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To: Frank A. Coluccio who wrote (9431)	11/30/1998 2:29:00 AM
From: Pamela Murray	Read Replies (1) \| Respond to of 12468

2 to 31 in one day? December 01, 1998, Issue: 314 Section: Financial Track -------------------------------------------------------------------------------- Ride of Their Lives -- Stock Market Swoops May Leave Some Up-And-Comers Feeling Woozy Mark Langner Mark Langner is a research analyst at Hambrecht and Quist Inc. (San Francisco), an investment bank. He can be reached over the Internet at mlangner@hamquist.com. Emerging service providers have had a wild time riding the stock market during the past year, seeing their prices flash up and down like a roller coaster. Take Qwest Communications International Inc. (Denver). Its share price began the year at about $30, rose to just over $40 by spring, fell below $30 in June, jumped to $46 a month later and retreated to $25 by the end of August, only to rally back over $40 by mid-November. And this is only one example. There are plenty of others, some of which make the Qwest's price fluctuation look tame. WinStar Communications Inc. (New York) share prices performed equally mind-bending acts. The market's volatility for emerging service providers, however, probably hit an all-time high on Nov. 12, when regional broadband service provider Avtel Communications Inc. (Santa Barbara, Calif.) saw its share price rocket 1,266 percent in one day, from $2 to $31, pushing its valuation from under $4 million to more than $300 million. The catch? It simply announced it would be rolling out digital subscriber line (DSL) services in the greater Santa Barbara area. All these fluctuations may be exciting to watch, but they're not necessarily fun if you're trying to run a company and plan for the future. So what's in store for these smaller providers as the new year approaches? Certainly not the unprecedented and seemingly never-ending good times of the first half of 1998. During 1997 and much of this year, emerging service providers generally outperformed both the general stock market, as measured by the S&P 500 Index, and a basket of more established service providers, as measured by the S&P long-distance and local telecommunications indexes. In the second half of this year, with the collapse in the overall market, that trend reversed itself as up-and-comers fell faster and farther than more established players (see "Basket Cases"). gambles vs. dividends It's not surprising that the more traditional companies outperformed these smaller service providers over the last few months. These are two completely different types of companies. On one hand are the high-flying newer organizations that often lack earnings or even operating profits. These companies may be positioned to capture the next wave of growth in what continues to be a large and exciting industry. But in the meantime, they also offer investors plenty of risk, thanks to their unproven business plans, the potential for unexpected changes in their pricing or marketing strategies, and increased or refocused competition from more established players. The larger, more established companies are simply more attractive in skittish markets. Most of them post both operating profits and earnings, and even pay dividends. They may not be growing at the same rate as the smaller emerging service providers, but many offer strong fundamentals that help them take advantage of the factors generally propelling the telecom industry. In a volatile market, companies like AT&T and the regional Bells offer an inviting haven for nervous investors. AT&T's share price has risen by about 25 percent since its September lows and is now approaching its 52-week high. Emerging service providers have more against them than just fundamentals. Their share prices are also suffering from the relative upward volatility that occurred during the first half of the year, when money was pouring in and pushing them up to extremely high valuations. These stocks simply had further to fall when the market stumbled. The recent rebound in the overall market outpaced the revival in smaller service provider valuations by several weeks. And even when investors are willing to recommit to newer service providers, they are are showing a higher level of selectivity than before. This in turn is creating a wider range in valuations among emerging companies. A volatile market is probably never good, but it is particularly harmful to small service providers. They're least able to absorb the related shocks. It limits their access to capital and inhibits the trend toward mergers and acquisitions (M&As) and the benefits they can bring. With the overall stock market moving away from the strong and steady growth of the "Goldilocks economy"-not too hot, not too cold-of the last few years and toward riskier, more volatile behavior, capital for fueling growth has dried up. This is particularly disconcerting for emerging service providers, which often require several large cash infusions to fund their business development before their operations are profitable. ... nor a lender be The recent stock market rebound has yet to encourage a similar resurgence in the markets for initial public offerings (IPOs) and debt. Since the market bottomed out in September, only a few high-profile IPOs and a small number of debt deals for more established service providers have been financed. Investors have been burned recently and aren't likely to return to the fold for these smaller companies until they see an extended period of stability. The market for M&As also deteriorated in the face of the volatility. The depressed share prices of possible targets may make them more attractive than ever; unfortunately, the stock prices of many potential buyers are also depressed, cutting into these would-be investors' acquisition currency. And for companies looking to finance the acquisition by raising capital, weakness in the IPO and debt markets becomes a problem in the M&A market as well. So will this roller coaster come to a stop anytime soon? It's hard to say. What's certain is that the current financial environment demands that emerging service providers create business plans that are scalable to reflect shifts in funding. An "all-or-nothing" approach may look great when the capital markets are flowing, but in times like these it causes more sheer terror for telecom managers than anything they'd feel at an amusement park.