If you are one of the half a million punters who took part in the largest ever sale of a State asset last July and are now sitting on a significant loss, two questions are probably upper most in your mind: who is to blame and when will my shares bounce back?

There are several reasons why Eircom's share price has slumped to record lows this week and is set to fall even further over the coming months. One stands out - the €3.90 (£3.07) flotation price which has turned out to be fantastically over-optimistic.

Alfie Kane, the taciturn Eircom chief executive, acknowledged this week for the first time that the flotation price was inappropriate for a company with Eircom's credentials. He also pointed the finger of blame firmly at the Government and Mary O'Rourke, the Minister for Public Enterprise, in particular.

Ms O'Rourke responded with characteristic robustness. She countered that the Government had set the price only after seeking the best possible professional advice from AIB and Merrill Lynch. A Cabinet sub-committee, of which she was only one member, had set the price more or less mid-way between the two conflicting prices suggested by the advisers.

AIB said the price should be €3.73, while Merrill Lynch had pushed for €4.26 and the Government had plumped for €3.90. It seemed a fair enough explanation. Government ministers after all are not experts on the stock market and had availed of the best advice that money could buy, at a cost of £58 million (€74 million).

What Ms O'Rourke did not say, and what only emerged late on Wednesday, was that Eircom had warned the Government in the weeks running up to the flotation that the prices being suggested by their advisers were wildly optimistic. Eircom based its views on advice it received separately from ABN-Amro and also its own view of the market.

At this stage almost everyone in the State had received a prospectus and a price range of €3.35 to €4.15 had been indicated. Eircom, however, was telling senior civil servants that at a minimum, the offering should be priced at the bottom of the range and, if necessary, below it. What happened next is well documented at this stage.

The obvious question is how could the same company be given such different valuations by separate experts. The answer lies in the different objectives of the two sets of advisers. AIB and Merrill Lynch worked for the Government. Their job was to maximise the value of the asset being sold. The US bank, in particular, seemed to argue that the Government should capitalise on the huge demand from the Irish public and foreign interest in the economy to set the price as high as possible.

Eircom and its advisers took a longer-term view as they would have to live with the share price and the consequences once the company was cut loose by the State. Put simply, their concern was that Eircom was being priced at a premium to its peer group of companies in a sector (telecommunications) that was itself at a premium to the market. Although Eircom was a fundamentally strong company it did not deserve this sort of rating and would come crashing to earth once the market realised this. In the end it took about two months before the market caught on.

In her defence, Ms O'Rourke has pointed out that if the board of Telecom Eireann knew all this why did it approve the prospectus sent out with the indicative price range?

In a Jesuitical response Mr Kane has countered that the board had a duty to act in the interest of the shareholder - at that stage the Government.

However, a board with such political heavyweights as Ray MacSharry and Dick Spring might have been expected to press the company's case more successfully with the Government.

Academics and organisations such as the Institute of Directors could happily spend hours discussing the extent to which the board also had a responsibility to the incoming shareholders, but for the 500,000 who gave the Government their money it is something of a moot point.

Of more interest to them is knowing when they might actually see a profit on their investment.

Mr Kane gave a frank assessment of the company's prospects at the presentation of Eircom's first set of results as a public company this week. He said that Eircom was in good shape financially and there were a number of interesting developments in the pipeline which should be good for the share price.

Turnover was up 10.4 per cent to €1.955 billion and operating profits grew by 15.8 per cent to €325 million. Earnings per share were up 26 per cent at 12.2 cents and a final dividend of three cents per share was declared.

In the autumn, the company plans to bundle its multimedia and Internet companies and float them as a separate stock market company. Eircom will hold on to 75 per cent of the shares and any uplift in the market value of its new subsidiary will feed into the Eircom share price.

Two subsidiaries, Eircom.net and Indigo, which between them have 60 per cent of the Irish Internet provider market are to be included in the new business. Other related e-commerce businesses will also be included.

Mr Kane made it clear on Wednesday that the new venture will be more than just an Internet provider. Most of the existing Internet providers are years away from making profits and the value in their share prices is essentially based on the hope that the asset they are creating - a subscriber base - will one day be realised.

Mr Kane held out the prospect that some of the money realised from the flotations could be paid to shareholders as a special dividend.

