October 31, 2008

“Just remember that they’re measured by ‘EBE’”.

“I’ve never heard of such a thing.  What is ‘EBE’?”

“Earnings before expenses.  It’s the way all internet companies are evaluated.”

Many of you remember well those “halcyon” days of the dot-com bubble.  With the wild fluctuations and “who knows where it is headed” market of the last month, March of 2000 doesn’t seem that bad anymore.  I remember the market run-up from 1995 to 2000.  For the first time that I could recall, certain companies started reporting financials using a new term called “negative earnings”.

Of course, prior to the internet sector coining this new reporting terminology, CFOs simply referred to losses as just that, losses.  It was a strange time.  Some companies made an initial public offering of their stock and raised substantial amounts of money without ever having generated a profit, or in some really bizarre cases, earned any revenue whatsoever.  The idea was to expand customer base even if it meant increasing your losses.  Sounds familiar, doesn’t it?  The motto of that era was “get large or get lost”.  When we think of what has happened in the financial markets this year the comparisons to the dot-com bubble are striking.

During a break in a conference in the late nineties, a good friend was commenting to me about a discussion we had just had with a financial planning executive with one of the internet firms.  I had mentioned that this gentleman’s firm seemed destined to failure if measured by the foundational principles of traditional finance.  My friend started a quick exchange with me that went as follows:

 “Just remember that they’re measured by ‘EBE’”.

“I’ve never heard of such a thing.  What is ‘EBE’?”

“Earnings before expenses.  It’s the way all internet companies are evaluated.”

So here we are, only eight and a half years later.  I think back to good old ‘EBE’.  It seems as though earnings before expenses (EBE) was the measure used by lenders in approving and writing mortgages for unqualified borrowers.  What a surprise that yet another bubble has burst.