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Devil's Advocate: Making money out of IT
How difficult can it really be?

By Martin Brampton

Published: Monday 28 April 2003

Not only are some IT people finding life hard, one has to wonder how much of the IT business is actually making any money. One of the great optimists of the dot-com boom, Frank Quattrone of Credit Suisse First Boston has been arrested for obstruction of justice.

Quattrone was one of the Wall Street high flyers who were involved in the initial public offerings of many dot-com shares. At the time, the shares were highly sought after, and people who bought in early and sold while prices were still rising made huge amounts of money. Now questions are being asked about the way shares were allocated.

The suspicion is that the banks frequently used them as bait. Privileged executives are said to have been favourably treated as a means to persuade them to bring new investment business to the banks. With huge loans and stock issues being launched by much of the IT business, Wall Street seemed to be making money hand over fist.

A few voices were raised in warning, but it is only now after the dot-com bust that the situation is obvious to everybody. The fortunate early investors made vast sums of money, and investors who were sucked into the later stages of the dot-com saga lost equally vast sums. In particular, much ISA money and a good deal of pension fund money disappeared into technology stocks bought at their unsustainable peak.

It is claimed that Quattrone’s income peaked just short of a hundred million dollars a year as he presided over the launch of names like Amazon and Netscape. But the FBI wants to know exactly what went on and whether there was reckless disregard of rules by Wall Street in the welter of shares and cash. The Feds seem to think Quattrone is not helping as much as he might, hence his arrest for obstruction of justice.

So how much of the IT business is really making anything? The answer is probably not a lot. We know that the so-called pro-forma earnings of US companies have frequently evaporated by the time the full accounts are revealed. We also know that following the Enron affair, companies were required to review their earnings and restate them with the full commitment of senior executives. That brought quite a few downward revisions.

All this makes it interesting that a few companies, notably Microsoft, are starting to pay dividends. In the current financial environment there is renewed interest in seeing a cash return from investment in companies. The argument that highflying companies could always reinvest their profits has worn thin as share prices have been seen to be so vulnerable to financial engineering.

If share price appreciation has turned out to have a bitter taste, there is something to be said for an income stream from investments. It not only provides the investor with some welcome cash, it also places a floor under the share price, since an asset that yields an income will always be worth something. It is early days though. Just issuing the odd dividend is easy enough to manage for all but the most cash strapped companies.

What will persuade us that IT businesses are really making money will be a regular stream of dividends over a number of years. How many of them will be able to achieve that?

** Martin Brampton is a director and founder of Black Sheep Research (www.black-sheep-research.co.uk ), an independent consultancy providing research, writing and speaking services on a wide range of business and technology subjects. Martin was previously a director at Bloor Research, and has worked with IT as a user and analyst for over 20 years. He can be contacted at silicon@black-sheep-research.co.uk