Return to Virginia Business - November 2002

by John Rubino

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Few companies have ever been as hot — or as cool — as Herndon-based Teligent was in 1999. A competitive local exchange carrier, or CLEC, it was one of the new breed of telecom companies that were out to overthrow the Baby Bells. And for a brief, shining, moment, it seemed to have what it needed: unlimited access to capital, big-name management and futuristic technology, including wireless rooftop antennas capable of making copper wire obsolete.

Like most of the New Economy, this was, alas, a mirage. Teligent and many other CLECs crashed not long after they peaked. But while most of the other CLECs were simply absorbed by healthier companies or sold off piecemeal, Teligent has survived, emerging from chapter 11 this past September, a smaller, humbler, but possibly quite viable company.

Could this presage a telecommunications revival? Perhaps. A handful of telecom survivors, many from Virginia, are crawling out of bankruptcy of late. Alexandria-based Metrocall, the second-largest U.S. paging company, emerged from chapter 11 in October having shed most of its $880 million in debt but still needing to pay off another $80 million. Last month Reston-based XO Communications cut a deal to let two former suitors, investors Forstmann Little and Telefonos de Mexico, out of an $800 million offer, which opens the door for bottom-fishing financier Carl C. Icahn to take over the company. Motient Inc., a wireless-messaging firm in Reston, came out of bankruptcy in April with its $500 million debt reduced to $30 million.
Compared to them, Teligent doesn’t look so sickly. It comes out of bankruptcy completely debt free, fully funded and with its fixed-wireless network intact. To be sure, bankruptcy wasn’t part of the original plan, but it’s a decent exit strategy for Teligent and other telecom firms looking to revive themselves.

Part of that revival is avoid the same dumb decisions, such as throwing millions in a market glutted with capacity and too few customers. The telecoms coming out of bankruptcy might have less debt, but they still face the same imbalance in supply and demand that helped sink them before. In essential ways, though, Teligent isn’t the same company it was 18 months ago. Where the old Teligent used wireless broadband to compete head-on with the Baby Bells in local telephone, the new one offers cellular and long distance companies a cheap “last mile” solution. If Sprint or Cingular needs a broadband link between an office building and their fiber backbone, “We’ll supply the big fat pipe,” says Teligent CEO James Continenza, who joined the company as a senior vice president in October 2000. It’s wholesale rather than retail, and low-risk rather than high-growth.

As such, it’s a good fit for today’s market, says Martin McDermott, president of Management Profiles, a Gaithersburg, Md., telecom consultancy and author of a recent book on the rise and fall of the CLECs. “I see a tremendous pent up demand by both residential and business users for local broadband service,” he says. “People who have local broadband capacity should have no problem in selling it.”
If it succeeds, Teligent will become a rare happy ending to a story that began when the Telecom Act of 1996 opened the local telephone market to competition. Back then, the incumbent Baby Bells looked like easy prey to the sharks of Silicon Valley and Wall Street, who reacted by creating and funding an army of CLECs. With their futuristic technologies and cutting-edge business practices, these upstarts would, their backers promised, steal away the Bells’ most lucrative business customers, and, who knows, maybe their whole franchise.

Teligent’s plan was as simple as it was seductive. It would link businesses to high-speed communications backbones via antennas on rooftops. No need to tear up sidewalks and walls to install fiber. Just sign up and, voila, your business is cruising the information highway in a Porsche.

Other CLECs had similar ideas, but Teligent had something they didn’t: its own radio spectrum. In 1993, when seemingly no one else was watching, its founders acquired the rights to 24 GHz in 74 U.S. cities for a fraction of its eventual worth.

So bright was its future that it enticed Alex Mandl, president and heir apparent of mighty AT&T, to become its CEO. And on one spectacular day in November of 1999, it landed investments from a group led by Microsoft totaling about $500 million. Within a year — though its revenues were negligible and profitability years away — its market capitalization touched $6 billion.

But the seeds of destruction had already been sown. Wall Street’s generosity came with strings, in the form of extraordinarily aggressive growth targets, says Legg Mason analyst Danny Zitto. This “led a lot of CLECs to stray off their business plans just to maintain the revenue covenants.” Teligent and the other CLECs rushed to “light up” as many cities as possible on the assumption that money would always flow freely to the biggest players. Build it, said the bankers, and they will come.

Meanwhile, the CLECs were discovering that the Bells had some weapons of their own, including the ability to make life miserable for annoying upstarts who, despite their rhetoric about replacing the Bells, still needed connections to existing local networks. “[The CLECs] had to match all the policies and procedures of the Bell companies or the Bells wouldn’t talk to them,” says McDermott. Most lacked the know-how and resources to put these kinds of practices into place.

The CLECs, as a result, began missing their numbers, Wall Street turned off the money spigot and Teligent began its descent into oblivion. By early 2001, its market value had dwindled to just a few million, and bargain hunters like cash-rich phone company IDT began scooping up its stock, gaining de facto control for a song. Mandl, seeing the writing on the wall, moved on, though to his everlasting credit, he did so without having made a dime. In post-crash interviews, in fact, he claimed to have lost $5 million of his own money in Teligent stock.

Continenza, a 40-year old operations specialist brought in from Lucent to engineer a turnaround, became CEO in early 2001, but by then the game was over. “The buildout wasn’t complete but there was no more capital…We could either let it fall apart or work with our creditors [to salvage something in Chapter 11],” he recalls.

He chose the latter, and spent the next year at the center of a whirlwind of buyout plans. IDT made an offer, as did a management group led by Continenza and Arlington-based investment bank Friedman Billings Ramsey Group. WorldCom and Verizon both expressed interest. All the while, Teligent was shedding assets, paring itself down to a core that might be either viable or marketable. Switches designed to make it a fully functioning local phone company and warehouses full of related gear went for pennies on the dollar, and nearly all the remaining employees were let go.

When, for a variety of reasons, a buyout didn’t materialize, Continenza and the bankers went to Plan B. In September, Teligent emerged from bankruptcy, a very different company with a very different capital structure. The $1.6 billion of debt that drove it into Chapter 11 was converted to equity, all of which is owned by the banks, including JP Morgan Chase and Bank of America.

The new Teligent will use its remaining assets — its spectrum and the antennas perched on thousands of office buildings around the country — to augment other people’s networks. Potential customers include businesses with multiple locations in need of broadband connections, government and university complexes, and telcos in need of backup capacity following September 11. “Fixed wireless isn’t dependent on fiber in the ground. It gives a system diversity and redundancy,” says Continenza.

The near-term plan is to build a presence on the East Coast, and then go west only as demand and tomorrow’s capital markets make it possible. With only 100 employees (versus 2,400 at its peak), it lacks sales offices in most of the cities it serves, meaning that potential customers in Las Vegas and Salt Lake City will have to make first contact. Teligent is, in short, what it would have been had it been founded at any time other than the late 1990s: A startup with limited capital and modest growth plans.

And where in 1999 it was highly leveraged and in the middle of a furious build-out, the new version is pretty complete from a technical standpoint. It retains its spectrum in all 74 cities. And because of its late 1990s spending binge, “We can continue to grow into our infrastructure [without massive new capital outlays],” says Continenza. “We’re a full-blown company, so we’re not creating things from scratch. We have an IT infrastructure, policies, and procedures.” Being debt free, meanwhile, “gives us a huge cost advantage. It’s like not having a mortgage.”

The final difference is one of attitude. Now, says Continenza, “Our focus is on free cash flow.”

Return to Virginia Business - November 2002