The Boom, The Bust, and The RecoveryByChris Fenot, Sam Hauxwell, Wade ReeseBA 471Dr. ReitsmaThe dot com boomThe dot com boom was approximately the period from 1997 to 2001 where stockprices and the world economy grew at a rapid rate. During this time period everyonewanted “in,” meant being part of the quickest “rags to riches” stories, becoming aninstant millionaire, or acquiring instant financial freedom. Speculation on stocks was theresult and venture capitalists and companies spent money exuberantly and dismissed theirold methods of business model analysis. The forces that lead to the dot com boom whereexplorations in new technologies such as the Internet and telecommunication. The ideathat new technologies would change the landscape of business in every possibledimension was becoming a reality through the Internet. Venture capitalists in turn startedinvesting lots of money into these areas and entrepreneurs just wanted to grow and sell tobigger companies who wanted “in” or have an IPO on the stock.The dot com bustThe result of the increased investments into these sectors was venture capitalistsignoring business plans and investing in every great idea without doing feasibility andaccounting studies to ensure the success of the ideas. In turn the dot coms got fundingand continued to get funding even though they weren’t turning a profit. Companiesstarted enjoying the perks of being successful like new offices and artwork filled hallswithout really becoming successful. Companies also were finding it hard to attractcustomers because they had no marketing and advertising plans or the knowledge of howto market an online company. Millions were spent on wasteful advertising like $30million on Superbowl advertisements in one year.The bust lead to one of the longest recessions in history and impacted the globalmarket greatly. The bust also lead to investigations into companies that were changingtheir books to please stockholders and give the idea that they were still a successfulcompany, which lead to several corporate scandals being unfolded. The dot com recoveryThe companies who survived and recovered after the .com bust where the oneswho invested wisely. This is brought to attention by the production paradox, whichillustrated how many companies invested but there was no real impact on GDP. Mostanalysis’s expected that this was due to a wide variety of investment techniques. Thecompanies that invested wisely, however, saw greater rewards and were able to weatherthe dot com bust. Financially, companies after the dot com bust ended up almost wherethey started before the dot com boom. Overall investment in technology decreasedbecause many companies were hesitant to invest during a recession and hoped to weatherit out with what they had. This is not the best long term strategy because companies whoreengineer during recession can maximize profits when economic conditions turn goodagain. Companies that were diversified or had long been around weathered the dot combetter than most of the newer entrants to the markets.IBMKey FactsOverviewRevenue (2005)$91.134 billionNet Income$7.934 billionEmployees329,001ProductsE-businessE-serverMainframe computersSoftwareDB2RationalLotusTivoliWebSphereIBMBackgroundWhen compared to many companies in the IT business,IBM is one of the oldest. It was incorporated in the state of NewYork on June 15th 1911 as the Computing- Tabulating- RecordingCompany (C-T-R), but started its business already at the end of the19th century. In 1915 the “Think” sign was first introduced, a wordthat stuck with the company for a long time, representing theconstant innovation. After having done business in Canada startingin 1917 under the name of International Business Machines, thename was adopted for the entire company on Feb. 14th 1924. Atthat time IBM had already 3,384 employees with revenues of $11million with $2 million in profits and operations already in Europe.IBM was from the early days on committed to research. It finishedin 1944 the Mark I, after six years of research, the first machinecapable of simple calculations. The fifties saw the development ofthe now famous IBM 701 and IBM 7090. In 1964 the IBM 360introduced the first family of real computers. The 80s brought thedevelopment of the PC market; built in collaboration with Intel andMicrosoft. But the 90s followed, which saw IBM almost bankruptin 1993 with net losses of $8 billion. Louis V. Gerstner becameCEO and concentrated on customer service and integrated business solutions. E-businessIBMKey FactsMarket29.8% in server market (200541% in server software market (2003)FinancialsDot com high at $134.9375Dot com low at $80.0625Currently tradingat $80.02Evolution of IBM Stock Price from:July 1996 to January 2006became a symbol towards the end of the decade of the newstrategy of IBM. IBM has now sold its PC and Laptop business toChinese Lenovo and is shifting to an IT service company while notforgetting its core competency in mainframe computers andservers. In 2005 IBM had grown to a company of 329,373employees (first quarter 2006).The dot com boomIn 1993 IBM’s entire corporate strategy had to be changedand refocused on its core competency and the real money makers,because of the threat of bankruptcy. Gerstner took a big risk on E-business and it paid off. At a time when everybody wasdisinvesting from the Internet technologies, he decided to investeven more in it. He didn't buy multiplecompanies at sky- high prices, but strategically allocating funds for research within the company itself. IBM is the company with the most patents in the US and every yearis the one filing the most, with 3,248 in 2004.Sun MicrosystemsKey FactsOverviewRevenue (2005)$11.070 billionNet Income$ .107 billionEmployees35,000ProductsDesktop SystemsServersStorageSoftwareJavaSolarisThe dot com bustAs every other company in our study, IBM lost a lot of its value during the dotcom boom. IBM, while loosing almost $55 in value per share during that period, hadbeen trading at a much higher level, $134 to be precise, than HP for example, which wastrading at $78 at its peak. The fact that the company had already faced a strong downturnand crisis in the beginning of the 90s, is one of the explanations why IBM managed tosurvive the dot com boom and end up in better shape than some of its competitors. Surepeople
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