Bubble Internet

The bubble Internet ( in English) or technological bubble is a Speculative bubble, which has affected the “technological values”, i.e. those of the sectors related on the Informatique and the Télécommunications, on the gone of actions at the end of the Années 1990. Its apogee took place in March 2000.

The period of euphoria (1995-2000)

The primary symptoms of the technological bubble appear in 1995. The frenzy of the investors during the going public of Netscape makes assemble the course of the action of the young company from 28 to 75 $ in one day. At the end of its first day of quotation, the company reaches 2 billion dollars of market cap.

During approximately five years, the profits promised by the companies of the sector of the TIC sharpen the appetite of a growing number of investors, large and small, which results in large volumes of issues of shares, loans and bank credits. The quoted values of the companies of the sector increase without bond with their real turnover or their benefit.

Index IXIC of the electronic market NASDAQ, which was with: 1000 at the beginning of 1995 was thus multiplied by 5 in 5 years and culminate with more: 5000. Several combined events are at the origin of this phenomenon, in particular:

a world surplus of saving financial, in particular related to the preparation of their retirement by the Baby-boom ers;
a modification of the Monetary policy very accommodating with the the United States and the Japan. The credit, little expensive, is largely available, in particular thanks to the investors in Capital risk ( venture capitalists );
Several policy changes macro-economic amplifies the effect:
# the opening to the competition of the service market of telecommunications in the majority of the countries of OECD had as an incidence to increase the investments of the operators massively and involves many fusion-acquisitions in all the sector.
# the investments carried out in data processing to adapt the systems to year 2000 inflate the outputs of the data-processing companies.
# the European countries invest to ensure the transition from the national currencies the Euro
the popularization of the network Internet in 1994 makes accept the day before of a second Industrial revolution and, therefore, one period of amazing Economic growth.

Opening to the competition of the service market of telecommunications

During second half of the years 1990, the majority of the countries of OECD adapted their regulation framework in order to more largely open their market of telecommunications to competition. The analysts agree then on a growth forecast of the service market of almost 10% per annum, this in spite of the fall of the price caused by the arrival of the competitors. What pokes the interest of many investors.

The agreement on the liberalization of the télécoms signed in Geneva within the framework of OMC opens the way with new development appropriatenesses. The large national historical operators leave to the conquest new fixed and mobile markets to the international one. With blows of billion dollars, they take participations in foreign historical operators who have just been privatized or then create new competitor operators of any part or in partnership with local groups (joint venture).

In a few years, the service sector in telecommunications knows an extraordinary effervescence. It becomes the battle field great European, American and Asian groups, with all superlatives: “méga-fusions” (example, tender offer of BT on MCI, Against-tender offer by “small” the Worldcom), méga-growth and méga-investments.

With the universalization of the economy, the performances of the internationalized large companies depend more and more on their telecommunication networks. These large accounts represent important turnovers and margins raised for the national historical operators, which leads them to want to propose world services “without seam”. One attends a race with “total alliances”, in particular:

Alliance between French France Telecom, German Deutsche Telekom and American Sprint (projects “Phoenix”, “Atlas” and “Total One”)
Alliance between the British BT and American MCI (“Concert”)
Alliance around American AT&T (“World Partners”) to which unites operators of all countries which have bonds with a baptized European alliance “Unisource”.

These alliances, complexes, not always effective and sometimes ingérables, will be generally a failure.

Everywhere in the world, of the troops of “new operators” have an easy access to important liquidities and deploy vast alternative infrastructures with high banc, in particular containing fiberoptics (“highways of information”). Technologies of data transmission in package mode and optics evolve/move quickly and make it possible to already increase in a spectacular way (of a factor 100) the capacity of the networks in place. The operators justify the billion dollars invested by agitating forecasts showing the “explosion of the traffic”, consequence of the “exponential” increase in the number and the average demand of the users. This type of advertisement causes much enthusiasm and fascination in the economic and financial press.

Actually, the incomes on the segment long distance do not evolve/move as that is projected, in particular because with the other end of the chain, there exists still (at the end of the years 1990) a bottleneck on the local loop, left of the networks which gives access to the final customer. It will be necessary to still await many years to attend the takeoff of the number of access high banc, Mobile Internet, avid services in band-width and, especially, services generating of the receipts. The networks are very often deployed on the same roads connecting the same large metropolises, and there are no sufficient real markets making it possible to justify the invested colossal sums. In other words, of many competitors are redundant.

