By Dr.Mitul Mehta

[ Article done for Electronic Business Europe - SEPTEMBER 2001 http://www.eb-mag.com ]

Have we talked ourselves into a slump?

Nowadays, bad news seems to be in constant supply in the high-tech industry. With collapsing stock markets, predicted recession, technology firms laying off people and dramatically missing their financial targets, are we in danger of talking ourselves into a recession?

If so, we have to ask: Why are tech firms in so much trouble? Why is Europe talking itself down? What lessons are there to be learnt?

This slump does not resemble the past recessions; it has a sense of madness, a hypothetical drama about it. As the paper valuations are becoming much more realistic, billionaires are becoming millionaires. But this is a self-made slump, due to one reason - Greed - not only from individuals but also from companies and even governments. This has driven firms to become over-valued and over-inflated. Remember Yahoo which was valued at $100 billion when it was still a start-up? The same applied to telecom stocks. The simple reason was in the vast amount of money invested, which created unrealistic returns expectations. With billions coming from savings institutions and individual investors, the financial analysts and fund managers were having a ‘field day’. Companies became over-hyped and business fundamentals were lost in huge expectations of quick profits. No one stopped to ask what the experienced senior executives and industry analysts were saying about the unreasonable expectations and longer term returns. Even the governments became greedy, compounding the problem with impossible fees as in the example of mobile phone licenses. They expected ordinary people to buy into the mobile communications ‘imagination’. This would have allowed them to bring in the stealth taxes even before their bureaucrats could describe the services on offer. The spin cycle inflated senior executive pay levels beyond comprehension and created paper millionaires at the rate of knots, who are now all involved in law suites, saving whatever they can, except their reputations.

Talk about hyping the markets by expecting growth rates of over 40% year-on-year and creating an environment that burdened solid technology corporations with impossible targets. Talk about Internet and 3G without listening to experience or history. The same financial institutions now give even companies like Nokia Corp. (that is still growing, despite the slower rate of 10%) a hard time, when a few months ago they could not praise them enough. Apparently these companies were meant to be immune from all market restraints and yet, they can lose a third of their share values overnight because they have not met the financial analysts’ expected returns.

One thing everyone forgets is that 2000 was an exceptional year in growth and that most companies will not deliver the same rates for some time although they will still grow. The technology companies’ fundamentals are still good, however the financial gurus have taken the billions lost by venture capitalists and the billions owed to governments for mobile phone licenses and created a slump.

In Europe, it is clear that the banks are using interest rates to boost the economy. This may help some firms but what will it do overall? The latest statistics show that there is a massive downturn in European manufacturing, telecom, computer sales and, most significantly, the semiconductor industry. Although not sheltered from global factors, European economy’s fundamentals were sound and it had a balanced growth during the last few years, as opposed to the fast-track growth in the US. Now, the weeding has started and it’s affecting all sectors. Businesses are being badly knocked but they will survive and become more realistic. So it is time for Europe to take action and plan for a longer-term future rather than take short-term drastic actions. Consolidation cannot be too far away.

And all of these crises because the market had to correct itself from a madness!

Part II of this comment will appear in the next issue of EBE.

Dr Mitul Mehta is managing director of business transformation and strategic direction consultancy firm TekPlus Limited. He can be reached at mitul@tekplus.com

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