What can banks learn from the clean-up after the telecoms crash of 1997-2003?

Lessons from the telecoms bubble (1) Crash course Feb 26th 2009 From The Economist print edition What can banks learn from the clean-up after the telecoms crash of 1997-2003? BEFORE banks, the last global industry to commit collective suicide was telecoms during the boom and bust of 1997-2003. The parallel is imperfect—banks are uniquely vulnerable to runs and have a special role in the economy. Reflecting this, only a few telecoms companies received state bail-outs. But in a narrower corporate sense, the meltdown rivalled that of the banks. From peak to trough the industry lost $2.8 trillion of market value, compared with the $4.6 trillion banks have shed (see chart). Just like banks, telecoms had imperial bosses, kamikaze deals and incomprehensible jargon—if collateralised-debt obligations troubled you, try gigabit Ethernet routers. In telecoms leading firms were reduced to indebted objects of ridicule. The consequences were bankruptcies, huge job losses, fraud, trashed reputations and, eventually, a clean-up. By these standards, banks remain in a fantasy world. They are largely still run by the same people, they have a piecemeal approach to cutting leverage, and their goal, beyond firefighting, is to tinker with their portfolios, removing areas of egregious excess. If the telecoms industry is anything to go by, this gradualism will fail. A management cull is both inevitable and desirable—only a handful of telecoms bosses clung on and prospered, Ivan Seidenberg of Verizon being one example. Firms, like Vodafone, that took an evolutionary approach to replacing the old guard regretted it, with rows souring the boardroom for years. Complacency can kill even the biggest firms. The two leading telecoms firms of the 1990s, AT&T (since bought by SBC, which took its name) and British Telecom, were more or less dismantled by investors tired of their flawed cultures and incoherent empires. Bank conglomerates like Citigroup should take note. What should new managers do first? Define a core business and be brave enough to raise the equity to fund it. Those telecoms firms, such as Telecom Italia, that failed to cut their debt went on to shrink into obscurity. Too many others chose expedient fire sales, especially of emerging-market assets. Banks look vulnerable to this, since governments want them to bolster their domestic balance-sheets, but the telecoms firms that did best were those, like Spain’s Telef&oacute;nica, that clung to the assets that promised growth. Telecoms companies, like banks today, were encouraged to go “back to basics”. But once they wiped away the froth, their core businesses were mature and mediocre—as banks will discover with their branches. That raised the temptation for acquisitions. Sadly for the telecoms firms, bottom-fishing for distressed assets rarely worked, and investors vetoed empire-building deals involving mature assets that yielded few cost synergies. Even domestic deals had mixed results. In America SBC successfully swallowed several rivals, but the merger of Sprint and Nextel, two mobile-phone firms, was ruined by bad execution. This pattern of European ossification and American consolidation is holding true for banks. Doubtless the difficulties of meshing combinations like Bank of America/Merrill Lynch and Wells Fargo/Wachovia during a downturn are being underestimated. Next, new bosses must start a cultural revolution. Bubbles corrupt firms’ intellectual capital; in telecoms, everything from sales incentives to budgeting had become based on measures that had little to do with a sober view of profits. The rot reached the top, with investors, directors and managers eval‎uating performance using cashflow models that were so long-dated that they broke even after their authors planned to retire. This problem is deeply embedded in banks, where most common measures—return on equity, cost/income ratios and price/earnings ratios—flatter leveraged firms, and where a culture of giving cheap capital to high-risk units has thrived. Bank bosses must create a new financial language and may find they are treated as heretics when they do so. Ideally, this revolution can be extended to reinventing brands and business models. But a depressing precedent has been set by incumbent telecoms firms, which, like most banks, are stodgy bureaucracies at heart. Despite endless product launches and reorganisations, perhaps only two firms, KPN (see article) and O2 (subsequently bought by Telef&oacute;nica) were transformed by innovative managers. For most others, the decade since the bubble has been a slog against competitors and reinvigorated regulators. That is the lot of most firms in most industries. They face a constant battle to protect pockets of high profits and have few chances to grow. For telecoms, the glamour and infamy were followed by mediocrity. Banks are still staggering about in the limelight, but the same fate surely awaits them. Lessons from the telecoms bubble (2) Adulation Feb 26th 2009 From The Economist print edition Tips on taking charge of a basket case in a broken industry, from KPN’s boss AD SCHEEPBOUWER is the nearest thing the telecoms industry has to an action hero. For anyone parachuted in to turn round troubled banks, he has a move or two worth learning. When he arrived as chief executive at KPN in 2001, the Dutch operator had been wrecked by the bubble. Net debt was six times operating profits and some employees were “living in an illusion”, he says. “I told them: ‘You could do business with me or the receiver’.” First, he persuaded banks to give KPN some breathing space and convinced shareholders to back a rights issue. He also hired a team of external consultants to search the firm’s books for unexploded ordnance. There were also “dozens of hobby projects” that had to be shut down, with even minor capital-spending decisions subject to board review. And there were big job cuts. On disposals, KPN trod a fine line skilfully. Minority stakes were “dead money” and sold, whereas alliances with other firms were unwound to remove complexity. But KPN also bought assets where necessary, even in the midst of the crisis, taking full control of its growing but troubled German mobile unit—a very significant move. By 2004 KPN was off life-support, but Mr Scheepbouwer wondered “what the hell we were going to do next”. The answer was the then-radical policy of selling multiple mobile brands on one network, which transformed KPN’s prospects in Belgium and then Germany. Mr Scheepbouwer plans to stay until at least next year, when he expects dividends per share to be about 50% above the level in the peak bubble year of 1999. If banks can match that by 2019, they will be doing well.