the high-flying Technology Sector and; 3) failure to appropriately assess the dangers of “Financial Risk”, attributable to leverage, as well as “Business Risk”.
Misleading Weather Reports Valuation Analysis
By Robert W. Stuart, PhD President & Chief Executive Officer InDepth Financial Advisors LLC Since March, 2000 we have seen the precipitous decline in the equity value of telecom operators and equipment manufacturers resulting in a rash of highvisibility bankruptcies including, in our submarine fiberoptic sector, 360 Networks, Global Crossing, WCI Cable, Flag and Pangea. These filings, however, represent only the tip of the iceberg and the seeds of our current turmoil were laid
well before March, 2000. This article will seek to outline the principle causes of our current situation attributable to activities in the financial markets. The root financial causes to be examined include: 1) the rush by telecom start-ups to the IPO market at highly inflated and non-sustainable valuations; 2) the shift in telecom operators and network builders to be more closely associated with 10
The tried and true methodology employed to value a company, even a start-up company, had been some multiple of its current and projected future cashflow generation capability over the next 5 years discounted back at a discount rate to reflect both the time-value of money and the uncertainty of the Business Plan’s “Execution Risk”. IPO candidates normally demonstrated 3 or more solid quarters of performance and positive cashflow that served to validate its underlying Business Model and assumptions. But what were financiers to do when IPO investors clamored for more deals but the new crop of telecom start-ups showed negative values over the 5-year projection period under traditional, tried and true valuation methodologies? The answer, unfortunately, was to modify the valuation methodology (not once but twice) to meet