Elliott and Schroth set out to tell you how companies befuddled investors, and why they got away with it. Their book is fun to read, although it shows the effects of writing in haste (it is a sort of tut-tutting amalgam of corporate naughtiness, flung together without much coherent structure or analysis). But it tells the target readers (investors and executives) what signs of trouble to look for in a company. These include lots of insider trading, projections about market potential that run counter to market research, and the abrupt resignation of senior executives. Ultimately, the authors write, good governance “largely depends on the integrity of the management team and the business culture they create and lead.”
The trouble is, in the atmosphere of a market bubble, it takes huge self-confidence to resist the pressure to stretch not just targets, but the truth, too. “Business lies begin innocuously,” Elliott and Schroth point out. “Cranberry juice contains only a fraction of real cranberries; blueberry cereal has no real blueberries.” They go on, “Business plans of new ventures are … based on the dreams of business planners more than market reality. Sales forecasts inevitably have elements of guesswork. And, when companies miss their earnings targets, impatient markets wreak prompt and terrible revenge.”
How true this was for the dot-com Value America, whose sorry tale is engagingly told by J. David Kuo in Dot.bomb: My Days and Nights at an Internet Goliath (Little, Brown and Company, 2001). Kuo, who lived through the rise and fall of Value America as its corporate communications officer, gives a witty and wide-eyed account of life in a failing dot-com, using a sharp instinct for telling details.
Value America, a onetime corporate dreamboat, was supposed to become the Wal-Mart of the Internet — indeed, the Microsoft of e-commerce. The face that smiles engagingly from the book wrapper is far too unwrinkled to have had any premonition of catastrophe as the company sailed through a $130 million initial public offering, its stock soaring to a market capitalization that was twice that of the strong books business of Borders, and then proceeded to burn its way through $12 million a month.
In the heady environment that Kuo so vividly describes, where even the call girls desert Hollywood for Silicon Valley and insist on payment in stock options, it is easy enough to see how integrity could get lost. Kuo joined the company after the stock price began to slide, only to discover that the job of the corporate communications offices was to get the stock price back up: “I was Value America’s Viagra.” What, in a sentence, described the company?, David Kuo asked CEO Craig Winn, the company’s creator. “There is no way to relate the revolutionary story of Value America in just one sentence,” replied Winn. “We are the marketplace for a new millennium.”
Kuo recalls how he felt at that moment: “All my internal voices sang in harmony, ‘Run away!’ It was a virtual symphony of fear.” But he didn’t: Instead, he stayed on to see, in the closing hours of 1999, the biggest Internet layoff on record as the company became the world’s first dot-bomb. Finally, in August 2000, the company went bust, as did hundreds of others that year.
Kuo’s book is as good an account as you’ll get of why people become carried away in a boom. Kate Jennings’s novel raises a broader question — whether the whole capitalist system is rotten and needs to be replaced by something better. Her (fairly) imaginary Wall Street investment bank, Niedecker Benecke, brings us back to the soaring and swooping era of the derivatives frenzy, the hedge fund debacle, the Asian markets crisis, and the default of Russia.