The value of the European internet sector halved during the fourth
quarter of last year, closing the year with a total market
capitalisation of €100 billion (£62 billion), eroded by continuing
high marketing spend and a loss of investor confidence according to
a report issued today.
The findings come from "PricewaterhouseCoopers Internet 150", a
quarterly analysis of cash burn rates (the length of time a company
can survive before needing additional cash to stay alive) and share
price performance of the top 150 publicly listed European internet
companies, done in conjunction with e-business strategy
consultants, Fletcher Advisory.
The 150 companies in the study underperformed the FTSE 100,
NASDAQ and TechMARK. The fourth quarter saw business to business
(B2B) stocks in particular lose ground, losing 51% of their value
over the quarter compared to a 38% drop in the value of business to
consumer (B2C) stocks.
According to PwC, the overall slump masks increasing
polarisation between the best and worst performing internet
companies in Europe. While the worst performers shed well over 75%
of their value, the best performing companies nearly tripled their
value. Germany’s stronghold on the sector was eroded over the third
quarter, with German companies accounting for 35% of the index by
value compared to 45% previously.
The research and analysis revealed a slight deterioration in the
burn rates of European internet companies during the third quarter
of last year (most recently available financial reports), driven by
depleted cash holdings and increased spending. Among the key
findings:
- Only 28% of companies in the sector are profitable, a fall from
41% in the second quarter;
- The average burn rate is 18 months compared to 20 months in the
second quarter; and
- B2C companies continue to be most vulnerable, with an average
burn rate of 16 months compared to 21 months for B2B
companies.
According to PwC, internet companies failed to build on the
second quarter trend for improving burn rates, choosing instead to
continue with high marketing spend in a bid to position themselves
as attractive candidates for M&A (merger and acquisition)
activity.
Commenting on the findings, Kevin Ellis, a partner in PwC
Business Recovery Services, said:
“Given some of the high profile dot.com
insolvencies last year, we might have expected some belt-tightening
from companies in the sector. Instead, the typical internet company
increased spending on marketing and overheads by 11% in the third
quarter, bringing the total spend to more than 150% of gross
profits.”
Despite burn rates remaining fairly static during the third
quarter, the report notes that more prudent management by a number
of companies have enabled them to distinguish themselves from the
rest of the sector and go some way to regain the confidence of
investors. The most profitable European internet companies
outperformed the 150 companies in the study, characterised by a
more attractive ratio of marketing and overhead costs to sales.
Companies within the top quartile of the index spent 64p for every
£1 of revenue they made, compared to the £1.25 spent for every £1
of revenue by companies in the bottom quartile.
Kevin Ellis said:
“Profitable dot.coms are exercising greater
discrimination over their spend, moving away from expensive
advertising to more targeted marketing activity – something the
advertising industry may feel the effect of during 2001.”
”Market sentiment is now strongly biased
towards profitable dot.coms, which marks a turnaround from the
first half of last year when the focus was on long-term value. We
expect polarisation between the best and worst performers to
continue during the fourth quarter and into 2001, leading to
further consolidation in the sector. We may also see a flow of new
e-business propositions from bricks and mortar companies due to the
negative market sentiment towards – and lack of funding for –
dot.com start-ups.”
Stephen Adler, a director at Fletcher Advisory, commented:
“We expect to see internet businesses coming
to terms with conventional business realities. Consequently the
weaker companies are likely to be shown the back door by investors,
leaving the market clearer for the well-managed businesses to set
themselves up for the long term.”
A copy of the report, PricewaterhouseCoopers
Internet 150, is available. Registration is required.
