I thought to myself … Self, you've read this article before! It
goes on to tell us how, in the midst of a bubble, Goldman was the
largest underwriter of toxic crap that fell a ton, leaving a
disaster in its wake. That sounded all too familiar.
Well, I may not be able to remember what I had for lunch, but
there are some things that I just can't forget. Even though it's
been nearly a decade, this article from June 2000 (
the bear market even got going full force) was so profound, that I
copied it and pasted it in Word. Good thing, because Bloomberg
doesn't seem to have it on their web site anymore. It's an article
about the last bubble - the internet bubble - and, you guessed it,
Goldman was in the middle of it. Here's the key section:
Read the whole thing below. It's unbelievably scary how much the
housing bubble mirrored the internet bubble. And you ended up with
the exact same result as far as the market was concerned. The only
difference was that a lot more people had their wealth tied to
homes than they did to stocks in 2000. So the fall in housing had a
much greater impact on the economy.
One other thing, let this be a lesson to anyone who thinks they
have an edge in the market. Whether you're an individual or a
professional math whiz like the geeks at AIG, you're up against
people like this every day. Their sole goal at work is to legally
make money. If that source of money happens to be you, too bad for
That means, you have to be better prepared than them. You have
to be able to answer, "What is it that the counterparty to my trade
knows that makes them want to take a position opposite mine? What
do they know that I don't?" If you can't answer those questions
accurately, then don't trade. Otherwise, you'll end up just like
the guy who can't count to six
P.S. - I hope Bloomberg doesn't mind me posting this 10-year-old
article, as I couldn't find a copy on their web site.
Salon.com Typifies Demise of `Content' IPOs:
By Christopher Byron
June 20, 2000 (Bloomberg) -
When the history of the great dot-com investment bubble of
1996-2000 is finally written, surely a few select comments will
be heard from some quarter or other regarding the role that Wall
Street has played in this game. It's called How to Fleece the
Public and Get Away With It.
This week we'll drop by for one of our characteristically
unwelcome visits with one of the more vivid - and easily grasped
- examples of that fleecing: The initial public offering of
Salon.com Inc., the San Francisco-based Webzine. This desperately
struggling company perfectly encapsulates the failed promise and
doubtful future of an entire generation of IPOs in the dot-com
These are companies that never should have been taken public
in the first place but were dumped on the public anyway. The
senseless business theory that lured in the gullible: That
advertising alone could support "content" marketing on the Web -
this when, in many cases, the advertising and marketing costs of
the content companies themselves were greater than the total
advertising revenue collected from others.
Worst of all, it was the IPO proceeds from one company that
became the ad revenue of the next company - a kind of Wall Street
financed merry-go-round in which dot-com startups became little
more than a capital transfer mechanism from Wall Street to
Madison Avenue. It was all dependent in the end on the continuing
flow of funds from the new issue market - a flow that was
destined to end sooner or later, and now has done just that.
Role of Underwriters
The bad guys in this tale?
Fee-obsessed underwriters who couldn't say no to seven- and
eight-digit commissions, and thereupon set the merry-go-round
whirling to create a market for deals that had crash and burn
tattooed all over them. The stupidos they preyed upon? Anyone who
failed to read - and heed - the exculpatory warnings that came
emblazoned across every prospectus: Caution, this deal is going
to blow up in your face.
In case you might not be familiar with it, Salon.com is one of
the best, most imaginatively written "magazines" on the Web. It
routinely publishes such writers as Camille Paglia, my colleague
Joe Conason, Garrison Keillor, and many others. The trouble is -
this editorially excellent content site for culture and political
commentary hasn't been able to make a dime of profit from Day
One, and it's hard to see how it ever will. The operation's costs
are too high, its revenue is too low, and demand for what it
offers the public is simply too limited.
Anyone could have seen these limitations from the moment
Salon.com began in business - which is why I wrote over a year
ago that the company's finances were unworkable and that
investing in the business would be no different from simply
throwing one's money away.
But common sense - and simple arithmetic - didn't stop
Salon.com's underwriter, W.R. Hambrecht & Co. - from taking
the company public in a much-watched IPO, exactly one year ago
tomorrow, on June 22, 1999, at $10.50 a share. For a brief and
glorious moment a few days later, Salon.com touched an intraday
high of $15.12, giving Salon.com a market value of $162 million,
as all involved congratulated each other on their collective
financial genius … while leaving for another day the annoying
problem of what to do when the $24.9 million in IPO proceeds ran
And now, almost 12 months later? Well, a lot has happened. All
of it was inevitable and easily foreseen, and for Salon.com it
all spells disaster. For starters, the entire dot-com sector has
crashed and shows no signs of reviving. Meanwhile, the IPO window
has slammed shut, and venture capital fund managers have taken
their phones off the hook and gone to work in the garden (or
maybe to hang themselves). And in the middle of all this, the
folks at Salon.com look to be running out of money.
In the process, the company's stock has plunged to as low as
$1.25 Friday - a decline of 92 percent from its high, and down 88
percent from its offering price. As of Monday, with its stock
trading around $1.30 a share, Salon.com had a value of about $15
million, meaning that the company now faces the threat of de-
listing from the Nasdaq National Market for failure to meet
minimum tangible assets, net revenue, and market cap standards.
The way things are going, the company may soon not even qualify
for a Nasdaq SmallCap listing and could wind up being bounced to
the OTC Bulletin Board market.
