UK internet sector slumps 30.5% in Q4

IPOs declined dramatically, with only 25 new internet companies joining the market, compared to 44 in quarter three. This faltering supply of new economy equity was not sufficient to compensate for the plummeting valuations of pre-existing internet listings. The average capitalisation of companies in the sector fell 36.9%.

The core internet sector under-performed both the techMARK and AIM indices, the host markets for most of them, with AIM dropping 19.4% and techMARK 27.2% over the quarter. But both of the UK's technology-biased indices outshone the Nasdaq, which fell 36.3% over the quarter. The picture is similar in the longer term too, with the Nasdaq falling 42.8% over the year compared to AIM's 35.5% and techMARK's 36.5%. The more old economy-leaning FTSE 100 remained robust in comparison, falling back 1.7% on the quarter and 3.9% on the year.

No publicly-traded internet company in the UK has yet gone to the wall. But the state of the public markets has exacerbated the acute financing problems faced by unlisted internet companies. The recent high profile online urban directory service CityKey and personal finance site TheStreet.co.uk could both be traced back to the cash concerns of their listed backers. In an attempt to ride out the storm AIM-listed internet investment company NewMedia SPARK merged with cash rich counterpart Internet Indirect.

Only 21 companies rose over the quarter, notably: software companies ASAP International and Logica; technology companies Spirent and Ultima Networks; investment companies Beeson Gregory, Internet Incubator, which is due to be merged with NewMedia SPARK and Pacific Media; content companies Einstein Channel and Hemscott.net; and spread betting company IG Index, which was by far the quarter's star performer with a 55% rise. The e-commerce sub-sector did not record a single quarterly rise, having been the object of much derision from the mainstream media and investment analysts.

The Q4 downturn has left the core internet sector with a market capitalisation of 60.4bn, down 8.7% compared to the total at the beginning of 2000. As in the quarterly figures, the aggregate values mask an even more vertiginous decline in average capitalisation, which strips out the effect of new issues. The average capitalisation of the sector's 269 constituents at the end of the year was 225m, down 64.0% from 625m at the beginning of the year when it was composed of 106 companies.

No internet sub-sector progressed in average capitalisation terms. The hardest hit was the e-commerce sector with components losing 91.8% of their average value to finish with an average valuation of 25m, down from 304m. E-services came off relatively lightly, with their average capitalisations falling just 55.3%, though its cause was helped substantially by the debut of the online financial giant Egg.

Internet services were the fourth quarter's biggest casualties, with their average capitalisation falling 22.4% largely because of a 61.7% fall in the value of the sector's dominant member, Freeserve, following news of a takeover by Wanadoo of France.

At the end of the period only 31 of the 269 core internet companies closed on Friday 22 December above their average capitalisations for the weekly closes over the previous thirteen weeks, a "diffusion" rate of just 11%. A market ready to head up would normally achieve a far higher value.

Note: This article was based on a weekly publication called the TMT DataSheet. For more information about subscribing, please contact Niki Panourgias or Phil Cain on 0207 247 0880.