In Europe, the mobile operators are involved in debt very heavily by buying with the full price the “licenses networks of third generation UMTS”. The States allocate them by using the method of the biddings. Considerable receipts are taken on the operators on this occasion. With the the United Kingdom, the five licenses allotted to Vodafone, BT, One 2 One, Orange and TIW on April 28th 2000 cost them the sum of 22,47 billion books (38,4 billion euros). According to OECD, nearly 120 billion euros are on the whole taken by the Member States.

A national historical operator like France Telecom expenditure in 1999 and 2000 on the whole nearly 80 billion euros in acquisitions companies and right licenses.

Strategic redeployment for the equipment suppliers in telecommunications

In 1995, a cycle of massive investments in the networks of operators starts, which makes the happiness of the equipment supplier S.

The rapid growth of the Internet makes that a considerable share of the purchases of the operators are done in optics and IP, which pushes the equipment suppliers to extend their activities beyond their respective traditional trades via fusions/acquisitions. Of Lucent to Nortel, while passing by Alcatel or Cisco, the great multinationals of the télécoms devote a war without thank you to blows of billion dollars to take the control of young companies having required technological know-how. They buy often too expensive and, sometimes, without real strategy, simply to imitate the competitors. The price of acquisitions flames.

Ascend Communications repurchases Cascade Communications for 20 billion francs in 1997, Stratus for 5 billion Francs in 1998.
Lucent buys Ascend Communications in 1999 for the sum record of 20 billion dollars, Kenan Systems for 1,48 billion dollar and on the whole nearly about thirty companies.
Alcatel buys DSC for 26 billion francs and Packet Engines for 315 million dollars in 1998, then Xylan for 2 billion dollars and Assured Access Technology for 350 million dollars the following year, and finally 2000, it buys one of the large last independent of the sector, Newbridge, for 7 billion dollars.
Cisco Systems, historically a specialist in the data networks for companies, must make up for its lost time in certain technologies controlled by the traditional equipment suppliers (Alcatel, Lucent and Nortel). On the whole, it will buy close to forty companies for 20 billion dollars in telephony (Fibex, Sentient Network, GeoTel Communications Corp., Transmedia, Calista, MaxComm Technologies, Webline, Worldwide Data Systems, InfoGear, Komodo Technology, Vovida Networks, Active Voice Corporation,…) and especially in the optical transport which is necessary on the market operators (StratumOne, Monterey Networks, Cerent for 6.9 billion, Pirelli Optical Systems, Qeyton Systems…).

The consequences of these investments become visible as from March 2000, when the market of the capital is drained.

The phenomenon of the startup, the stock-options and the IPO

The strategic redeployment of the great groups of telecommunications makes that, during this period, the young companies (the Startup) push like mushrooms in some Technopole S like the Silicon Valley or Research Triangle Park, in the United States, Montreal (video design) or Ottawa (more: 1000 companies in the télécoms and optics) with the Canada. Several dream that some Startup will reproduce the legendary success of the companies Apple and Microsoft in the years 1970.

The launching of a company does not require almost any contribution in capital. Financial means the very important ones are placed at the disposal of the creators. The concept of event First Tuesday , symbolic system of this time, appears in Great Britain starting from 1998 and develops in several other countries. All first Tuesday of the month, a great “mass” joins together several hundreds of carriers of projects and investors. One brings back surrealist scenes where company founders see themselves proposing sums four times higher than what they seek by investors surprised by the modesty of their request and who insist

The Stock-options play a central role in the higher bid. Held up to that point for the top executives most important in the great traditional groups, they tend to spread. They motivate the leaders, the researchers, the engineers and the students of the universities to create their own company or contrary preventing them from going to work in a concurrent startup.

The dream dominating is to reproduce the success real or supposed of such company founder, such engineer, such assistant, all more astute the ones than the others, become millionaires in dollars, which ceased working or spend their time creating news startups. new rich person appear, which leads in a way localized to a raising of prices of the real goods and, generally, cost of living.