So it's not surprising that, in a desperate bid to stay in
business, Salon.com announced on June 7 that it was firing 9
percent of its staff, while trimming projected spending by 20
Considering that most of the 13 people being axed are
editorial employees, and that the high quality of its editorial
content is the only thing Salon.com has going for itself, well,
we need not dwell at length on the apparent business acumen of
the knuckleheads who are running the company - other perhaps than
to suggest that the shareholders would evidently have been better
served if the suits in charge had decided to let themselves go
Roundup of Firings
Salon.com is hardly the only dot-com now handing out pink
slips. In the last month, more than 30 different Internet
operations - almost all of them in the business of trying to
deliver news, entertainment or other such "content" to consumers
- have fired at least 3,500 employees altogether. In some cases,
the people let go represented only a handful of the company's
employees; in several cases, they've been everyone on the payroll
because the companies have gone out of business.
The one thing almost all these companies have in common is the
confused, "we'll figure this out as we go along" nature of their
business plans and strategies for actually making money.
Yet Wall Street financed them anyway, and the reason is hardly
mysterious: For every dollar raised in an IPO, the underwriter
typically gets seven to eight cents.
When Goldman, Sachs & Co. raised $100 million in an IPO
for the bizarre iVillage Inc. 15 months ago, $8.4 million went to
Goldman and the other underwriters before iVillage ever saw a
dime. As for anyone who bought shares at the first trade in the
after-market (for $95.88 each) and hung on to them since, why,
those luckless souls have seen 94 percent their money
But you'd better believe the underwriters still have their
How bad has this exploitation of the public been, really?
Well, consider the following factoid, mined from the Internet
database of Hoover's Inc., which itself went public last July and
began trading at $24 and now sells for around $7.50: If you
bought one share, at the first trade in the aftermarket, for
every Internet IPO that Goldman Sachs has managed since its
underwriting of Yahoo! Inc. in April 1996 - some 60 deals in all
- you'd have done spectacularly well in less than half a dozen of
them (Yahoo, RealNetworks Inc., eBay Inc., DoubleClick Inc.) and
you'd at least have come out ahead, so far, in maybe 15 more.
As for the rest - about 40 stocks in all - you'd have done so
poorly that your entire portfolio would now be down about 8
percent. You'd have been better off leaving the money in a coffee
can in the kitchen.
What Investors Got
Instead, if you bought the IPOs of Goldman - the premier
underwriter in the business today - you'd be the proud owner of
dozens upon dozens of total disasters. Your stock in eToys Inc.
would be worth 7 percent of what you paid for it. So would your
stock in PlanetRx.com Inc. and InsWeb Corp. You'd have taken a 75
percent haircut on your Webvan Group Inc. stock, on your 1-800-
FLOWERS.com Inc., on your NetZero Inc., your Agency.com Inc.,
your E-Loan Inc., and on and on and on.
And if that's how you'd have done with the best underwriter in
the game, imagine how you'd have fared with any of the rest.
As for Salon.com, the company's latest financial filings tell
it all. In the three months ended March 31, Salon.com's revenue
was $2.6 million, which is triple the year-earlier period - but
the base is so low (barely $900,000 in the 1999 quarter) that the
magnitude of the increase is almost meaningless. Far more
important is the fact that, based on the pattern of the previous
quarters, roughly 17 percent of the company's revenue probably
wasn't cash at all but so-called barter deals (I'll run your ad
for free if you'll run mine on the same basis - and we'll both
call it revenue).
Take the barter revenue out of the picture, and Salon.com's
actual cash revenue in the quarter was probably only about $2.16
million. During the quarter, production and editorial costs ($2.4
million) alone ate up all that and more. If the company had done
absolutely nothing else during the quarter except turn on the
lights and pay its monthly rent, payroll and utilities bills
($795,000), it would have been in an impossible hole, spending
$1.48 for every dollar of revenue.
But on top of that came another $3.56 million of advertising
and marketing costs, net of barter - the budget-busting expense
that Salon.com and indeed almost all Web companies have had to
incur to promote themselves to the consuming public. Put that
into the equation, and Salon spent about $3 for every dollar of
Is it any wonder that in the January-March quarter the
company's balance sheet cash and investments dropped from just
under $24 million to just under $18 million? After all, the
company was spending almost $9 million to take in barely $2
million in revenue.
Money Running Out
With the company's own underwriter, San Francisco-based W.R.
Hambrecht, now cutting its revenue estimate for the fiscal year
ending next March by 30 percent, to $14.3 million - and with at
least 17 percent of the net result likely still to be non-cash
barter, the company could easily end the year with actual cash
revenue below $12 million. Against that, Hambrecht is projecting
$33 million of cash costs, meaning a cash shortfall of $21
million. With only $18 million of cash on hand to cover it, the
company looks set to be stone-broke within five quarters - and
that includes the savings from the June 7 cuts.
To drag out the inevitable, there will doubtless be more
firings, and more cutbacks, until the quality of the Salon.com
editorial product is so ravaged that no one will want to read it
So, why, we may ask, was this business started in the first
place? So that a group of talented writers and commentators could
perform like barking seals for a year or two, while an obscure
San Francisco underwriting shop bagged $1.3 million in
underwriting fees even as their own clients got hosed? This is
the New Paradigm? If so, you can have it.