The other priority for Mr Kane is to get a foothold in the British mobile phone market so that the company can offer a seamless - and much more profitable - service in Ireland and Britain. Eircom bid £2.5 billion for a licence in the recent round of auctions for third generation licences in Britain, but was unsuccessful. The company is now believed to be looking at a link up with one of the main British mobile operators - possibly Orange. Mr Kane accepts that he has something of a mountain to climb before he can restore the share price to something close to its flotation level. "What I need to do is ensure that I have in place a good strategy to ensure that we deliver a good return on investments. If we do get our act together, I have little doubt that we will deliver shareholder value," he said this week.

A major challenge for Eircom is the entry of a third mobile operator, Meteor, into the market at the end of this year. Eircell, the company's mobile division is a star performer with more than one million customers and contributed earnings of €129 million to the group this year.

Mr Kane argues that the additional marketing effort put in by the new entry and the extra competition will grow the market in the same way as when Esat Digifone, the second operator, set up.

"The ever increasing level of competition will force us to do what we have to do anyway in order to have a sustainable business," says Mr Kane.

In the short term, the main drag on the share price will be the coming sale by KPN, the Dutch phone company, of its 21 per cent stake in the company acquired under the 1996 strategic alliance agreement. Given the depressed share price and the large size of the stake to be sold, it has been predicted that KPN will have to dispose of the shares at anything up to a 10 per cent discount to the market, further pushing down the price.

Smaller shareholders might be forgiven for wondering why they should hang on when one of the larger European telecommunications companies is prepared to take a hit to get out of Eircom.

Mr Martin Pieters, who represents KPN on the board of Eircom, went some way to answering that question this week.

The Dutch company has decided to focus on mobile and Internet markets in mainland Europe, he said. He even went as far as to hint that they had looked at buying Eircom outright or spending the same amount of money to buy 77 per cent of the third-largest mobile company in Germany.

He said that they had waited until last Wednesday's results to confirm their intention to sell because "we wanted to show that we were not selling out of desperation, but as part of a strategy".

Mr Pieters said that it was hard to find a trade buyer for the stake because although it was a substantial chunk of the company it did not confer management control.

Telia, the other strategic partner, announced on Wednesday morning that it was retaining its stake for the time being. The news came as something of a surprise to Mr Kane who was only told at 12.20 that morning. It was a bitter disappointment for the chief executive who had been devoting a considerable amount of time and energy to resolving the issue of the share overhang.

Telia is not expected to make any move regarding the stake until after its own flotation this summer.

Ultimately it is the stock market that will pass verdict on Mr Kane's efforts and at present it is distinctively bearish about the company. Mr John Coolican, technology analyst with Merrion Capital, expects the shares to hover between €3.30 and €3.00 for the foreseeable future.

A couple of factors are at play, one of which is that several European telecommunications companies are planning to raise money in the market in the coming months. The problem is that most European institutional investors have more money tied up in telecoms companies than they really want to.

European fund managers piled into telecoms stocks in the latter half of 1999 and earlier this year as a way of having some exposure to the boom in technology stocks. Most have little appetite for them now, following the crash in technology related shares and there are doubts now as to whether even the blue chip Deutsche Telekom will get the last tranche of its massive fund-raising away. "The whole sector is taking a beating," according to Mr Coolican. More recently fund managers have become concerned about the amount of money that phone companies are spending trying to buy third generation mobile phone licences and the impact of higher interest rates on their profits.

Analysts also point out that if Mr Kane is to make a success of his plan to float Eircom's multimedia business, he must first do a deal with someone who can provide him with programmes and other content to sell across his multimedia platform. At present no deal has been done, although the company is understood to be in talks with Rupert Murdoch's Sky.

Mr Coolican predicts that the shares could fall as low as €2.80 in the wake of the KPN disposal. Eircom will not have found its true level in the market until it is at a discount to its European peers reflecting the fact that despite the hype the Republic is still a small market on the periphery of Europe, he argues. Despite its recent falls, Eircom is still trading in line with its peer group companies, so further falls are predicted.

With such a bleak future in prospect, small investors could be tempted to cut their losses and get out now. This is probably the wrong course of action for the smaller shareholders who will see their losses compounded by the fees they will have to pay brokers when they sell.

Most of the small investors who bought shares have shown that they are in for the long haul. The good news is that the consensus among analysts is that over three to five years Eircom will turn out to be a good investment.

Some, including Mr Coolican, suggest that if you are brave you might even like to think of buying some more shares when they hit €3.10. In any case, those who hold on to their shares until July 7th will get one bonus share for every 25 held.