Welcome to the bone yard

I'm on the edge of my seat waiting to see how companies that became accustomed to good times in telecom over the last few years will react to — and survive in — the coming months.

M&A used to stand for “mergers and acquisitions.” It now is coming to stand for “mitigate and acquiesce.” For a few years, carrier and vendor corporate leaders were acting like the first and best way to get into a new business or a new market was to buy a company that was already doing it, or was already there. They also took a similar attitude when it came to beating the competition: If you can't beat them, or if you don't want to waste your time trying, just buy them.

Not a whole lot of people in the telecom industry are looking forward to the coming months, as the general souring of the economy makes itself felt in the one industry no one thought it would penetrate. As of this writing, JDS Uniphase, WorldCom and Corning are the latest telecom companies to announce layoffs. We have to say “as of this writing” just to be safe because who knows how many layoff or bankruptcy announcements you have seen since this went to print.

Certainly, those being laid off are not looking forward to the coming months. Nor are the individual and institutional investors in once-high-flying telecom firms. Across the industry, we all rather came to enjoy the feeling of living in a boomtown.

However, I have to confess to having a perverse interest in the dark days ahead. Maybe it is a Hannibal-like hunger for carnage, but I'm on the edge of my seat waiting to see how companies that became accustomed to good times in telecom over the last few years will react to — and survive in — the coming months. Particularly, the firms that have come to live by merger and acquisition will be the ones to watch.

In some cases these companies are not unified organizations so much as quilts sewn together from different patches. Some of these companies grew so fast and so large in the last few years that it seemed they were just stitching more patches into their quilts, without much regard for the size of the patch, or the color, or the intricacy of its pattern.

In the coming months, those companies will have to figure out a different way to survive. If you take a look at the recent headlines, it is already obvious that the M&A flow has slowed to a trickle. Deals are no longer moving with the pressure of a fire hose. Only Cisco Systems methodically continues, cyborg-like, to buy up firms, and maybe even Cisco has slowed (just a couple of deals in the last few weeks).

Most telecom firms that lived by M&A the last few years now face the pressure not to do deals. It is a pressure to cut and pay off debt in more traditional ways than acquiring new revenue channels (thereby creating more debt) to pay it off. It is a pressure to decide you don't need every single employee you have acquired, and find out which ones are really the most valuable to the cause. It is the pressure to find 10 more ways to grow your core business rather than 10 more businesses to acquire and grow.

The M&A binge is over, and it is probable that some of those merger-happy firms will be forced to rip their quilts to shreds. A few months back, some industry analysts were looking at 2001 as a year of further deal-making that would create bigger companies, and markets would be rife with corporate consolidation.

Now it is becoming clear that the biggest companies will get no bigger, at least not through acquisition, and the only consolidation will come from firms exiting the business altogether.

The M&A parade can try to continue, but for what reason? You can collect bones in a bone yard, but who wants a bunch of bones?

Contact Dan O'Shea, Content Director for TelecomClick, at doshea@industryclick.com