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Demise of theglobe.com says it all

Failure of Web site is a fitting and symbolic end
to one of the costliest misadventures on Wall Street

By Christopher Byron

Aug. 6 — The news that theglobe.com, Inc. is closing its Web site, effective a week from this coming Wednesday, brings a fitting and symmetrical end — at least in a symbolic sense — to one of the costliest misadventures in the modern history of Wall Street. We speak, of course, of the dot-com craze that swept American capitalism in the final, blow-out phase of the 18-year super bull market that began in the depths of the Ronald Reagan recession in August of 1982 and ran essentially without letup until March of 2000.

EVERY BULL MARKET breeds its oddities and excesses, and the super bull market that spanned the last 209 months of the 20th century and the first three months of the 21st was no exception. Scarcely had the rally gotten going before excess capital from money center banks like Citicorp and Continental Illinois was pouring into Third World sovereign debt in what quickly became known as the Latin Debt Bomb.

This was followed by the Sunbelt and oil patch bubbles, in which the balance sheets of big and presumably savvy investors like Prudential Insurance wound up filled to overflowing with see-through office buildings and interests in worthless REITs. After that came the S&L debacle and the junk bond fiasco that sent Michael Milken to prison and brought about the collapse of Drexel Burnham.

But when the full measure of excess — in all its broadest ramifications — is finally taken for the greatest and last bull market of the 20th century, no misallocation of capital is likely even to come close to the incredible and infantile waste embodied in the dot-com IPO craze of the boom’s final and most egregious four years … the perfect expression of which turns out to be, appropriately enough, the lurid 33-month birth and death throes of theglobe.com.

Given the right circumstances, one can see how otherwise sensible investors might have invested in rusting oil drilling rigs, or empty office buildings, or even junk bonds collateralized by other junk bonds. Given the right circumstances, a fellow might even hand over his money for rights to a tube of bull semen or a sack of jojoba beans. But what person, in any state of mind, would have paid $97 per share for stock in a company that the underwriter itself said was worth no more than $9, when the company was actually being run by two late-adolescent boys who hadn’t yet learned to clean up their dorm rooms?

Well, as the saying goes on Wall Street, 10,000 lemmings can’t all be wrong … which is simply to say that numberless investors did exactly that — and have kept on investing in theglobe.com all the way down until we now find it trading on the OTC Bulletin Board at 14 cents per share, on the way to liquidation.

This one company — more than all the others — captured the utter and complete waste of the entire dot-com frenzy. Theglobe.com was the Burma Shave sign, planted over and over again, on the highway to ruin.

Consider the phenomenon of the instant dot-com zillionaire. As the dot-com bubble swelled, it became commonplace to read newspaper stories about dot-com millionaires who were still in their 20s but were said to live in 12,000-square-foot palaces outside San Francisco, or beyond Seattle, or in Greenwich … young men and women who had gone straight from college (if they even got that far) into the world of the digital superrich.

‘PAPER MILLIONAIRES’

Well, the two young men — children actually — who started theglobe.com weren’t inventions of some public relations hustler from Edelman Worldwide; they were honest-to-God, overnight, zero-to-hero “paper millionaires.” They had no knowledge of business, no experience in life, they were in fact still not much more than students from Cornell when they became — thanks to the IPO for their company — instant demi-billionaires.

The TGLO deal was also representative of another phenomenon of the dot-com IPO era: the scruple-free underwriter prepared to bring almost anything to market if enough knuckleheads could be lined up to buy it.

The underwriter in theglobe.com’s case was Bear Stearns Cos., the New York investment firm. In 1997 the firm was the subject of a devastating cover profile in Forbes magazine (“Sleazy Doings on Wall Street; Why Did Prestigious Bear, Stearns Get Cozy With so Many Discredited Bucket Shops?”) Two years later, the firm was fined a record $38.5 million for aiding and abetting the penny stock swindles of one such shop, the now-defunct boiler room operator A.R. Baron & Co. Ancillary fines in the case continued to be levied against Bear as recently as last week.

