Dallas, Texas
Tyson Ramirez, chairman of the major private equity firm Lone Star, sat on the office sofa with a face flushed red like molten lava.
[Cisco crashes! Nasdaq hits new yearly low.]
Staring at the bold newspaper headline, Ramirez let out a curse mixed with anger and frustration.
"Damn it!"
He had bought five percent of Cisco Systems—one of the leading internet networking equipment companies at the heart of the dot-com boom—at a ten percent premium for a staggering 23.1275 billion dollars. But now the stock was plunging nonstop. It was impossible not to swear.
Cisco's steep fall felt like plummeting into a bottomless cliff with no end in sight, and the weight of it crushed his chest.
There had been concerns even when they first bought Eldorado Fund's entire Cisco stake through a block deal. At the time of purchase, the PER was over 113, so the worry was justified.
But Ramirez, inflated with a strong belief that the internet revolution would reshape the world, and with rosy optimism clouding his judgment, borrowed massive amounts of leverage and boldly acquired the shares.
At first, it had looked like a brilliant bet. After the block deal, Cisco's stock kept rising, and its market cap neared 500 billion dollars.
But the celebratory moment didn't last long.
Before long, Microsoft's antitrust ruling and growing doubts about the profitability of dot-com companies triggered a collapse. Cisco and other tech stocks began to crash as if someone had flipped a switch.
A bet once praised as a huge success had turned into a catastrophic miscalculation that pushed the entire fund toward crisis.
To Ramirez's left, sitting on a brown luxury leather sofa, Fernandez Onofre—the fund's heavy-set CFO—watched him nervously before speaking.
"The lenders—Wells Fargo, Wachovia, and Merrill Lynch—have notified us that they'll recall the loans unless we provide additional collateral."
Because the collapsing stock price had eroded the value of the Cisco shares pledged as collateral, the banks and securities firms that had provided the leveraged buyout funds were demanding more collateral.
Ramirez, seated at the head of the room, loosened his tie with a rough tug and asked irritably:
"How much more collateral do they want?"
Onofre met his gaze and answered grimly.
"They're asking for more than ten billion dollars' worth of stocks or real estate."
"That much?"
When Ramirez scowled deeply, Onofre pulled out a handkerchief and wiped the sweat from his forehead.
"The first requirement is ten billion dollars. And if the stock drops further, they'll reassess the value every fifteen days and demand more collateral equal to the shortfall."
"Damn it! The stock's already crashing and everything is a mess—this is insane."
Ramirez raised his voice, bursting with anger.
"Stocks rise and fall depending on circumstances, but reassessing collateral every fifteen days and adjusting it? That's outrageous!"
It was true that stocks were volatile.
But with the price having already fallen more than thirty percent from its peak, blaming the banks and securities firms was hardly reasonable.
Of course, Onofre thought this to himself. He kept quiet, knowing that saying anything would only add fuel to the fire.
Instead, he spoke carefully.
"They said if we don't provide the required additional collateral within three days, they'll begin recalling the loan immediately."
Bang!
Before he even finished speaking, Chairman Ramirez slammed his fist onto the armrest of the sofa.
The loud thud made Eric Raps, the CIO sitting across from Onofre, flinch and shrink back.
"Damn bastards!"
Ramirez's shoulders shook as he struggled to steady his rough breathing. Then he turned his eyes toward Onofre.
"I'm furious, but the market conditions are bad. It can't be helped. Among our assets, what can we put up as collateral?"
Onofre straightened his posture and answered right away.
"If we bundle our stakes in NTT Docomo and Toshiba, along with the Tokyo office buildings, we should be able to meet the required amount."
He didn't like the thought of using such valuable assets as collateral, but if he didn't, the banks might force-sell their 23-billion-dollar stake in Cisco. There was no choice.
"...Hoo."
Letting out a weary sigh, Ramirez reluctantly nodded.
"Fine. Do it."
"Understood."
At that moment, Raps, seated on the right, adjusted his gold-rimmed glasses and spoke cautiously.
"The Fed doesn't seem likely to stop raising rates anytime soon. And more importantly, not only Cisco but most tech stocks have been collapsing hard. The decline is severe."
Ramirez narrowed his eyes and glared at him.
"So what exactly are you trying to say?"
Raps glanced at his expression, then spoke seriously.
"For risk management—before the losses get even worse—perhaps we should consider selling at least part of our Cisco stake."
At those words, Ramirez's face twisted with disbelief and anger.
"Sell our stake? Just because the market is panicking for a moment, you want us to throw away shares in a company that will change the world and make us a fortune—at a bargain price?"
Ramirez raised his voice sharply. Raps leaned forward, trying to persuade him.
"I agree that Cisco is an essential company in the age of the internet. But the euphoria that pushed dot-com stocks upward is fading fast. If things don't go as expected, the decline could deepen."