But fortune is not always with go. In many cases, the Stock-option S are only one means of making work the collaborators with wages sacrificed (tiny rooms sometimes of half or worse still) by justifying them with the hope than they will make fortune with their stock-options, the day of the going public or the sale of the company to a more important rival company.

The effect “news economy” overflows on all the sectors

Transition to the euro, passage to the year 2000

This period also corresponds for 11 countries in Europe, like for their business partners, with the transition from the national currencies to the Euro which spread out on a little more than three years, of 1999 to beginning 2002. In 1999, one observes a rise of the investments in the companies which must adapt their information systems in order to be able to continue to ensure their exchanges on the places on the market and to hold their accountancy.

See also: Euro#Transition of the national currencies to the euro (euro area)

New investments are necessary to re-examine the data-processing code in order to spend the year 2000.

See also: data-processing Passage to the year 2000

Purging: shortly after painful festival (of 2000 to ~2005)

The bubble Internet also corresponds to the period which followed 2000. Many technological companies carried out good deals, but the investors largely exaggerated the importance of the “very long run” in their estimates, and neglected to calculate that some of the companies too quickly consumed their capital to hope to reach one day the point of balance.

Under the pressure of the increase of the Interest rate in the long run (see graphic opposite), the bubble ends up “bursting” starting from March 2000, in the form of a Krach, extending to the unit from the purses and initiating a Economic recession of this sector and economy in general.

All profits carried out since 1995 (145 Mds USD) by: 4300 companies of NASDAQ are volitilized by the gigantic losses of 2000-2001 (148 Mds USD).

Operators télécoms: debt, bankruptcies, consolidations

The historical operators and mobiles are on this date weakened by heavy debts, because of the high investments carried out in companies abroad and excessive price discharged for the licenses necessary to the mobile networks of third generation UMTS.

The operators of optical wide-area networks ( backbones ) have on their side an enormous surplus production capacity in band-width which does not find taking. It follows a fall of the prices of the services. Under the effect of the draining of the markets of the capital, the most fragile operators financially are made buy the ones after the others.

Others are put under the protection of the American law of the bankruptcies:

Winstar in April 2001 (6,3 Mds USD of debt, 2,9 Mds USD of credits),
Viatel in May 2001 (2.68 Mds USD of dollars of debt),
Total Crossing in January 2002 (one of the largest bankruptcies in the United States with 22 Mds USD of credits for 12,4 Mds USD of debts),
Worldcom in July 2002 (bankruptcy associated with one with the most important countable frauds with the history with the United States)
Flag Telecom in April 2002 (2.6 Mds USD of debts),
NTL in May 2002,
Teleglobe in May 2002,
KPN-Qwest in June 2002.

Equipment suppliers télécoms: order books in Bern, Reorganization S massive

The operators who survived freeze their investments in the networks and set up programmes of drastic reduction of the costs. The consequences are disastrous upstream on the turnover of the suppliers who equipment supplier S. Their assessments are the are seriously unbalanced by important nonprofitable credits. This is more particularly true for the groups (1) which have a level of engagement raised in the deployment of the optical wide-area networks and (2) which must support heavy investments in R & D to develop solutions of mobile networks 3G UMTS (that the operators are long still today in deploying).

Of 2000 until 2005 approximately, the die of the equipment suppliers in telecommunications entered a cycle of recession and at best of stagnation, sometimes that some indicate under the name of “nuclear Hiver of the télécoms”.

One assisted for this period with long series of warnings on results, of advertisements of “cost reductions”, bankruptcies and consolidations.

Equipment suppliers télécoms: practical supplier credits and others at the risk

Starting from October 2000, the investors discover that the equipment suppliers télécoms are doubly exposed to the risks of bankruptcy of the operators. Firstly, as a customer, the operator is likely never not to pay the invoices of the delivered products. Secondly, to help to make succeed a network investment plan and/or to become “the preferred supplier”, it appears that the equipment suppliers very often proposed with their customers to finance at 100% the cost of their networks, even in certain cases of going up to 150% or 200% (what makes it possible the operator to finance other loads, the such radio licenses).

