Genuity Is an E-Something, But for How Long?
By Christopher Byron
Weston, Connecticut, Oct. 18 (Bloomberg) -- Will somebody puh-leese tell me what this means: ``We are a leading e-business network provider delivering managed Internet infrastructure services to enterprises and service providers.''
I know the words mean something because the sentence contains a subject, a verb and a predicate, and all the words are English. What's more, I can diagram the sentence, just like I was taught to do in sixth grade. But what does the sentence actually mean?
I want to know because it is upon that formulation of language, and apparently little else -- an expression of such paralyzing obscurantism as to defy restatement into any words other than those the sentence already contains -- that a Burlington, Massachusetts-based Internet company named Genuity Inc. was able to stick its snoot into the Wall Street capital trough in June and snorgle up an astounding $1.8 billion in public monies ... an achievement that will likely prove in time to be remembered as the final blowout to Wall Street's Internet IPO craze.
We'll get into the particulars of the Genuity story in a minute, but first an update on the current state of affairs in dot-com land, which is beginning to look like a riot-ravaged town on the West Bank.
The Casualty List
Every ``content'' stock in the space has by now collapsed. Salon.com Inc., publisher of the cultural and political ``Webzine,'' has fallen 80 percent since Jan. 1, and now sells for $1 a share. TheStreet.com Inc., an online financial news service, has plummeted 81 percent since the start of the year, to $3.69. Marketwatch.com Inc., another online financial news service, has plunged 89 percent this year, to $3.88. There are countless similar examples.
Almost all advertiser-supported Internet stocks have similarly collapsed. 24/7 Media Inc., an Internet advertising shop, has dropped 91 percent this year, to $4.94. DoubleClick Inc., the leading Internet ad agency, has fallen 92 percent to $10.19. Even Yahoo! Inc., the largest online search service and bluest of the blue-chip Internet stocks, has dropped 77 percent since Jan. 1, to $48.94.
All business-to-consumer Internet stocks have crashed. Amazon.com Inc. is down 81 percent from its high of $113 in December and now sells for $21.94 a share. Priceline.com Inc. has crashed from a high of $104.25 on March 14 to about $5.16 -- a loss of 95 percent.
Other Victims
Almost all business-to-business stocks have tanked. FairMarket Inc., a business-to-business auction site, traded as high as $53.50 on March 14, the day it went public. The stock has since lost 96 percent of its value and sells for $2.25. The leader in the field, Commerce One Inc., has lost 52 percent of its value since its March 9 high, and at its current price of about $64.75 may have much further to fall. CMGI Inc., which holds investments in all sorts of Internet-based activities, has fallen 91 percent from its high in January of $163.50 to about $15.38 a share.
These are losses of unprecedented magnitude, severity and swiftness for investors, and so far, about the only sector of the Internet space to have escaped the carnage has been the networking and infrastructure space -- the companies providing the switches, cables, routers and software to make the Internet actually work. Juniper Networks Inc. is up fourfold this year. Network Appliance Inc. shares have more than tripled in value, and Extreme Networks Inc. has almost tripled.
`Field of Dreams'
They have soared because, generally speaking, companies are still building out their Internet and telecommunications systems. Like Kevin Costner in ``Field Of Dreams,'' they are being driven by the belief that if you build it, they will come -- ``they'' in this case being actual customers, people who (it is hoped) will take one look at cool new stuff like streaming- video eyeball- socket cameras on their computers and conclude that they absolutely, positively cannot ever again sit down to type another e-mail to someone without beholding the intended recipient staring back, from his own computer, at the sender in the process of typing it up.
Yet overcapacity is already so extreme in this sector that rates for long-distance, bulk data-transmission services over so- called T-3 lines -- a mainstay of the business -- have collapsed by 25 percent in the last six months. As a result, almost every company involved in providing data-transmission telecommunications services to business has seen its stock crash right along with Internet shares.
Back to Genuity
Global Crossing Ltd., which is building a fiber-optics network connecting Europe, Asia and the Americas, has lost 54 percent of its value since the start of the year. WorldCom Inc. is down 59 percent and NTL Inc. has dropped 61 percent. Level 3 Communications Inc. is down 31 percent. Verizon Communications has declined 21 percent. These are all huge companies, with multibillion-dollar market caps, and they are collapsing because demand for their services is just not developing at the rate they had been counting on.
And so we come to Genuity and its June 28 initial public offering, which raised a staggering $1.8 billion on the proposition that what the world needs more than anything else is yet another company in this over-crowded space.
There are several things worth noting about the Genuity IPO, the largest Internet offering of its kind, and here is one of them: Genuity and its investment bankers -- led by the crews at Morgan Stanley Dean Witter & Co. and Salomon Smith Barney Inc. -- raised that money less than four months ago, and if things go according to plan, the whole $1.8 billion of it should be pretty much gone in another eight to 10 weeks.
That fact alone will give you some insight as to why stocks in the networking space haven't yet caught up with the downward spiral that's taken over the rest of the tech sector: The networking and infrastructure stocks are still being force-fed orders from outfits like Genuity.
