-Caveat Lector-
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US Stock Market
Internet Stocks and Asset Price Inflation
We'll buy you with printed money (stock certificates), write down big
numbers, and call it square
How do you compare the value of blue sky and hot air?
To put it another way, what does it mean to say that Yahoo!'s purchase
of Broadcast.com valued the acquired company at $5.7bn (�3.5bn)?
On the face of it, that's a lot of money for a company which lost $16.4m
last year on revenues of $22m.
But of course Yahoo! wasn't paying in real money. It was handing over
its own shares, trading at 1,634 times earnings.
In a traditional all-paper acquisition, the shares of the acquiring
company are a genuine currency, founded on underlying assets or cash
flow. It is fairly easy to tell how much is being paid, and whether it
is too much.
In the virtual world of internet stock swaps, all this is meaningless.
Quite apart from the intangible nature of Yahoo!'s business, there is
little free float in its shares.
At end-1998, less than 20 per cent of Yahoo!'s stock was in the hands of
the investing public.
If the big shareholders tried to sell their 80 per cent plus in the
company, to crystallise the theoretical value of the stock they own,
they would not be able to get the open-market price.
That does not mean the current stock price is wrong. It could be right.
It could even be too low. The true value of the company is simply
unknowable. Similar conditions apply to Broadcast.com.
The exchange of paper between the two sets of shareholders is just that,
an exchange of paper - no matter how fancy the engraving on the stock
certificates.
If you are a Broadcast.com shareholder, you are trading in one
hypothetical future for another. Both are equally obscure - and
apparently equally rosy, since shares in both companies jumped when the
deal was announced.
We used to marvel at these stock valuations. Now, amazement has been
replaced by a sort of dead-pan humour, as in this quote from last week's
New York Times: "On its second day of trading yesterday, Priceline.com,
an internet service that sells discount airline tickets, rose in value
to $11.7bn, more than any airline in the world."
Amazement. Straight-faced humour. Both reactions are plausible. But
here's an alternative view of what's going on. It's the democratisation
of the stock promotion business, the creation of an equal-opportunity
boondoggle.
Think back to the great stock promotion booms of the past century -
railways, mining, the car industry, electrification, radio, television,
electronics. They have all involved the creation, merger, re-creation,
consolidation and endless restructuring of a host of hopeful companies.
The underlying technology was real. But most of these early ventures had
no more claim to longevity than the average internet stock.
In the background, there have always been shadowy promoters, people who
carry out a string of corporate transactions, each time watering the
stock or finding another way to profit from the process.
Each time, the public clamours to join in, and briefly makes paper
profits. Some individual investors even manage to cash out in time.
Eventually, though, reality takes over. Stock valuations plummet. Many
companies collapse, or are swallowed up by the survivors at a pittance
of their top-of-the-market price. Even the survivors take decades to
regain their peak value.
As night follows day, the pattern will recur. With one significant
exception: the shadowy stock promoter has given way to the geek. A huge
over-supply of venture capital, and the very low capital requirements of
the internet business, have between them eliminated the need for an
intermediary.
True, investment banks and lawyers still earn fat fees from taking
companies public. But the real money was always made by the stock
manipulators - and this time, those profits seem to accrue mostly to the
companies' founders.
On paper. Because the run-up in internet stocks has been so big, and so
fast, that it has had one unexpected effect. It has closed off the
opportunity for conventional companies to pay real money - in the form
of cash or traditionally valued stock - for internet companies. At the
height of the 1960s electronics boom, Xerox paid around $900m for
Scientific Data Systems. It was a disaster, of course.
This time, conventional companies would certainly be making the same
sort of mistake, if they could afford it. But Xerox was paying only 90
times earnings for SDS. Today, with companies such as Broadcast.com
selling at 260 times revenues, mistakes like SDS are simply out of
reach. Only internet companies can afford to pay those prices, because
they are not using real money. So the wave of deals that traditionally
accompany the early years of a promising new technology are taking place
in a vacuum, unconnected to external valuations.
That makes the notional prices that are paid all the more unrealistic.
But it also minimises the damage to real-world acquirers, by pricing
them out of the market. And it ensures that the geeks are rewarded
largely with paper profits, not real ones.
No traditional stock promoter worth his cigars, silk hat and French
mistress would have settled for paper. But in a virtual industry, you
must expect virtual profits.
The Financial Times, April 6, 1999
Der Fuhrer Conquers Yugoslavia
"See the NATO Unity. See? Over There, Quick!"
"We have a plan. Somewhere . . . Does anyone know where we put the
plan?"
THE Clinton administration denied mounting evidence yesterday that it
had ignored warnings of failure from top military commanders when it
launched the air war on Yugoslavia.
