'Nine out of ten dot.coms will not survive' warns L&G fund manager

By Andrew Garfield and Lucy Baker

15 March 2000

David Rough, head of UK investment at Legal & General, the life insurance group, yesterday warned that nine out of ten of the dot.com stocks coming to the UK market would not survive.

The comments by one of the City's most respected fund managers came as lastminute.com, the hottest of the current crop of Net floats disappointed investors when it closed at a first day premium of "only" 28 per cent. Other dot.coms like Interactive Investor International and Stepstone had doubled in value on the first day of trading.

Howard Davies, chairman of the Financial Services Authority, the City regulator, yesterday told the House of Commons Treasury Select Committee that he had discussed with the Treasury whether the internet "bubble" posed a systemic risk.

Mr Davies said there was a strong divergence between the performance of the technology, media, and telecommunications sectors, the so-called TMT stocks, and the rest of the stock market, suggesting that any correction would fall most heavily on these shares and not across the board. "At this point in time, I'm not saying there is a risk of systemic crisis," he said. "If there is a rerating of the dot.coms a lot of investors would get their fingers burnt, but I don't think the fabric of the City would collapse."

Mr Rough said yesterday that while the TMT sector appeared to be valued at the equivalent of 12,000 on the FTSE 100, the unloved sectors were closer to 4,000.

L&G believes that the Wall Street Net bubble had two quarters to run. The US however, has had a much richer spread of technology companies, many of whom have much more durable prospects than the dot.com stocks now flooding the market.

Mr Rough pointed out there are "hundreds" of e-retailers being created every year, "many of them valued at hundreds of millions more than established retailers with strong brands". "At present," he said, "UK investors are going wherever there is a new technology label. Eighty to ninety per cent of new issues will not be here in five years' time. Their time will have passed."

L&G, like many UK institutions, participated in the lastminute.com issue but, again like many UK institutions, received too small an allocation to justify holding the stock for long.

In the Net chatrooms, the sharp end of the new investing phenomenon, there was anger at the way Morgan Stanley, the lastminute.com promoter had short-changed retail investors in favour of the big City institutions. Private investors who were allocated 20 per cent of the issue received just 35 shares apiece irrespective of how many shares they had applied for.

Visitors to the iii discussion page on the Net urged those who felt cheated by the allocation process to boycott lastminute's site. One investor wrote: "If you are really disgruntled with LMC... don't use their service."

Others suggested stopping subscription cheques before they were cashed or bombarding lastminute's founders, Brent Hoberman and Martha Lane Fox, with e-mailed complaints.

Lastminute.com shares, which were priced at 380p, at the top end of their revised range, hit a high of 562.5p, valuing the company at #845.67m. But they later fell back to end at a more sober 487.5p. The blanket allocation would have been worth #133 at their issue price and #170.63 at yesterday's close.

Justin Urquhart Stewart, of Barclays Stockbrokers, said: "Being hit in the face with a wet fish would be preferable to being given 35 shares in this company. After commission, they are probably worth about #21."

David Todd, an analyst at Singer & Friedlander, said: "35 shares are pretty well meaningless ... The allocation process has been very poorly handled."

-- Bearer of Bad News (@ .), March 15, 2000

Answers

9 out of 10 dotcoms don't deserve to survive :-)

-- Uncle Bob (unclb0b@aol.com), March 15, 2000.

Will all those 'instant' billionaires become paupers overnight? Their shareholders almost certainly will. At least with tulips you could (hopefully) get a few decent blooms in the Spring.

-- TulipMania (IsAliveAnd@Well.com), March 15, 2000.

Nine out of ten took it in the ear today. Rejoice, ye tulipmaniaphiles!

-- Lars (lars@indy.net), March 15, 2000.