The resounding boom in telecommunications investments from 1996 to last year fizzled this year, when at least 27 telecommunications companies, each with more than US$100 million of liabilities, filed for bankruptcy protection. The industry may require a year, or perhaps even two, before a muted recovery starts to take place.
Even the vulture investors, like hedge funds, private equity companies and funds within investment banks that specialize in distressed businesses, may not be attracted to the carcasses of once-ambitious companies that now litter the industry's landscape.
It is painfully clear that the telecommunications debacle eclipsed in size all earlier investment bubbles, whether they involved dot-coms, oil wildcatters or tulip bulbs.
"It's hard to tell when the pain in telecommunications will ease because the crisis is so extensive," said Edward Altman, a bankruptcy expert at the Stern School of Business of New York University (NYU).
Telecommunications companies accounted for nearly half of the US$45 billion of defaults in high-yield bonds this year, according to a study of the securities by Altman and Pablo Arman, a research associate at NYU. The telecommunications industry had a default rate of 18.4 percent, compared with an overall default rate of 4.5 percent.
Vulture investors may find few opportunities among the telecommunications carnage. While they often seek to restructure ailing companies, as they did with such recession-battered industries as retailing or real estate in the early 1990s, they also look at cash flow.
"What currently makes telecom bankruptcies unique in the history of restructuring is that many of these companies had little positive cash flow to begin with," said Jeffrey Manning, a managing director of Legg Mason, a financial services company in Baltimore.
The vultures also like to glean value from troubled companies' assets in legal proceedings, but that is difficult in an industry that embraces technologies that are subject to rapid changes. For example, much of the fiber strands and laser-based equipment in communications networks will be obsolete in a few years.
"It's not like a steel mill you can buy and idle for two years while you work things out," Manning said. "In two years the company and its technology could be worthless."
There are additional reasons behind the debacle. One is that the huge buildup in capacity on transcontinental and transoceanic networks was fueled by a similar expansion in the number of the communications companies. Few of these start-up concerns generated enough cash to be profitable.
When financing for such ventures dried up, these companies slowed or halted purchases of communications equipment. That generated weakness at large equipment companies like Lucent Technologies and Nortel Networks and the smaller producers of fiber optic equipment.
Parallel crises gripped the wireless communications industry in Europe, where large carriers, in hindsight, overpaid governments for next-generation mobile Internet licenses, and in the long-distance industry in the US, where intense competition reduced revenue for heavyweights like AT&T, WorldCom and Sprint.
Of course, not all is grim in telecommunications, an industry that provided a major underpinning for the economic boom of the late 1990s. Some important areas of the industry are still relatively insulated from distress, like the local telephone businesses of Verizon Communications, SBC Communications and BellSouth. Large wireless carriers like Cingular Wireless, jointly owned by SBC Communications and BellSouth; AT&T Wireless Services; and Sprint PCS are also doing fairly well.
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