Interesting comment in bold, my comment in italics:
Bring on the Bankruptcies in the Telecom Space
By Cody Willard
Special to TheStreet.com
05/17/2002 01:28 PM EDT
The market has finally begun separating the telecom haves from the
have-nots. But the final winnowing process that ultimately will take place
in all segments of the teleconomy is still in its early stages.
Remember the sector's early trickle-down effect, which carried cash from the
cash-flush carriers to the equipment providers to the component suppliers?
That same kind of effect will happen again soon, but instead with bankruptcy
filings.
First Victims
The vast majority of bankruptcies have thus far been in the carrier space.
The collapses of Global Crossing, Winstar, XO Communications, McLeod and
others have been high profile and gigantic in magnitude. Countless other
carriers, both public and private, have withered away in the telecom desert,
many never to be heard from again, with their major assets sold off
piecemeal to the highest bidding buzzard.
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More bankruptcies still loom in the carrier space, as so many of these
companies depended on revenue from other start-up carriers, and they're now
scrambling to find alternative venues for growth. They will likely jump ALL OVER New Visual as it will offer a tremendous avenue for growth. The enterprise-spending
depression has hurt companies on the retail end of the spectrum, too. It's
created yet another giant hurdle for the thus-far surviving and even
relatively healthy competitive local exchange carriers such as Allegiance
(ALGX:Nasdaq - news - commentary - research - analysis) and Time Warner
Telecom (TWTC:Nasdaq - news - commentary - research - analysis).
Lower down on the teleconomy totem pole, equipment vendors, component
suppliers and other sectors will be next to face a rash of bankruptcies.
Sure, we've already seen a slew of smaller private companies close their
doors over the past year or so, but those are just the tip of the iceberg.
Just as there wasn't enough end-user demand to justify all the hundreds of
billions of dollars spent building out those carriers' networks, there
simply isn't enough capital expenditure to justify all of the plants and
equipment that the vendors churn out. Similar to the networks that sit
around with gobs of excess capacity, oodles of inventory are still sitting
out there, some not even carried on anyone's books.
The Debt Difference
The biggest difference between the carriers and the next class of companies
is that Sword of Damocles otherwise known as debt. While most of the carrier
start-ups dipped again and again into the debt markets, many of the start-up
equipment vendors went public in overheated markets, leaving them incredibly
well-capitalized.
Corvis (CORV:Nasdaq - news - commentary - research - analysis) is the best
example of this kind of company. It can hardly generate any real revenue,
reporting less than $10 million last quarter, yet it still has more than a
half-billion dollars in cash and no real debt.
That actually prolongs the problems for companies such as Advanced Fibre
(AFCI:Nasdaq - news - commentary - research - analysis) and Cisco
(CSCO:Nasdaq - news - commentary - research - analysis), which clearly will
be survivors on the other side of this winnowing process. Still, they're
stuck waiting for these start-ups to wither away and die.
The death of other balance sheet uglies like Nortel Networks (NT:NYSE -
news - commentary - research - analysis) and Redback (RBAK:Nasdaq - news -
commentary - research - analysis), whose managements were too foolish or
hubristic to take advantage of the crazy market caps they once sported, sure
would help to move things along.
The customers of these vendors also are pushing along this winnowing process
as they become increasingly selective about their suppliers. We'll
eventually see the demise of many of these vendors and their suppliers.
The market finally appears to be making some of the same judgments, as Cisco
and Advanced Fibre have made some nice moves up lately as Corvis and Nortel
have languished. I'm still long Cisco and Advanced Fibre, although I
encourage trading around a core position. Ultimately, the survivors of the
equipment and component worlds will become thrivers.
