Interesting story on GLW in NY Times:
Remember Rutherford B. Hayes?
He was the president of the United States
when Corning (news/quote) last failed to pay a
dividend to its common shareholders. That was
in 1880, a few years after Corning came up with
a specially shaped glass container for Thomas A.
Edison to use in making light bulbs.
Corning began paying dividends in 1881 and
never stopped, through wars and depressions.
Until now.
Corning is a victim of the greatest bubble of our
time, the fiber optic craze. The lure of a wired
nation, with unlimited potential, led numerous
companies to invest hundreds of billions in fiber
optic capacity. The majority of that money
appears to have been wasted.
This week, Corning did more than eliminate its
dividend. It announced plans to close one
manufacturing plant that opened last year, and
another that was under construction. People
who were hired last year will be laid off.
Corning's management committed many errors. It lopped off units that had
provided diversification of risks while it paid high prices for $10 billion in
acquisitions, virtually all of them to serve the booming telecom market. It was
so sure the market would keep growing at exponential rates that it signed
take-or-pay contracts with suppliers requiring Corning to buy components
whether or not it needed them. Such contracts were unknown in the industry
until the last couple of years, when the bubble mentality took hold. Now
Corning is writing off inventory that it does not yet own, but that it knows it
will never be able to sell.
And yet Corning will survive. Even while it was making ill-considered bets on
the fiber bubble, it was protecting itself financially. Rather than repurchase its
own stock with borrowed money, as so many companies were doing, it issued
stock to finance its acquisitions.
Now Corning has $1 billion in cash and ample bank lines. It is in the clear
financially at least until 2004, when its bank lines expire and a $2 billion issue
of convertible preferred stock will have to be bought back unless Corning's
share price has rallied sharply by then. The most important decision it made
during the bubble was to be a seller — not a buyer — of its shares when prices
were high.
Contrast that to the situation at Britain's Marconi. That company, the old
British General Electric (news/quote), followed a somewhat similar course. It
went big into fiber optics while jettisoning other operations, some with
reliable cash flows. It ran down its cash and borrowed money to make
overpriced acquisitions. Now it is selling subsidiaries at depressed prices, and
there is talk of the need to raise capital by selling stock at prices that are down
90 percent from the peak. "This has been a difficult period for the company and
its shareholders, which the board sincerely regrets," Marconi's chairman said
in a letter to its owners yesterday.
Marconi's management had planned to have its chief financial officer, John
Mayo, elevated to chief executive at next week's annual meeting, at which
shareholders were being asked to approve slashing the exercise price of stock
options for management. Now the option proposal has been dropped, and Mr.
Mayo has resigned.
The fiber optic market is not dead. But bubbles have consequences, and it may
be years, not months, before the dry spell ends. Companies face the prospect
of reduced revenues and limited access to financial markets.
"The worst of all worlds," said James B. Flaws, Corning's chief financial officer,
"is to have a balance sheet that is not strong when you run into rough times." |