This system, which functions very well when economic environment is in growth, is turned over violently against the “bankers” who are the equipment suppliers when the recession in 2001 arrives. The clauses of the contracts of “vendor financing” provide indeed that the sums are refunded in time according to the business success of the operator (many subscribers, make an attempt first benefit). However, the business success hoped by the operators is long in appearing and in much case will never arrive.

There does not exist any precise study making it possible to know which was the real exposure of the equipment suppliers. It seems that practically all had recourse to the vendor financing . According to the Total newspaper Telecom , Lucent is exposed the most with 8 billion dollars. Motorola (4 billion), Nortel (3 billion), Cisco and Alcatel (2,5 billion) are in an intermediate position of risk. With 1 billion dollar, Nokia and Ericsson were shown more “reasonable”. Several courts have to treat dispute of a new kind between operators and their suppliers. Thus, the operator Winstar reproach with the equipment supplier Lucent supposément to have supposément violated its contract of financing, which would have pushed it to go bankrupt. He claims to him 10 billion dollars of damage.

Also, about the credit rating agencies worry about the difficulties of an operator (360networks), whose supplier (Alcatel) is at the same time the supplier and the shareholder with height of 700 million dollars. Justified concern since the company will go bankrupt in July 2001.

Operations “truth”: depreciation of credits, useless stocks, stop of activities

The companies made very many acquisitions with the full price between 1995 and 2000, but after 2000 the value of the acquired companies crumbles. In certain cases, nonprofitable activities purely and are simply stopped, or resold each time with depreciations. The purchasers must hold account in their assessment of it, by depreciating the credits in a corresponding way. The listed companies with NYSE are all the more incited to make it that as from 2002, following the scandals Enron and Worldcom, the American countable standards are modified (Loi Sarbanes-Oxley) in order to penalize any irregularity voluntary or conscious.

This operation has as an incidence to lead the results sometimes in a very heavy way. The management of the firms concerned are brought to recognize implicitly that their strategy as regards acquisitions in years 1995-2000 led them to a failure.

AOL Time Warner declares losses annual of approximately 100 billion dollars, largely ascribable with the massive depreciation of the credits of its subsidiary company AOL. At the fourth quarters 2002, the net loss is of 44,9 billion dollars, including 45,5 billion dollars of depreciations of credits.
JDS Uniphase records a net loss of 50 billion dollars on its annual exercise closed in June 2001, largely ascribable with the depreciation of credits.
Vivendi presents in March 2002 of the considerable overvalues of about 15,7 billion euro of depreciation of credits and must pass 6 billion euros of damping of overvalue for Canal+, 3,1 billion euros for the branch music, 1,3 billion euros for the movie studios and the international télécoms activities, 600 million euros for the branch environment and 300 million euros for pole Internet. These depreciations force the company to declare a deficit annual in France: 13,6 billion euros for a turnover of 57,4 billion.
Alcatel is forced to pass from the provisions and of the depreciations of credits of more than 3 billion euros (19,68 billion francs) in 2001 (accumulated stock and components, depreciation of the value of the participation in the Canadian operator 360networks, overvalue of acquisitions of Xylan and Packet Engines)
Lucent records a loss of 3,7 billion dollars in the first quarter 2001 for a turnover of 5,9 billion dollars. The loss is mainly due to a provision of 2,7 billion dollars for reorganization, damping of overvalues, depreciation of credits and losses exceptional.
Cisco Systems, which followed a policy of very aggressive external growth (more than 80 Startup bought), is forced into 2001 to fund a load, for depreciation of credits, more than 2,2 billion dollars.
Nortel announces 19,2 billion dollars of loss at the explainable second quarters 2001 for two thirds by depreciations of credits.
France Telecom leads her results with nearly 1 billion euros damping for overvalues acquisition, including 480 million for the acquisition of Orange. It is necessary to add 3,4 billion euros of depreciations of credits, including 1,7 billion for the setting out of purse Orange, 892 million for NTL, 715 million for its subsidiary company Global One and 41 million for the participation in Bull.
For NTT DoCoMo, the depreciation of value related to its only participation in Mobile KPN the constrained one to record a loss of 2,4 billion euros in the first half of 2001.
BT depreciates its participation in Viag in the height of 3 billion books.
Telenor depreciates its participation in Sonofon.
Telecom Italia depreciates 1,6 billion euros of credits in 2001
PSInet declares 5 billion losses in 2001, including 3,8 billion depreciation of credits.

