Dot com crash, fear of economic slowdown signal return to business basics for telcos

The financial markets are giving Canadian telcos a critical examination partially based on the sins of their American counterparts. The same scrutiny is true for firms that service telcos. But that may not be such a bad thing, industry experts offer. While investors were flocking to telecommunications companies of all stripes just a couple of years ago, that market has begun to tighten lately. IPOs are more difficult to launch and firms are cutting back or in some cases shutting down operations altogether. Venture capitalists are casting a wary eye before committing their money. "I think people are being affected by the news of some of the larger companies and what’s going on in the U.S.," Niraj Bhargava of Queen’s University tells Network Letter. "There is a slowdown happening in the economy. People may be a little gun shy to invest, especially if they have been riding the wave of the hype economy that’s been going on over the last year and were hoping for those home run opportunities that may not be as forthcoming as they were. Some people may be looking a little harder and I think that’s a good thing." Bhargava is the managing director of the Queen’s Centre for Enterprise Development (QCED). The newly formed body provides tech companies with a wide assortment of services, ranging from mentoring to VC coaching to interim management. Anchored by the Queen’s business school, it also draws on the expertise of 50 outside advisors. They represent firms like CIBC, Deloitte & Touche and Gowlings. The answer to financing problems is simple, Bhargava maintains. Too many people have forgotten the essentials of operating a company. "We have to get back to some business basics. You have to prove the opportunity by showing that you have a great business model, a great management team and prove that the opportunity is coming to fruition," he states. "The wave of hype that suggested if you’re the first mover into the new space, you’re going to have a great ride, may not be the case any more." Dot com mania to blamePeople who are in the middle of the industry agree with that assessment. Bruce Jones is the president of Magardi Inc, an Ottawa-based manufacturer of telephony fraud detection devices (NL, Oct. 23/00). His company is currently going through another round of financing and is attempting to get its house in order to satisfy creditors. He echoes the call for a return to the old models of business plans. "Things are coming back to reality. You’ve got to make money," he explains succinctly. He looks back at the fantasy financing of before. He thinks things got out of hand with the mad rush to dot coms. Investors were tossing money at anything that claimed to be involved in the new economy. Those firms now litter the economic graveyards as they fall, fast and furious. The fallout has meant that fewer companies are willing to risk IPOs. Magardi is one that has yet to approach the markets in this fashion. Currently privately held, Jones told Network Letter last fall that his firm was likely to be involved in a "liquidity event" within the next few months. He offered the possibility of either issuing an IPO or the firm being taken over by another company. Venture capitalists, spurned in recent months, are becoming more popular again – not that all telecom firms can afford to be choosy about what options they use. "I think in general it’s going to be wherever people can get the money," Jones suggests to Network Letter. "Right now everybody is pretty skittish. I think a lot of people got burned with the dot coms."That opinion is shared by the VP government affairs of one of Canada’s largest CLECs. "It started off with the dot coms," Ian Scott of Call-Net Enterprises Inc tells Network Letter. "A lot of them were clearly overvalued." American results influence CanadaThe situation is most dire south of the border. Companies like Lucent Technologies Inc, WorldCom Inc and Sprint Communications Co have seen their shares fluctuate wildly and Canadian telecoms seemed to have been tarnished with the same brush. Nortel Networks Corp took a battering on the stock market over diminished expectations and Cannect Communications Inc wasn’t able to sustain business and has gone into interim receivership (see related story on page 1)."I think the reality is that the telcos in Canada tend to look at what goes on in the States and they see everybody backing off," Jones offers. "There’s going to be a lot more questions in terms of investment into new services." Call-Net’s Scott, looking at the broad telecom picture, thinks Canada’s competitive position gave an unexpected assistance to the new entrants. With the field not as wide open as it is in the United States, Canadian firms like Sprint and AT&T Canada were not expected to do as well as their American cousins. "We may not have been as high during the highs as they were and so the lows perhaps aren’t as damaging," he suggests. The wild rush to the market by financiers, followed by the sudden retreat, leads to a domino effect. "Everybody got caught up in the correction. That passed on to a certain extent to the telecom sector," Scott says. "The telecom stocks then started to come under scrutiny. There clearly was a change in the view of the value of those companies." Corporate views alteredThat’s also led to a change in the view from the corporate boardrooms, according to a man who sits in one. Companies can no longer afford to be particular, Bruce Jones maintains. "It’s not so much that people have preferences anymore. I think the options that people might have had on the table a year ago are not so much on the table," he states. "It’s more going to be who you have a relationship with and you can actually sell them on your ideas that really counts." Bhargava of QCED sees changes ahead, but thinks telecoms should be hopeful about what awaits them. "I think there is a shakeout going on, in industry and in incubators and VCs," he predicts. "There may be some skeptics out there, but I think if you have a sustainable model and you show that you have the right management team and the right skills, there’s still money to be invested. It’s just that people are going to be looking a little harder, which I’d say is a good thing." The gold rush of recent years is over, he believes, but insists opportunities still exist for those willing to blend the business basics of the old economy with the realities of the new economy.

Dot com crash, fear of economic slowdown signal return to business basics for telcos

News | 02/12/2001 5:00 am EST

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