1/ For those of you too young to remember, the 1997-2002 bubble essentially provided public venture capital money to the entire telecom sector. These were early stage startups wholly dependent upon the capital markets for survival.
2/ The evolution usually went like this: (1) private equity money; (2) $100mm high yield; (3) IPO; (4) follow-on high yield. I lived this first as a cap mkts banker in high yield, later as an analyst.
3/ The story told by managements went like this: “this is a heavy fixed cost business, once we get to critical mass, spending stops and huge amounts of free cash flow follow. It’s simple math.” And the markets initially believed this story and funded follow-on after follow-on.
4/ Robust demand for telecom capacity and telecom services was assumed by the market with no proof it actually existed. The reason all these telcos eventually filed was because they never generated enough revenue or cash flow to grow into their balance sheets.
5/ The truth was, there was massive over-capacity, no one sized the market properly, real revenue growth was a pipe dream, and every company needed to raise capital, not for growth cap-ex, but to cover a huge funding shortfall in basic operations.
6/ Things started to head south for the sector when the free cash flow promised from the waves of capital raises never materialized and the market started to get wise to the fact that the sector had a revenue problem.
7/ If I heard it once I heard it 1,000 times on conference calls: “This round gets us to fully funded status – we can fund all growth capex after this from internally generated cash flow.” Of course, that promised cash flow never materialized.
8/ What got the telco’s into trouble wasn’t their constant reliance on cap markets, though that exacerbated their demise – it was that they never had enough customers and revenue and were never going to. No one sized the end-user markets properly.
9/ Their capital markets activities were lies on top of lies. Managements had no clue about the size of their end-user markets, and institutional markets took management’s claims at face value.
10/ What ultimately did the telcos in was when high yield said “No Mas.” Suddenly, none of these companies were “fully funded.” But it all started with high yield demand drying up.
The next time someone tells you the capital markets are always open, point them to the Interweb’s Wayback Machine. Markets are open until they’re not. It always happens faster than expected.
