Corning is one of the victims of today“s fiber-optic craze. The lure of a wired nation, with unlimited potential, led numerous companies to invest hundreds of billions in fiber optic capacity. The ma…
Corning is one of the victims of today“s fiber-optic craze. The lure of a wired nation, with unlimited potential, led numerous companies to invest hundreds of billions in fiber optic capacity. The majority of that money appears to have been wasted. This week Corning announced plans to close one manufacturing plant that opened last year, and another that was under construction. People who were hired last year will be laid off. Corning“s management committed many errors. It lopped off units that had provided diversification of risks while it paid high prices for $10 billion in acquisitions, virtually all of them to serve the booming telecom market. It was so sure that market would keep growing at exponential rates that it signed take-or-pay contracts with suppliers requiring it to buy components whether or not it needed them. Such contracts were unknown in the industry until the last couple of years, when the bubble mentality took hold. Now Corning is writing off inventory that it does not yet own, but that it knows it will never be able to sell. And yet Corning will survive. Even while it was making ill-considered bets on the fiber bubble, it was protecting itself financially. Rather than repurchase its own stock with borrowed money, as so many companies were doing, it issued stock to finance its acquisitions. Now Corning has $1 billion in cash and ample bank lines. It is in the clear financially at least until 2004, when its bank lines expire and a $2 billion issue of convertible preferred stock will have to be bought back unless Corning“s share price has rallied sharply by then. The most important decision it made was to be a seller – not a buyer – of its shares when prices were high. The fiber optic market is not dead, but it may be years, not months, before the dry spell ends. Companies face the prospect of reduced revenues and limited access to financial markets. “The worst of all worlds,” said James B. Flaws, Corning“s chief financial officer, “is to have a balance sheet that is not strong when you run into rough times.”