9912120036
DETROIT FREE PRESS
991212
Sunday, December 12, 1999
METRO FINAL
1H
MITCH ALBOM
Copyright (c) 1999, Detroit Free Press
FRUITLESS PURSUIT OF HIGH-TECH GHOSTS
Let's say I have a business idea. My idea may never make money. And if it
doesn't make money, I won't be able to stay afloat.
I tell you this up front. Then I ask you to invest in me. What do you do?
A) Laugh hysterically.
B) Say, "Sorry, I gave at the office."
C) Empty your pockets immediately.
If you are a normal person, you choose B. If you are my boss, you choose A. If
you are in today's stock market, however, you choose C before I even ask the
question.
Such was the case with a stock last week named VA Linux Systems. This company
is in ...the computer business! What a shock! It sells computers that run not
on Windows 95, but on an operating system called Linux.
This is not unique. Several huge companies, including Dell and IBM, sell
computers like this. And they dwarf VA Linux the way a Sumo wrestler dwarfs a
figure skater.
Maybe that's why, the VA Linux prospectus read: "We do not expect to generate
sufficient revenues to achieve profitability.... If we do achieve
profitability, we may not be able to sustain it."
At least they were honest. They were saying, in plain English, "We may never
make a dime."
Who would invest in such a thing?
A better question is: Who wouldn't?
How to succeed in business
The company went public Thursday. Shares rose 1,000 percent in the first
hour. That is not a typo. One thousand percent. The initial price was $30, and
it rose to $300 before you could say, "I'm busted."
As a result, this little company -- with no profits and no prospects -- raised
$10 billion in a day.
Why? Because the American stock market has flipped. It used to be a place
where you had to show products, customers, sales and profits before anyone
took you seriously. Now all you need is an idea and the word ".com" attached.
Anyone who thinks we are not witnessing an upheaval as big as the industrial
revolution of the 1800s isn't reading the stock pages. You've heard the market
is soaring, right? But did you know that many big companies that have
factories, sales forces, customers, profits -- you know, companies that
actually make and sell things -- are seeing their stocks fall?
Meanwhile, scruffy grad students with a computer program and a still-wet
business card are becoming billionaires overnight.
That's because everyone wants to be in on the next big thing.
But no one knows what it is.
The secret of computers
So here is today's frenzied chase for instant wealth: A computer geek begins
with an idea in his basement. He doesn't exactly have money to start a
business. And he doesn't have patience to build a business, since he really
wants that huge mansion in Silicon Valley, like, right now!
So he goes to investors. They don't really understand computers, but they want
to get their mansions in Beverly Hills. So they give the computer geek enough
to get started, and then, as quickly as they can, they find investment bankers
to take them public.
These bankers don't really understand the whole computer thing either, but
they all want their mansions on St. Barts. So do an IPO (Initial Public
Offering or, in my book, Idiots Purchasing Orgy). And they tell their richest
clients: "This is big. Get in on it."
Word gets around. These rich clients don't really understand computers either,
but they all want mansions in Switzerland. So they start ordering shares,
which drives the price up before it ever hits the market. This, by the way, is
the most infuriating hypocrisy about IPOs. They're supposed to be initial
offerings, but somehow the richest clients get to order first.
Thus, when it finally hits the market, this so-called hot stock is zooming
upward. And some poor Joe sitting by his computer figures he'll get in on it.
He buys the shares at $300, instead of $30.
But by this point, the computer geek, the investors, the investment bank and
the privileged clients have made their billions. They cash out. Which drives
the stock down. And the average Joe ends up losing money.
That's because there's no there there. It's chasing ghosts. As one industry
watcher said of the VA Linux frenzy: "There's no fundamentals. People don't
read beyond the first page of the prospectus."
But then, people don't read the back of a dollar bill either. If they did,
they'd see the phrase "In God We Trust."
Everyone else should have a bottom line.
THIS ELECTRONIC VERSION MAY DIFFER SLIGHTLY FROM THE PRINTED ARTICLE.
COLUMN;COMPUTER