Scams, Crisis & Bubbles
Transcript of Scams, Crisis & Bubbles
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SCAMS, CRISIS &BUBBLES
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US SUB-PRIME CRISIS
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What does Subprime mean?
rimeMortgages For amounts
that are smallrelative to
value ofproperty
Borrower hasclean credit
history
Borrower hassufficient
current Income
Readily paydownpayments
Subprime Very Bad credit
History
May not even havecurrent jobs
Not able to paydown payments
No taxDocumentation
-lt A In terms ofloan quality theylie between prime
and subprime
Do not have agood or badcredit history assuch
May or may not
show their
current Income
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SUBPRIME LENDING
vAlso called B-paper, near-prime, or second chancelendingvvOffered at a rate higher than A-paper loans due to the
increased risk.
vvKey design features of a subprime mortgage are:
(1) Short term, making refinancing important
(2) there is a step-up mortgage rate that applies at theend of the first period, creating a strong incentive torefinance;
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WHO OPT SUBPRIME LENDING?
vIndividuals who have experienced severe financialproblems are usually labeled as higher risk.
v
vthese individuals may also be precluded fromobtaining any type of loan for an automobile orreal estate.
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!!lassic 8 Steps to Hell
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How did Subprime start??
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How did Subprime start??vBetween 1998 and 2006 subprime mortgages worked
as they were supposed to.
vThe subprime lending is 9% in 1996 but in 2004 it is
21%.v
vBetween 1997 and 2006, American home pricesincreased by 124%.
vMany subprime borrowers to obtain ARM they couldnot afford after the initial incentive period.
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..Contd
vWith housing prices now depreciating moderatelyin many parts of the U.S., refinancing has becomedifficult, leaving homeowners with higherpayments than anticipated.
vA steep rise in the rate of subprime mortgageforeclosures has caused more than 100 subprimemortgage lenders to fail or file for bankruptcy.
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Causes for the debaclevBoom and bust in the housing bubble
vSpeculation
vRisk mortgage loans and lending practices
vSecuritization practices
vInaccurate credit ratings
vGovernment policies
vPolicies of central banks
vFinancial institution debt levels and incentives
vCredit default swaps
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..Contd
vPiggyback loans 43% more likely to default thanothers; still majority share of pool value arethese (52%-Washington Mutual Inc)
v
vEncouragement from S&P by not slashingratings- in its total share of ratings to asset-backed securities, 99% were subprime
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The Mediums Involved
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Where things went wrong ??
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- ( )ASSET BACKED SECURITY ABS
vThe asset-backed security (ABS) has been around fordecades, and at its core lies a simple investmentprinciple:
vTake a bunch of assets that have predictable and
similar cash flows (like an individual's homemortgage),
vbundle them into one managed package thatcollects all of the individual payments (themortgage payments),
vuse the money to pay investors a coupon on themanaged package.
v
v This creates an asset-backed security in which theunderlying real estate acts as collateral.
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COLLATERALIZED DEBT OBLIGATIONS
vA cash CDO is a special purpose vehicle,which buys a portfolio of fixed incomeassets, and finances the purchase of
the portfolio via issuing differenttranches of risk in the capital markets.
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Teaser Loans
v An adjustable-rate mortgage loan inwhich the borrower pays a very lowinitial interest rate, which increases aftera few years.
v Teaser loans are considered an aspect ofsubprime lending, as they are usuallyoffered to low-income home buyers.Unfortunately, when these borrowers tryto refinance the loan before the rate
increases, most will not qualify forstandard mortgages. This leavesborrowers with increased monthlypayments, which many cannot afford.
v This method of loaning is considered risky,as default rates are hi h.
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Types of Subprime Mortgages
vInterest only mortgages: Only interest is paid for atenor 5-10 years.
vPick a payment loans: The borrowers have the
option to choose their monthly repayment whichcan be full payment, interest only or a minimumpayment.
v
v2-28 loan: Interest rate is initially fixed for 2 yearsand then reset to equal the value of a rate indexat that time , plus a margin.
