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Dead Companies Walking

Don't get burned: Many cash-starved techs and telecoms won't last the year

Is the worst of it over? Investors, employees, and more than a few technology journalists are trying to figure out whether the new year will bring with it a new and improved outlook for tech companies. Perhaps, just perhaps, the steady stream of layoffs, corporate closings, and bankruptcies is winding down.

Forget about it. A close look at the financial statements of about 500 tech and telecom companies shows that the crunch is likely to get worse before it gets better. Particularly troubling are the low cash reserves at dozens of money-losing players. Nearly 50 tech and telecom companies have 18 months or less of cash, based on conservative estimates of the current rates at which they're burning through their stashes. With investors refusing to pony up more dough, many of these upstarts are likely to close their doors or sell out to rivals. "Marginal companies that are running low on money are dead," says analyst James H. Henry of Bear Stearns & Co. "Even good companies that are running low may have to sell out, because the capital markets are closed."

Who's at risk? Start with the band of upstarts that are selling speedy Net connections over telephone lines. Covad Communications, Rhythms NetConnections, and Northpoint Communications are all former highfliers that are running perilously low on cash. Northpoint is in the worst shape. The San Francisco company had $150 million on its balance sheet at the end of September and burned through $110 million in the third quarter. At that rate, it could use up the money in its coffers before the end of January. The company suffered a serious blow in November, when Verizon Communications pulled the plug on a deal to invest $800 million for a 55% stake. To make its cash last, Northpoint said in December that it would cut 19% of its workforce, or 248 jobs. Now it's suing Verizon for damages and scrambling to find another sugar daddy.

Covad and Rhythms are slightly better off. Both appear to have enough cash to last through 2001, but they're being cautious about how they spend their precious reserves. Covad is laying off about 400 people, or 13% of its workforce, and plans to cut its capital spending this year to $250 million, from the previously planned $350 million. Now Covad says its revenues likely will hit $380 million to $390 million this year, instead of the $550 million that analysts had been expecting. "The coming months will not be easy ones for us," said Chairman Charles McMinn in a December conference call. "We believe we can weather the market conditions for at least a year."

Several fledgling phone companies may not be so fortunate. Take RSL Communications Ltd., the telecom and Internet services company founded by Ronald S. Lauder, heir to the Estee Lauder cosmetics fortune. In 1999, RSL boasted a market cap north of $1 billion. Now, it's de-listed from Nasdaq and is worth about $20 million. One reason RSL's prospects look so bleak is that it had only $151 million in cash on its balance sheet as of Sept. 30, after burning through about $100 million in the third quarter. Jim Magrone, RSL's vice-president for treasury and investor relations, says a deal that would raise cash is "imminent." The company plans to sell its stake in a German-based directory business called Telegate, which RSL said in July would bring in about $395 million. But when asked to confirm the terms in January, Magrone said that "any deal is subject to renegotiation."

RSL is just the tip of the iceberg in the telecom sector. Henry predicts that more than half of the 31 upstart telephone players he follows will disappear through bankruptcies or mergers. ICG Communications Inc., a once-hot telecom player based in Englewood, Colo., filed for bankruptcy last year, and its survival is unlikely. Savvis Communications Corp., which provides data and Internet services, also is in rough shape. Savvis, which had $78 million in cash at the end of September, said in its financial statements that it only has cash through "early 2001" and may not be able to raise more. Chief Financial Officer David J. Frear says Savvis has not raised any new capital since then, and he declined to give any guidance on capital expenditures and other financial metrics going forward.

Plenty of former Net stars are feeling the cash crunch, too. On Jan. 4, eToys Inc., the much-hyped online retailer, said that it only had money to fund operations through March, and it would lay off 70% of its 1,000 person staff. Prodigy Communications, once a legitimate rival to America Online Inc. in providing Net access, said in a recent financial statement that it may not have enough cash to survive. And remember Theglobe.com? The New York community site saw its stock soar more than 600%, to $31.75, on its first day of trading in 1998. Now it's on life-support, with shares at about 50 cents. At the current burn rate, the company's $25 million in cash will last about a year. In a recent financial filing, the company conceded that there is "substantial doubt" that it can continue in business. A spokesperson did not return phone calls.

Even Webvan Group Inc., the high-profile home-delivery company, is in a serious squeeze. After announcing aggressive plans last year to roll out its service nationwide, Webvan disclosed in a recent Securities & Exchange Commission filing that it doesn't have enough cash to last the year. It says it has funding to continue through June but needs to raise an additional $80 million to $100 million to make it through 2001. A company spokeswoman declined to comment beyond the financial statements.

So buckle up: 2001 won't bring a quick end to the troubles of last year. Over the next few months, the ride in tech and telecom is going to be bumpy.By Peter Elstrom, Peter_elstrom@ebiz.Businessweek.comReturn to top


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