Financial accounting irregularities, dissimulations and other embezzlements

During this period, waiting of the analysts and investors encourage of the chairmen, when confronted with one moment or another with a deceleration of the sales of their company, artificially to overestimate the turnover or the benefit.

Enron dissimulated its debts and its losses by fraudulently using unconsolidated credits and other qualified entities with special goal. 85 billion dollars of market cap volitilized. Other companies in the technology sector, like Verisign and Dash, are suspectées to have had recourse to a less scale with these practices of accounts except assessment.
Worldcom makes fraudulently pass approximately 3,8 billion dollars of capital expenditures. It is one of the most important countable frauds of the history.
the American cable television operator Adelphia was put in bankruptcy in 2002 and was the subject of continuations by the SEC and American justice concerning of the transactions except assessment, like 4,6 billion dollars of abusive loans to the family of the founder.
Several operators in telecommunications, little known of the general public, like Total Crossing, Qwest, 360networks, Cable & Wireless, Level 3 and some others devoted themselves to fictitious exchanges ( hollow swaps ) of line capacity of traffic. The operator has inflates his turnover artificially by entering a certain sum invoiced with the operator B, while in addition paying exactly the same amount to him, amount which was then entered by the operator has like an investment. The American operator Qwest, by playing with the headings “equipment sale” and “sale of capacities”, could overestimate of almost 18% his total turnover accumulated between 1999 and 2001.
the company Xerox overestimated its turnovers and its results. The company has to revise the whole of its accounts on 5 exercises, impacting more than 6 billion dollars turnover.
the Belgian group Lernout & Hauspie, specialist in technologies of recognition, voice synthesis and automatic translation, would have overestimated its sales of licenses to Belgian and Asian startup, indirectly under its control.
Safran, French company specialized in the defense systems and in safety, announced that its accounts could require a reprocessing of approximately 100 million euros on several exercises.
Altran, consultancy, has to correct in 2002 its operating profit, of almost 44% with the fall on 2001 and 2002
AOL Time Warner, group of media and services Internet, announced with the third quarters 2002 to have to reprocess its accounts since the third quarters 2000 because of accounting irregularities. The turnover was tiny room of 190 million and the gross profit of exploitation of 97 million dollars.
Alsthom, whose subsidiary company in the United States had tried to camouflage the losses wiped on a contract, passed from the additional provisions of approximately 100 million euros

It is probable that other american companies, European and Asian are in the same case. The spectrum of countable frauds which could be at any moment discovered at large companies haunts the financial circle and contributes to weaken the markets of actions.

Role of the analysts, the companies of audit and the auditors

The kindness or the passivity of other actors as various as companies of To that the, financial analysts, banks and auditors, contributed very largely so that these accounting irregularities can occur.

Collective appeals and monitoring of the markets

This troop of accounting irregularities and accounting scandals which splashed with large companies at the time of the technological bubble make that from now on financial analysts and investors require a transparent and sincere financial communication. Not-transparency, even voluntary dissimulation (or all that can resemble it) important information at the market, is pitilessly pursued by the defense associations of the shareholders and by the authorities of regulation of the stock exchange activities (the SEC in the United States, CVMO for the Stock Exchange of Toronto, MFA in France, etc)

Leaders: scandal linkeds with the modes of remuneration, resignations and continuations

It would be exaggerated to imply that the majority of the leaders were dishonest persons. Nevertheless, with the bursting of the technological bubble, of many irregular practices of management of company and, in certain cases, of the fraudulent activities of more shocking were revealed leading many leaders to have to resign and in certain cases to be the subject of continuations:

resignations due to financial results catastrophic, revision of the accounts
modes of remuneration of the excessive leaders until the obscenity (méga-programs of Stock option S, parachutes out of gold, retirements hat, various advantages whimsical), while at the same time their companies from went away to vau-l' water.
In certain cases, these modes of remuneration were allotted in an irregular way (e.g. antedated stock-options). In the United States, more than 190 companies announced to have launched internal surveys or to be the subject of federal investigations concerning attributions of stock-options.
Continuations for tax evasion, conflicts of interest, plot, handling countable, false claims and offenses of initiates. In the United States, several leaders were handcuffed and carried out in prison, in front of the television cameras.