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( )Mortgages Backed Securities MBS
vMBS refers to securities backed by residentialmortgage loans
v
vFixed income security with prepayment options.
vvPayment of Interest & principals is guaranteed by
the issuers of the securities .
v
vTremendous volume growth from $ 100 billion in80s to $ 3 trillion currently.
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Types of MBS
vMortgage Pass Through Securities
vCollateralized Mortgage Obligation
vAgency Mortgage Backed
Securities
vStripped Mortgage Backed
Securities
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Benefits of MBS
vHigher Return: 100 bps more than treasury andcorporate bonds.
vQuality of credit: No risk as it is backed by theUS Government.
vInvestment profiles: Various options likeduration, prepayment, fixed or floatingcoupons.
vLiquidity: It helps in making illiquid mortgage
receivables more liquid.vAnalytics: Better tools are available today to
analyze MBS.
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HE IMPACT
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HE IMPACTvv E ffe ct o n sto ck m a rke t
v E ffe ct on fin a n cia l in stitu tio n sv " " Waves of the credit crunchv E ffe ct o n in su ra n ce co m p a n ie sv " "E ffe ct o n m u n icip a l b o n d m o n o lin e in su re rsv E ffect on h om e ow n e rsv E ffe ct o n jo b s o f th e fin a n cia l se cto r
v E ffe ct on m in o ritie sv E ffe ct o n te n a n tsv E ffe ct o n w o rld e co n o m y
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oss due to Subprime Crisis
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CTIONS TO MANAGE THE CRISIS
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CTIONS TO MANAGE THE CRISISv Central Banks have conducted open market operations to
( . ., ).ensure member banks have access to funds i e liquidity
vv Banks and Lenders to tighten lending normsvv .Lenders and homeowners can restructure loans
vv -Credit rating agencies rating process to be re examined.and improved
vv Regulators and legislators can take action regarding
, , ,lending practices bankruptcy protection tax policies, , ,affordable housing credit counseling education and the.licensing and qualifications of lenders
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:ENTRAL BANKS AN EFFORT TOSTABILIZEv :FED
released USD 235 billionallows term financing for up to 30 days
v :ECBreleased 265 billion Euros
Banks could have any amount of money at the base%.rate 4vv .Bank of Japan released 1 6 trillion Yenvv ( . .)Central banks of Russia $1 64 bnvv .Australia and Canada also pumped money in the system
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SATYAM FIASCOTHE HIDDEN TRUTH
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SATYAMBIRDS EYE VIEWBIRDS EYE VIEW
IT Major Founded in 1987Associates:- 53000 employees.Revenue:- Rs. 11,181 Crores (08-09)
EPS: 31.83 (08-09)Geographies:- 67 countries.Listed with NYSE and Euronext
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Milestones
1995 First ISO 9001:2000.1999 - Listed on NASDAQ.
2001 - Satyam listed on New York StockExchange.2002 - Satyam wins Golden PeacockAward
for Excellence in CorporateGovernance.
2002 WinsCNBC's Asian Business Leader.
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Milestones
2003- Satyam Computer honored withprestigious IBM LotusAward.
2005 - Satyam acquired KnowledgeDynamics.
LaunchedEMRI.2006 -Achieved global certification - ISO
9001, ISO 20000,ISO 27001.
2007 - Becomes the Official IT ServicesProvider for the FIFA World Cups,2010 (South Africa) and 2014 (Brazil).
