I wouldn’t claim to have been alone at the beginning of this month in suggesting dot-com stocks had become absurdly overpriced, the forthcoming flotation of Lastminute.com was a paradigm for the over-inflation of Internet shares, and that it would all end in tears. But, in stock markets, as in the world of comedy, timing is the secret to getting things right.
Over the past couple of weeks, we’ve witnessed Lastminute.com’s 380p flotation price drift to as low as 270p in its after-market. As I write, it sits at about a ten per cent discount on its initial offer. That, I think we’re entitled to say, is a poor flotation performance, even for a company from the boring old economy – one that does something as 20th-century as making a profit, for example.
I said Lastminute.com didn’t make sense (MW March 2), so I, along with all the other observers who predicted a collapse in Net valuations – and this has occurred most notably since on the Nasdaq exchange in the US – can feel jolly pleased with ourselves.
But my point isn’t just self-congratulatory. It is that Net over-valuation isn’t only about market hubris and a bunch of teenage scribblers and clickers getting over-excited in their desire to go post-economic. There are darker factors at work. The shadow being cast over share prices is that of bigger and older bears than those that affect single sectors of the economy.
One grizzly old bear is the oil price. The oil industry is about as old-fashioned as Net stocks are faddish. Ponytailed Net entrepreneurs are as interested in oil prices as they are ship-building or coalmining (unless, of course, you could order an oil-tanker or coal-train on the Net – Lastfossilfuel.com, perhaps).
Oil prices are lurking in the background to spoil the party far more fundamentally than a few major institutional investors which notice dot-coms aren’t delivering anything like the value their ratings promise. And it’s not just dot-coms. Those of us who had an interest in making money in the early Seventies will recall how hard the oil-producing economies can clobber other economies if so minded.
But it’s the over-inflated sectors – technology, media and telecoms (or TMTs as we must call them) – that will really feel the pinch from oil markets. Within the TMTs, dot-coms are moving towards an acceptance of old cost-base analyses that mean something as old-fashioned as the oil price could play a significant role in bringing them down to earth with a harder bump than last week’s market correction.
Second-generation dot-com valuation – which in these markets came about a month after first-generation analysis – argues, as I have done, that the Net isn’t a sector in itself. It is a distributive conduit, albeit one that has the capacity to change the shape of companies and the way that they do business. In turn, that process can change the nature of economies, although it is still vital not to put the Net cart before the business-proposition horse.
It’s what has become known as the “clicks and mortar” argument. Briefly, well-run companies can transform the way they do business through the Net, but even well-run Net companies can’t move successfully into industries in which they are not established or experienced.
It follows that the Net revolution will be executed by real businesses with intelligent online strategies, rather than virtual businesses that have built their offer on nothing more than their dot-com prowess. In turn, this leads to a new supply services sector, in which a fresh breed of logistics companies provide the distributive infrastructure dot-coms lack. You might purchase your PC or three-piece suite through the Net, but your goods still need to be housed in a warehouse and arrive at your door in a white van.
This piece of industrial logic must have been behind last month’s &£2.75bn merger of international freight-forwarding concern the Ocean Group and the old road-haulier NFC. It provided a much-needed boost to the blighted FTSE transport index, but it is precisely the kind of business that is dangerously exposed to the cost-base significances of oil prices.
It may not have made the kind of headlines Lastminute.com chief operating officer Martha Lane Fox has made us more used to, but crude oil prices have trebled in little more than a year, recently reaching as high as $34 (&£21) per barrel.
The US will be watching Vienna closely this week as the Organisation of Petroleum Exporting Countries (OPEC) meets under heavy lobbying to raise production quotas to alleviate price pressures. For the first time in many years, it is starting to look like the oil price will set the economic agenda again.
But if inflation takes off, equity markets will not have the strength to resist – and dot-coms are the most exposed, even before the cost considerations of their logistics base. All it needs is one major, high-profile corporate failure and we’re on a market roller-coaster called Oblivion.
Remember, too, that the Chancellor of the Exchequer Gordon Brown produced an old-fashioned tax-and-spend Budget last week that could further add to interest rate pressure. It appears to me that the trendiest of sectors, the new-paradigm dot-coms, may become the victim of the most old-fashioned of industries, not to mention old-fashioned politics in the shape of Brown.
George Pitcher is a partner at issue management consultancy Luther Pendragon