WorldCom Bankruptcy May Help Rivals' Suppliers Such as Cisco
By Justin Baer
Clinton, Mississippi, July 21 (Bloomberg) -- WorldCom Inc.'s bankruptcy may give a bigger share of the telephone-equipment market to top suppliers of AT&T Corp. and Sprint Corp. as WorldCom customers defect to its rivals, analysts said.
Cisco Systems Inc., Lucent Technologies Inc. and Ciena Corp. would benefit, while Nortel Networks Corp. and Juniper Networks Inc. might lose out, should corporations and government agencies take their business -- and their phone and data traffic -- to WorldCom's competitors, they said.
Traffic will swell on rival systems if enough big customers drop WorldCom. That would prompt AT&T and other carriers to buy more fiber-optic, phone and data-transmission equipment. Because carriers prefer to pick a handful of vendors and stick with them to avoid the cost of replacing an entire network, they typically order additional gear from the same manufacturers, analysts said.
``There are going to be some market share shifts between different suppliers,'' said Shawn Campbell, an analyst with Northern Trust Corp. ``It's more painful for some.''
WorldCom said last month that it concealed $3.85 billion in operating costs as capital expenses for the past five quarters. The move inflated profits and led suppliers to believe WorldCom had spent billions of dollars more in gear and other capital goods. In reality, no one had won many orders from Clinton, Mississippi-based WorldCom for at least a year.
Lower Capital Spending
Lehman Brothers Holdings Inc. telecommunications-equipment analyst Steven Levy said WorldCom spent $2.7 billion in the fourth quarter of 2000. Excluding the operating costs improperly classified as investments, WorldCom's capital spending slid throughout 2001, from $1.46 billion in the first quarter to $827 million in the fourth quarter. In the first quarter of 2002, WorldCom spent $580 million.
By June 2002, WorldCom's suppliers, including Nortel, Juniper, Corning Inc. and Tellabs Inc., said orders from the phone company comprised a small fraction of sales. Equipment typically accounts for 50 percent to 60 percent of a phone company's capital budget, Levy said.
Nortel has been WorldCom's biggest supplier of fiber-optic equipment, while Juniper sells WorldCom routers used to direct Internet traffic. Corning supplies the cable for optical networks, and Tellabs makes equipment that manages network traffic.
Extra Capacity
Some WorldCom customers may have contracts that stipulate that they won't work with bankrupt vendors, leading them to switch to AT&T or Sprint. The effects of this shift likely won't reach equipment suppliers until phone competitors have used up all spare network capacity and WorldCom decides how and when it will emerge from bankruptcy, analysts said.
``In reality, nobody's changing anything for a while,'' Levy said.
Long-distance and Internet competitors also may choose to purchase WorldCom assets rather than expand their own networks, said Ariane Mahler, an telecommunications-equipment analyst with Dresdner Kleinwort Wasserstein. Carriers might not want to replace the gear already installed in their newly acquired piece of WorldCom's networks.
``Would you really want to change all of those routers?'' Mahler asked.
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