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Source: Asiaweek Resources

Fire in the Valley
Stocks in Asiaweek's Internet index were ravaged during the global technology meltdown. But there is a bright side

Let's see. What would be a good analogy to describe the March/April tech wreck? Did the bubble burst? That's too mild a comparison -- a mere pop!. Might as well describe the Hindenburg disaster as an unscheduled loss of altitude. Newpapers were prone to refer to Nasdaq's record plunge as a "bloodbath," but that's because the term is graphic and fits in a headline.

How about a forest fire? Apt. Forest fires are ugly and scary, like a market collapse. They are also nature's own high colonics, periodic purgatives necessary for the maintenance of a proper ecology. A nice healthy fire from time to time clears the forest of underbrush, culling the weak to make room for the strong. Certainly the Internet sector was weedy with unviable start-ups. Valuations had to come down. IPO madness inevitably had to end.

A controlled burn was needed. Barring more dramatic declines, that's what we got. After reaching an all-time high of 281 on Feb. 21, the Asiaweek/CNN Internet Index fell 43% by April 17. The Nasdaq Composite fell as much as 34.2% from its record March 10 high. The dual swan dives underscore that when there is fire in Silicon Valley, Asian Internet stocks -- despite being at an earlier stage of development -- get burned. For the year, the Asiaweek/CNN Index is down 28%, but keep this in perspective. The group is still 60% above where it was at inception nearly 10 months ago.

The recent damage is unsettling. All 20 index stocks, big cap and small, registered declines over the last eight weeks -- the average individual drop was 39.5%. Hardest hit were the companies that had been top performers all year. Softbank, amid speculation the giant Internet conglomerate had few options for generating cash flow outside of selling its myriad investments, saw the air come out of its share price, which fell 66% between Feb. 21 and April 17.

Over the same period, plunged 74% on Nasdaq. Pacific Century CyberWorks was not sheltered by its deal to buy Hong Kong's largest telephone company nor by a timely investment from Telstra, Australia's big telco -- PCCW shares dropped 43%.

Even non-dotcom companies with profitable track records were punished. Trend Micro, despite strong growth in sales of its anti-virus software, slid 60%. Singapore-based Creative Technology fell less than 1% from Feb. 21, but the soundcard manufacturer-turned-Internet company only appeared to be spared. They just arrived late for the party. Creative's runup came in March, to nearly $40, just as dotcom fever peaked. Shares have since declined by about half.

In an April 3 report, Merrill Lynch Internet analyst Henry Blodget wrote that the business is consolidating. "The Internet tide is not rising fast enough to lift all boats anymore," Blodget wrote. "As ballistic returns become a thing of the past, we expect investors to be far less generous in funding companies with dubious business propositions."

The timing of the swoon is unfortunate for the region in some ways, healthy in others. A return to caution and selectivity on the part of venture capitalists and investors could retard development of Asia's sector. Dozens of IPOs may have to be postponed. The flood of investment capital will ebb, for solid and questionable companies alike.

Yet there appears to be some appetite for dotcoms left., China's largest Internet portal, went public on Nasdaq April 13 during the market storm, and still managed a 22% first-day gain. That's not a 300% rocket ride. But Sina's respectable debut is evidence of a return to more reasonable (albeit still high) valuations and more realistic expectations. In the long run, that will be good for the industry, even if it means less worthy start-ups will go begging and may fold entirely. Sometimes fire is our friend. It allows us to see the forest through all the tree stumps.

More information is available at The Index is also featured on CNN's BizAsia show airing throughout the region at 6.30 p.m. and 8.30 p.m. (Hong Kong time) and on Asia Business Morning between 6.30 a.m. and 9 a.m. weekdays.

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