Fyffes share price rise due to 'dotcom mania'

The sharp rise in the Fyffes share price in the early half of 2000 was due to it being valued principally as a dotcom stock "under the influence of rampant dotcom mania", a UK finance expert has told the High Court.

Asked to comment on expert evidence on behalf of Fyffes to the effect that the company's share price was dependent in early 2000 on the underlying performance of Fyffes' core business, Prof Richard Taffler, called as an expert for DCC, said all the evidence was consistent with the underlying business of Fyffes being "not directly the key driver" of Fyffes' share price.

It was clear by the beginning of 2000 that the market had been "completely carried away" by dotcom euphoria, taking Fyffes' share price with it on the back of the apparent prospects represented by its internet venture, worldoffruit.com, Prof Taffler said.

The underlying fundamentals of Fyffes' business appeared to be "almost totally ignored" by the market.

Prof Taffler said the unveiling by Fyffes of worldoffruit.com in November 1999 was exactly concurrent with the final and most dramatic stage of the dotcom boom before the bubble burst.

At the height of the dotcom boom, the US was consumed by the idea of getting rich on the internet and the lure of financial gain led to the casting aside of all normal caution, he said. Although Europe came rather later to the internet bubble, neither the London nor Irish markets were left out.

US studies of internet stocks showed these were being valued in a contrarian way - the larger the losses, the greater the market value. Many companies had no sales but were valued at billions of dollars. Parallel beliefs pertained in Ireland and the UK.

It was very important not to forget the hype, drama and excitement of the dotcom mania when considering whether two documents available to DCC chief executive Jim Flavin in early 2000, prior to the €106 million sale of the DCC stake in Fyffes in February 2000, were price sensitive, he said.

In early 2000, Fyffes was being described as a dotcom or quasi-dotcom stock by financial journalists, reflecting the basis on which it was valued by the market, he said. This was despite worldoffruit.com being unlikely to be able to contribute revenue in the near future and boasting a business plan that envisaged profitability only "sometime within year three".

In early 2000, the merest association with the internet seemed enough to provide a firm with a large and permanent value increase, Prof Taffler said.

Further evidence of the power of dotcom mania at this time was illustrated by how "voices of reality" were denied and dismissed.

In Fyffes' case, the repeated realistic assessments of prospects provided by ABN-Amro in its research reports, which queried the underlying value of worldoffruit.com, and articles in the financial press, which explicitly predicted the collapse in the dotcom bubble and investor mania, were clearly ignored.

Prof Taffler said the trajectory of the Fyffes share price from its peak of €4 on February 18th, 2000, to around €2 on June 30th, 2000, "clearly resembled the characteristics of a typical dotcom stock post-crash".

Prof Taffler was continuing his evidence on the 72nd day of proceedings by Fyffes alleging insider dealing in connection with the sale of the DCC stake in Fyffes over three days in February 2000.

The action is against DCC, Mr Flavin and two DCC subsidiaries - S&L Investments and Lotus Green. All parties deny the claims and plead that the share sales were properly organised by Lotus Green, a Dutch-resident subsidiary of DCC to which beneficial ownership of the Fyffes shares was transferred in 1995 to avoid payment of capital gains tax on any subsequent sale of the shares.

Earlier yesterday, Prof Taffler said the key question to answer in deciding whether the two documents available in early 2000 to Mr Flavin were price sensitive was whether dissemination of the contents of those documents to the market would have materially moved the price of Fyffes shares.

In that context, it was necessary to decide whether the information in the two documents - Fyffes' November 1999 management accounts and a December 1999 trading statement - was "generally available" to the market.

He concluded the information was available from a number of sources, including analysts' reports.

As such, investors would/should have been well aware of any potential implications of adverse trading conditions in Fyffes' main profit-earning produce business, bananas, he said.

He added that the documents were "rather obscure", needing interpretation by management with respect to any potential implications for earnings forecast revisions and, consequently, the market pricing of Fyffes shares. The strong likelihood was that the contents of the documents, without elucidation, would have been viewed as "noise" rather than producing actual news.

In that context, it should be noted that Fyffes' management was, in late December and early January 2000 (the 2000 financial year having begun on November 1st, 1999), predicting that 2000 would be another year of growth.

It was only when Fyffes issued a cautionary trading statement in March 2000 that the market reacted adversely, he noted.

Even then, it was difficult to separate how much of that market reaction was due to the profit warning for the first half of financial year 2000 (blamed on the weakness of the euro against the dollar and uncertainty whether the shortfall could be made up in the second half), the general fall in internet stock valuations or indications that a merger between Fyffes and Dole was now unlikely.

It was also necessary - given how Fyffes was being valued as a dotcom stock in 2000 - to address how price sensitive the information might have been had it been publicly available prior to the share sales, Prof Taffler said.

He had addressed this issue through a detailed review of comment on Fyffes by brokers and the financial media; analysing trading volume and price volatility; analysing the co-movement of the share price with the EU Datastream Internet Index; reviewing estimates of the market valuation of worldoffruit.com; analysing market psychology and behaviour at the time; and analysing information events which impacted materially on Fyffes' share price.

Prof Taffler had concluded - discounting the ready availability of proxy information to the market about Fyffes short-term trading performance in bananas - that the two documents, had they been released to the market, would have been very unlikely indeed to be price sensitive given the then prevailing state of rampant dotcom mania and the basis on which Fyffes was being priced by the market.

The case continues today before Ms Justice Laffoy.

In yesterday's report on these proceedings, Tom Byrne was described as a non-executive director of DCC. Mr Byrne, formerly head of corporate finance in Davy Stockbrokers, is not and has never been a director of DCC.

He gave evidence in the proceedings as an expert witness on behalf of DCC and the other defendants.