Tag Archives: AT&T

Fiorina, Lucent, and Lucidity

Fiorina 1 Nevada Republican Party Chair, Michael McDonald, was pleased to post that Carly Fiorina won the National Federation of Republican Women’s straw poll at their convention in Phoenix, AZ last month. [NVGOP]  Gathering 27% to the Hair-Do’s 20% – if that’s to be called a ‘win’ in the sorting of the occupants in the GOP 2016 Clown Car.  There’s another way to sort the candidates, especially those who claim that business acumen is an automatic qualifier for political office. 

Those pundits who have labeled Fiorina “Snarly Failure-ina” are usually referring to her unfortunate tenure – and subsequent Golden Parachuted Escape therefrom – at Hewlett Packard.  However, it’s instructive to go back a bit and start with AT&T.

Twenty years ago AT&T began the process of selling off one of its core assets, the equipment manufacturing division, including Bell Labs the originator of the transistor and a ‘preeminent research outfit.’  The idea was that as a separate entity the equipment division could compete with AT&T competitors and sell its products to flashy outfits like Sprint, Winstar, and PathNet telecom networks.   Fiorina’s star ascended as the head of the group selling gear to “service provider networks.” [Fortune]

The Big Deal in which AT&T spun off Lucent was not without some chickens which would come home to roost later.  There were several clues at the time which projected problems: (1) Lucent was valued at $15 billion at the time of the IPO, but a $21 billion value had been bruited about only a week earlier; (2) its major competitors were Siemens (Germany), Alcatel (France), and Motorola. (3) AT&T loaded the company with $3.8 billion in debt; (4) there were restructuring costs tied to planned major layoffs and Lucent reported a loss of $867 million for 1995 on revenue of $21.4 billion, down from a profit of $482 million and revenue of $19.7 billion for the year before. [LATimes]  And then there was this warning:

Lucent also faces a maturing U.S. market for telecommunications switches. It is making an aggressive push into faster-growing markets in Asia and elsewhere, but it faces tough competition from companies like Alcatel that have long had a powerful international presence. [LATimes]

A bit of history is in order:

“At that time, telecommunications equipment companies had entered a period of unprecedented — and as it would later emerge, unsustainable — growth. Congress had passed a law making it easier for new companies to compete with local phone companies, which had long been de facto monopolies. Households and businesses first connecting to the new-fangled Internet added phone lines and equipment and services, creating a gold rush to build up new network capacity around the world.” [Recode]

For “gold rush” read “financing” for the Qwests and WorldComs and other providers  which had laid far more fiber optic cable and installed way too much capacity, well beyond the needs of the potential customers.  What to do in the service of selling telecommunication switches in a “mature” market – one which was at least saturated if not in the flood zone?

Fiorina administered the practice of “vendor financing” to keep revenues up. There’s nothing necessarily nefarious about this – it was a standard business practice in which Lucent required suppliers to arrange or provide “long term financing for them as a condition to obtaining or bidding on infrastructure projects.” [recode]  When the deals were good, such as the $2.3 billion extended to Sprint, they were very good. But then… there were others of much more questionable obligations. 

It was reported in October 1998 that Lucent and WinStar entered into a $2 billion five year “network pact.” That $2 billion from Lucent was supposed to allow WinStar to expand on an international basis. [IntNews]  The deal didn’t last any five years, it only lasted until WinStar declared bankruptcy in 2001, and sued Lucent for $10 billion claiming that the firm broke its vendor financing agreement. [CompW]  By the time WinStar went under, Fiorina was ensconced at Hewlett-Packard.  WinStar wasn’t the only disaster.

There was also PathNet, a vendor financing deal which made even less sense.  PathNet at least had the sense to notice that first tier cities were all but awash in telecommunications equipment in 1999, so they were going to focus on second and third tier cities for their networks. To this end they secured $2.1 billion from Lucent in vendor financing in February 1999.  [FOonline]  This amount to a company which reported less than $2 million in annual revenue. [recode]  Even using the most generous estimates the company had barely $100 million in equity; it was juggling $385 million in junk bonds at 12.25% interest, and the added $440 million in loans from Lucent only served to jack up the company’s leverage to 8:1. Even higher as they drew more of the loan? [Fortune]

Fiorina has pushed back on the notion she was happy with these short term, dubious deals, however, there’s another side: Lucent at one point predicted annual growth of 17%-22% annually. (1997) [Fortune]  Now, what’s not for Wall Street to love about a 17% annual growth rate? Fiorina may not have been over the moon about the vendor financing deals, but she was determined to rack up big sales. [Fortune]  PathNet filed for bankruptcy in April 2001.