2008 - Satyam Receives Golden PeacockGlobal Award forExcellence in Corporate Governance by
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The Fiasco as ittranspired
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FAILED ACQUISITION ATTEMPT
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THE BITTER TRUTH
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THE BITTER TRUTH(Accounting Fraud)
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a rtie s to th e H id d e nTru th P W C O ve rlo o ked fa u lty b a la n ce sh e e t
S E B I G ive s cle a n ch it in its p re lim in a rysu rve illa n ce
B A N K S Fa b ricate d b a n k sta te m e n ts
D IR E C T O R S B lin d ly fo llo w in g m a n a g e m e n t
d e cisio n s
D S P M E R R ILL LY N C H b le w th e w h istle b u tve ry la te
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O V E R N M E N T O F IN D IAIN T E R V E N E S Ministry Of Corporate Affairs
Arrest Of Satyam s Top Management
Legal Action
-ICAI Actions Against
http://images.google.co.in/imgres?imgurl=http://bp2.blogger.com/_JcskcRS7B-0/RoET8Hgn33I/AAAAAAAAAx8/uuzGUJsp8x8/s320/pwc_6.jpeg&imgrefurl=http://terraslon.blogspot.com/2007/06/pwc-and-yukos-additional-validity-for.html&usg=__PcGE5HaqH6C6dlbRC_UeHSdCFOs=&h=320&w=233&sz=10&hl=en&start=3&tbnid=6q_FOrLVmjUGdM:&tbnh=118&tbnw=86&prev=/images?q=pwc&gbv=2&hl=enhttp://images.google.co.in/imgres?imgurl=http://bp2.blogger.com/_JcskcRS7B-0/RoET8Hgn33I/AAAAAAAAAx8/uuzGUJsp8x8/s320/pwc_6.jpeg&imgrefurl=http://terraslon.blogspot.com/2007/06/pwc-and-yukos-additional-validity-for.html&usg=__PcGE5HaqH6C6dlbRC_UeHSdCFOs=&h=320&w=233&sz=10&hl=en&start=3&tbnid=6q_FOrLVmjUGdM:&tbnh=118&tbnw=86&prev=/images?q=pwc&gbv=2&hl=en -
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FFECTS OF THE BITTER TRUTH
Loss in Reputation /Financial Operational
Satyam Stock Employee Morale
Tech Mahindra acquires
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Tech Mahindra acquiresSatyam
Tech Mahindra won the bid for Satyam.Computer after bidding at Rs 58 per share
.Tech Mahindra would pay Rs 1757 crore for
%a 31 stake in Satyam
Tech Mahindra has secured complete funding%to acquire 51 stake in Satyam
Satyam will now be Mahindra Satyam
l d
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Conclusions And Learning
Lack of Regulation on part of Govt. & otherRegulatory Authorities
Corporate Non Governance
Satyam not alone: Compliance should beintroduced to check fraud like this
Blind Compliance and other regulatory body
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YES BANK IPO SCAM
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YES BANK IPO SCAM
Issue opened on June 15, 2005Listed on BSE and NSE on July 12
1.75 crore shares were reserved for small
investorsRoopalben panchal cornered and sold
8,39,500 shares @ 61.40
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GIMMICK OF ROOPALBEN IN YES BANKIPO
6315 bogus fictitious applications, bankA/cs and Demat A/cs
Same address of Ahmedabad on DematA/cs
On all application same address of BharatOverseas Bank, Worli, Mumbai
9,47,250 shares alloted to these fictitious
A/cs
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SYNDICATE OF PANCHAL INVESTORS
Roopalben made off market transfer of931,600 shares on 11th July to thefollowing entities:Seer Financials Pvt. Ltd 332,875 shares
Excel Multitech Ltd. 161,180 shares
Devangi Dipakbhai panchal 220000shares
ZenetSoftware ltd. 92,855 shares Taurus Infosys Ltd. 80,590
shares
Rajan Vasudev Dapki 44,100
shares
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Sugandh Investment
1315 bogus applicationAllotment of 1,97,250 shares
Profit of 32,26,492
Modus operandi same as Roopalben Panchal
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Order of SEBI-Actions on Yes Bank
Panchals and others directed not to buy, sellor deal in Yes Bank and other companyshares ensuing IPOs, directly or indirectly
NSDL is directed to monitor the benamiaccounts such that they are not used infuture
NSDL is directed to undertake
comprehensive inspection of Karvy DPRBI to intervene in a careless lending
pattern of bank to A/cs having the sameaddress
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BOTTOMLINE
10,669 benami accounts opened on 16thAugust, 2004
Ms. Roopalben Panchal 6483
Sugandh Investments 4186Total 10,669
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SECURITIES SCAM 1992
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Introduction
In April 1992, press reports indicated thatthere was a shortfall in the GovernmentSecurities held by the State Bank of India.
