ACCT 5910 Business Analysis And valuation Mahfuzur Rahman Sumon

Student ID: 3278685

Case Study 1
The Role of Capital Market Intermediaries in The Dot- Com Crash of 2000

1. What is the intended role of each of the institutions and intermediaries discussed in the
case for the effective functioning of capital markets?
The institutions and intermediates roles are:
a) Venture capitalists: VC provides capital for companies in their early stages of development
and screen good business ideas and entrepreneurial teams from bad ones. It employs savvy
business people who worked closely with their portfolio companies to both monitor and
guide them to a point where they have turned a business idea into a well- managed fully
functional company that could stand on its own and nurture the companies until they
reached a point where they were ready to face the scrutiny of the public capital markets after
an IPO.
b) Investment Bank Underwriters: It helps entrepreneurs in the actual process of doing initial
public offerings, and provides advisory financial services, helped the companies price their
offerings, underwrite the shares, and introduce them to investors.
c) Sell-Side analysts: The main role of sell side analysts was to publish research on public
companies and involved forming relationships with and talking to the managements of the
companies, following trends in the industry, and ultimately making buy or sell
recommendations on the stocks.
d) Buy-Side Analysts and Portfolio Managers: They are usually assigned to a group of
companies within a certain industry and are responsible for doing industry research, talking
to the companies management teams, coming up with earnings estimates, doing valuation
analysis, and ultimately rating the stock prices of the companies as either buys or sells and
also need to convince the portfolio managers and portfolio managers are responsible for
buying or selling securities.
e) Accountants and Auditors: Independent accountants audit the financial statements of
public companies to verify their accuracy and fair and auditors are responsible for making a
report to the third parties based on the companys financial statements.
f) The Regulator-FASB: It establishes of standards of financial accounting and reporting for
the guidance and education of the public, including issuers, auditors, and users.
ACCT 5910 Business Analysis And valuation Mahfuzur Rahman Sumon
Student ID: 3278685

2. Are their incentives aligned properly with their intended role? Whose incentives are
most misaligned?
Their incentives are not associated with their role.
The most misaligned incentives associated with Venture capitalists. Venture capitalists provided
capital to public companies with questionable business model and which were went to public very
early without scrutinizing these companies by VCs savvy business people. Moreover, the partners
in VC firm typically had a substantially percentage of their net worth tied in their funds, which
aligned their interests with their investors and the main form of compensation was large share of
profits (typically 20%).
3. Who, if anyone, was primarily responsible for the Internet stock bubble?
Venture Capitalists were the primary responsible for internet stock bubble. Companies in VC were
primarily financed by venture capital and IPOs (Initial Public Offerings) of stocks. The novelty of
the stocks and the difficulty of valuing the non-traditional firms meant the stocks were initially
overvalued and, combined with enormous demand from investors wanting to get in on the ground
floor of the next big thing, the stock price would soar upwards as soon as the company went
public. This was true even if the company had never made a profit or even a stream of revenues
(Dot-com Bubble). Moreover, VC had an expertise people to analyse and guide the companies.
4. What are the costs of such a stock market bubble? As a future business professional,
what lessons do you draw from the bubble?
$5 trillion costs of such stock market bubble were related to dot com crash case.
i

Lessons from the bubble:
ii

y If business model does not real money do not buy it.
y Rapid growth is not way to build a solid company.there is nothing wrong with doubiling the
company each year like Microsoft company did back in late eighties but, doubling size
within quickly is not well enough for the long term prospect.
y Start a company with experience what a company is going to start.
y To make a huge profit in short time is not good all the time.

i.Wikipedia (2009) Dot -com bubble, Wikipedia, http://en.wikipedia.org/wiki/Dot -com_bubble
ii
http://www.zeromillion.com/econ/dot-com-crash.