Telecoms take dive in wake of WorldCom

BellSouth, Verizon, SBC fall more than 10 percent

July 23, 2002|By Andrew Ratner | Andrew Ratner,SUN STAFF

While government regulators and industry analysts tried to be reassuring about the long-term health of telecommunications a day after the huge bankruptcy filing by WorldCom Inc., the short-term impact was devastatingly apparent in the dive of phone stocks yesterday.

Companies considered the strongest in the phone business, the regional Bells, suffered double-digit percentage drops and new lows for the past year - their worst collective performance on Wall Street in a long while. The phone stock groupings of Dow Jones and Standard & Poor's yesterday were each down 7 percent and set new 52-week lows.

Verizon Corp. fell $3.85 a share yesterday to close at $28.65, down 12 percent. SBC Communications Inc. dropped $2.72 a share to close at $23.96, down 10 percent. And BellSouth Corp., after a disappointing report of its most recent quarter, fell $5 to close at $22.61, down 18 percent. Long-distance provider AT&T Corp. also fell 40 cents a share to close at $9.52, down 4 percent.

"The stocks got hammered," said Ned Zachar, a telecommunications analyst with Thomas Weisel Partners in New York. "Companies go bankrupt, but not usually with a full-fledged meltdown in the telecom business in the background."

In some ways, consumers and investors can't believe what they're seeing: After all, people and businesses have never spent more on telecommunications, now a $700 billion industry.

There is no appliance so old that has changed more in the past decade than the telephone. It is now a constant presence for many people and one they're apt to use to call anywhere at any time - a far cry from not so long ago when families gathered to place a precious long-distance call. The same $100 that bought 100 minutes of cell phone use five years ago now buys 16 times that much. Business telecommunications for voice and data has become ever more instantaneous and indispensable.

But that transformation also underlies the fact that the three largest bankruptcy filings this year - and half of the six largest ever - involve telecommunications companies. This year's largest filings include Adelphia Communications Corp., with $24 billion in reported assets; Global Crossing Ltd., with $26 billion, and Sunday's filing by WorldCom that estimated $107 billion in assets.

"The decline and fall of absolutely everybody comes from a handful of factors hitting at the same time," said Reed Hundt, who chaired the Federal Communications Commission from 1993 to 1997 under President Bill Clinton. "In 1996, we repealed monopoly protection of telephone companies. Anyone should have expected that competition would produce winners and losers, because that's what it does. There has also been an earthquake of technological change. And the third thing is that the financial advisers of the world recommended to the phone companies that they borrow to the hilt. This was probably the worst financial advice given to anyone in history."

Predictions about the impact of WorldCom's bankruptcy are wide-ranging. Some say it will worsen problems already hampering the industry, from depressed values for unused telecom equipment to investor mistrust. Others believe the headlines might begin to return sanity to the industry. Recent accounting scandals, including the $3.8 billion in disguised expenses by WorldCom, have made investors more wary of the practice of evaluating a company's value exclusive of its long-term investments. The practice ignored the unsustainable borrowing and capital spending levels by WorldCom and others.

"`If you build it, they will come' is a great movie theme, but it's not the best of business acumen," a phone executive said. "We found an industry unusually invested in hope and promise."

Some even believe that a "WorldCom on steroids" will emerge from Chapter 11 and batter competitors weakened by the distrust that WorldCom helped increase.

"We're really very concerned that we will have a re-energized WorldCom, without the heavy debt burden, that can come back and undercut everybody's prices," said Rudy Baca of the Precursor Group, a telecommunications analyst in Washington.

WorldCom's businesses include MCI, one of the best-known consumer long-distance providers; Metropolitan Fiber Systems, which owns fiber-optics beneath cities and UUNET, a major line for the Internet.

Some telecommunications competitors that filed earlier for bankruptcy, such as Covad Communications Group Inc., have begun emerging, said H. Russell Frisby Jr., president of the Competitive Telecommunications Association, a trade group based in Washington.

"You're seeing private companies who didn't fall into the debt trap and others who had debt, but who filed for bankruptcy protection and have come out the other end and are doing much better," he said.

President Bush expressed concern yesterday about the bankruptcy and its impact on WorldCom employees, investors and the economy. He sought to reassure the markets and customers, and repeated calls for a crackdown on corporate abuses.

But some say they are already feeling a negative impact.

Dan Polk, a vice president of business relations for Xcellacom Corp. in Fells Point, said maintenance calls that used to get responses in a few days now take weeks. His company handles technical support for Internet service providers, many of them on WorldCom's Internet network. He suspects that with no certainty of getting paid, Hewlett-Packard has pulled back from some maintenance it performed for WorldCom.

"Demand continues to be strong for high-end telecom services that all of us need to go about our daily lives. Short-term, we have some issues, but none of us is seeing telecom going away anytime soon," said Martin Stern, a Washington telecommunications attorney and a former counsel to the FCC. "WorldCom is unfortunate, because had they accounted for this type of expense properly all along, it would not have had as dramatic an effect. What you have now is a surprise, and the market hates surprises."

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