An SEC filing just after Fiorina left Lucent revealed a $7 billion in loan commitments to customers, Lucent dispensing some $1.6 billion. [Fortune]  Why would this be important?  For starters, think Bubble. What the highly questionable home mortgages were to the Housing Bubble, those vendor loans were to the Tech Bubble.  At one point Lucent shares dropped to >$1, and in 2006 the company merged with Alcatel. [Fortune]

So, what do we know?  Fiorina’s tenure at AT&T/Lucent wasn’t much more than that of the Super-Saleswoman who predicted high growth rates and revenues based on vendor financing deals, deals which collapsed as the saturated market finally emerged from behind the curtain of financial manipulation. This isn’t business vision, it isn’t even lucidity – it is merely chasing a fast buck.

References and Recommended Reading:  Linda Rosencrance, “Winstar files for bankruptcy, sues Lucent for $10 billion, Computerworld, April 18, 2001. Staff Report, “AT&T Spinoff Lucent Makes Historic IPO,” Los Angeles Times, April 4, 1996. Scott Woolley, “Carly Fiorina’s troubling telecom past,” Fortune, October 15, 2010. Arik Hesseldahl, “Time to revisit Carly Fiorina’s business record before HP?…” Recode, August 30, 2015.  Jeffrey Sonnenfeld, “Why I still think Fiorina was a terrible CEO,” Politico, September 20, 2015.  Glenn Kessler, “Carly Fiorina’s misleading claims about her business record, Washington Post, May 8, 2015.  Andrew Ross Sorkin, “The influence of Fiorina at Lucent, in hindsight,” New York Times, September 21, 2015. Julie Bort, “Yale Professor on Carly Fiorina’s business record: She destroyed half the wealth of her investors yet still earned almost $100 million,” Business Insider, September 16, 2015.

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Sandoval’s Session: GCSB Menu — To Serve Man?

To Serve ManNevada’s economic plan — hold another conference? There’s nothing like a lovely conference to get the juices flowing in regard to economic development.  Not that there’s anything essentially unproductive about getting small business leaders in the same room with government officials and inspiring speakers…but.   The Governor’s office and the Chamber are teaming up to present panels on “Access to Capital, Educating Tomorrow’s Workforce and Healthcare: Myths and Facts.” [NV2013]

The “grand sponsor” of the event is NV Energy.  Other sponsors include Heritage Bank, AT&T, Advantage Capital Partners, and IQ Technology Solutions.   [NV2013]

Skeptics may wonder what AT&T, whose petition to the FCC in 2013 is straight out the of ALEC model plans book, [HuffPo] wants to say to small business owners and managers in Nevada, other than to promote the idea that they should continue to utilize their old copper wires to offer U-Verse services over their system without all basic obligations and regulations on the state and federal level.  We might wonder about AT&T’s grand plans for broadband access for small businesses when these observations come to light:

“In 2009, AT&T’s started the federal ball rolling with comments outlining that the states should not have jurisdiction over broadband and it should be the exclusive purview of the FCC — read federal law. Moreover, regulations should be removed on virtually all aspects of their business that would be applied by either the FCC or the commission — including removing service quality requirements.”  [HuffPo]  (Emphasis added)

NV Energy is the self-same corporation purchased by Warren Buffet’s MidAmerican Energy Corp. for $5.6 billion this past May. [USAT] This would also be the self-same energy corporation looking for a rate increase:

“NV Energy’s residential power and natural gas customers would see rate increases starting in January under the utility’s three-year general rate case filed Monday with the state Public Utilities Commission.

The increases, which include a profit and must be approved by regulators, would add $1.48 per month to the average single-family residence power bill across Northern Nevada and $3.96 to the typical monthly bill for natural gas customers in Reno-Sparks. Commercial customers in Northern Nevada would see an average 2.81 percent decline in electricity rates under the filing.”  [RGJ] (June 4, 2013)

Thus far we have one corporate sponsor that wants to “transition” its communications services without making any real technological progress, and desires to do so without state “interference” or those “burdensome regulations” on quality of service; and, another that has a rate increase proposal before the PUC.  What could possibly get skewed?