The Washington Post, America's most important political newspaper,
reported in detail on a secret meeting last month at which senior
commanders told American officials that the air and missile bombardment
had scant chance of achieving Clinton's goals.
Amid signs of splits and confusion in Washington and Nato, officials
struggled to paint a picture of an alliance heading for victory. There
is disagreement over war aims, targets, Slobodan Milosevic, a land
battle and who has the final say. Cabinet members encountered deep
scepticism as they insisted in television interviews that their plans
were coherent.
In a series of morning network broadcasts, William Cohen, the Defence
Secretary, was asked: "Is this an exercise in futility?" It was frank
incredulity of this sort which decisively turned public opinion against
the Vietnam war a generation ago. Support for the Balkan war is
increasing but so is doubt over tactics.
In a Newsweek poll, 54 per cent of Americans said they believe ground
forces should be sent to subdue Milosevic but 44 per cent think bombing
is making things worse for refugees. So the American-led Nato campaign
is increasingly failing to reflect the drift of opinion.
Mr Cohen dismissed as "not true" the notion that Mr Clinton overrode his
military advisers' warnings. The Post reported in detail a discussion in
the Pentagon's secure "tank room" at which top generals opposed military
intervention and complained about the White House's lack of long-term
vision for the Balkans. "I don't think anybody felt like there had been
a compelling argument made that all this was in our national interest,"
the Post quoted a senior officer as saying.
Even Gen Henry Shelton, chairman of the Joint Chiefs of Staff, was
doubtful and led other senior commanders in challenging the "domino
theory" put forward by Madeleine Albright, the Secretary of State, who
said that hostilities to protect Kosovo were needed to prevent a much
wider Balkan war.
Eventually the military agreed unanimously to go along with the air war
- they were bound to unless any were prepared to resign in protest - but
Mr Cohen acknowledged there had been "divisions" and "doubts" at first.
By the time the top brass came round, the President had narrowed the
military objective to "diminishing" Belgrade's armed forces, which
critics say is such a vague and limited aim that success can be declared
at almost any time.
There is confusion too about the circumstances in which ground troops
would be used. Mrs Albright suggested on Sunday that Nato infantry might
go into Kosovo if bombing created a "permissive environment" for them,
hinting that this did not necessarily mean only a full peace agreement.
But Mr Cohen said: "We're not changing our ground troops policy", which,
so far, has been that infantry would enter Kosovo as peacekeepers only.
Splits in Nato also widened. Mrs Albright, like Tony Blair, suggested
that the Allies' aims might include the forceful removal of Milosevic.
None of the 17 other member countries is saying any such thing. Amid a
battery of mixed messages, it is becoming clearer by the day that Gen
Wesley Clark, Nato Supreme Commander, is being second-guessed by
politicians.
Nato members boast about their unity but it is being achieved, say
insiders, by the more hawkish Americans and British agreeing to fall
into line with Italians, Greeks and others waging war in a tentative
fashion. This "war by committee" has produced the gradually intensifying
bombardment rather than the instant overwhelming force which many
military men would prefer.
Although Washington has not officially admitted any failure in one of
its key aims - to prevent Serb repression of ethnic Albanians - Mr Cohen
acknowledged as much yesterday when he said: "What we have said is that
we would try to deter Milosevic from engaging in ethnic cleansing.
"Failing that, we are going to start taking down his military by
diminishing and degrading it. We're in that process now." The White
House is suggesting that it could take three more weeks to determine if
the air war has worked, but Milosevic might have virtually emptied
Kosovo of ethnic Albanians by then.
The London Telegraph, April 6, 1999
Headhunting
Microsoft Research Center Raids the Universities
Lures Elite Professors with Stock Options and Money
REDMOND, Washington - The company well known for its aggressive
domination of the software world has set itself a new target: the best
minds of academia.
With cash, stock options and the promise of vast resources, Microsoft
Corp. is luring faculty elites to its research center at a pace so fast
that some campus departments say they are being picked clean.
Last month, Microsoft hired Lazlo Lovasz, a mathematician and recent
winner of his field's prestigious Wolf Prize, away from Yale University.
He will start in June and will join, among others, Michael Freedman, a
Fields Medal-winning mathematician from the University of California at
San Diego, and Jim Blinn, a MacArthur fellow and computer graphics
expert from California Institute of Technology.
Microsoft Research, known as MSR, is aiming for a ''faculty'' of 600
people by the end of next year. It already is among the biggest computer
science laboratories in the world, with 350 researchers.
But while other private research labs, including Lucent Technologies
Inc.'s Bell Labs, IBM's T.J. Watson Research Center and Xerox Corp.'s
Palo Alto Research Park, recruited faculty stars long before Microsoft,
no company has raided universities so brazenly, university
administrators said. And none has offered such stock options as those
that have mass-produced so many Microsoft millionaires.
