To print this page, select "Print" from the File menu of your browser salon.com > Technology Dec. 21, 1999 URL: http://www.salon.com/tech/feature/1999/12/21/y2k_stock The real Y2K crash Why did stocks that skyrocketed on the promise of "silver bullet" millennium bug solutions fall back to earth? - - - - - - - - - - - - By Mark Gimein On Dec. 10, a Fremont, Calif., software company called Zitel put out a press release announcing one of its software tools in a version compatible with the Linux operating system. The press release stretched through several pages of technical lingo, but as far as investors -- or stock market speculators -- were concerned, there was only one word in it that really mattered. The magic word, of course, was "Linux." The press release came on the heels of a series of blockbuster stock offerings from companies that sell Linux-related software, hardware and services. Thanks to one press release, Zitel was suddenly a "Linux company" and its stock price immediately jumped sixfold, from just over a piddling $1 a share to a respectable $6. The really striking thing, however, for those who have been following the gyrations of the tech stock market over the last few years, is how familiar this scenario was. Because, in fact, this was the second time in recent memory that Zitel had shot up in the midst of a speculative mania. In 1995, consultants had begun talking about the Year 2000 problem as the pressing issue in the information technology business. Fixing date problems in old computer programs, the consultants said, would cost U.S. companies hundreds of billions of dollars. Who would that money go to? Naturally, to computer services companies specializing in Year 2000 solutions like, you guessed it, Zitel. In early 1997, Zitel's stock, which had hovered below $10 a share for several years, briefly hit $60 as speculators jumped at anything with the Year 2000 label. Speculators hoped that a little company like Zitel might come up with a "silver bullet" software solution. In fact, none was forthcoming. Zitel's revenues stayed stagnant. In its 1996 fiscal year, Zitel had revenues of $23 million; the next year its revenue dropped to $18 million, and in its 1998 fiscal year the company took in $21.7 million. The Year 2000 services unit added little to Zitel's bottom line (in fact, until late 1998 the much-hyped Y2K consulting practices added nothing to the bottom line). As big revenue failed to materialize, Zitel's stock plunged back down to $10 a share in early 1998 and to just $1 a share by December 1999, before rising on the Linux announcement. In fact, Zitel was only one of many companies whose stock shot up on promises of vast profits to be mined from the Year 2000 problem. A mainframe software developer called Viasoft also saw its stock climb above $50 a share in mid-1997 on big hopes for its Year 2000 practice. It now trades at just $6 a share. Another company, Data Dimensions, presented itself as pure Year 2000 play, because since 1993, the technology consulting firm had turned its attention exclusively to Y2K solutions. By May 1997, its stock, too, was trading at more than $40 a share; it's now trading at less than $4. Meanwhile, multibillion-dollar computer services giants like EDS (Electronic Data Systems) and the Computer Sciences Corp. also talked up the possibilities for their Year 2000 business. EDS, the biggest player in managing corporate computer systems and software, regularly sent out press releases announcing its new contracts for Year 2000 work. The Year 2000 investment craze, in fact, was so big that the American Stock Exchange created an index of Year 2000 stocks (a stock market index makes it easier for investors to make bets on a whole market sector without having to select a small number of companies). The index of 20 stocks is, appropriately enough, called the De Jager 2000 Index, after Peter de Jager, a onetime programmer who has built a writing and speaking career as one of the leading prognosticators of Y2K meltdown. Despite having allowed his name to be put on the index, de Jager himself now beats a hasty retreat when asked about Year 2000 stocks. "The index was designed to represent what was happening," de Jager now says. "It wasn't designed to beat the market. Everybody was looking for the silver bullet. People buying into these stocks didn't do any research." De Jager says that despite having identified many of the companies in the index when their stock was trading as low as $2 or $3 a share, he never made any money in the run-up. "I stayed out of it very simply to keep my nose clean and avoid accusations that I was profiting from this." De Jager says that he consented to putting his name on the American Stock Exchange index only to increase awareness of the Year 2000 problem. It probably didn't hurt, of course, that it also increased awareness of Peter de Jager. De Jager now speaks dismissively of companies, like Zitel, that that tried to make an instant killing by selling Year 2000 solutions, even though he consulted for some of them and advertised them on his heavily trafficked Year 2000 Web site. "I call companies like that 'Wayne and Garth's Excellent Aluminum Siding and Year 2000 Services' companies," he says. In all fairness, the De Jager index has done tolerably well. It lost over a quarter of its value when the Year 2000 stock frenzy ebbed in mid-1998, but has recently risen substantially. But don't thank the Year 2000 problem for that. Nobody, big or small, came up with an easy fix for the millennium bug; instead, legions of programmers spent millions of hours debugging code. Smaller companies like Zitel, Viasoft and Data Dimensions that were pegged as "pure" Year 2000 plays watched their stock drop as much as 90 percent, while some of the other more versatile companies included in the index have done well. But their stock has risen in lockstep with the rest of the technology industry, with little of the gain attributable to the Y2K problem. For instance, EDS, the Goliath of the bunch, has seen major revenue increases. But while its revenue for the first nine months of this year was more than $1 billion higher than for the comparable period last year, $475 million of the increase comes from a huge deal with MCI that is unrelated to Year 2000 work. In fact, having hired hundreds of programmers over the last three years to deal with Y2K demands, EDS has now announced an expensive restructuring -- unrelated to Year 2000 issues -- in which it will cut staff and pay out big severance packages. EDS spokesman Reed Byron says that EDS did get a total of about a billion dollars' worth of Y2K-related business. But Y2K worries also slowed down installations of major software systems. "You wouldn't want to start an ERP [enterprise resource planning, the trade name for huge software projects that tie together a major company's computer systems] project before you're finished with the Y2K remediation and testing," said Byron. Or look at Computer Sciences Corp., the next-biggest company that works on maintaining big corporate computer systems. One might have expected that as U.S. companies spent more and more money furiously testing and modifying their systems to reach the Nirvana of being "Y2K compliant," the revenues of companies like CSC would grow at an increasing rate. In fact, while CSC has indeed grown very quickly, the opposite has been the case. The company's revenue growth has actually slowed substantially, from 25 percent a year four years ago, when few companies were devoting substantial sums to Y2K fixes, to 16 percent in the last fiscal year. Some of the very same companies expected to profit most from selling solutions for the Year 2000 problem are now feeling the pinch of corporate belt-tightening as companies that spent loads of cash to become Y2K compliant find little money left in their technology budgets for anything else. The Gartner Group, a research and consulting company that rose to prominence largely on the strength of a series of reports that drew attention to the vast sums of money that would have to be spent on Y2K bug fixes, now says that big companies are postponing spending on Internet initiatives because of Y2K costs. De Jager himself points out a "lockdown" in effect at many corporations that, having painstakingly modified their computer software, are now unwilling to make any big changes until well after the date change. In a press release announcing the results of Data Dimension's dismal last quarter, the company presented a tellingly dour and, as management analyses go, fairly trenchant description of the unfortunate situation that hopeful Year 2000 solutions providers now find themselves in: "Clearly we are disappointed with our financial results for the third quarter. We, along with the broader IT services market, are seeing a general reluctance on the part of clients to commit to new technology spending prior to the Year 2000 date change." Ironically, even a company like Data Dimensions, which pegged its future to Year 2000 work has found that the Year 2000 problem has merely come back to bite it. For investors who bought stock in the company and saw it lose over nine-tenths of its value, of course, the clear-eyed analysis comes much too late. For Data Dimensions and its brethren, however, there's always Linux, or perhaps whatever stock craze comes along next. salon.com | Dec. 21, 1999