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Thursday, 30 March, 2000, 12:10 GMT 13:10 UK
European internet fever cools
By BBC News Online's Steve Schifferes
It was supposed to be the next big thing.
Europe was finally catching web fever, with investors in Italy, Netherlands, France and Germany bound to get rich by buying shares in newly-floated web sites.
However, most of their shares are now trading below the initial offer price.
Coupled with the big fall in internet stocks in the United States over the past three months, it could spell more realistic valuations for internet firms and then end of stock market infatuation with dot.com companies.
Some of the most influential analysts agree.
Abbey Joseph Cohen of Goldman Sachs, which has promoted the boom in high-tech stocks, has advised her clients to sell shares and increase their holdings of cash.
Mark Mobius of Templeton Funds has warned there could be a crash in the internet sector.
He predicts that shares in dot.com companies could fall by between 50% and 90%, with the biggest drops in emerging markets.
"Look at the number of internet stocks that have come off their highs, look at the number of internet stocks that are below their issue price, and you begin to see this is beginning to happen," he said.
The most recent internet share flop is World Online, the Dutch-based internet service provider which floated on the Amsterdam stock market on 17 March for 43 euros per share.
World Online shares have plunged 44% since then, and the shares are now worth just 24 euros. Its value plunged from $12bn to $5bn in a week.
The news that World Online's founder and largest shareholder, Nina Brink, cashed in the bulk of her holdings before the float infuriated investors.
World Online, which is an Internet Service Provider in 17 European countries, was expected to make money to make money for investors. The initial offer was 30 times oversubscribed.
"Companies are about leadership and people. If my investors see me focusing on short-term benefits and not on the long-term, then they get nervous," said Gary Mesch, chief executive officer of VersaTel, another internet company that hopes to float soon.
In the UK, shares in the latest internet float, Lastminute.com, dropped below their offer price, leaving thousands of small investors out of pocket.
Also, the value of the UK's largest internet company, Freeserve, has been cut in half in the last month, from $15bn to $8bn, after rivals threatened to undercut its charging system.
In Germany, Lycos Europe fell below its offer price after floating on the Neuer Markt.
Only French ISP Libertysurf has remained unscathed with shares worth 66 euros each compared with the float price of 55 euros on 16 March.
The poor performance of World Online could have a serious effect on the biggest European internet flotation yet.
On 17 April Deutsche Telekom plans to spin off its internet subsidiary, offering 10% of the stock to the public.
But the company's advisors have suggested that the shares could be valued at anything between 30 and 50 euros per share - an unusually wide range that suggests the company's market value could vary by $25bn, from $30bn to $55bn.
Reports suggest that Telekom's board is set to price the stock at the bottom end of this range.
T-Online, with a growing share of Europe's richest internet market, Germany, was expected to outclass the other big European ISPs, like Terra Networks of Spain and Italy's Tin.it.
Now its flotation, and that of French ISP Wanadoo, owned by France Telecom, are in jeopardy.
It is not clear why the latest round of floats have flopped.
One theory is that company founders, and their managers, have become too greedy.
That appears to be the case for Lastminute.com, the UK travel site that also floated in March.
Advisors Morgan Stanley originally said the shares would be sold off at around £2.50 each, but after seeing the huge demand they revised the offer price up to £3.80.
In the event, Lastminute.com shares plunged to £2.80 before settling down at around £3.30.
Other UK internet stocks have also suffered from a dramatic re-rating in recent weeks.
Financial websites Interactive Investor and Exchange Holdings have seen their value more than halve in the past month.
Even high-flying auction site QXL has seen its value fall from £2bn to £1bn in the last few months.
It looks like two kinds of stock market corrections are taking place.
In relative terms, European internet shares, which joined the bandwagon rather late, always looked over-valued compared with their American rivals.
Although the method of valuing dot.com companies is still in its infancy, most analysts use a rough figure of the market value per customer to work out the company's long term potential.
In America internet companies with a huge customer base are rated highest. But even the top-rated sites only trade at around $3,000 to $5,000 per customer.
In Europe, companies like Terra Networks were at one time worth around $30,000 per customer.
Most analysts argue that Europe, with its market fragmented by language and custom, is likely to grow more slowly than the US internet market.
The other correction is the value of internet companies relative to the value of ordinary bricks and mortar concerns.
Investors have begun to see other companies with real assets and a solid profit history as under-valued, and switched back into those sectors.
US leads the re-rating
The decline in the rating of internet stocks really began in the United States, where the boom had begun - and in retrospect, the key event was the acquisition of media giant Time Warner by the world's biggest internet company, AOL for $165bn in January.
While at first that deal merely seemed to confirm that internet companies were indeed worth much more than their old-fashioned rivals, it also forced a more realistic rating for the new company.
AOL and Time Warner shares plunged by more than one-third in the month after the deal was announced as investors began to look at AOL in the light of old-style methods of valuation.
The re-rating of AOL then rebounded on other US internet companies.
In the first three months of 2000, the value of Amazon, the biggest e-commerce site, fell from $40bn to $23bn, while Yahoo lost one-third of its value.
Interest rate fears
Rises in interest rates have also hit the valuation of internet stocks.
Higher rates mean that future earnings will have less value.
It is no accident that as interest rates in the USA, the UK and Europe have risen, so the value of internet companies has fallen.
It is also no accident that the first boom in internet stocks occurred just after the US central bank cut interest rates three times in the autumn of 1998.
More consolidation likely
Of course, the fall in the value of internet stocks does not mean that the internet will not continue to grow in importance.
Indeed the internet may well grow faster in the next decade in Europe than in the US, spurred by the use of mobile phones that can access the web.
But the companies that benefit most from the trend may not be pure internet companies.
Instead, telecoms, media, software and hardware companies could see most profit from the net.
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