Ethernet services

Bankruptcy Boondoggle

You’ve got to love our industry. We can’t even do bankruptcy right.

When I hear about a bankruptcy, I think of some poor soul who has lost everything and needs to get a job bagging groceries. Or maybe his wife has left him and he’s started hitting the sauce.

Not in telecom. In telecom we’ve invented a whole new style of bankruptcy: The Club Med School. You wrangle with a few debt-holders, take a slap on the wrist from some prosecuters, pay a small fine...

It's like visiting the Telecom Spa. Take a few weeks off, play some golf, and come back with a squeaky clean balance sheet that can beat the crap out of anybody competing with you on price.

That’s about what’s happening at places like WorldCom/MCI/Whatever (see WorldCom Plans Re-Emergence). Or 360networks Inc. And Global Crossing Holdings Ltd. No, not all these bankruptcies are done deals. And there have been some minor differences. But generally they’re all the same – former losers given a new lease on life. (see Court OKs GlobalX Reorg Plan, Tyco Declares Dividend, Williams Bolts Out of Bankruptcy , and 360networks Restructuring Approved).

There’s only one problem with this picture of bankrupty: These companies have failed. They’ve lost. Why should they be rewarded with springtime-fresh sheets? Call it “Survival of the Weakest.” They should be flogged and put to rest.

The saddest thing of all about this phenomenon is that the primary cause of our current depression has always been excess supply and poor pricing power. There have been too many businesses chasing too few customers. The field needs to be thinned… not reinvigorated . Now we’re stuck with more competition, not less (see The Post-Chapter 11 Hangover ).

So what of these “new” companies? Are they any better than their previous incarnations? There are early signs that the “new” WorldCom/MCI is shaping up as another disaster: The company has already overpromised on its first revenue cycle (see MCI Cuts Revenue Outlook). As F. Drake Johnstone of Davenport & Co. LLC puts it: "In my estimation, their original guidance was far too aggressive... and they're being impacted by the Bells entering consumer long distance."

Will things get better? I’m hoping they will. But they would certainly be getting better faster if we let companies like WorldCom go out of business. Innovation does not come out of bankruptcy court. Large, forgiving bankruptcies such as those being engineered today aren’t good for business. They increase the price competition, rather than relieve it.

Let the assets float – force somebody to buy them from the bondholders. The assets are useful, that’s for sure, but the companies aren’t. The companies are dead wood.

— R. Scott Raynovich, US Editor, Light Reading

BackSlash 12/4/2012 | 11:46:50 PM
re: Bankruptcy Boondoggle Nice perspective. Very reasonable. However wishes belong dream world.

Bankruptcies and the corporate credibility problem can only be solved by a true effort on the part of the regulatory bodies (SEC) and by the bankruptcy courts.

The corporate credibility issue has been GǣTimeGǥ addressed.. meaning that the government has made the cover of Time with their efforts so they see the problem as resolved. Unfortunately this is far from being the last time corporate officers are paraded in the news media as the bad guys. I fear that this entire industry is played very fast and free with corporate finance / integrity.

The Bankrupt policies of the country have to be reviewed. To allow a company to be reborn from their own putrid ashes and start down the same road with the same board (or at least 50% of it) or with the same suicidal tendencies for their investors money is only a recipe for an economic death spiral. A dead cat bounce will be nothing compared to the festered cow pie flop this is making.

sir-wish-pro-wide-her 12/4/2012 | 11:46:47 PM
re: Bankruptcy Boondoggle I have always wondered why the bankruptcy laws seem to have been watered down?

One rationale that I could imagine is that consider the consequence of what could happen if bankrupty was what it meant in good ole days; in a soft economy putting a company filing for bankruptcy to rest, would mean increased unemployment because of laying off additional workers from the bankrupt "cease and desist" company. That in turn would increase burden on the government treasury because of lowered tax collection as well as any unemployment support that may need to be provided. Increased unemployment would also have the potential to leave a black mark on the ruling political party. Of course the flip side is the surviving companies (the ones that didnt file for bankruptcy) have to face price competition, and perhaps as a result have to layoff some folks to compete. So one would argue, where is the savings in unemployment numbers now? Well, it seems plausible that a surviving company that is unable to compete on price is also a weak company, even though it may be a shade stronger than the company that filed for bankruptcy and was allowed to remerge.

So to sum it up, it sounds like the current system that allows companies to file for and emerge from bankruptcies is shifting the burden from the government to the investors( because investors in the bankrupt company pick up the tab). Also, in a round-about way, the current bankruptcy system seems to shake up other not-so-weak-yet-not-strong-either companies too, that feel the heat of price competition, from the companies emerging from bankruptcy. This seems to indicate that perhaps the current "file-4-bankruptcy-and-re-emerge" system does create more competition in the long run, and ultimately supports Darwin's Law of the survival and thriving of the fittest. In other words, companies that have strategy and execution in place to compete on all factors, including pricing would emerge as victors, as ultimately, just like a cat only has 9 lives, and is not immortal forever, a company that emerges from bankruptcy cannot survive if it is planning to compete only on pricing.

Scott Raynovich 12/4/2012 | 11:46:21 PM
re: Bankruptcy Boondoggle Apparently Enron's back now too... filed its Chapter 11 plan today and is looking for approval from a judge.
greyhair 12/4/2012 | 11:46:19 PM
re: Bankruptcy Boondoggle
... Chapter 11 with Chapter 7.

Reorganization is not liquidation.

The question is whether WorldCom should have been allowed to enter Chapter 11 instead of being forced into Chapter 7.

Enron may have filed for Chapter 11, but that does not ensure that their filing will be accepted, and Chapter 7 may be their only exit.
Time will tell....

HeavyDuty 12/4/2012 | 11:46:19 PM
re: Bankruptcy Boondoggle should, at least sometimes, be a case where the failing company is considered completely trashed by it's executives (like when billions of dollars in debt, that's been hidden fraudulently, is discovered). Under those circumstances; execs should be prosecuted for fraud, and the assets of their former company should be collected and sold at auction.

But the execs are often the same folks from whom politicians have solicited large quantities of campaign funds... So, markers are called in; execs walk, and companies emerge largely intact with clean balance sheets...

<< The saddest thing of all about this phenomenon is that the primary cause of our current depression has always been excess supply and poor pricing power. There have been too many businesses chasing too few customers. The field needs to be thinnedGǪ not reinvigorated . Now weGre stuck with more competition, not less... >>

The problem is that we have enormous backbone capacity, and insufficient connectivity from the customer premises. The problem results from insufficient competition in the local loop (a.k.a., last mile). In spite of a telecom provider backround, I can't get away from the fact that I am also a customer. As a customer, the fact remains, it's incredibly difficult to impossible to get the product and services desired from telecom equipment and service providers.
alchemy 12/4/2012 | 11:46:10 PM
re: Bankruptcy Boondoggle I think there is a lot of similarity between the airlines and the backbone providers like Global Crossing and MCI. Airlines are constantly going in and out of Chapter 11 as their costs, debt, and management mistakes pile up. The airlines live in a fiercely competitive environment selling a commodity service. Once in a while, an airline like Eastern, Pan American, or TWA will disappear completely but most of the poor performers come out of Chapter 11 and manage to stumble along and adapt to the new competetive world of the Southwests and Jet Blues.

The equipment provider area is much more Darwinian. When there are too many companies in a market, most of them end up failing completely or moving on to a different market.
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