Tadpole in deeper water

THE INVESTMENT COLUMN

A lot of people have lost a lot of money in Tadpole, one of the most spectacular share price meltdowns even by the standards of the hi- tech, high-risk computer sector. It will come as cold comfort to the company's 3,000 small shareholders who have lost their shirts, but at least the company's directors have gone down with them.

Buying shares at 165p in January, the directors have been as unlucky/misguided as all the other investors who, as the table shows, have subscribed for the regular drip-feed of equity at prices well in excess of yesterday's 83p close, down 51p on the day and only a fifth of last November's all- time high of 423p.

Hindsight is easy, of course, but the lessons from the Tadpole debacle are manifest. They underline the risks inherent in investing in young, optimistic companies, those with small product lines, under-capitalised businesses, companies in fast-moving technological areas and those with most of their operations on another continent.

Tadpole is all of these, but its most important failing has been its size. The need to build up a small sales force in anticipation of high sales of its latest product, an admittedly highly impressive notebook computer, meant that any shortfall in sales would inevitably create a yawning gap between revenue and overheads.

As part of a larger group, the slower-than- expected build-up of sales would have been merely an irritant, not the potential disaster it has been for Tadpole. With only three main products, however, the company is always likely to be betting the ranch on its latest offering.

The other lessons to be learnt from Tadpole are nothing new but worth repeating none the less. Investing on the basis of hope is a dangerous game - like British Biotechnology, whose shares suffered a similar fate recently, Tadpole has no profits record, let alone assets, to fall back on when the going gets tough.

As a result, the company can only be valued on the basis of forecasts - which, expecting a jump from a £1.3m loss to a £25m profit in just two years, were always likely to be too good to be true. Those stockbrokers' profits forecasts were in their turn premised on internal and independent sales forecasts that proved worthless.

For what it is worth, Tadpole is now expected to break even in the second half for a £6m full-year loss. On that basis there is no sensible way to value the shares, and anyone bottom-fishing at just 20p above 1992's flotation price should only do so with money they are prepared to lose.

The sad thing about Tadpole's demise is that there seems to be nothing at all wrong with the company's products, which have received enthusiastic reviews. As Psion found to its cost a few years back, however, good ideas are not in themselves enough.