FTSE 100's fallen stars

August 28, 2001 Posted: 1604 GMT

LONDON (CNN) -- When Baltimore Technology joined the FTSE 100 index on March 20, 2000, it was an archetypal "new economy" stock.

Its elevation to the top echelon of British public companies came just two years after it listed its shares on the London Stock Exchange – and before it had come within sniffing distance of a profit.

But its fall has been equally fast. This week, with its FTSE 100 membership a fading memory, Baltimore is even being ejected from London's FTSE Mid-250 index of medium-sized companies.

As if to underline the passing of the tech-stock craze, Baltimore is being displaced by a company that could epitomize the pre-digital age: Woolworth's, the British descendant of the original five-and-dime store, which listed its shares in London on Tuesday following its spinoff from British retail conglomerate Kingfisher.

The reasons for Baltimore's fall from grace are familiar enough. It was partly a function of overblown expectations for Internet-related companies during the surge of tech-share enthusiasm that peaked in mid-2000.

When increasing numbers of tech companies failed to live up to wildly optimistic estimates of their revenue-earning and profit-making potential, stock market investors started yanking money out of the sector. Previously abundant funding evaporated, leaving loss-making and cash-strapped firms high and dry.  

Halcyon days

Baltimore's addition to the FTSE 100 nearly 18 months ago took place at the height of the technology revolution that was sweeping through U.K. PLC – a wave that had parallels in the United States, France, Germany and other world markets.

Its stock market valuation had rocketed to £3.8 billion, even though annual sales hadn't even reached £100 million ($144 million).

The make-up of the 100-share index is reviewed and if necessary refreshed once a quarter to ensure it accurately reflects the top layer of British public companies. The rebalancing exercise in March 2000 was seen as a watershed in the rise to prominence of the so-called new economy sectors of  technology, media and telecommunications – TMT in investors' shorthand.

In addition to Baltimore, in came Internet service provider Freeserve, handheld-computer maker Psion, fresh-faced telecom operator Thus, cable provider Cable & Wireless Communications, radio-to-magazines company EMAP, outsourcing provider Capita Group, biotechnology developer Celltech, and medical technology firm Amersham (formerly Nycomed Amersham).

'Old economy' stocks routed

The companies tipped out into the mid-cap index to make way for the new tech titans could, without exception, be seen as emblems of the old economy. From the food and drink industry: Whitbread, Scottish & Newcastle, Allied Domecq, and Associated British Foods. From the building sector: plumbing equipment maker Wolseley and building materials supplier Hanson. Rounding off the list, utilities Powergen and Thames Water.

Contrast Whitbread and Baltimore. Hotel, restaurant and leisure operator Whitbread dates its origins as a brewer back to the 1740s and has about 73,000 employees. Last year it made pretax profit of £292 million ($423 million) on sales of £3.1 billion.

Baltimore, on the other hand, was founded in 1976 and came to the stock   market in 1999. Sales in 2000 amounted to £74 million, generating a pretax loss of £94 million (about $136.2 million). With a staff of 1,400 at its peak, the company now plans to trim its payroll to as little as 470 by the middle of next year.

In the harsh climate that has followed the collapse of the Internet bubble, its market capitalization has been trimmed even more severely, falling to £123 million this week. Far from hanging onto its spot among the United Kingdom's biggest 100 companies by value, it now sits at a lowly 347^th on the list.

And whereas bosses at Whitbread have probably never dreamed of listing their shares on Nasdaq, the U.S. exchange for high-growth and especially high-tech stocks, Baltimore has a Nasdaq listing – but now says it will quit the U.S. exchange to save money.

The Internet software company's fate has been shared, to some degree, by a host of other members of the TMT brigade that made their charge into the FTSE in 2000.

Where are they now?

Of the nine companies that entered the 100-share index in March 2000, only three – Amersham, Celltech and Capita – remain in the top ranks. Freeserve and Cable & Wireless Communications have been swallowed up by other companies. And along with Baltimore, the final three entrants from March 2000 have sunk back into the FTSE Mid-250 index, and some may fall further.

While EMAP, which has solid bricks-and-mortar businesses in magazines and radio stations rather than relying on online trade, may hope for an eventual recall to the 100-share index, Thus has seen its worth fall to £314 million and Psion has collapsed to a market capitalization of £282 million.

In fact, it's a common enough fate among TMT stocks that were added to the FTSE 100 in 2000.

Excluding stocks that joined the FTSE as a result of corporate restructuring, mergers and rebranding, there were 29 new entrants to the index in the course of last year. Ten of them have returned to the lower leagues, of which six – fiber-optic device maker Bookham Technology, Internet software developer Autonomy Corporation, regional telecom company Kingston Communications, plus Baltimore, Thus and Psion – are now worth less than £500 million, and could soon be too small to remain in the FTSE Mid-250.

And the clearing out of technology and telecom companies from the FTSE 100 looks set to go even further.

In mid-September, the FTSE 100 index comes up for its next quarterly shake-up, and declining market values mean that another host of TMT stocks could face demotion from the blue-chip index.

Based on capitalization at the close of trading on Friday, August 24, telecommunications operators Energis, Colt Telecom Group, and TeleWest Communications all might make the drop into the FTSE Mid-250.

The same fate could befall software and IT consulting firms CMG and Misys, telecom equipment manufacturers Marconi and Spirent, and media companies Carlton Communications and United Business Media.

And with old-style companies such as cigarette manufacturer Gallaher Group, Enterprise Oil and plumbing equipment supplier Wolseley – remember them? – knocking at the door of the FTSE 100, it looks as though the counter-revolution in U.K. PLC is virtually complete.

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