Finc 667: “the Role of Capital Markets in the Dot Com Crash of 2000” – Volatility in Market Value

FINC 667:  “The Role of Capital Markets in the Dot Com Crash of 2000” – Volatility in Market Value

Background

Capital markets provide the financial process for reflecting value and for the maintenance of value on behalf of investors. Investment institutions and professionals have fiduciary responsibility for the maintenance of fair and orderly markets. These responsibilities are in return for the special positions and opportunities for profit provided for them in the capital markets. In the United States broad regulatory systems oversee the markets with the particular involvement of the Securities and Exchange Commission.

The capital markets have demonstrated extraordinary volatility despite the regulatory environments and the assigned roles for institutions and professionals. Markets have their own perception of value. A critical issue is the responsibility with which institutions and professionals having fiduciary responsibility contribute to the stability or the volatility of the capital markets.

In the late 1990’s the equity markets reflected tremendous surges in valuations. The culmination was the achievement in the NASDAQ index of a level in excess of 5000. This index especially followed the optimism for the expectations of internet based businesses in the “Dot-Com” sectors. In 2000 this optimism dissolved with the rapid downturn of market valuations so that the NASDAQ index rapidly fell below the level of 2000. What led to the dramatic loss of market value? Who was responsible?

Assignment

“The Role of Capital Market Intermediaries in the Dot-Com Crash of 2000” is a vivid description of the market situation. It is found in your casebook. The case describes the activities of the following market participants:

• Venture Capital Firms                                      -   Buy-Side Research Analysts
• Investment Bank Underwriters                        -   Accounting Profession/FASB
• Sell-Side Research Analysts                            -   Companies issuing equities

In preparation for our class discussion your review is expected to examine the financial situation of Scient Corporation, an example of a company with extreme shifts in valuation; the market factors which were involved in the changes in value; and the respective roles of the principal participants in the market. Use of financial analysis and references should be stressed in demonstrating your points. In class you will be expected to take an active role in the discussion of this case reflecting your immersion in the issues through this report.  The discussion should respond to the following questions:

Page 2/”Dot Com” Assignment

1. Scient Corporation – an example of market volatility.

Review the company’s financial condition at 3/31/99 prior to the IPO (See exhibits 5 and 6). What were the strengths and weaknesses in its financial and operating condition? How did these factors lead to the decision to seek capital in the equity market through the IPO. Compare Scient’s financial condition at 3/31/00 to that of the prior year. How did the IPO impact the company’s financial structure? What were the financial strengths and weaknesses in 2000? Do the financial factors help explain the fluctuations in value of the company’s stock. Explain your viewpoint.

Conditions

In May 1999 the company went public at a $10 per share as the year ended their shares were trading at ten times that amount despite the $11.7 million net loss of sales of $20.6 million

Capitalization at 20 times

Main focus was the speed on which companies penetrated the market as opposed to quality and added value to the companied.

Early months of 2000 were the most profitable for Scient. Sales grew from $20.6 million in 1999 to $155.7 million in 2000 an increase of 653% and Net losses of $11.7million in 1999 to $16 million in 2000.