisco. The media didn’t pay much attention to the Netcom IPO, but Wall Street did. The stock was issued at $13, valuing Netcom at more than $85 million. Since Netcom didn’t make any profits or pay any dividends, its stock was priced on the basis of a new formula: value per subscriber. Netcom certainly had subscribers—about 41,500 of them—and they had to be worth something. At $13 a share, each one of them was valued at about $2,100—more than twice the value that the stock market was attributing to cable television subscribers. This was despite the fact that Internet service providers charged about $20 a month, while cable companies charged upwards of $30 a month. There was no obvious reason why Internet users should be valued so highly, but even at this early stage Internet stock valuation wasn’t based on reason. It was based on hope and hype. The new valuation formulas were primarily an attempt to rationalize the fervor of investors. “This is a rocket that has been launched,” Eric Schmidt, a senior executive at Sun Microsystems, declared shortly after the Netcom IPO. “There’s no one who can stop it.”
Within a few months of going public, Netcom’s stock price had doubled, thereby justifying the new valuation formula, at least in the eyes of its progenitors. In the spring of 1995, two more ISPs went public at outlandish prices. PSINet, a Virginia company that had lost more than $10 million during the previous year, sold 3.8 million shares at $12 each, valuing the company at $431 million. UUNet, which was also based in Virginia, sold 4.725 million shares at $14 each, and its stock price almost doubled on the first day. Goldman Sachs, the most prestigious firm on Wall Street, underwrote the UUNet offering, and the sight of the mighty Goldman giving its imprimatur to Internet stocks raised the industry to a new level of respectability.