E-Finance: A new way to create value and survive

• The fall of old Gurus
• Who loses?
• Investing in a Tornado
• Case Study Publishing: Wolters Kluwer
• The trouble with publishers
• A few exceptions?
• The strategic dilemma of high-change industries
• The importance of new investors
• Dot.corp or dot.com?
• Conclusions: the moral for E-Finance

The fall of old Gurus

With the exploding stock prices of Internet companies in mind, top CFOs are asking themselves what lessons should be learned from the new economy. Valuation obviously has nothing to do with price-earnings ratios, price-revenue ratios, or short-term profit expectations anymore. Calculations made with the help of proven discounted cash flow methods seem to teach us that the stock prices of most Internet companies will never create sufficient value for the investors. But is this line of reasoning correct?

What we can be sure of is that all the investors who didnt invest in the new economy last year now have the hangover that comes from making the wrong decision. This is just what happened with one of the most famous old gurus, Warren Buffet, and his investment company, Berkshire Hathaway. He openly admitted that he had no understanding of high technology and consequently, last year, he paid the price. B.H. stock quotations tumbled 50% compared with the S&P index; no comment was made about the NASDAQ, which did much better than both the S&P and the Dow Jones. Buffet openly donned the penitential robe. "Even inspector Clouseau could have found last years guilty party: the chairman," he said.

Who loses?

Experts in Silicon Valley argue that in the next years only the expected market position matters. In other words: Is a company in a position to achieve the number one or number two rank in its respective E-Marketplace? Only then it seems, will the company become attractive. But is this a sound argument? Or is this reasoning only part of a short-term hype? The coming years will provide the answer, but should CFOs wait for this? No, of course not, they have to fulfil the expectations of the stock market each quarter. So they are forced to participate in a new gamble that was never part of their job.

In my article: Global business 2000: first innovation and then crisis , I pointed out that we may expect an economic crisis in a few years, and raised this question: Will an economic crisis help the representatives of the old economy? I dont think it will, because even if the crash destroys the reputations of new entrepreneurs and many investors, the new market realities will still remain. Only E-Business companies can survive. A new way of life is emerging today just as it did when our grandparents faced "new technology" like trains and telephones. They could have continued to ride horses but trains were much faster, to write letters but the telephone was much more interactive and faster. E-Business creates a choice for everybody: adopt or die.

Investing in a Tornado

One of the best books to explain the reasons and timing of investments in new technology is still the 1995 book, "Inside the Tornado" from Intel official, Geoffrey Moore. He stresses the importance of the "technology adoption life cycle". After the successful introduction of a product, a "chasm" has to be bridged to find "a bowling alley" and then the company can benefit from the hyper-growth of "the tornado" and reach "main street". See chart: High-Tech Market Development.

Of course, many experts question the reality of all the theories but even they cannot ignore the numerous IPOs that have become big successes because many investors believe in this model. Entrepreneurs in traditional companies are often frustrated because after a lifetime of hard work they have earned "peanuts" compared with the new wealth of the new economy pioneers. Many of the criticasters of the new economy talk about the continuous, escalating losses of companies like WebMD and Amazon.com. But they forget that there are already very profitable E-Commerce companies like AOL,Yahoo and E-Bay, not to mention high-tech E-Business companies like Cisco, Oracle and Intel. So it seems better to be ready for change.

Case Study Publishing: Wolters Kluwer

A Traditional Company crushed by the new economy?

On Friday, March 10, 2000, Wolters Kluwer shares dropped from 34.60 to 25.60 Euro, a loss of 26 % in one day. At the lowest point of the day share prices were only 22 Euro, a market cap loss of Euro 3 billion. The Board announced that profits would not increase in the coming two years. They intended to invest 250 million Euro (within three years) to move their products to the Internet. The results in 1999 did reflect the usual 16% increase; this gain has been a common event for the last 20 years. Obviously the investors didnt like the news but why&? And how could this happen to a company that just a short time ago was one of the darlings of the Dutch stock market?

The answers are: With a yearly cash flow of Euro 610 million, Wolters Kluwer will not even be investing in new business at a maintenance level. Top management seems to be avoiding all risk and hoping to control the future by waiting for better times, which as explained- will never occur. The Board obviously chooses to defend their still very valuable content and consequently, their publishing business. But they may be not able to create any positive shareholders value because only representatives of the new economy can do this substantially.

The trouble with publishers

Wolters Kluwer is not the first publisher to face the problem of switching to the Internet. On the contrary: almost all of the publishers are doing that. In February Elsevier announced a huge investment of Euro 1.2 billion in the Internet. It was not very clear in which activities. Almost simultaneously Reuters said it would invest Euro 750 million with a risky shift toward providing consumer information. In the recent past Bertelsmann announced an investment of Euro 485 million, Thomson doubled investments to Euro 75 million in the third quarter of 1999 and Havas [Vivendi] will invest Euro 170 million over the next three years. New combinations could emerge because Microsoft will invest Euro 100 million in Vertical.net, and Softbank Euro 50.4 million in Law. com. And no one can predict the success of these investments

A few exceptions?

VNU is one of the few publishing companies that has a good chance to successfully realize the transition to a modern Internet-based media group. They acquired companies like Nielsen Media for the huge amount of $ 2.8 Billion and they increasingly became active business partners for data base solutions. Knight Ridder moved its head office to Silicon Valley and launched a few successful portals, benefiting from the consumer reach of their newspapers. Their portals are based on their own content as well as on the need for a consistent offering to their customers, other services, and even "real physical products."

