Stock Market Prices and the Media During

Stock Market Prices and the Media During the Tech Bubble

Stock Price and the Media During the Tech Stock Bubble

The world of stock trading at first gives the impression of a hardcore science. Prediction of stock movement is based on a complex series of formulas, algorithms, and mathematical predictive models. These portions of stock trading represent the quantitative element of the stock world. However, there is also a qualitative side to stock trading that is often not addressed via traditional stock trading metrics. The world of finance is reactive to major world events and other conditions such as consumer demand. Prior to the great tech stock crash of the 1990s, tech companies attempted to make a profit based on trends in consumer demand. This research will analyze two companies that used unethical practices to profit from the tech stock crash.

The Rise and Fall of the Tech Sector

The rise of the Internet meant the founding and sometimes quick downfall of Internet-based companies. Many companies increased their stock price by simply adding the prefix "e" to their name (Galbraith & Hale, 2004). Rapid rises in stock prices caused a type of "flocking" affect among traders. When a stock price rose, even if the rise was unfounded in solid metrics, it enticed others to buy the stock in hopes of fast money. This created a "bubble" in tech sector stock prices. However, like a bubble, these rises in stock price more fragile because they had no basis in solid financial management of the company. The stocks were overvalued and many of them declined as quickly as they rose.

Dot-com business theory was based on the ideal that profits were best obtained by expanding one's customer base as quickly as possible, even when this would produce large debt or annual losses. Some of today's giants, such as Google and Amazon survived using this strategy to become some of the largest Internet companies after the bubble burst. However, many companies did not survive using this strategy. At the beginning of the bubble, anydot-com that looked promising could make an initial public offering (IPO) to raise capital, even if it had never had shown profit in the past. The company's lifespan was measured by how quickly it used up this initial capital in expanding their customer base. The customers had to come and come quickly, or the dot-com was doomed for failure as soon as their capital ran out. This was not a viable business model and many companies resorted to unscrupulous means to fool stock investors into purchasing their stock. The primary tactic was to utilize a public awareness campaign using the biggest mass media form possible. Now let us look its two companies who used this strategy to fool investors by placing growth over profits and a solid foundation.

Expanding too Fast

Nortel (stock symbol NT) is an excellent example of a company that had a solid foundation in the "old economy" but that switched to the "new" rapid growth business model and used unscrupulous methods to cover up its mistake. The foundations of Nortel go back to 1895 when it began existence as Northern Electric & Manufacturing (Nortel-Canada.com, 2012). Nortel was in infrastructure provider and when the dot-com boom began speculators anticipated that demand for Nortel's products & services would soar. They were right, and by the 1990s Nortel was one of the largest providers of infrastructure for Internet services.

Nortel executives underwent a long court trial to defend themselves against accusations that they fraudulently inflated profits to create a rise in stock price in order to fund the needed infrastructure expansions. After the dot-com crash, it was further alleged that executives continued to use fraudulent accounting practices to protect their company from stock price drops in failure. Inflated forecasts drove stock prices upwards. At same time Nortel executives enjoyed an extravagant lifestyle at the expense of employee retirement accounts and benefits (Austin, 2012). Eventually, these business practices were not sustainable and after accusations came out that executives faked profits and minimized losses in the books, the long downfall of Nortel began. The issue began shortly after the turn of the century, but is still ongoing with the legal dissolution of Nortel.

The Webvan that Crashed

Webvan was an excellent idea and offered a new dimension to grocery shopping. Webvan would allow consumers to shop online for the products they needed and have them delivered on credit to their home. It was an excellent idea that began in 1996. Like many dot-coms, investor thought it was a great idea that would be a certain "win." Like many dot-coms, speculators provided Webvan with $375 million in funds from an IPO (Kawamoto, 1999).

Webvan's IPO was heralded by massive media attention, promising to revolutionize the grocery business. Speculators jumped on it in a frenzy, but prices soon fell to near the $15.00 offering price after only one week (Kawamoto, 1999). News such as this cost investors to lose confidence and they began to flock away. However, this did not stop Webvan from quickly expanding its territory from San Francisco to include Chicago, Los Angeles, Orange County, Portland, San Diego, San Francisco, and Seattle. It had planned to expand the East Coast, when it suddenly found that it had no money to do so. When Webvan began posting losses, investors moved away from the stock as quickly and enthusiastically as they came to it. This was soon followed by layoffs, downsizing, in the eventual fall of Webvan only 18 months after it started (Zito, 2001).

What Can MNCs Do To Protect Themselves?

Nortel and Webvan are only a small example of companies that used the supposed "new" business model to expand rapidly and then fall just as quickly. The question is what multinational corporations can do to protect themselves from investing in a company that is destined to fail. According to the WP Carey school of business (2012) companies must watch for warning signs of trouble. These warning signs include pressure to meet the numbers, an operational attitude of the fear and silence, a high number of small executives and CEOs that are touted as larger than life by the media, a weak Board of Directors, multiple conflicts within the organization, extremes in good and bad within the corporation or claims of such. The media can tell us many things about the promise of a potential investment if one just reads between the lines and examines objectively what the story is saying.