Investigations uncovered misappropriationof funds to the tune of over Rs. 3500crores.
Created a panic among investors and
brokersStock prices dropped by over 40%, wiping
out market value to the tune of Rs.100,000 crores.
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Precipitating Events
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Precipitating Events
Sensex rose from around 1000 in February1991 to a peak of 4500 in March 1992 justbefore the scam came to light.
Nationalized banks were under pressure toimprove their bottom line.
Growing need for funds in the informalmoney market to finance stock market
operation
The Ready Forward Deal
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The Ready Forward Deal
A secured short term (typically 15 day) loanfrom one bank to another bank
Purpose
qprovide much needed liquidity to thegovernment securities markets.qStatutory Liquidity Ratio (SLR)
requirements.
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Mechanics
The settlement process in the governmentsecurities market became broker intermediated,that is, delivery and payments started gettingrouted through a broker instead of being madedirectly between the transacting banks.
The broker through whom the payment passed onits way from one bank to another found a way ofcrediting the money into his account though theaccount payee cheque was drawn in favour of abank.
While the above two steps transformed an RF dealfrom a loan to a bank into a loan to a broker, itwould still be a secured loan. However, thebrokers soon found a way of persuading thelending bank to dispense with security for theloan or to accept worthless security.
Creative accounting and Bank
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Creative accounting and BankBalance Sheets
Most banks carried investments in theirbooks at their cost of acquisition and didnot mark it down to market.
The profit earned through transactionimproved the bottom line for the bank
Loss suffered by the bank in transactionwas not reflected in its profit and lossaccount at all.
Where is the money?
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Where is the money?
The bulk of Harshad Mehtas purchases was made at low prices. Theaverage portfolio corresponded to an index well below 2500 withmany of the shares untraceable till today.
A powerful "bear cartel, represented by Hiten Dalal , A.D. Narottamand others, operated in the market with money cheated out of thebanks. It is likely that a considerable part was spent on financing
the losses in the rising stock markets. It is said that a part of the money was sent out of India through the
hawala racket, and brought back as India Development Bonds.
A part of the money must have been spent as bribes and kickbacksto the various accomplices in the banks and possibly in the
bureaucracy and in the political system. A part of the money might have been used to finance the losses
taken by the brokers to window-dress various banks' balance
sheets returning to the banking system.
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KETAN PAREKH SCAM
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The man behind the scam
Ketan ParekhMumbai based broker
Hails from a Gujarati family
Chartered accountant by professionUsed to manage familys broking firm, (NH Securities)
Also known as Bombay bull
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The Scam
Year 2000-2001Scam worth Rs.2000 bn
Formed a network of brokers at ASE & CSE
Relied on scrips of ten companies(K-10)Benami transactions
Overtrading in equity markets
Also involved promoters in the fiascoFIs (IDBI, IFCI) also involved
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Buy stake from promotersSafeguarded himself against uncertainity
Understanding to sell stock back to
promotersKetan made deals with FIs
Identify stock, take the up & later dumpwith fund manger
Ensure enough appetite for fund managers
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K-10 Scrips
Silverline Global Telesystems Satyam Computers Zee HFCL Aftek Infosys DSQ Software
Ranbaxy Pentamedia SSI
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KPs Favourite
IT sector- Aftek infosys, Satyam computers,DSQ software
Pharma sector- Lupin Pharma, Ranbaxy
Media- ABCL, Zee telefilms, Mukta Arts, Tips
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Factors Contributing
Brought in banksBought shares at low prices
Continuous trading Bull in prices
Pledged these shares with banks ascollateral
Madhavpura Mercantile Cooperative Bank(MMCB)
Calcutta Stock Exchange (CSE)
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SEBIs Remedial Measures
Additional 10% deposit margin on o/s netsales
Restrictions on short sales
Sales to be followed by deliveriesSuspended all brokers at BSE
Banned trading by VPs, treasurer etc
Banned badla system
Introduction of Rolling Settlement Systemon BSE
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ASIAN ECONOMIC CRISIS1997
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HISTORY
South East Asian Countries increased their interest
rates attracting investments
Thailand , Malaysia, Indonesia, Singapore, and South
Korea - growth rates of 8-12% GDP
Real Estate prices and other asset prices soared
IMF & World Bank termed it as "Asian economic
miracle"
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Cont..