WebMD, a great example for the medical publishers, is already doing this with many complementary partners. By merging with Healtheon, WebMD became a company with a multi-billion dollar market cap. E-Business is all about communities and communication, connected to consistent needs from their customers (see my article, Without Partnering, No Web Strategy .) Reuters benefits from their controlling interest in one of the most exciting IT-companies in the world: real time systems supplier Tibco. But most publishers seem to have little understanding of "trade tricks" in commerce and do not have the competencies to follow the example of WebMD and Knight Ridder.

The strategic dilemma of high-change industries

Lets face it, there is no easy strategic decision-making in high-change industries. The entire Internet-related investment requires huge money, and losses in the first two or three years can be very significant. The reason is that community building requires enormous efforts in advertising, about 2/3 of the total investment, in order to create a community with its own brand known as a market leader to the customers. Technology drives this business and few, certainly in Europe, have sufficient knowledge to make the right decisions.

Since no company is able to succeed in E-Business without partners, it is a very complex process to manage, with enormous risks for entrepreneurs. This often means that in the view of the managers of the traditional economy, a dangerous scenario is emerging in which they will be always bitten by dogs or cats, no matter what they do. A no-win situation laced with fear seems to be overwhelmingly present.

Nevertheless, the only solution, as a Reuters official recently said, is: "The Internet strategy marks an historic watershed for the company, its customers and employees. The Internet means we have crossed a threshold. What used to be the province of the professional trader has now become the territory of the individual." Break away from the pack and think out of the box, should be the new theme.

The importance of new investors

Many of the executives of traditional companies believe that their products and content are still "king." They neither have the competencies to go outside their industry and to follow all the needs of their customers in a so-called ecosystem, nor are they able to form the many partnerships necessary for E-Commerce. New entrants like Webvan, E-loan and Vertical.net are moving much faster in value creation. Sometimes supported by incubators or venture capitalists like Softbank and CMGI, they are growing rapidly and are able to buy traditional companies easily with a share deal, based on their high stock valuation. And so the members of the new economy are eating the representatives of the old.

In an earlier article, I already referred to Softbank as a very important Internet investor and early facilitator of companies like Yahoo. CMGI is also one of the chief architects of the Internet. What began as a direct marketing firm has become a prolific investor in the future of the Internet. Concentrating on marketing and advertising, content and community, E-Commerce, and technology companies, CMGI has packed its portfolio with stakes in more than 55 Internet companies, including Engage Technologies, Furniture.com, iCAST, Lycos, MyWay.com, and Vicinity. CMGI also owns 83% of AltaVista, which it is taking public. The firm nurtures new companies in-house and invests in others through its @Ventures funds.

Dot.corp or dot.com?

As a result of all these developments, the business world is aware that the older, more traditional companies are moving too slowly. Furthermore, it is clear that tremendous risks are involved with new E-Business investments. More and more companies, along with commercial partners as well as venture capitalists and other financial institutions, are launching new activities outside the existing organization. We call these in common parlance, dot.com activities, which are the opposite of dot.corp activities, the phrase for inner company activities. Forrester research has a very simple questionnaire to answer the strategic question: Should we go dot.com or dot.corp ?

Dominant factors indicating that a new activity should be dot.com: if the mother company :

• is a late mover
• has low distribution control in the channel
• is a bureaucratic organization
• has a decentralized organization

Summarizing: If a company has fallen behind, the organization is fragmented, and it is not able to cooperate across the business unit borders, go dot.com .

Conclusions: the moral for E-Finance

We are now able to draw the following conclusions:

• Dont listen to old traditional-oriented investment Gurus anymore.
• Think more in future market power rather than in P/E ratios.
• Seek investments with tornado power.
• Transform your company (and do it fast if youre in a high-change industry).
• Use venture capital for new risky investments.
• Go dot.com when the company culture is not entrepreneurial.

In nearly all cases in Europe, this list calls for new leadership. The CEO has to be an entrepreneur and a turnaround manager at the same time. This combination is hard to find. Consensus management should be avoided. It helps if the CFO is an entrepreneurial investment thinker, with great interest in value creation, not primarily a bottom-line thinker. The CFO should be a financial engineer who always thinks about two main routes, going dot.corp or dot.com . In the case of selecting a dot.com, new questions arise: In the case of success, should the CEO opt for an IPO, to sell the new activity, or for integration with the old company? And if the answer is to integrate with the old company, which one is acquiring the other: the new one or the old company?

Statements:

1. E-Finance is always connected with outside funds and partnerships. Explosive growth needs spread of risk.
2. Thinking only dot.corp is a deadlock. The integrated company is not longer sacred.
3. Value creation is more a matter of charisma and market approach than P/E ratios.
4. Without very good contacts with Venture Capital companies and their networks, there cant be sufficient connection with innovation.

De bijdragen in m@n@gement van onze correspondent in Silicon Valley oogsten veel waardering. Burt Rost van Tonningen heeft zijn bijdragen verwerkt en gebundeld in een integrale visie op E-commerce, E-organization en E-strategy met als titel:

"PREPARING FOR THE E-TORNADO:
Observations from a European in Silicon Valley"

In november 2000 heeft Holland Business Publications dit boek gepubliceerd. U kunt het on-line bestellen .