1) Objectives of the case:
To understand and evaluate the dramatic rise and fall of the stock prices of the Web consultants, along with many others in the Internet sector, during the dot come bubble of 2000. It was question that boggled minds, as to how this could have happened in a relatively sophisticated capital market like that of the United States. To discuss the role of capital market intermediaries in the dot-com of 2000 and to check whether their incentives were properly aligned with their intended roles. To evaluate why the market allowed the valuations of many Internet companies to go so high, and what was the role of the intermediaries in the process that gave rise to the stock market bubble. To go through the details regarding the various intermediaries involved in the situation, including Venture Capitalists, Investment bank underwriters, sell-side and buy-side analysts, etc. To understand the profound role played by information, retail investors and the dot come and internet consulting companies themselves, in taking the stock prices to such momentous heights and such punishing lows. To brief the blame game scenario and the consequences of the dot com crash that led to such a scenario.
2) Observations of the case:
There was a steady and momentous rise of the stock prices of Internet consulting and dot com companies, which made their debut roughly around 1997. Stock markets in industrialized nations saw their equity value rise rapidly from growth in the Internet sector and related fields, with the steady commercial growth of the Internet with the advent of the World Wide Web, as exemplified by the first release of the Mosaic web browser in 1993, and continuing through the 1990s. There was a clear value shift that was taking place from PC focused technologies to those that were based on the global information network. Network based companies such as Microsoft, Cisco, Pets.com, AOL, Netscape, etc., saw huge turnovers and capital marketization. There was a continuous growing trend towards believing that the internet was going to change the world profoundly, through greater computing power, ease of communication and the host of technologies that could be built upon it. Scient Corporation, considered a leader in the Internet consulting space, had a fast paced growth from a small information technology company to one with 2000 employees and silver spoon clients. Its stock prices had reached over reaching values of around $134 per share in March 2000, but dramatically dropped to $2.94 by February 2001. The intermediaries had a key role in accelerating the dot com crash. Venture Capitalists, who provided capital for companies in their early stages of development and screen bad investments from good ones, were blamed because they had encouraged investment in too many of the failed dot coms. They were blamed to have been influenced by the euphoria of the market. VC firms had invested in companies in the late 1990s, which they wouldn’t have under normal circumstances. Sell side analysts, who typically interacted with buy side analysts and portfolio managers at money management companies to ‘buy’ or ‘sell’ their ideas, found themselves the target of criticism for having buy ratings on companies that had subsequently fallen drastically in price. The ‘Big Five’ companies, PriceWaterhouseCoopers, Deloitte & Touche, KPMG, Ernst & Young and Arthur Anderson, came under some criticism for not adequately warning investors about the precarious financial positions of some companies.
3) Need for intermediaries
Financial intermediary is an entity that acts as the middleman between two parties in a financial transaction. While a commercial bank is a typical financial intermediary, this category also includes other financial institutions such as investment banks, insurance companies, broker-dealers, mutual funds and pension funds. Financial intermediaries offer a number of benefits to the average consumer including...
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