Bear Stearns was the company that took theglobe.com public in its IPO. In fact, during Bear’s first attempt to take the deal public, at $14 per share, the offering was viewed as such dross on the roadshow that the underwriter had to withdraw it and mark down the price. In the second go-around, at a markdown price of $9, Bear had more success — not least because the whole market was boiling as a result of the Federal Reserve’s efforts to ramp up world liquidity following the Russian ruble crisis and the collapse of Long Term Capital Management.
When the deal finally did go public, market makers and insiders in the IPO swindled millions — and ultimately, billions — from public investors by setting the price of the stock at grotesquely inflated levels, then selling into the after-market.

Not only was the marketing of the IPO bogus, but so was a follow-on stock offering, in May of 1999, which lifted an additional $65 million from the public market — this time on the false claim that the Web site possessed more visitors than it really did. When I published a column explaining, in detail, exactly how the public had been misled, the New York State Attorney General opened an investigation. But two years passed before the case was completed, and theglobe.com agreed not to do it again. Yet the agreement was functionally pointless since, by that time, theglobe.com’s share price had plunged from $20 to less than 25 cents, and the company could not raise any more money anyway.

JUST A GAME?

Even in its death agonies, the company continues to treat its shareholders with disdain — as if they were nothing more than stupid people who need to be separated from their money. In its Aug. 3 press release announcing the closing of its Web site, the company’s CEO, one Chuck Peck, was quoted as saying, “The decision to discontinue our community operations, which contribute disproportionately to our operating losses, allows our senior management team to focus solely on theglobe.com’s core strength — games.”

That is about as weaselly a statement as it is possible to make regarding the company. That is because theglobe.com has no “core strength” — games or otherwise. Total revenues for the three months ended March 31 were a mere $4.7 million, and when you shut down the Web site, there’s nothing left but $2.3 million from a games magazine that the company acquired roughly 18 months ago. According to the company’s year 2000 annual 10K filing with the SEC, this money-losing magazine last year cost nearly $12 million simply to print, and those outlays are certainly greater now since circulation is greater. In other words, on the numbers stated, it is hard to see how the company can make any money at all, even on a gross margin basis.

SPOUTING NONSENSE

Statements like these have been typical of the rhetorical waltzing that has characterized the dot-com phenomenon throughout its entire life, from birthing room to morgue. When sell-side financial analysts spoke of “new paradigm” concepts for stock valuation, they knew they were spouting nonsense. They knew it was demonstrably absurd to speak of “revenue growth” as a way to determine a stock’s worth in the market. They knew it was all baloney, but they spouted it anyway — because the fees their firms stood to earn (and thus their own bonuses) were so enormous. In other words, the temptation proved too great to resist, and they simply wound up stealing from the market.

How much was stolen? Coming up with a precise number is almost certainly impossible. But one way to look at the matter is to make reference to the infamous “Internet Suckers Index” I began publishing on an irregular basis — and to much derision — as the dot-com bubble swelled ever-larger. Eventually, the value of this index topped 25 percent of the market value of the entire Dow Jones industrial average, representing more than $500 billion that has now simply vanished.

But these weren’t just paper losses, they were real losses, of actual wealth — a lot of which had been monetized through loans and plowed into real estate and yet more stock. Now it’s all gone, and the whole of Washington is frantic to figure out a way to get it back. But it’s not coming back — because there was never any business in them to begin with. Of the more than 400 Internet stocks we monitored on a regular basis during the course of the boom, only seven are still in positive territory from their offering prices, with nearly every other one having lost more than 95 percent of its value; most have simply gone out of business and disappeared.

In the process, the economy has been wounded, lives have been destroyed, and families and careers have been convulsed and disrupted. And a few rich people, who knew how to manipulate stocks on Wall Street, are now richer than ever. It’s enough to make you lean into the gutter and vomit.

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