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Wednesday, 15 March, 2000, 13:17 GMT
Floating out of favour?

Private investors have been flooding into share dealing
By BBC News Online's Iain Rodger

There is no pleasing some people it seems.

Thousands of private investors have been applying for shares in internet company flotations and pocketing easy profits.


Lastminute lived up to its name by doubling its offer price very much at the last minute

Now word has got around, so many people are doing it they are changing the nature of the game - and those who thought they were on to an easy killing are not happy.

Take two recent high-profile flotations - Interactive Investor International and Lastminute.

Both were hugely oversubscribed and most private investors have been allocated far fewer shares than they wanted (145 in Interactive Investor and only 35 in Lastminute).

The rest of the investors' money is eventually returned with their share certificates, but it is standard practice for interest earned while it was held on account to be kept by the offering company.

Unpopular

Investors hoping for a profit when the share price rises must deduct the interest they could have been earning on their money and any dealing charge for selling their shares before they celebrate.

Made a profit?
Float price: 380p
Allocation: 35 shares
Investment: 133
Value now: 170.62
Profit before dealing charge: 37.62
(Based on closing price of 487.5p)
With Interactive Investor, which kept to the pattern of floating at a lowish price leaving investors to reap the gains, they will be looking at a healthy profit at the time of writing.

But with Lastminute - which lived up to its name by doubling its offer price very much at the last minute - there is little to cheer about.

As a result, many private investors are complaining about being limited to so few shares. Hundreds of them phoned Lastminute's helpline, some saying they would cancel their applications.

As a concession for the way the float was handled, Lastminute has said it will distribute interest earned back to applicants pro-rata "so far as legally permitted".

On the basis that it raised about 25m from the 20% of the issued capital allocated to private investors, and was 40 times oversubscribed in this part of the issue, a conservative estimate suggests the interest earned could total 2m.

Shifting costs

Investors are also aggrieved that costs associated with the flotation have been transferred to them by the offering companies.

Lastminute founders
Lastminute.com founders Brent Hoberman and Martha Lane Fox
While Interactive Investor invited applicants to register at its site to be sent a glossy prospectus, Lastminute - and online recruitment agency Stepstone before it - forced applicants to download and print the prospectus at their own expense.

So, as ambitious young companies are getting wise to the tricks of squeezing every penny out of their eagerly awaited flotations, many private investors are getting fed up with being made to jump through hoops for ever smaller gains.

Some have suggested that the only people to really cash in from Lastminute's flotation are its high-profile founders, Brent Hoberman and Martha Lane Fox, who are now richer to the tune of 77m and 50m respectively.

Confidence

Could this signal the end of internet flotation mania? If profits are to be made elsewhere, the money will go elsewhere.

Recently, there has been so much investment in high-tech stocks, many healthy "old economy" businesses appear very undervalued.

Just look at how Wall Street's Dow Jones blue-chip index has fallen back while the high-tech Nasdaq index has climbed since the New Year.

It is possible that a swing in sentiment is on the way, and a trickle could quickly turn into a rout.

But while many young internet companies are very risky because they are so exposed to competition, there is no doubt that others will succeed and become the giants of tomorrow.

The lessons of history

Many critics of internet stock mania have pointed to past booms, saying the only thing we can be sure of is that boom is followed by bust.

People gather across the street from the New York stock exchange 24 October 1929
Biggest bubble - New York stock market crash of 1929

The spoof website, iTulip, takes its name from the Dutch tulip mania of the 1630s.

It says: "In 1637, at the peak of the mania for tulip bulbs, one bulb sold for 4,200 guilders, roughly $1.5m today."

"Likewise, many internet stocks have achieved unprecedented prices based not on any reasonable extrapolation of future earnings but, as with tulip bulbs in the 1600s, on buyers' expectations that there will always be more buyers at a higher price."

Bubble

During the South Sea Bubble of 1719-1720, the speculative atmosphere in London grew to such proportions that shares were offered in companies for "trading in human hair" and "extracting silver from lead".

Spoof website iTulip
The ultimate case was an offering of shares in "a company for carrying on an undertaking of great advantage, but no one to know what it is."

Within five hours of the books opening, a thousand investors had handed over their money. The proprietor then closed up shop, set off for the Continent and was never heard of again.

The iTulip site suggests that an appropriate offering for the current era would be: "A company to eventually generate several hundred million dollars in earnings to justify the current stock price, but no one to know how or when."

Fool's gold

This goes right to the heart of the matter. A company's share price is generally determined by investors' expectations of future profits.

The higher the profits, the higher the share dividends - the more desirable the stock, the more the share price goes up.

Only if investors are sure an internet company is offering products or services large numbers of people will want to buy, and that it will withstand competition, can they feel comfortable holding its shares.

If not, it is inevitable that the unlucky ones will eventually be left wondering how it was they came to be taken in by the latest version of tulip mania.

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See also:

15 Mar 00 | Business
Lastminute share price plunges
09 Mar 00 | Business
Lastminute ups its float price
02 Mar 00 | Business
Martha my very dear
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