Exit Lastchance.com with a bear in pursuit

There are signs that the economy’s love affair with the Internet – during which comely dot-coms could do no wrong in the eyes of besotted investors – is starting to cool. I don’t mean the affair is over, or even that dot-coms are falling from favour. It’s just that the infatuation might be over.

I write of tainted love perhaps because I’ve just spent a week in Dorset’s Thomas Hardy country. I’m reminded of the harsh realities that haunted the lyrical sentiments of Jude, Tess or Bathsheba and undid the follies of their blind passions.

A dark valley under a windswept heath is just the place in the early 21st century to plug in a modem and conduct e-dialogues with those who understand markets better than I do. And, out of sight of the City, you can see the wood for the trees.

There is no single, startling revelation that makes one realise the fawn-necked beauty is, in reality, a manipulative bitch. Rather, there are signals that suitors are getting in too deep with objects of desire that cannot possibly be worthy of such affection.

I think what was most instructive during my week of stock-taking by e-mail was the view that there is a bull market in Net stocks (and how), while there is a virtual – literally – bear market in anything that isn’t a dot-com.

How else to explain the taciturn response to the proposed merger of Norwich Union and CGU to form the largest insurance conglomerate in Britain and one of the top five in Europe? Maybe critical mass is an outmoded concept of valuation. But it may also be that the likes of Direct Line have already taken the distributive dog-leg out of the market with telephony and there is little perceived value left for the Net to add. It may also be that this is simply not a dot-com deal and is, therefore, subject to the bear market that the rest of us have to live in. In any event, Norwich Union’s shares fell 12 per cent and CGU’s by nearly as much in the four days following their announcement.

Similarly bizarre is the lukewarm reception by equity markets to the Glaxo Wellcome/SmithKline Beecham get-together. The markets were apparently longing for years for Glaxo to get its critical-mass act together, yet its shares have dropped by 30 per cent relative to the UK market since the start of the year. Anyone would think it had failed to find a partner.

Such is life outside the Net bubble. Inside the bubble, company valuations are subject to a kind of virtual reality, metaphorically speaking. In short, you can’t see the value unless you don a sort of virtual-reality helmet.

The latest archetype is Lastminute.com, which has a turnover of &£6m, makes no profits but is nevertheless “valued” this week at &£400m. It’s not so much the valuation formula for this sort of venture that troubles me – that just looks bonkers. What troubles me is the business proposition at its heart.

Lastminute (let’s drop its dot-com status for a moment and pretend it’s just like any other company) is a bucket shop. In the nature of bucket shops, its margins are bound to be wafer-thin. But it is not even close to being priced on that basis, simply because it’s a dot-com. In this context, I like the observation that Dixons, no slouch in the retail markets, is now valued in its entirety at less than its stake in Freeserve, the Internet service provider that it partly spawned.

But all this is to rehearse the incongruity of share prices in Lilliput.com, where a raging bull market can run parallel with a bear market for stocks outside the virtual-reality bubble. It doesn’t begin to explain why I think that it’s coming to an end.

Part of the reason for that arises from one of my City e-correspondents last week, who referred me to an excellent piece in last week’s New Statesman, which I then drove 20 miles to buy (thereby infringing no copyright, you understand). The thrust of the argument is that the Net’s value contribution to business is, at best, incremental and that there was far more of a step-change in the Victorian era and the development of telephony.

This sort of iconoclasm was gaining ground in my rural research last week. In short, I’m suggesting that, at an analytical level that will feed through to investor sentiment, the Net may be rumbled. Does that matter?

Well, yes – if publicly-listed companies buy-back their shares in order, at least in part, to create liquidity, but if the created liquidity is being invested in a Klondike-rush into dot-coms, then it matters very much that the Net three-card trick is rumbled. But, when the bubble bursts, the institutional investment fingers that will be burned, from venture capitalists to retail investors, could create a credit crisis that will take some purging from the system.

As I drove from Dorset, I mused that Hardy was often obliged by publishers to write alternative happy endings to his tragic love stories. Maybe there’s a happy ending to the equity market’s love affair with the Net. But, for now, I’ll stick with a bleakly tragic first draft.

George Pitcher is a partner of issue management consultancy Luther Pendragon