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What Time Is It in the Bubble?

Posted by on September 20, 2014

What’s a bubble?  Wikipedia defined the dot-com bubble of the 90’s as:  The dot-com bubble (also referred to as the dot-com boom, the Internet bubble and the information technology bubble)  was a historic speculative bubble covering roughly 1997–2000 (with a climax on March 10, 2000, with the NASDAQ peaking at 5,408.60  in intraday trading before closing at 5,048.62) during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the Internet sector and related fields

Now does the word “historic” mean “one time only?”  Unfortunately, probably not, as we are in the midst of another bubble, with not only dot-com valuations but private equity groups acting like they are in drunken orgies of paying too much for companies.

So if each bubble is compared to a clock, what time is it in the current bubble?  Using the terribly unscientific of comparing this one to the dot com bubble that lasted three years, are we at 1996 now?  1998?  10 minutes to 2000?

No one can say.

Remember GeoCities?  WebVan?  Excite?

What companies today can be compared to those former multi billion dollar valuations?   There are plenty of candidates, but I’ll leave that speculation to you.

The craziest one this week was certainly Alibaba with an IPO that valued a company at more than USD $200 bil.  One of the punchlines to the story is Yahoo holds a big piece of Alibaba, will surely cash out –  their interest in Alibaba is nearly the same value as the whole Yahoo company. Add Yahoo’s Japanese interest in, and their Asian investments are worth more than the core company.  There’s speculation that Yahoo may use the proceeds to buy AOL.   WHO?  This has to be a joke rumor started by some day-trader, hoping for a bump.  Or maybe AOL has warehouses full of those CD-ROMs left and Mayer has figured out how to monetize reusing them.  What’ll the price be, if this transaction does take place? Easily north of $6 billion, if at a 30% premium.

One almost feels sorry for the venture capital industry, regularly getting cut out of deals these days because of the high valuations, early in a company’s history.

But math is math, and accounting is accounting,  and most of these enormous valuations can’t be justified by either math or accounting , and the companies don’t have (or project having) the revenue to ‘pay for the deal.’

The only hope of private equity is to find an even greater fool down the line, willing to pay more (and it appears there is no shortage), or to hope the market stays steady and dump the acquisition into an IPO for a big payday.

I think that’s betting an awful lot on things no one has control over.  Some of these companies will tank, and then people get hurt.  Not the private equity groups, of course, but the investors, pension and retirement funds of  every day people will take big hits, and if the company severely cuts back or stops operations, of course a lot of people lose their jobs.

It’s time to put some regulations in place for private equity.









Private Equity Bubble

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