Net Bargains on Auction Block
In a meeting room at the San Jose Airport Hyatt Hotel, a weary auctioneer is working a crowd of bidders, desperately trying to spark some excitement over the latest flood of leftovers from the boom-and-bust Internet economy.
The assets of more than 20 defunct high-tech companies are on the auction block, packing the sales catalog with the usual list of desktop computers, printers and copy machines.
But this time, the event also features something relatively new on the auction circuit: a sprinkling of heavy-duty telecommunications equipment from the biggest names in phone hardware. Among the treasures worth tens of thousands of dollars: a Lucent Definity corporate phone system in two cabinets, seven Northern Telecom Meridian phone switches, along with a Siemens phone switch.
“It’s a blood bath out there,” said Michael Helms, who came to the auction conducted by DoveBid Inc. in search of bargain-priced equipment for a telecommunications company he hopes to launch.
The dot-com death march has moved deeper into the tech world, creating a glut of telecommunications equipment that now totals in the billions. Much of it is selling for 30 to 40 cents on the dollar--or worse.
“The amount of equipment that is ending up on the auction block . . . there’s more out there than we’ve ever seen before,” said Bob Azzi, a vice president of engineering for long-distance company Sprint Corp., one of the largest buyers of telecom equipment in the country.
The glut in equipment has been caused by a cascade of failures that started with last year’s collapse of dot-com companies.
Those failures hit hard at Cisco Systems Inc., Sun Microsystems Inc. and Hewlett-Packard Co., whose gear had helped store and distribute data for many e-commerce and high-tech start-ups. In short order, many of the high-speed Internet access companies serving the dot-coms died or filed for bankruptcy, including NorthPoint Communications, GST Telecom, PSINet Inc. and ICG Communications Inc.
The meltdown has led to declining sales for the large telecommunications equipment makers whose machines formed the basic infrastructure to move the flood of data and voice traffic. The victims include some of the biggest names in the business, such as Lucent Technologies Inc., Nortel Networks and Siemens.
By one estimate, four of the world’s top equipment builders are poised to report losses totaling a staggering $23 billion for the second quarter.
And there appears to be no end in sight to the cascade. Internet access players Covad Communications Co. and Rhythms NetConnections Inc. are still buried in debt and losing millions, and even the strongest remaining phone companies are slashing capital spending, issuing earnings warnings and laying off workers.
“I think life is going to be quite tough for some time,” said Cliff Higgerson, a partner in ComVentures, a Palo Alto, Calif., firm that invests in telecommunications. “The equipment market will go down sharply from its high in 2000 to a low in 2003 and then gradually improve.”
Piles of equipment have been stacking up as more companies fail, and auction companies such as Woodland Hills-based Cowan Alexander Equipment Group say they are handling higher-end equipment that in the past was rarely seen.
“The market hasn’t been flooded with this kind of equipment, but I’ve probably seen 30 or 40 [big switches] this year, and that’s a lot,” said Adam Alexander, one of the auction firm’s founders.
Alexander said his company recently worked with a phone company that had 17 regional network centers and Nortel equipment so new that some of the switches were never turned on.
“They paid about $4 million for the equipment in each center, plus $2 million to $3 million for the installation and build-out,” he said. “And we just sold one of them for $1.7 million.”
The glut in equipment is keeping Lucent, Nortel and other suppliers on the defensive in negotiations with Sprint, AT&T; Corp. and other big customers--long the bread-and-butter clients of their industry.
Those big customers are cutting back their overall spending, but they also are picking up used equipment cheap and using the robust secondary market as leverage to get still-lower prices for new hardware.
“The availability of all that used equipment has had a significant impact on new-equipment prices,” said Steve Kamman, a telecommunications analyst at CIBC World Markets. “It’s hurting everybody in the equipment business.”
Last month, Lucent put $10 million worth of switches, cabling and other networking gear and components up for sale through a two-day online auction. In several cases, the company held on to equipment that did not attract minimum bids.
Firms such as AT&T; and Sprint can now buy more equipment for less money, and customers at the low end are starting to skip buying new equipment altogether.
“The typical buyers we see are small to medium-size businesses, who want to avoid the mistakes of the companies that preceded them. They want to buy secondhand equipment at good prices,” said David Marchick, executive vice president of Bid4Assets Inc., an auction company in Silver Spring, Md. “If someone can buy a 6-month-old, new-in-the-box switch, why would they buy new?”
Indeed, the equipment makers’ nightmare has turned out to be a windfall for corporations and surviving telecommunications firms, which can snap up good gear at bargain prices.
AT&T; agreed to pay $135 million for NorthPoint Communications equipment and other assets said to be worth more than $500 million. And earlier this year, Time Warner Telecom spent $690 million buying assets from bankrupt GST Telecom.
The Littleton, Colo., company walked away with regional fiber-optic lines, a customer base worth $20 million in revenue per quarter, and millions of dollars in top-tier equipment.
“We had been looking at expanding organically into some of the [GST] West Coast markets, but the acquisition allowed us to move into 15 new markets 12 to 18 months sooner in most cases. . . . That’s obviously created a substantial savings for the company,” said Tom Henley, spokesman for Time Warner Telecom, which had been a mostly Lucent shop until buying up the GST assets.
Time Warner’s purchase of so much used gear carries even more grim news for equipment makers: The company has all the switches it needs for the foreseeable future.
With extremely low prices as the norm, some distressed companies are thinking twice before agreeing to sell off prime assets at such a big loss.
ICG Communications, an Englewood, Colo., carrier that hopes to emerge from bankruptcy later this year, is mothballing seven Lucent 5E switches, some of them never deployed. After collecting a few bids, ICG said it might keep the equipment instead.
Of course, some of the used equipment is of questionable value and poses little threat to the sale of new hardware. The line cards used to deliver digital subscriber line Internet connections, for example, are not worth the cost of removing and reinstalling them.
In addition, some of the hardware is either obsolete or too exotic to easily sell.
Late last year, Bid4Assets sold computer and telecommunications gear left behind by Broadband Infrastructure Group, a St. Louis firm that fell into bankruptcy. The auction yielded $600,000, but the company has yet to find a buyer for $2.4 million worth of high-end switches made by Zhone Technologies Inc.
Marchick said he has no trouble selling Nortel and Lucent switches, but it’s a different story with the two dozen switches from Zhone. “They are so cutting-edge that there may not be a market for them,” he said.
Buyers also have become more picky about their purchases, believing that there will be more bankruptcies in the coming months, and thus more equipment and cheaper prices.
Back in San Jose, Helms and his partner, James Dunn, sit in stiff chairs toward the back of the auction room, watching as the auctioneer sells some Nortel phone switches for $2,500 each. A page full of Hewlett-Packard Procurve switches each go for the same price, helping boost the auction’s total bidding to $1.6 million over two days.
Together, Helms and Dunn have attended five auctions in a week, picking up all the office equipment they need for their new company. Now they are fishing for test equipment.
Dunn said they just missed a batch once owned by Optreon Inc., a San Jose fiber-optics firm. With a tinge of regret, he added: “They sold a high-resolution three-axis translation stage, which costs $15,000 new, for just $1,500.”
Still, the entrepreneurs know the financial crush is not over yet, and they’re willing to wait for another flood of failures.
“We’re being very careful,” Dunn said.
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As Spending Slows, Inventories Mount
Telecommunications equipment firms, which rushed to fill orders just 18 months ago, now are carrying bloated inventories as sales tank.
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Quarterly inventory levels at U.S. communications equipment firms as a percentage of cost of sales:
First quarter 2001: 158%
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Source: Merrill Lynch
