From The New York Observer:
observer.com
Genuity Inc. I.P.O. Is Last Cocktail on
Dot-Com Spree
by Christopher Byron
Bloomberg News
Will somebody puh-leeze 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,
Mas.–based Internet company named Genuity Inc. was able to stick its snoot into
the Wall Street capital trough last June and snorgle up an astounding $1.8 billion in
public monies … an achievement that, in time, will likely be remembered as the
final blowout to Wall Street’s Internet initial public offering 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.
Every "content" stock in the space has by now collapsed. Salon.com Inc., publisher
of the cultural and political Web zine, has fallen 79 percent since Jan. 1, and now
sells for about $1 a share. TheStreet.com Inc., an online financial news service, has
plummeted 80 percent since the start of the year, to about $3. Marketwatch.com
Inc., another online financial news service, has plunged 89 percent so far this year,
to about $4. There are countless similar examples.
Almost all advertiser-supported Internet stocks have similarly collapsed: 24/7 Media
Inc., an Internet advertising shop, has dropped 89 percent this year, to about $7.
DoubleClick Inc., the leading Internet ad agency, has fallen 90 percent to $12. Even
Yahoo Inc., the largest online search service and bluest of the blue-chip Internet
stocks, has dropped 74 percent since Jan. 1, to $55.25.
All business-to-consumer Internet stocks have crashed. Amazon.com Inc. is down
about 70 percent from its high of $113 in December and now sells for about $25 a
share. Priceline.com Inc. has crashed from a high of $104.25 on March 14, to about
$6—a loss of 94 percent.
Almost all business-to-business stocks have tanked. FairMarket Inc., a
business-to-business auction site, went public March 14 and traded as high as
$53.50 in its first day. The stock has since lost 96 percent of its value and sells for
about $2. The leader in the field, Commerce One Inc., has lost 49 percent of its
value since its March 9 high, and at its current price of about $69 may have much
further to fall. CMGI Inc., which holds investments in all sorts of Internet-based
activities, has fallen 89 percent from its high in January of $163.50 to about $18 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 about fourfold this year. Network Appliance Inc. shares have
more than tripled in value, and so has Extreme Networks Inc.
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 up 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 over-capacity 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.
Global Crossing Ltd., which is building a fiber optics network connecting Asia,
Europe and the Americas with undersea cable, has lost about half its value since the
start of the year. So has WorldCom Inc. and NTL Inc. Level 3 Communications
Inc. is down by 27 percent. Qwest Communications International Inc. and Verizon
Communications shares have lost about a quarter of their value. These are all huge
companies with multi-billion-dollar market caps, and they are collapsing because
demand for their services is just not developing at the rate they had been counting
on.
Which brings us 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 I.P.O., the largest Internet
offering of its kind, and here is one of them: Genuity and its investment
bankers—led by the crew 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.
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 further down the road.
Not long after the New Year’s Eve ball drops on Times Square, they’ll be whacking
away at their next $2billion 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 $2billion 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, under a section entitled
"Liquidity and Capital Resources," one may see that, over 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 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.
Never mind all that baffle-gab 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 Steve Case and his Machiavellian consiglieri, Gerald Levin, happy.
In other words, this company has gotten itself oo-scrayed (pig Latin) from the git-go
(English). To hang onto 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 a broadband, high-volume data
transmission network in which over-capacity 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.
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) annualized 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
annualized 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 $516 million of revenue while
spending $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.
Already the company has racked up a deficit of $1.3 billion simply to get itself
going, 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 about $6, 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 spin-off of GTE Corp., which
merged with Bell Atlantic 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 I.P.O. to
raise $1.8 billion, we’ve got the perfect site to start from. Log onto the Internet, go
to dack.com, and have a blast. |
