This post will briefly touch on three key defining features of the Dot-come bubble that have cropped up repeatedly in my reading and why they have continued to be discussed today. Due to swiftly increasing enthusiasm, the bubble entailed companies being ‘floated with no revenues, and not much of a business plan, and achieving huge valuations. Money was thrown at entrepreneurs like it was going out of fashion’.[1] Although the bubble was of a relatively short duration, the impact was significant as ‘the NASDAQ index today is still only 40% or so of its peak value’.[2] IPOs played a huge role in the Dot-com bubble as they produced returns that dwarfed earlier periods with the Journal of Finance insisting that ‘‘Internet IPOs averaged a stunning 89 percent (median: 57 percent) during 1999 and 2000’.[3]
The case of Amazon has been extensively discussed due to its survival despite finding itself in a dangerous position and the widely held belief that management was poor. The survival has been attributed to a combination of luck, timing and extremely tactical fund raising. The funding move consisted of ‘Ruth Porat, co-head of Morgan Stanley’s global-technology group, advised him to tap into the European market, and so in February, Amazon sold $672 million in convertible bonds to overseas investors’.[4] Analysts insisted that waiting even a few weeks longer to raise the funds would have resulted in Amazon failing alongside other Dot-com disasters including Webvan, Kozmo and Pets.com. Arguably, the survival of Amazon could not be attributed to a diverse product offering as many of the defining features of Amazon that drove their success emerged after the bubble. Amazon Marketplace was launched in November 2000 and Prime in 2005. The survival of Amazon has continued to appear in articles so frequently and continued to attract attention due to the potential to compare it with relevant companies today including Uber and Snap who also attract concern due to mounting losses.
One of the key markers of the Dot-com bubble was the merger between AOL and Time Warner on 10th January 2000 which has been labelled as the peak of the bubble. The motivations behind the merger have been summarized as combining ‘Time Warner’s impressive book, magazine, television and movie production capabilities with AOL’s 30 million Internet subscribers to form the ultimate media empire’.[5] The final terms of the mergers cleared by the FTC entailed AOL shareholders owning 55% of the new company and Time Warner shareholders owning 45%. The failure of the merger has been blamed on a variety of factors including culture and leadership. Fortune published an article claiming that ‘the aggressive and, many said, arrogant AOL people “horrified” the more staid and corporate Time Warner side’.[6] Leadership also came under scrutiny as Levin was blamed by shareholders for ‘allowing Time Warner and its stable old-media assets to be effectively taken over and dragged down by the ailing new-media division’.[7] Following Richard Parsons being selected as replacement, the situation worsened as increasing tensions ensued.
[1] Matthew Lynn, ‘Opinion: Looking back 15 years, three things the dot-com bubble got right’, (2015). https://www.marketwatch.com/story/looking-back-15-years-three-things-the-dot-com-bubble-got-right-2015-01-07
[2] J. Bradford DeLong, A SHORT NOTE ON THE SIZE OF THE DOT-COM BUBBLE, NATIONAL BUREAU OF ECONOMIC RESEARCH (January, 2006). http://www.nber.org/papers/w12011
[3] Alexander Ljungqvist, ‘IPO Pricing in the Dot-Com Bubble’, The Journal of Finance, Vol. 58, No. 2 (Apr., 2003).
[4] Timothy Lee, ‘The little-known deal that saved Amazon from the dot-com crash’, (2017). https://www.vox.com/new-money/2017/4/5/15190650/amazon-jeff-bezos-richest
[5] AOL-Time Warner formed, (2000). https://www.history.com/this-day-in-history/aol-time-warner-formed
[6] Rita Mccgrath, ‘15 years later, lessons from the failed AOL-Time Warner merger’, Fortune (2015). https://fortune.com/2015/01/10/15-years-later-lessons-from-the-failed-aol-time-warner-merger/
[7] AOL-Time Warner formed, (2000). https://www.history.com/this-day-in-history/aol-time-warner-formed
Financial Institutions 1850-2020 