By Timothy J. Mullaney
The cognoscenti in the 1950s once debated "Who lost China?" Now, the question of "Who blew all our money" has become one of the politically and culturally loaded questions to emerge in the wake of the 2000 fiasco on Wall Street. As banker Frank Quattrone was sentenced on Sept. 8 to 18 months in prison and a $90,000 fine after being convicted of obstruction of justice, it was tempting to regard the former head of technology banking at Credit Suisse First Boston (CSR ) as one of the prime culprits.
After all, he orchestrated initial public offerings for everything from all-time hits such as Amazon.com (AMZN ) to epic flops like Corvis (CORV ), the now-staggering telecom-gear startup once valued at more than General Motors (GM ). The National Association of Securities Dealers charged Quattrone in a civil complaint last year with pioneering practices like slipping CEOs shares of hot IPOs to secure future banking business and pressuring analysts for favorable reports on banking clients. His team ran 138 tech and Web IPOs from 1998 to 2000, nearly as many as Goldman Sachs (GS ) and Morgan Stanley (MWD ) combined.
However, the criminal case against him boiled down to a single e-mail he sent on Dec. 5, 2000, endorsing a colleague's note telling bankers to clean out their files to forestall lawsuits over cascading stock prices. A jury decided that note constituted advice to obstruct a federal probe of Credit Suisse First Boston. New York Attorney General Eliot Spitzer and other white knights of justice like to focus blame for the bust of 2000 on the likes of Quattrone. After a slew of criminal cases and convictions, investors have been promised "reforms" -- who could be against reforms? -- as an assurance that it will never happen again.
As Quattrone prepares to serve his time -- presuming he does, since he's appealing his conviction -- let's look in the mirror: The Internet boom and bust was the fault of everyday stock buyers, from the small investor down the street to the mutual-fund manager. By late 1999, broadcaster Don Imus was handicapping IPOs on his radio show, which was my own touchstone for when investors had lost their collective minds.
The most important remedy was not a list of Sarbanes-Oxley restrictions on when stock analysts and investment bankers can be in the same room without lawyers present, or banks' keeping lists of their analysts' contacts with reporters. The needed corrective was people losing their shirts. That has made investors smarter -- and safer -- in ways U.S. District Court Judge Richard Owens' sentence never could, even if it had been twice as harsh or come three years sooner.
Losing money, not Spitzer & Co., made people stop taking stock tips from disk jockeys and chat rooms. And that's the real difference between today's sane IPO market and the crazy one back then. "Fund managers who didn't buy deals at 20 times revenue, because that's insane, were getting fired," says Barry Randall, manager of US Bancorp's First American Technology Fund in Minneapolis. "Now people have time to actually do due diligence."
Indeed, reform hasn't changed all that much. Wall Street is still perfectly willing to shovel companies with few sales, no profits, and other huge business challenges into any public market that looks willing buy them. The Street is in the business of generating deals, because deals generate fees. And Wall Street firms still routinely guarantee research coverage to banking prospects -- though today, there's no guarantee the coverage will be positive.
This year alone, bankers signed up to help tech and Web companies like Linux operating system startup Linspire, gay and lesbian portal PlanetOut Partners, travel-industry data-management company Worldspan, and pop-up advertising king Claria go public. Thse outfits are just for starters, but they're useful examples.
DEATH TO DOPEY DEALS.
All four of those deals, like dozens of other IPOs, have been put off, and it's no mystery why: Investors are cautious, with good reason. PlanetOut had less than $20 million of 2003 revenue, modest growth, and no profits. Worldspan faced a pending loss of an undisclosed share of business from its biggest customers (Web travel sites Expedia IACI and Orbitz ORBZ ). And Claria's business had just been declared illegal in Utah, with several regulatory proposals pending in Congress.
Three-year old Linspire had $2 million of revenue and no profits. It hopes to compete with Microsoft's (MSFT ) core operating-system business, yet it wanted a $165 million market cap before proving it can hold its own against Redmond, according to IPO research firm Renaissance Capital. That didn't stop CEO Michael Robertson from declaring in an Aug. 18 press release announcing the IPO's delay that he would not be held hostage by a "fickle stock market" that declined to meet his price.
Despite the spin, smart deals -- even quite risky ones -- are getting done. Certainly, search engine Google (GOOG ) after cutting its price 30% to $85 a share, got its IPO through. Its stock immediately went up to around $102 a share, and there it hovers, three weeks later. Google is obviously a real company -- and at a price around 80 times this year's earnings, it's a clear risk, too. But the market is betting that Google can continue to grow strongly.
Want more proof? How about the IPO for Salesforce.com (CRM ), now trading at about 300 times this year's earnings? Or online jeweler Blue Nile (NILE ), software-for-nonprofits player Blackbaud (BLKB ), and software maker for college classes Blackboard (BBBB )?
They've all done reasonably well in post-IPO trading. The market has paid premium multiples for all of them, because some plurality of investors thinks they're worth the price. They're all profitable, and all have more than $100 million in annual sales.
The moral: Nowadays, the more questionable deals don't get done, and the games bankers play don't matter much. No amount of spinning or leaning on analysts was going to make Linspire's IPO hot. Investors grew tired of losing money and got smarter, and getting smart is the best reform of all.
Quattrone will presumably hate his prison stretch more than his irrelevance. But he was sentenced to the latter long ago.
Mullaney is E-business editor for BusinessWeek in New York