Line of Credit
Here's the next interesting thing about this shop-until-you- drop ``e-business network provider'' outfit: That $1.8 billion they've been burning through is actually only warm-up spending for what these boys really have in mind farther down the road. Not long after the New Year's Eve ball drops in Times Square, they'll be whacking away at their next $2 billion in spendable folding stuff -- this courtesy of a tide-me-over $2 billion credit line that the boys worked out just the other day with Chase Manhattan Bank.
And after that $2 billion is gone (which considering the way things have been going at Genuity, ought to take about an hour), well, don't expect them to be going cold turkey. Turning to the company's latest (and only) 10-Q quarterly financial report filed with the Securities and Exchange Commission, we can read, under a section entitled ``Liquidity and Capital Resources,'' that during the next five years the company plans to spend a stupefying $11 billion more to get itself suitably tricked out as a (well, whatever it is).
Which brings up the third interesting thing about Genuity: All this effort and expenditure, which works out to an average of $2 billion-plus per year in capital outlays until at least mid- decade, may in actuality never turn a profit for Genuity's shareholders at all.
Why? Because when it comes to business strategies, you can't find one much worse than Genuity's -- even in the Internet space.
What Genuity Is
Never mind all that bafflegab talk about being an ``e- business network provider delivering managed Internet infrastructure services to enterprises and service providers,'' Genuity is fundamentally the following and nothing more: When you turn on your computer and connect to the Internet, Genuity is one of more than 70 public companies (and hundreds of private ones) in business to connect you. It is what is known in the trade as an Internet service provider ... the stocks of which are also collapsing.
Now the dumb thing -- and we mean the really dumb thing -- about the Genuity business model is that the company is utterly and hopelessly dependent on just one customer -- America Online Inc. -- in order to stand upright and keep breathing. Almost half -- and we repeat, half -- of Genuity's revenue derives from precisely one source, AOL, with which Genuity has a seven-year contract. Moreover, it is a contract that can be terminated by AOL on precisely 30 days' notice if Genuity cannot raise the billions of dollars it says it needs to keep building out its system to a level that keeps AOL Chairman Steve Case and his Machiavellian consigliere, Gerald Levin, happy.
Business Outlook
In other words, this company has gotten itself oo-scrayed (pig Latin) from the get-go (English). To hang on to a customer without which it cannot stay in business, the company will have to borrow maybe as much as $12 billion over the next five years ... and all to finance the construction of broadband, high-volume data-transmission network in which overcapacity and declining prices grow worse by the day.
So, how are Messrs. Case and Levin likely to play their royal flush hand against the pair of deuces held by the bunch at Genuity? Well, duh! They'll simply let the Genuity bunch keep building out their network until the company's balance sheet is no longer visible from under the mountain of debt piled upon it. Then they'll say, great, guys, tell you what: Either cut your rates or we won't renew our contract! At which point the folks at Genuity will meet Jesus, the Buddha and Mohammed all at once, coming face-to-face with humankind's greatest lesson: At the end of life comes death, and in the end you die alone.
Revenue Growth
Genuity is in fact dying already. According to its 10-Q filing, the company's revenue is growing at a modest (for the Internet space) annual rate of 60 percent. But the company's Cost of Goods Sold -- the first and most basic category of expenditure that any company faces simply to stay in business -- is already greater than its revenue and, amazingly enough, growing even faster, at a 74 percent annual pace. Down that road lies ruin, even if you don't count any of the other costs the company faces.
Add in so-called Selling, General and Administrative expenses, and depreciation (which in the case of this equipment- dependent company is a real expense), and in its latest six-month reporting period, Genuity took in just under $516 million of revenue while spending almost $940 million in operating outlays simply to get itself going. Between operating losses and capital expenditures, the company is burning cash at a rate of half a billion dollars per quarter. On top of that, in the months and years ahead, the company will face what could eventually total perhaps as much as $300 million per quarter in additional charges from interest on its debt. This is a business plan? No, this is a prescription for financial suicide.
Decline of Stock
Already the company has racked up a deficit of $1.3 billion simply to get started, and it is hard to see how the red ink can ever be reversed. After all, if the company does by some miracle show signs of starting to turn a profit, just one of its customers, AOL, will be able to cream off 100 percent of the benefit by simply demanding rate cuts that will bump it back into the red.
Put bluntly, Genuity is in a no-win situation, forever -- which doubtless helps explain why the stock went public at $11 a share and is now selling for $5.91, giving it a market cap of roughly $1.2 billion, or a little more than half the cash on its balance sheet as of June 30.
So why did Morgan and Solly take this dog to market at all except to pocket the resulting fees? No mystery there. Genuity was a spinoff of GTE Corp., which merged with Bell Atlantic Corp. and is now known as Verizon. Here at Curmudgeonly Arms, we're betting the whole deal was done so that the underwriters could get some follow-on business from Verizon, and for probably no other reason than that.
Enough said, on all of this ... except that if you want to write up your own IPO to raise $1.8 billion, we've got the perfect site to start from. Log on to the Internet, go to dack.com, and have a blast. |