Some examples sadly famous:

Scandal linked with antedated stock-options: The founder of Comverse Technology, Alexander Jacob, is in escape, in particular required by Interpol. The financial ex-director, David Kreinberg, and the former general secretary, William Sorin are also accused. They risk up to five years of prison. Jacob Alexander will be found and stopped some time after in Namibia. The procedure of extradition is on standby of a court order in July 2007. The consequences of these embezzlements were very heavy for the company and its employees. According to the Israeli daily newspaper Haaretz , the board of directors gave instructions to the direction to liquidate the company and its subsidiary companies. The company lost 30% of its value and had to lay off 300 paid, of which several tens in its historical research centres.
Scandal linked with antedated stock-options: The American cable television operator Cablevision Systems was led to have to revise the whole of his accounts 2003,2004 and 2005 and to reveal that it had granted stock-options to a consultant who did not form part of paid company, and granted stock-options antedated to a framework directing deceased, whereas it was in life.

Incidences on the employees

The “cost reductions” announced by the companies of the sector of the TIC were translated for the employees by plans of voluntary departures, Licenciement S dry, departures in anticipated retirements, closings of sites and massive Délocalisation S.

The site of the British newspaper The Financial Times maintained at a certain time a “barometer” which showed that close to: 500000 employment had been removed in the sector of telecommunications. This accounting established in 2001 was only very partial, since many social plans intervened thereafter. The operators (Worldcom, Sprint, BT, KPN, France Telecom, Qwest, etc), the equipment suppliers (Alcatel, Lucent, Nortel, Cisco, Siemens AG, Ericsson, etc), the subcontractors (Flextronics, Solectron,…) and, in end of chain, the manufacturers of semiconductors (Motorola, Texas Instrument, STMicroelectronics, etc) all were touched.

Incidences on the investors

The technological bubble made the happiness of certain investors, in particular the professionals knowing the sector, and who had sagacity to sell their actions before the slump in prices. But it especially caused the disappointment of tens of million private individuals, who realized to this occasion that one could not succeed in making fortune out of purse without a minimum of information, experiment and competences. These had the impression “to be made pluck” and are promised to be more made begin again. The phenomenon is more important still in North America, where close to a hearth on two had actions of listed companies. Some borrowed from their bank of the important amounts in order to be able miser even larger and were ruined.

Incidences on the retirements

In certain countries like the France, the retirement schemes are financed by a redistribution by distribution with a solidarity between the generations. In other countries on the contrary, in particular in North America, the retirement schemes are financed mainly by Capitalisation, which means that the contributions of the company and the employee are entrusted to managers who place them with various strategies, which can include the stock market with sometimes a strong component in technological values.

The stock exchange vexations caused by the bursting of the technological bubble had important incidences for many employees who have to push back their projects of retirement or which have to combine a statute at the same time of reprocessed and of credit on the job market. To indicate this type of situation, one created Oxymore S like “post-career employment” or retirement job . In addition, of the former wage earners of companies in difficulty noted a posteriori that their employer had sometimes drawn from the pension funds of the company, when it had not completely drained it.

Incidences on the real estate: towards another “miracle”?

See also: Real estate bubble, Crisis of the subprimes

In a located way, in certain areas equipped with many research centres like the Silicon Valley, one attended during the rising phase of the bubble two or three years of madness. The professional buildings were taken by storm by the young companies which pushed like mushrooms. This phenomenon was also observed (all things considered) in certain districts of big cities like the Path with Paris. The “millionaires” in stock-options made flame the price of the private residences. The amounts were such as simple wages did not make it possible more to only buy anything. The market was folded up in 2000 and 2001: surplus production capacity of the professional buildings, falls of the office rents and of the residences private, dismissals, new unemployed, new poor and financial problems of all kinds.

On a worldwide scale, after the bursting of a first speculative bubble to the beginning of the year 1990, one attends a strong fall in the price of the real estate up to a level floor towards 1998, then with a rise of the prices without precedent since 2001 - 2002 until today. One of the factors explaining this rise is that important liquidities were placed before on actions of listed companies, and that then they were redirected towards the market of the real estate considered as surer and remunerative.

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