Despite Raps' serious concern, Ramirez refused to bend.
"Is this because you read some article calling the internet revolution a bubble? Those idiots praised the internet as the future when prices were rising—now the moment stocks fall, they spout cowardly nonsense!"
At that, Onofre, who had been listening intently, stepped in with a furrowed brow.
"Even if this is temporary, the burden from the price drop is enormous. Even if we manage to get through this time, if the stock doesn't recover and we're asked for additional collateral again, we could be in real danger."
Ramirez knew very well that they had borrowed over eighteen billion dollars in acquisition financing to buy the Cisco stake, and that the pressure was immense.
But even selling a portion now would mean admitting that the aggressive acquisition had been a mistake. He couldn't accept that.
More than that, he couldn't bear to acknowledge that the shares he bought at a premium were actually purchased at the peak.
Clenching his teeth stubbornly, Ramirez said:
"When the panic settles, the stock will recover like it always does. All we have to do is hold on until then."
"If the drop gets worse from here, we may not survive long enough to see that rebound," Raps warned darkly.
When even Onofre nodded in agreement, Ramirez clicked his tongue in irritation.
"Tsk. Fine. Let's abandon our plan to enter Korea for now. Instead of using the NTT Docomo stake as collateral, let's sell it outright. That should give us some breathing room."
Lone Star had been preparing to expand into Korea the following year, drawn by the appealing opportunities created by the financial crisis—strong companies and prime assets were being sold off at bargain prices.
But the bursting of the dot-com bubble had derailed those plans.
Watching Ramirez cling desperately to Cisco, refusing to let go, both Raps and Onofre couldn't hide their worry.
Their failed attempt to persuade him left them sitting in heavy silence.
Just then, a sudden knock sounded, and Chief Director Aronson burst into the room in a hurry.
"We have a problem!"
Already in a foul mood, Ramirez frowned deeply.
"What are you making such a fuss about?"
Normally Aronson would have flinched and apologized, but his face was pale, and he didn't have a second to spare.
"Cisco, IBM, Motorola—major tech stocks are plunging more than five percent!"
"What!"
Ramirez's eyes widened as he jumped to his feet.
Raps and Onofre also looked stunned as they stared at Aronson.
"Is that true?"
"Yes."
"When I checked earlier, the decline was barely one percent. What on earth happened?"
"It seems Intel announced a massive recall due to defects in their computer motherboards. Their stock dropped sharply, and it's dragging down other major tech stocks."
Raps, having grasped the situation instantly, spoke in a grim voice.
"If the market sentiment were strong, this wouldn't have had much impact. But investors are already nervous, so even a small shock is triggering an overreaction."
"Ugh…"
While Ramirez let out a pained groan, Chief Director Aronson hesitated before speaking again.
"Sir… there's one more piece of bad news."
Ramirez ran a hand through his hair, irritation plain on his face.
"What now?"
After glancing nervously at Ramirez, Aronson delivered the bombshell.
"J.P. Morgan and Goldman Sachs have changed their rating on Cisco Systems from 'buy' to 'sell' and lowered the target price to 56 dollars."
"What? Fifty-six dollars!"
The target price was more than ten dollars below the current stock price. Ramirez's face turned a furious shade of red, as if it might explode.
"Have they all lost their minds? Fifty-six dollars? How is that even remotely reasonable?"
He shouted until the veins in his neck stood out.
Raps, now wearing a grave expression, turned to Aronson and asked:
"Did they explain why they lowered their outlook?"
Aronson swallowed hard and answered:
"They said that even though the stock has crashed over the past month, it's still trading at more than a hundred times its earnings. For Cisco's net profit to justify that, it would need to grow by more than one hundred percent every year and reach over two and a half trillion dollars by 2010. They said that's impossible—an unrealistic fantasy."
At those words, Ramirez's eyes flared sharply.
"Just a short while ago, they were praising Cisco for dominating the rapidly growing network equipment market and for generating real cash profits. They said its sales and net income would continue explosive growth every year. And now they come out with that nonsense?"
Ramirez's voice rose uncontrollably. In front of him, Chief Director Aronson bowed his head, cold sweat forming on his brow.
"They're also saying that due to vendor financing, Cisco's reported revenue is heavily inflated compared to its actual profits. That opinion is putting even more downward pressure on the stock."
"Damn it!"
Unable to contain his fury any longer, Ramirez grabbed the crystal ashtray on the table and hurled it across the room.
TL/n -
Intel announced a major recall after finding defects in one of its motherboard chipsets. The recall meant high costs and production delays, so investors sold the stock and the price dropped sharply. Because Intel was a key supplier for the entire PC industry, the news also pulled down other big tech stocks. During the already fragile dot-com bubble, this added to growing doubts about the sector and helped push markets lower.
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