The Incredible Shrinking Index

Even bears would be scared by these numbers.

The TNE 100 Index lost 20.4% of its value in the first quarter of this year, closing 1Q at just over half its baseline value, which was set only last August. The index, comprised of 100 convergence companies in nine component sectors, fared better than the Nasdaq Composite Index, which dropped by 25.5% in 1Q, but not as well as the S&P 500 Index, which fell by 12.1%.

Only 14 of the 100 companies in the TNE index showed a gain in 1Q, and 26 companies saw their stock price drop by more than 50%. Only one of the nine sectors, the convergent conglomerates, came through 1Q with a collective gain.

In overall index performance, the relative strength of large-cap tech firms such as Microsoft, AT&T, WorldCom, Apple Computer and Dell Computer helped mask the continued devaluation of the new breed of communications companies. After taking their share of pain during the second half of 2000, these large-cap companies turned in double-digit gains for 1Q 2001. Working in their favor were reduced price/earnings valuations, relatively strong balance sheets and good cash flows.

Those factors didn't help everyone, however. Cisco Systems (-60.1%), EMC (-54.9%), Nokia (-47.2%), Oracle (-47.3%) and Sun Microsystems (-45.4%) all posted steep declines, despite their relatively strong positions as market leaders. The drop-off for these companies — all technology suppliers — can be attributed directly to a series of IT revenue warnings that hit during the first few weeks of January. The combination of flat top-line prospects and diminished earnings drew a big slap from Wall Street.

But the companies really taken to the woodshed were those that committed worse transgressions — either failing to turn a profit at all or burying themselves in massive debt. The first category included Corvis (–70.4%), Level 3 (–47.1%) and Nortel Networks (–56.2%), which was a Wall Street darling just weeks ago. TNE 100 companies now suffocating under huge debt loads include Loral Space & Communications (–31.1%), Lucent Technologies (–26.0%) and broadband wireless competitors Teligent (–78.7%) and Winstar Communications (–82.3%). Winstar's outlook has grown progressively worse since 1Q ended, with shares trading at about $0.30 as of April 11.

Without question, 1Q 2001 will be long remembered as the time that once invulnerable companies like Lucent, Nortel and Cisco suddenly started looking vulnerable.

Still Good for a Bump

Takeover activity — actual and rumored — helped boost values for two TNE 100 companies, EarthLink and Efficient Networks. DSL equipment maker Efficient jumped 68% on Feb. 22, after it agreed to be acquired by Siemens for $1.5 billion. The all-cash offer helped immunize the stock from the tremendous volatility in the overall market. Efficient shares flat-lined near $23.50 for six weeks until the deal closed on March 30.

EarthLink shares more than doubled in value, to $12.12, following the Feb. 9 announcement that its partnership with Sprint had changed. The alliance is no longer exclusive, freeing EarthLink to work with other service providers.

Sprint, which owns 27% of EarthLink, also relinquished its first right to buy the remainder of the company, immediately making EarthLink a takeover target. Microsoft is rumored to be a likely suitor.

Saved by Synergy

Also benefiting from an M&A bump was AOL Time Warner, which picked up a big gain running up to the formal approval of its merger on Jan. 16. That stock spike ran out of steam soon after the deal closed, and AOL Time Warner ended 1Q about 14% off its January high. But it still ended the quarter 15.3% ahead of where AOL started the year. Although there's no way to tell for sure, given the general climate of the market AOL probably would have taken a hit in 1Q were it not for the Time Warner deal.

For evidence to support that speculation, you don't have to look any further than Yahoo! The big Internet portal saw its stock price plummet by 47.6% in 1Q, as investors reacted to the company's dependency on a disappointing online advertising base. In 1Q, Yahoo! joined the ranks of the ever-expanding 90% club — those companies that have lost at least 90% of their stock value compared with their all-time high.

The TNE 100 segment that fared worse in 1Q is also the index's smallest segment by company count: content distributors.

Only three companies comprise the content distributor segment, and all of them have hit hard times in terms of market valuations. The content distributor component plummeted 56.2% in 1Q, and the index ended the quarter at less than 20% of the baseline value established last August.

As a group, content distributors are suffering from business models that don't place a big emphasis on profits. To stop the bleeding, content distributors are halting expansion plans, laying off workers and paring back services.

Two of the three sector components, iBeam Broadcasting and Digital Island, have posted sequentially wider losses over the past three quarters and are wallowing in debt. With shrinking assets, low trading volumes and share prices hovering near $1, both face the prospect of being delisted from the Nasdaq.

Old Gold

The big companies that took a hit in 1Q might be able to draw some consolation from the fact that other big telecom names that suffered in 2000 started to stage a rally in the first months of 2001.

AT&T (+16.1%) and WorldCom (+32.9%) both posted gains in 1Q, making up at least some of the substantial ground they lost in 2000.

Copyright © 2004 Ziff Davis Media Inc. All Rights Reserved. Originally appearing in The Net Economy.