Microsoft Research is seeking big names in computer science foremost,
but also leading thinkers in graphic arts, linguistics, biology and
mathematics. While they may never write a piece of software, they could
hatch ideas that the company's programmers one day might turn into
big-selling products.
Here on a lush-green campus crisscrossed by shuttle vans painted with
the Microsoft slogan, ''Where Do You Want to Go Today?'' the software
giant is practicing its so-called dinner-party philosophy of basic
research: By assembling the right mix of brilliance, eliminating the
usual concerns such as teaching, tenure and grant-proposal writing, and
leaving people free to develop ideas, it hopes to generate the next wave
of great computing.
But some school officials say Microsoft's elite guest list is depleting
their own.
''Microsoft Research has become a parasite on the academic
establishment,'' said Jim Morris, chairman of the computer-science
department at Carnegie Mellon University. ''They are eating our seed
corn. If you take away great people from schools and put them in a place
where they're not teaching anyone, who will train the next generation?''
Microsoft officials deny that they have spurred a university brain
drain. Nathan Myhrvold, the company's chief technology officer, said MSR
probably hired six full professors a year. The rest are junior-level
professors and Ph.D.s. ''We haven't taken all that many top people in
all,'' he said.
Some universities scoff at this, saying that Mr. Myhrvold is counting
only fully tenured professors, a shallow measure of a department's
teaching cache. And a few departments have been hit undeniably hard:
Carnegie Mellon, for example, beginning in 1991, when a computer
operating system expert named Rick Rashid left to become MSR's first
director. Since then, ''between 15 and 20 top people'' have followed,
said Raj Reddy, dean of Carnegie Mellon's computer science school. ''You
never can completely recover from this,'' he added.
Still, Mr. Reddy is a member of Microsoft's high-tech advisory board, a
group of deans and department heads - many of whom, like Mr. Reddy, have
been hurt by the company's talent hunt.
While seemingly at odds, Mr. Reddy's joint roles underscore the mixed
feelings of many in academia toward Microsoft. On one hand, the company
is depleting universities' staff. But on the other, ''Microsoft is not a
clear-cut force for bad,'' said David Dopkin, Princeton University's
computer science chairman. The company, he said, should be praised for
contributing to basic research when other corporations were cutting
back.
Microsoft spends $3 billion a year on research and development. Carnegie
Mellon's total endowment, by comparison, is $600 million. In recent
years, the company has opened basic research labs in Cambridge, England,
where the Cambridge Science Park has helped create about 1,200
high-technology companies, as well as in Beijing and in Silicon Valley.
The main facility in Redmond, Building 31, has a giddy
Nerd-in-Wonderland quality. Barefoot Ph.D.s mingle with computing
legends such as Gordon Bell, the pioneer of the 1960s, who last month
was seen fumbling with an office printer.
Company officials insist MSR is not at odds with the broader goals of
academia.
Researchers often retain affiliations to their former schools, and the
papers they publish benefit scholarship in general. Likewise, the
company has courted university favor with $80 million a year in cash and
software ''gifts.''
This is not pure altruism. Microsoft wants university scientists to
invent things that will support its software. Until the practice was
stopped last year, Microsoft paid faculty members $200 to lecture at
conferences at which their speeches were deemed sufficiently
pro-Microsoft.
While universities might bemoan Microsoft's recruiting drive, no one is
forcing the professors to leave. In fact, they are inundating Microsoft
Research with job inquiries, often through former colleagues.
Steve Clyne, a staff recruiter, said MSR received 50 to 200 such
inquiries a month and that 80 percent of those who were offered
positions accepted them. Base salaries, well into six figures for senior
researchers, are on a par with those at most major universities. But
stock options are the ''X factor,'' and it doesn't take a Wolf Prize
winner to calculate the profits reaped by Microsoft options-holders in
this decade.
''Stanford has stolen people from us before, but at least that was a
level playing field,'' said Mr. Dopkin of Princeton, who has lost two
top professors to Microsoft. ''Microsoft is implicitly saying, 'If you
come here, in a few years you will probably be a millionaire.'''
Researchers insist they have not been lured merely by wealth. In a dozen
interviews last month, they characterized Building 31 as research
nirvana where ideas could transcend the numb abstraction of academia and
shape a mass market. Several MSR innovations have found their way into
software.
''To me, this corporation is my power tool,'' said Steven Shafer, a
Microsoft researcher who came from Carnegie Mellon in 1995. ''It's the
tool I wield to allow my ideas to shape the world.''
International Herald Tribune, April 6, 1999
-----
Aloha, He'Ping,
Om, Shalom, Salaam.
Em Hotep, Peace Be,
Omnia Bona Bonis,
All My Relations.
Adieu, Adios, Aloha.
Amen.
Roads End
Kris
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