Following my article about XO’s layoffs last month and the outpouring of comments that followed from both insiders and outsiders, I have pondered what to say in followup. There are obviously strong feelings involved, and there are more than two sides. But from my point of view, XO spends too much time in the shadows relative to the assets they hold and I am not sorry for having briefly shined a flashlight back in the cave. But where is it that XO can or should go from here?
To answer that question properly, one must understand how they got here. How did a company with 9000+ miles of choice metro fiber get itself into a position where it struggles to maintain 10% EBITDA margins nearly a decade after the last bubble popped? For those who follow the stories of this sector, it is possible to feel the personality of the true leadership as it runs through each company and its story – both the uplifting and the challenging parts. Level 3’s optimistic, grand strategic vision which sometimes outpaces reality on the ground – it pervades the company but seems to come directly from Jim Crowe. TW Telecom’s no-nonesense, meticulous, but highly risk-averse approach similarly seems to filter down directly from Larissa Herda. Paetec finds value everywhere, fiber, fiber-light, energy, VARs, fixed wireless – and seems to enjoy multitasking to try them all, just as Arunas Chesonis himself seems to. None are necessarily wrong, that comes down to details of implementation. But what about XO? What sits at the core of its corporate personality?
I would argue that it is Carl Icahn himself. It‘s Icahn’s multidirectional manic energy, the relationship between CEO and Board of Directors he subscribes to, and and the forceful, combative style that he specializes in. That’s where XO’s corporate personality derives from whether he means it to or not; it bleeds through despite the fact that he says he is barely involved. At XO, there’s always some grand effort going on to preserve or flesh out the value of some subset of the company’s assets, whether it be pouring piles of cash into NextLink to preserve unproven spectrum, lighting those longhaul dark fiber IRUs and entering the wonderful(?) wholesale bandwidth market, the Ethernet-over-copper initiative to make more of their central office presence, and most recently this aborted assault out of the blue on the Fortune 1000 market by an SME-focused company. Some of these plans have worked out better than others, obviously. But it all has the feel of an über hedge fund manager with too much influence over company decisions, one who doesn’t understand the nitty gritty of telecom and fiber and lacks the necessary knowledge or insight to have it taken apart and put it back together again like Bill LaPerch did at AboveNet.
From talking to many from the company, both happy and angry, first I’d like to say that there are and have been many, many good people there who have fought long and hard for the company’s success. For better or worse, they have believed in the future(s) they have been sold, and that includes the group who purportedly came in from Global Crossing as a major part of the national accounts effort. There is lots of misdirected finger pointing, though. Margins don’t stink because the sales team has the wrong people (again and again) or because a group of engineers need to be consolidated from two locations into one, or even because a manager here or there isn’t up to the job. They stink because high level decisions have consistently failed to match up with the assets on the ground. All else derives from that disconnect, and the layers in between bear the brunt of it each time.
As both chairman and majority shareholder, Carl Icahn can and will do as he likes. He’s undeniably a brilliant guy – one doesn’t get to be a self-made billionaire any other way. But at some point he’s surely going to realize that he doesn’t really understand telecom or fiber; they just don’t respond to his methods. Eventually it will surely dawn on him that he’s wasting his time managing these assets the way he has over most of the last decade. But what reasonable choices does he have going forward? He could hire someone who does understand fiber and telecom and back off completely, or he could sell or trade the assets to an existing player with a proven track record and focus his own efforts elsewhere. But until then, I think there is little anyone can do to break the cycle.
So now we sit and watch shareholder lawsuits smolder while the company’s cash dips below $100M as it inexplicably forswears long term debt in favor of equity despite a stock price hovering in the neighborhood of, as a recent commenter suggested, a can of Coca-Cola. In a post a week or so ago, I said there is a limited pool of talent with a proven track record of knowing what to do fiber assets. What do you think these guys and gals would do with XO if they had it? One thing is clear though： whatever happens, Icahn intends to get a decent return on his investment or the status quo will continue to prevail.
Ok, that was more than a few words, but anyway…
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