DSL Prime: Short Term Thinking

Short term thinking harmed tech companies during the boom by overvaluing people and continues to harm tech companies during lean times, now by undervaluing people.

by Dave Burstein of DSL Prime and Future of TV [November 16, 2004]

Armando's out at Conexant
Armando Geday seemed invincible, maintaining Globespan as the leading independent chip vendor, then emerging as CEO after Conexant bought the company. Armando, a smart, intensely competitive executive, will surely do well. I hope the same applies to the staff being cut. Conexant needs to overcome some issues:

DSL chips will likely sell at low prices the next six months. Morris Chang tells EE Times TSMC, the world leading fab, is falling from 103 percent capacity utilization to perhaps 85 percent. Rival USMC sales were down 15 percent in October. The demand for DSL chips will continue growing with the consumer take-up, but the increased supply will drive down prices.

Engineering investment is necessary, but doesn't guarantee a return. Globespan spent heavily to build their talent base, essentially paying $2 million per engineer to buy several companies during the boom. Last year, when I questioned Geday about paying so much for Intersil's 802.11 team, he told me the quality of the engineers he was getting would overcome the competition.

The U.S. has fallen behind. For fifty years, the smartest engineers and businessmen worldwide came to the U.S., creating a golden era in Silicon Valley and beyond. That time is over - today, many can't even get visas, and university enrollment is down. Bell Labs is no more. So returning CEO Dwight Decker is focusing on a "shift of product development resources to lower-cost regions." U.S. staff is being decimated for the third time. Centillium is also laying off staff in the U.S. to design in Asia. Most dramatically, SBC's 17,000 layoffs are related to major outsourcing, including India for the call centers. David Lazurus in the SF Chronicle broke that story months ago, so I'm surprised other publications reporting the cutbacks missed that part of the story.

What color is your company?
Why are dark faces so few?
About 1 in 7 people at NARUC/NECA appear to be African-American. In one 42-person session, 7 were black. In a room of 75, perhaps 10. This should not be news; if there weren't barriers to success, this would be typical in the U.S. I couldn't say the same about the last conference I ran (about 7 blacks among 200), and most telecom events are even more lacking in color.

The layoffs cost
False economy of slashes
Bell Canada's earnings release had a mistake. "Annual savings of $390 million are expected going forward," is almost surely untrue. That would imply Bell Canada's management is so incompetent that they have 5,000 people on payroll who aren't substantially contributing to the company. Cutbacks may be necessary, but the payroll reduction doesn't simply flow to the bottom line. Some recent examples of the price paid by cuts include:

A telco just lost the kind of mind they can't afford to let go. "They offered a buyout, and it was the right thing for me to take it," came the note from the kind of innovative planner the telco needs to keep. He's sharp, extremely well informed, respected by his colleagues, working on crucial projects and soon leaving the company. At a bell, a CTO told me a while back "we cut so many from our labs we can't take any risks in decisions. Doesn't matter how good a product is, we probably won't even look at it if it's not one of our regular vendors. I don't want to lose my job if something goes wrong." Similarly, Verizon would be a stronger company if retirement incentives hadn't pulled away people like John White, an experienced pro who got things done.

The industry loses because Legg Mason couldn't maintain an attractive job for Mike Balhoff. He's long been a primary source, especially strong on the almost invisible $50 billion rural LEC industry. We often disagree, no surprise because his bias is in favor of strong returns to investors and my bias is towards great service for consumers and fair profits. But we can both read a balance sheet and recognize leverage so high the company is in trouble. He's got great command of the corporate information. I mentioned a public offering that had problems with a tax dodge; he corrected me, pointing out the tax benefits were unlikely to help, because they face few taxes due to prior losses. We can both agree this one is lipstick on a pig. DSL Prime believes rural telcos trying to raise capital at a price over $4,000 per line face insolvency under any sane regulatory policy.

Balhoff's new consulting firm, Balhoff & Associates, should do fine given the knowledge he brings. But folks like me—and the regulators involved—are losing access to important research. The company he left has a smaller payroll, perhaps, but surely is losing some revenue as well.

Tech stocks and historic change
Pip Coburn and David Bujnowski of UBS have just released a deeply bearish report, "The final stage of grieving? Valuations Drop." They note "Though the tech is no longer special line of thinking seems obvious to many, the sector is still being treated very specially. Globally, the MSCI Tech index is trading at 20x vs. the broader MSCIs 14x—a 44 percent premium." They suggest a likely scenario, "10-20 percent premium to the MSCI Global or S&P 500 in the next 12 mo's... likely heading to 0 percent," which implies a major price drop. This is their opinion, not DSL Prime's. My Graham and Dodd bias meant I was so consistently wrong five and ten years ago I gave up trying to guess the market.

Coburn and Bujnowski add some perspective that's parallel to the big issue of telecom risk. In effect, SBC is keeping investment down, assuming the future will fit past models. Verizon and Comcast believe we're at a discontinuity that makes small improvements inadequate.

Looking at the market, C & B note "In the late 1980s, the construction of the CAPM valuation model resulted in a Nobel Prize for William Sharpe in 1990 and then it failed immediately. Why? Because it did not capture the massive change that was taking place in the market particularly in tech. We failed in our attempt to make a strict science out of investing we failed more with tech stocks and we failed particularly during the Internet boom. So what? Big change. The failure of CAPM to explain stock prices in the 1990s created a crisis, and from this crisis came change—the popularity of behavioral finance grew. And, within a few years, the Nobel Prize for economics was given to non-economists—Dan Kahneman and Vernon Smith in 2002." In telecom, are a good CFO's projections enough? Do they still work during periods of change?

Copyright 2004 Dave Burstein.
The DSL Prime Newsletter is reprinted with permission.

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