Content area
Full text
There can be no doubt-our industry has a case of gold fever. The network business has captured the imagination of the financial markets, and things will never be the same.
Let's examine this gold rush, why it is happening and how long it is likely to last.
Lofty Stock Prices
The most visible measure of Internet excitement comes on Wall Street. As of early August, Cisco's market capitalization exceeded $100 billion, about the same at AT&T's and twice as large as General Motors'. It took Cisco only a decade to get there, and investors have loved participating in the Internet's growth.
It's not a stretch to think of Cisco as being in the business of selling shovels to the gold miners. Whether or not the miners find gold, they all need to buy tools.
Of course, Cisco is not alone. It took Lucent less than three years to exceed AT&T's worth. Its stock has gone up 600 percent since it was spun off, while AT&T's has risen a mere 10 percent. There's a message here: Investors want to be part of the construction of the new information networks, not the old phone system.
But when it comes to wild valuations, nothing tops the Web. Yahoo, the most popular Internet portal, is worth $9 billion, fueled by strong revenue growth and, unlike many other Web-related wonder stocks, some actual profits. But Yahoo is selling at a price/earnings (PE) multiple of over 400 for this year's earnings, and over 40 for earnings five years from now, assuming it can sustain 57 percent compound annual growth. This also tells you something: Gold fever has caused many investors to stop using conventional evaluation measures.
The Urge to Merge
So fast-growing companies have been rewarded on Wall Street, but the larger a company becomes, the more difficult it becomes to sustain the growth rate; it is much harder to grow a $5 billion business at 50 percent a year than a $500 million business. And other forces inevitably emerge as a company matures: Some of its products face tougher competition, and some of its best people start to leave.
The solution being pursued by CEOs facing this dilemma is well known: Acquire a company that is growing faster than yours,...