How did dotcom companies become so overvalued in the late 1990s?

By Andrew Beattie AAA
A:

A great example of a dotcom company that suffered the classic fate of many in the 1990s was VA Linux.

VA Linux specialized in hardware, computers and servers that used the Linux operating system as opposed to the Windows version. The founders, Larry Augustin and James Vera, had discovered a niche in the hardware business. In the throes of the internet boom, when a "back of the napkin" business model was considered too formal for the new paradigm, a profit-making tech company that was not traded publicly was unthinkable. Thus, VA Linux was cajoled into an IPO.

The VA Linux IPO was an extremely hot issue. In retrospect, it has become a good example of just how out of control the dotcom bubble became in 1999. On December 9, 1999, VA Linux shares went on sale at an offering price of $35. By the end of the trading day, they were selling at over $235. Later that week, they broke $300. Normally, a steep rise in share price is to be expected as unseasoned securities are snapped up and traded by speculators. A rise of almost 700%, however, would seem to suggest gross negligence on the part of the investment bank underwriting the issue. Not that the founders of VA Linux were complaining; in a single day, they had gone from owning a company of modest profits to paper millionaires - siliconaires, to use the lingo of the times.

Unfortunately, the VA Linux IPO came just before the dotcom bubble popped. Over the following year, Augustin and Vera watched their company shed value at an alarming rate. By April, their stock was down below $50. By December, it was trading for less than $10. In 2001, VA Linux flirted with becoming a penny stock. In 2002, the stock spent most of the year trading for less than a dollar. From 2001 onwards, VA Linux, renamed SourceForge Inc., reworked its business into a software development firm - a move that helped the company rebuild. In 2006, SourceForge recorded its first profit since its IPO. In 2008, the company has traded around the $1-3 range - a far cry from the $300 it once commanded.

This question was answered by Andrew Beattie.

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