Tech Titans Enduring a Wild Ride


When Marcos Sanchez and 11 colleagues sold their fledgling Internet company to San Francisco-based Macromedia Inc. last March, they pocketed 860,000 shares of the multimedia software company's stock, worth a tidy $32 million.

"It was a nice nest egg," recalls Sanchez, now a product manager with Macromedia.

The nest egg isn't quite so nice anymore. The months-long plunge in technology stocks--which became downright vertiginous before the market started to turn around midweek--has slashed Sanchez's holdings by half; those 860,000 shares are now worth "just" $16 million.

In Silicon Valley and other high-tech pockets, the great technology stock bust of 1996 has brought to a jarring halt a long era of easy money and ballooning paper fortunes.

In the blink of an eye, managers like Sanchez who had seen their fortunes rise exponentially have watched much of that wealth get erased. And lower-level employees who had accepted stock options in lieu of high salaries are wondering if they've been had.

Even in the face of this net-worth meltdown, good humor and a stiff upper lip are for now the order of the day for everyone from top executives to sales managers and software engineers. It's not clear whether the declines of the last few months are a temporary setback or the beginning of a long slide, but technology entrepreneurs--fittingly--tend to take the optimistic view.

But the financial carnage has been broad and deep. Since reaching its peak on May 20, investment firm Hambrecht & Quist's broad 250-stock technology index has plummeted about 18%, with several individual issues sinking more than 60%. The net loss of value among those companies alone for the two-month period was nearly $90 billion.

Much of that wealth was held by mutual funds and institutional investors, but individuals owned a good chunk too. Furthermore, a number of companies that had been planning to make initial public offerings--and thereby enrich their founders and employees--have pulled back in the face of a weakened market.

"On the IPO side, the door has slammed shut," said Charlie Federman, managing director of Broadview Associates, a Fort Lee, N.J., advisor on information technology mergers. "Institutions don't have the stomach to take another Yahoo in the portfolio."

Speaking of Yahoo, shares of the sassy Sunnyvale, Calif., company, which provides an index to content on the Internet, are languishing in the high teens after spiking at a high of $43 on the first day of trading in April.

Said Jerry Yang, the company's 27-year-old co-founder and self-titled "Chief Yahoo," attempting to sound philosophical beyond his years: "I haven't sold any stock since we went public, so I have as much now as I had when I started the company."

Even so, Yang has to feel a bit whipsawed. On Yahoo's opening day, he saw his net worth soar to $215 million from $65 million before it settled in at $165 million. His current fortune is still far from paltry at $95 million.

As a founder, Yang is handsomely rewarded. But for many working the typical 12-to-14-hour days at Silicon Valley start-ups, stock helps to compensate for salaries thousands of dollars below those at more established companies. And many workers are trying to take the long view of the recent beating tech stocks have been subjected to on Wall Street.

Internet phenom Netscape Communications Corp.'s stock has soared as high as $82 per share and plummeted to $22.875 in the 11-plus months since it went public. "We're used to this," said one engineer who asked that he not be named. "But I'd hate to figure out how much I've lost."

Once employees of high-tech start-ups are allowed to sell stock, they find themselves enmeshed in a terrible guessing game: When is the right time to sell?

"Strangely enough, the real nail-biting time is when the stock is high and not when it's low," the Netscape engineer said. "That's when you start checking the price every hour.

"In the back of my mind, I think I'll be able to send my daughter to the Sorbonne on the stock I sell five years from now," he continued. "But at the same time, I know I could be wrong, so I'll take the next opportunity to sell some more stock."

The recent plunge for some is "a little bit abstract," said Michael Marks, chief executive of Flextronics, a San Jose maker of mouses for Microsoft and other electronics products. Computing the downturn in his own fortune--including stock as well as options to buy more shares--he came up with a "paper" loss of $5 million, or about half its previous value.

"I don't think I feel poor," Marks said. "I'm not really worried about eating."

The technology decline felt more real and immediate for Doug Carolus of Monrovia. His spirits sank because a drop in shares of AT&T; means he will have less money to pay his $26,000 tuition bill when he begins his second year of USC's executive MBA program this fall.

Carolus, 41, a sales manager for Lucent Technologies, recently spun off from AT&T;, still holds shares of Ma Bell in his long-term savings plan. He plans to borrow against them to cover his schooling.

Sanchez of Macromedia is trying to heed some of the lessons he gleaned while working in marketing at discount broker Charles Schwab & Co.

"The first thing I learned about the market is if you're a heavy trader, you have to have millions or be willing to lose millions," said Sanchez, 26. "You can't get too caught up in the ebbs and flows of it or you'll go nuts."

One immediate effect of the market's downturn has been to put a chill on the ability of small companies to raise money on the equities market. In the quarter that ended June 30, 250 companies raised $18 billion, 50% more than the previous three-month record set at the end of last year.

Now that window may be slamming shut; 150 companies are waiting to do initial public offerings, but dozens of them are expected to postpone or cancel those plans or to accept much lower valuations.

Wired Ventures Inc., the San Francisco-based publisher of Wired magazine, said last week that it will put off until fall its attempt to raise nearly $76 million by offering 6.3 million shares. Pasadena-based Earthlink Network, a fast-growing Internet access provider, also pulled back a planned IPO last week.

Wired's managing editor, Russ Mitchell, kept up a brave front. "We're ready to go if the market rebounds," he said.

Mitchell, former San Francisco bureau chief for BusinessWeek magazine, took a "slightly" lower salary when he signed on with Wired nearly a year ago. To compensate, he was given the option to buy stock, although he declined to say how many shares of Wired he owns. The 3-year-old company has yet to turn a profit.

"I believe in Wired and high tech," he said. "I have 100% of my 401(k) in technology stocks."

Not all were as sanguine. A Silicon Valley marketing consultant in his mid-50s, who asked not to be named, recently traded away almost half his fee for stock in a start-up company he advises.

Although he could have recently sold the company's stock for $24 per share, he held on. "I want to sell it at $30--at $30 I come out pretty good." he said. The stock is trading in the mid-teens.

Internet companies, which have received the most inflated values, could be hit hardest. Some companies--including Mountain View, Calif.-based Excite, which develops "search engine" software for searching the Internet and recently went public--have watched their stock prices drop by 50%. More established tech companies could see a silver lining in the downturn. Programmers developing for the Internet might find themselves turning toward products of established players.

"You don't want to use products that will soon get antiquated," said Gary Flanzer, a Seattle-based developer for the World Wide Web. "I think you are going to see more people put their faith in a company like Microsoft."

Indeed, companies such as Microsoft Corp. can offer new hires not only stock options but also staying power. If stock values stay depressed, start-ups will find it harder to compete for talent.

Executive compensation experts said the downturn in share values could tempt some companies to "re-price" executives' options at lower values so that the options do not become worthless. But doing so, the experts said, would compromise years of efforts to link executive rewards more closely with shareholders' interests.

Many expect the crunch will lead to an early shakeout among Internet-related companies, for which profits have been elusive or illusory. That could end up being good news for the market, as companies with solid fundamentals and good technologies rise above the fray--and companies built more on hype fall by the boards.

"There was a lot of foam on the cappuccino," said Cristina Morgan, head of investment banking at Hambrecht & Quist, referring to the high valuations for many Internet companies.

Morgan noted that the prospectus for the firm's own $80-million public offering was about to be printed a week ago when stocks started heading down and the company decided to wait. But even last Tuesday, amid the sharp downturn in tech stocks, "we did a biotech deal yesterday," Morgan said. "It proves that nothing is impossible."

Groves reported from Los Angeles, Pitta from San Francisco and Helm from Seattle.

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