Executives of pan-European telecoms networks may be feeling a little less misunderstood this month.
Following the festive season, many people are suffering the effects of their own spending sprees. To add to their financial woes, January's retail sales provide the temptation to spend even more money.
It is a predicament pan-European operators have faced for months. The bargains offered by the liquidators of collapsed rivals are equally difficult to resist - yet they are also harder to justify given the glut of network capacity that helped cause many of the collapses in the first place.
For many networks, the dilemma is made simpler by financial constraints that prohibit any further expenditure. However, even those with strong balance sheets have displayed a crippling inertia and many analysts suggest the industry's main task this year is to overcome this impasse, allowing the development of a more discernible pan-European telecoms landscape. The changes may require a process of reinvention as well as refinancing.
"It is going to be a year in which the inertia is going to be broken," says Maureen Coulter, senior analyst at Gartner Dataquest, the telecommunications research organisation.
"Once the market has stabilised and carriers are aware that they have a chance of survival, they will start thinking: 'How can I start to make money? What do I want this company to look like in the future? Is it a network operator? A services provider? Or am I going to continue the way I am?'.
"Confronting these questions is a prerequisite for mopping up the much-documented overcapacity of fibre laid by operators along Europe's main telecoms "trunk routes" during a two-year frenzy of borrowing money and building network infrastructure.
The inevitable pressure on prices, combined with a dearth of demand relative to original projections, resulted in speculation that weaker carriers would be bought out by their stronger, better-financed rivals.
However, prophecies of high profile mergers and acquisitions were largely unfulfilled last year. Exceptions included the E645m ($583m) acquisition of Global Telesystems by KPNQwest, the Netherlands-based group, in October. Level 3 Communications, the US-based fibre-optics operator bought assets from Viatel, its rival which filed for bankruptcy protection in May.
And, as the year drew to a close, Cable & Wireless said it would spend more than $1bn to buy and invest in key assets of Exodus Communications, also in Chapter 11.
The consolidation of the industry has instead been driven by a handful of failures - most spectacularly of Viatel, PSINet and Global Telesystems. There are a host of reasons why surviving carriers have largely proved equally reluctant to buy both weaker rivals and assets out of receivership.
"There has been a decision paralysis in the M&A environment," says Marco Fasoli, managing director of Broadview, an M&A adviser and technology investor. The main reason, he says, has been a pre-occupation with short-term financial pressures and other organic issues: "Part of the reason the equity markets lost faith is that [companies] have not delivered the numbers."
Other factors inhibiting M&A activity centre on efforts to improve balance sheets, such as the disposal of non-core assets and the reduction of network roll-out costs. "There's a limit to how much activity we can see in the first half until these problems are sorted out," he says.
"The industry has to find a more realistic business from which to move forward," adds Don Eungblut, managing consultant at PA Consulting Group. "They are revisiting their business plans...whereas they had an approach that was growth orientated, investing for future demand, now it's more about removing costs and making the business more efficient."
As well as organic engineering, Mr Fasoli attributes the inertia to the failure of some previous acquisitions - such as Aberdeen-based Atlantic Telecom's purchase of First Telecom in Germany and the acquisition of Esprit by GTS. "People have been burnt and there's a process of ongoing digestion of existing acquisitions and a lot more caution about new acquisitions. It's inertia combined with the job preservation mentality of some of the senior executives who are not risking careers."
Mr Fasoli also flags the continuing downward trend in the valuations of potential targets as a reason for holding fire. "The fact that values have only gone one way for the past 12 months has made potential buyers just sit and wait," he says. "Although there are now some signs of improvement on the horizon."
Ms Coulter of Gartner Dataquest agrees. "Maybe 12 to 18 months ago a company with a decent network collapsing was a great buy. But now you should bide your time until a more targeted rival goes out of business."
Nonetheless, Sue Uglow, a research director at Ovum, the analysis and consulting company, maintains that the long-expected consolidation will take place eventually. "2002 will be a pivotal year in terms of players dropping out of the market," she says. "Instead of the 20 to 30 pan- European operators in 2001, there will be between five and 10 focused exclusively on the network layer within the next couple of years." The remainder, she argues, will move to value-added service provision, purchasing wholesale infrastructure.
The notion that increased specialisation will be a prelude to consolidation is shared by Mr Eungblut - who argues predators need to be much more choosy. "I'm not sure waiting for other people to go bust is a great strategy for the future," he says. "The fact that assets are available at very low costs because that operator has gone bust are only valuable to a company if they know what they do with those assets. Organisations need to be really focused on what their business is about. They don't need to buy assets. They can buy services from others or they can outsource.
"In a tighter funding climate they certainly can't own everything and can't do everything with their own assets. They can't have all their own infrastructure, all their own content. They need to work out where their core value-added comes from."
For those advocating greater focus, inactivity in the face of potential bargains is perhaps no bad thing. "It's only a bargain if you really want it and need it," says Ms Coulter.
"There are some good bargains to be had," concedes Mrs Uglow. "But companies thinking about buying up assets should be thinking 'do we actually need to own a network?'. Owning and operating a network is a very different business from providing services over a network. Companies that can't achieve economies of scale should not be in the network business. Companies that are aiming to be service providers should not be looking at buying up network assets because there will be better wholesale deals around in the future.
"So far, we've had hybrids which neither do networks really well nor do they do services really well so they need to get their act together and decide what business they are in. The industry needs different business models for different parts of the supply chain.
Mrs Uglow underlines these trends by pointing to the increased interest in telecoms operations from utility companies accustomed to managing networks. In
August 2000 Dynegy bought pan-European telecoms assets from Iaxis and last week, Lattice, the gas pipeline company that was demerged from BG Group, completed its UK fibre optic network while Centrica, the UK's largest combined gas and electricity supplier, bought a broadband reselling business from Iomart.
"People who run networks may not be telecoms companies in the future," she says.
Although not everyone advocates a strict dichotomy between running a network and providing services, Mr Eungblut says pan-European networks must nevertheless choose specific market segments. "The winners will be those that can identify attractive market segments on which they can focus and build market share by growing faster than the market's are growing," he says.
"That's the fundamental change. A couple of years ago there was a general view that the market growth was going to be so big that it could sustain all the investment money that was thrown at it. It's no longer about building a business that's going to grow because the market is growing."
