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Internet valuations: The case of Terra-Lycos

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  • Fernández, Pablo

    (IESE Business School)

Abstract

In this paper, we review twelve valuations of Terra performed by Spanish and non-Spanish bank analysts and brokers. Of the twelve valuations, only one used cash flow discounting. Another valuation was based on multiples, but also used cash flow discounting to perform a reverse valuation. All others used several multiples. Only one valuation report recommended to sell. Terra started trading on the stock market in November 1999. The placement price was 13 euros per share (11.81 for retailers). In February 2000, its price stood at 139.75 euros. Between November 1999 and February 2000, Terra provided a return of 975% for its shareholders. However, by December 2000, the share price had plummeted to 11.6 euros, 8.3% of its February high. The average annual volatility of the Terra share was almost 100%. If you can't find a rational explanation for a share to continue rising, you can be sure that it will fall. To become a millionaire, you must sell your shares at the right time. A website is not necessarily a business. Selling below cost gets you lots of customers, but not much money.

Suggested Citation

  • Fernández, Pablo, 2002. "Internet valuations: The case of Terra-Lycos," IESE Research Papers D/452, IESE Business School.
    • Handle: RePEc:ebg:iesewp:d-0452
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    File URL: http://www.iese.edu/research/pdfs/DI-0452-E.pdf
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    Cited by:

    1. Abdul Rasheed & Muhammad Khalid Sohail & Shahab-Ud Din & Muhammad Ijaz, 2018. "How Do Investment Banks Price Initial Public Offerings? An Empirical Analysis of Emerging Market," IJFS, MDPI, vol. 6(3), pages 1-19, September.
    2. Marc Deloof & Wouter De Maeseneire & Koen Inghelbrecht, 2009. "How Do Investment Banks Value Initial Public Offerings (IPOs)?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(1‐2), pages 130-160, January.
    3. Chitra Gunshekhar Gounder & M. Venkateshwarlu, 2017. "Shareholder Value Creation: An Empirical Analysis of Indian Banking Sector," Accounting and Finance Research, Sciedu Press, vol. 6(1), pages 148-148, February.
    4. Marc Deloof & Wouter De Maeseneire & Koen Inghelbrecht, 2009. "How Do Investment Banks Value Initial Public Offerings (IPOs)?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(1‐2), pages 130-160, January.

    More about this item

    Keywords

    Valuations; cash flow discounting;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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