Thursday, March 14, 2002

New Market For Used Equipment

BY MIKE ANGELL

INVESTOR'S BUSINESS DAILY

Once they were customers. Now they're competitors.

Firms that operate telecom networks are the customers of telecom gear makers. Now those network providers, saddled with billions of dollars in debt, are selling off some of their gear to placate creditors.

Gear makers face a second whammy. Network providers that actually are in the market to buy gear are more willing to consider used equipment.

These two trends are hurting an already weak market for new telecom gear, but are boosting the usually sleepy secondary market.

"It's a good time to be in the used equipment business," said Robert Davie, executive vice president at ITParade.com Inc., which sells refurbished tech equipment. "There's a very healthy market in used Cisco (CSCO), Lucent (LU) and Nortel (NT) equipment. "

Davie has handled used equipment of Enron Broadband Services, Global Crossing Ltd. and Covad Communications Inc., three network providers that have had big troubles.

Not Really 'Used'

Even nondistressed telecom companies are looking at turning to the secondhand market. Davie says his clients have included several of the regional Bells and AT&T Corp. (T), selling gear and/or looking to pick up gear cheaply.

"Used," though, might be an incorrect way to describe some gear sold on the secondary market. A lot of it was never used. Carlyn Taylor, who heads the telecom restructuring business for consulting firm PricewaterhouseCoopers, says that before the slowdown, carriers were overly optimistic and bought too much equipment.

"A lot of what's happening is people selling stuff in the box for 20, 25 cents on the dollar," Taylor said. "I've walked through warehouses where unused switches and routers are piled up."

One big seller in the secondary market is Williams Communications Group Inc.  The network builder late last month said it will sell off some network assets to improve its balance sheet. This influx of good used gear will only add to the distressed telecom equipment market.

Williams spent some $5.7 billion from 1998 to 2001 on building a fiber-optic network. The company hasn't said just what it will sell.

Nortel Networks Corp. and Cisco Systems Inc. are among the biggest suppliers to Williams. In a statement last year, Nortel said it expected to sell up to $1.5 billion worth of gear to Williams just through 2002.

Cisco sold Williams routers and data switches.

It was just in December that Cisco said in a statement that Williams would buy optical networking gear from Cisco.

So Williams and its new old gear could be quite a competitor to the gear makers.

Gear makers know this. Take network provider Global Crossing. The builder of a global fiber-optic network recently filed for bankruptcy.

A bondholders' group wants Global Crossing's network assets sold off to pay the $4.4 billion they are owed. But a group of trade creditors wants Global Crossing to stay in business. Trade creditors are owed $1.1 billion in services and gear from Global. They include Lucent Technologies Inc., Nortel and Cisco.

Cisco is fighting back in other ways as well.

Some buyers, and even sellers, of used gear often seek a warranty from Cisco, or whoever was the original manufacturer. Cisco, though, will give it only after requiring secondhand buyers to buy new licenses for the software in its boxes.

One Cisco reseller, who spoke on condition of anonymity, says Cisco now requires that any router seeking a warranty use only company-approved memory chips rather than off-the-shelf memory. Thus, the gear owner might have to go to, or through, Cisco for memory.

Sign Of The Times

"It's like buying a Chevy and you can only fill the tires with Chevy air," the reseller said.

Cisco also is selling used gear. When it gets some equipment back from leases, it's turning right around and selling it through resellers such as Ingram Micro Inc. (IM) and Tech Data Corp.(TECD)

The trend extends beyond just the big guys like Cisco and Nortel. Williams spent $369 million on gear from Sycamore Networks Inc. (SCMR), nearly two-thirds of Sycamore's total sales in its entire history.

Corvis Corp. (CORV) had $300 million in commitments from Williams to buy gear, some of which it had delivered.

Davie says used equipment from well-known vendors typically sells for 30% of the list price. Equipment from smaller companies might fetch 20% of list.

These low prices are a sign of the times.

Camilla Jensen, a telecom consultant with financial adviser BIA Financial Network, says not long ago, distressed network providers could have recovered as much as 40% of their cost by selling assets. Now there's so much stuff on the secondary market that she says they're lucky to recover 25%.