Large money went to uncontrolled hands
Fixed Exchange Rates led to high external
borrowings
Mid 1990 US recovered from recession
Alan Greenspan increased interest rates in US
and $ appreciated
Other currencies got devalued
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CONT
Growth dip due to depleting Current A/c
position
Organizations started defaulting
Investors confidence falling and theystarted withdrawing investments- led
to currency pressure
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Governments increased interest rates to
sustain investors and buyback of domestic
currency with Forex Reserves- damage
Thailand Government Floated the currency-
more adverse
Foreign currency denominated liability
increased in domestic currency leading to
bankruptcy
.ONT
IMFS INTERVENTION
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IMFS INTERVENTION
$40 billion program to stabilize
currency
Structural Adjustment Package (SAP)
Criticized for adopting the opposite
measure during the US recession
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CONT.
Resulted in permanent currency
devaluation, bankruptcies, booming
economies collapse, real estate burst &
unemployment.
People named it IMF CRISIS
http://en.wikipedia.org/wiki/South_Koreahttp://en.wikipedia.org/wiki/Malaysiahttp://en.wikipedia.org/wiki/Philippineshttp://en.wikipedia.org/wiki/Indonesiahttp://en.wikipedia.org/wiki/Thailand -
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AFTER EFFECTS
Corporate Governance improved
International investors cautious for
developing countries
Oil prices dipped to $8 a barrel in 1998
which led to 1998 Russian Financial
CrisisUS lost $4.6 bn in 4 months on a/c of oil
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CONT..
Alan Greenspan organized a $3.625
bailout
Nations started building Forex Reserves
including Japan, China & South Korea
Pan Asian Currency Swaps introduced
Russia, India, Brazil, etc restructuredtheir economies and created Current A/c
Surplus to build Forex Reserves
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Stock Market Bubble
A stock m arket b u b b le is a typ e o f e con o m ic b u b b le ta kin g p la cein sto ck m a rke ts w h e n m a rke t p a rticip a n ts d riv e sto ck p rice s
.a b o v e th e ir va lu e in re la tio n to so m e syste m o f sto ck v a lu a tio n
rational or irrational phenomenon ?
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Boom of IT Companies (1998-01)
q (In te rn e t w as b e g in n in g a re v o lu tio n d e riv e re a l b u sin e ss d riv e n
)p ro fits
q -C h a ra cte ristics
Easy to start
.n o b a rrie rs to e n try
.B u sin e ss to b u sin e ss con cep t
h a rn e ssin g n e tw o rk e ffe cts b y o p e ra tin g a t a su sta in e d
.n e t lo ss to b u ild m a rke t sh a re
strateg y g et b ig fast
q Pre fix in v e stin g
q A d v e n t o f v e n tu re ca p ita list
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Emergence of new economy
q a n e w e c o n o m y w a s e m e rg in g
NTERNET ECONOMYThe nternet Economy refers to conducting business through markets
- .whose infrastructure is based on the Internet and World Wide Web
q ( : ,It found reinforcement in media emerging magazines Red herring
, . )Fast Company Business 2 0
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Soaring stock prices
q C a sh flo w IP O s
q In fo rm a tio n ca sca d e
q A b sen ce of fu n d am en tals
q ,B y Fe b ru a ry 2 0 0 0 In te rn e t se cto r m a rke t ca p ita liza tio n
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Free spending
q In te rn et com p a n y's su rviva ld e p e n d e d o n ex p a n d in g its cu sto m e r
&b ase as rap id ly as p ossib le g oo g le am azon
q Pu b lic a w are n e ss cam p a ig n s
q la v ish in te rn a l sp e n d in g
q in v e stm e n ts w e re fa r o u t o f p ro p o rtio n to b o th th e ir cu rre n t a n d
p ro je cte d ca sh flo w
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Growth of bubble
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Bubble burst
q .T h e N a sd a q sa n kq S to ck tip s h a v e b e e n re p la ce d w ith ta lk o f re ce ssio n
q %O n lin e re ta ile rs saw th e ir sto ck s fa llin g m o re th e n 9 9 fro m th e ir
.h ig h
q %D o w jo n es in tern et in d ex w as d o w n b y 7 2q
Dot Com Crash of 2000
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Dot Com Crash of 2000
1997: Founded as Internet consulting firms to lendinformation technology and expertise to traditionalold economy.
