European internet sector down 50 per cent

Market capitalisation of the European internet sector has halved according to a PricewaterhouseCoopers report. Weaker companies will have a tough time convincing investors to stay with them.

The value of the internet sector in Europe fell by fifty per cent in the last quarter of 2000. The aggregate market capitalisation of the sector is E100bn, according to latest PricewaterhouseCoopers Internet 150, a quarterly analysis of cash burn rates and share price performance of the top 150 publicly listed European internet companies. The study was conducted with e-business strategy consultants, Fletcher Advisory.

The PricewaterhouseCoopers Internet 150 dropped by over 60 points over the course of last year, underperforming the FTSE 100, NASDAQ and TechMARK. The loss in valuation is due to high marketing expenditure in the sector.

The loss in valuation is due to high marketing expenditure in the sector and an erosion of investor confidence. The study says that there is likely to be further industry consolidation this year.

The overall slump in valuations concealed the increasing division between the best- and the worst-performing internet companies in Europe, PricewaterhouseCoopers found. While the worst performers shed well over 75 per cent of their market value, the best-performing companies nearly tripled their value.

Average burn rates, i.e. the length of time a company can survive before needing additional cash to survive, fell to 18 months compared with 20 months in the second quarter.

The study found that Germany accounts for 45 per cent of internet capitalisation which accounts for 35 per cent of overall market value in the sector, compared with 45 per cent previously.

Kevin Ellis, a partner at PricewaterhouseCoopers, said: “Profitable dot.coms are exercising greater discrimination over their spend, moving away from expensive advertising to more targeted marketing activity – something the advertising industry may feel the effect of during 2001.

“Market sentiment is now strongly biased towards profitable dot.coms, which marks a turnaround from the first half of last year when the focus was on long-term value. We expect polarisation between the best and worst performers to continue during the fourth quarter and into 2001, leading to further consolidation in the sector. We may also see a flow of new e-business propositions from bricks and mortar companies due to the negative market sentiment towards – and lack of funding for – dot.com start-ups.”

Stephen Adler, a director at Fletcher Advisory, commented: “We expect to see internet businesses coming to terms with conventional business realities. Consequently the weaker companies are likely to be shown the back door by investors, leaving the market clearer for the well-managed businesses to set themselves up for the long term.”