Back From the Edge -- With an Edge
Marconi plc (Nasdaq/London: MONI) is expected to announce a refinancing deal tomorrow that could see it emerge as a new company with a strong balance sheet, in much the same way a host of carriers -- including Metromedia Fiber Network Inc.(MFN) (Nasdaq: MFNX), Global Crossing Holdings Ltd., and WorldCom Inc. (OTC: WCOEQ) -- are expected to return from Chapter 11 bankruptcy protection.
The development raises an important question: Is the rebirth of these sorts of companies a good thing for the telecom industry? Or should companies that mess things up in a major way get their just desserts and be put to permanent rest?
More than a few observers opt for the latter. They claim any arrangement that lets carriers or equipment vendors come back, their financial problems swept under the rug, stifles healthy consolidation that must be part of the market correction of the telecom boom era.
Rejuvenated players could threaten those that have held on -- strenuously avoiding bankruptcy -- by producing unwanted competition and lowering prices, thus eroding any gains the relatively healthy companies might make in sales. If more and more companies are allowed to reemerge, the thinking goes, the pain will simply continue for an industry in dire need of fewer, not more, companies.
It's an argument consultancy RHK Inc. made against a WorldCom bailout in a statement August 13: "WorldCom’s self-inflicted damage should not be repaired when its competitors are trying to run honest operations and would not benefit from rescue attempts," the firm's press statement reads. "[R]escuing WorldCom would bring back to life a firm with significant unresolved inefficiencies... Over-investment during telecom’s bubble years has created a surfeit of capacity and service providers. The recycling of assets from bankrupt service providers is an astonishing way of preserving the industry’s pain." (For the full release, see: http://www.rhk.com/pressrelease.asp?NewsTypeId=2&id=355)
RHK also points to the bloat caused by WorldCom's undigested acquisitions. "WorldCom as it stands is bloated and inefficient," the release quotes RHK chief analyst John Ryan as saying. "There remain many distinct network operations within the whale that WorldCom became. Rescuing the company would only prop up its inefficient operations and postpone the day of reckoning when layoffs would be inevitable. Just don’t do it."
Marconi, too, is said to have suffered from a slew of ill-advised acquisitions that helped it reach a crisis point. The company's been wrestling for months over what to do about a total of approximately $4.3 billion in net debt (see Is Marconi Cooked? ). Financial newspapers in Europe have been speculating for the last two weeks that a resolution is imminent. Marconi is commonly expected to arrange a debt-for-equity exchange with its syndicate of 27 banks. Debtors are expected to "forgive" Marconi's enormous debt in exchange for newly issued equity, in a deal that will virtually erase Marconi's remaining shareholder value.
The company itself has no comment on exactly when or how it plans to restructure, except to say it will happen.
At least one industry source thinks it likely that several troubled firms will emerge from the throes of financial failure. "What you'll see is that telecom companies will do what the airlines did. They'll use Chapter 11 to emerge stronger companies," said Kevin Kalkhoven, ex-CEO of JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU) and founder of venture firm Kalkhoven Pettit & Levin Ventures LLC, at the Opticon 2002 tradeshow in San Jose, Calif., last week.
Some observers believe that if Marconi resurfaces, it may be able to offer equipment to carriers at very low prices and still make a profit, once it's written off all of its debts. That could make life uncomfortable for vendors that have ridden out the storm on their own.
Others, however, say the fear of bankruptcy returnees is overblown. "My general opinion is that there will be no predatory pricing," says Joseph Sullivan, senior analyst at Feltl and Co. "People have gotten more realistic and learned some lessons," he says. Carriers are likely to stay choosy, avoiding buying just because the price is right. Besides, he says, the root of the telecom downturn isn't pricing; it's demand.
One analyst says it's changes in the nature of carrier demand that will cause trouble for companies that come back from bankruptcy. "I think those companies that reemerge will flounder and flail and become marginalized," says Todd Koffman of Raymond James. He says Tier 1 customers will likely avoid them due to the stigma associated with past financial instability.
"Companies that were skimming the cream of the customers are going to be skimming the worst customers," he says.
At least one observer thinks the issue of reemergent companies is more likely to be a problem in the carrier space, as fallen service providers rise from the dead to compete for end-user customers. "I don't think you'll see this be an issue from an equipment makers' standpoint," maintains Ted Jackson of U.S. Bancorp Piper Jaffray. "I don't think it's going to make that much difference in the equipment market whether one or two companies return. It won't change the competitive landscape."
But he and others acknowledge that it may be too soon to tell how the situation will ultimately play out. The upshot remains to be seen if -- and when -- Marconi and others make the move back to market.
— Mary Jander, Senior Editor, Light Reading