1999: IPO $ 10 per share. In march 2000 Scient traded
at $ 133.75. A valuation of 62 times the companysrevenues.2000: net loss of $ 16 million on revenues of $ 156
million, 2,000 employees.2000 (June): Scients stock fell to $ 44 as most of the
technology sector.
December 2000: lowered revenues and earningsexpectations due to the slowdown for Internetconsulting services.
December 2000: plans to lay off 460 positionsworldwide (over 20% of its work-force).
February 2001: stock was trading at $ 2.94.
cient Corporation Overview
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Dot com Indices:
Company IPOprice
PeakPrice
% changeIPO toPeak
Price atend of Feb2001
% changefrom peakScient 10 133.75 1238% 2.94 -97.80%
Viant 8 63.56 695% 3.06 -95.20%
IXL Enterprises 12 58.75 390% 1.25 -97.90%
Lante 20 87.5 338% 1.81 -97.90%Razorfish 8 56.94 612% 1.16 -98.00%
US Interactive 10 83.75 738% 0.56 -99.30%
Xpendior 19 34.75 83% 0.69 -98.00%
M a rch 2 0 0 0 N A S D A Q February 2001
.5 1 3 2 5 2 .2 1 5 1 8 3
Reasons for the Burst
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The loophole in their Business plan/model.
Companies engaged in unusual and daring business practices.
Get rich quick internet strategy was flawed.
They spent other people's money unchecked in an effort to gain market
share as soon as possible. Get Largeor Get Lost.
Inexperienced teams.
Support from :
Venture Capitalists.
Investment Bank Underwriters.
Accounting Profession.
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Interest rate increased six times during the dot com period.
Leading technology companies such as Dell, Cisco and IBMtriggered a chain reaction of investors liquidating their shares.
Reaction of the Stock market.
Others:-
Rise in outsourcing
Y2K switchover
Terrorist attacks in US in 2001
Aftermath.
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Aftermath.
Several Communication companies sold their assets for cash
or filed for bankruptcy World Com
Overstated profits by billions
Stock Crashed
Filed largest corporate bankruptcy in U.S. history
North Point Communications, Global Crossing, JDSUniphase, XO Communications, and CovadCommunications
Many dot-coms ran out of capital and were acquired orliquidated
A few of the larger dot-com companies did survive,however: Amazon and eBay are good examples.
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Several companies and executives accused or convicted of fraud formisuse of shareholders money
Citigroup and Merrill Lynch fined millions by SEC formisleading investors
Huge layoffs of technology experts.
The dot-com bubble crash wiped out $5 trillion in market value oftechnology companies from March 2000 to October 2002
.
Advertising and Shipping business got a setback.
Learnings
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Learnings
For Companies:-
It is better to be profitable with 50,000 customers thansinking in debt with 100,000
Rapid growth is not the way to build a solid company
If you're going to start a company that you hope to gross a
billion dollars next year, make sure you have experience
For investors:-
If you are investing in the stock market for the long term,dont invest when prices are overvalued and fundamentals
are poor
If trading/short-term investing is your thing, then get yourprofit and get out.
When a company or many companies are promising life-
altering changes in how we live our lives, be veryskeptical.
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Thank You