Heritage Bank is pleased to tell one and all that it is the Number One processor of SBA 504 loans in northern Nevada:

Heritage Bank of Nevada has been named the #1 SBA lender for 2012 in Northern Nevada as the largest processor of SBA 504 loans.  In FY2012, Heritage Bank partnered with Nevada State Development Corp. to provide funding on 15 projects totaling $22,014,750. Heritage Bank’s portion of the loans totaled $9,812,788 and the SBA’s 504 loans totaled $8,179,000. [Heritage Bank]

SBA 504 loans are made to business owners for purchasing or refinancing commercial real estate.  As of January 2013, Heritage Bank had lent out funding for 15 small business projects totaling $22 million, with 90% of the funds for commercial real estate loans.  [RGJ]

A firm is eligible for a SBA 504 loan if it has a tangible net worth less than $15 million and an average net income less than $5.0 million after taxes for the preceding two years. [SBA]  It’s safe to say that most of Nevada’s small businesses would be eligible for these loans.

Grinding down a bit on the SBA 504’s:  A Certified Development Company (CDC) is a nonprofit corporation set up to contribute to the economic development of its community. CDCs are located nationwide and operate primarily in their state of incorporation (Area of Operation). CDCs work with SBA and private-sector lenders to provide financing to small businesses through the CDC/504 Loan Program, which provides growing businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. [SBA-CDC]

The typical SBA 504 CDC has the following components:

  • A loan secured from a private sector lender with a senior lien covering up to 50 percent of the project cost;
  • A loan secured from a CDC (backed by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost;
  • A contribution from the borrower of at least 10 percent equity.

So, a “project” would get its real estate, or equipment, loan in blocks —  50% from the lender/bank ; 40% from a CDC; and, a contribution of 10% equity.

What we’re not seeing in the Heritage Bank numbers are  7 a loans, those made to entrepreneurs and business persons who are launching start ups, or expanding businesses.  The 7a, or general business loans are the kind we’d most often associate with the start up, financing, or expansion of new businesses.

Between October 2012 and May 2013, the major players in the 7(a) program were Wells Fargo, Meadows Bank, Seacoast Commerce, Republic Bank, Hanmi Bank, U.S. Bank NA, Pacific Enterprise Bank, and further down the list, Heritage Bank with five 7 (a) loans out for a bank total of $1,170,000.  [SBA lenders]

If Heritage is seeking to inform more small business owners and managers of the availability of SBA 7 (a) loans that would be an excellent panel. However, if financing in Nevada is getting increasingly sucked into the “income generating property” business there are some questions which need to be raised.  How much money is getting resourced to real estate development firms seeking to buy up distressed property and make conversions to rental units?  Would a subsidiary of one of the Really Big Banks qualify as a business eligible for 504 loans?

Advantage Capital Partners is another of the highlighted sponsors of the Governor’s economic gathering.   The firm describes itself:

“Since 1992, we have raised more than $1.6 billion in institutional capital, often involving innovative structured financing solutions. Our capital has been provided by a large number of the nation’s leading insurance companies and commercial banks.”  [ACP]

Excuse me, but after the Debacle of 2007-2008, when I see phrases like “innovative structured financing solutions” my immediate reaction is to curl into a fiscal fetal position.  Why?  The very definition of structured finance is enough to bring on tremors:

A service that generally involves highly complex financial transactions offered by many large financial institutions for companies with very unique financing needs. These financing needs usually don’t match conventional financial products such as a loan. [Investopedia]

And what might be included in those “highly complex financial transactions?”   Some of our old and not-so-dear friends like: Collateralized Bond Obligations, Collateralized Debt Obligations, syndicated loans, and those wonderful Synthetic CDO’s etc.  I think we’ve seen this movie before, and the ending was — if not pleasant — at least memorable.

And, who’s paddling in these waters? “Our capital has been provided by a large number of the nation’s leading insurance companies and commercial banks.”  — What could possibly go wrong?

To Serve Man

On August 28, 2013 the Governor and the attendees of the GCSB conference will be under the Grand Sierra roof with (1) a communications firm that wants ever so much to be rid of pesky government regulations concerning customer service, (2) bankers who are delighted to offer SBA backed loans for real estate transactions, (3) a “high” finance firm still promoting the joys and profitability of synthetic CDO’s and other financial exotics that contributed to the Great Mortgage Meltdown, and an Energy corporation looking to increase its rates …

It could indeed be a menu To Serve Man.

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Filed under Economy, Nevada economy, Sandoval