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For Telecom Workers, Burst Of Bubble Takes Heavy Toll


The Wall Street Journal  

August 19, 2002

Source
PAGE ONE

For Telecom Workers, Burst Of Bubble Takes Heavy Toll

By REBECCA BLUMENSTEIN
Staff Reporter of THE WALL STREET JOURNAL
 

THE BUBBLE BURSTS
 

 Before Telecom Bubble Burst, Some Insiders Sold Out Stakes2
08/12/02
 
 Deadbeat CEOs Plague Firms As Economy and Markets Roil3
08/01/02
 
 Telecom Industry Leaders Struggle With Growing Debt, Overcapacity4
03/13/02
 
 



RICHARDSON, Texas -- Two years ago, J. Michael Dugan spread the word to his fellow optical engineers in North Texas that he was starting a company that could make them all rich. The telecommunications business was hot, and optical engineers were the hottest commodities of them all, commanding big signing bonuses and six-figure salaries.

[J. Michael Dugan]

Mr. Dugan, a burly Texan with more than 20 years under his belt at the giant French equipment maker Alcatel SA, was persuasive. So many flocked to his annual summer party in July 2000 to learn more about Latus Lightworks that he ran out of food. The start-up took off quickly, hiring 120 employees as the engineers raced to devise ways to squeeze more data and voice traffic through a hair-thin strand of fiber-optic glass.

Then the bubble burst.

A few weeks ago, when all those engineers gathered again in Mr. Dugan's backyard, it was to commiserate and swap job leads. Ken Maxham, a cheery 59-year-old who comes from a long line of engineers, was worried about his unemployment benefits running out as his savings dwindle. He had cut back expenses as much as possible, but basic health insurance costs $750 a month and his wife was putting off going to the dentist for a toothache.

David Wolf, who at 37 is one of the youngest optical engineers around, was counting the days until his second start-up was due to run out of money. The fresh-faced father of three young children was pruning expenses such as his daughter's gymnastics lessons and worrying about the future. Mr. Dugan, whose work as a temporary consultant was about to end, was contemplating returning to school at age 50.

And the party was buzzing about a cruel twist of fate: Two of the former colleagues had just gone head-to-head for one of the few remaining telecom jobs out there. The one in the more precarious financial position didn't get it.

"When I see someone I haven't seen in a while, my first question is, 'Do you have a job?' " said Bruce Raeside, a 46-year-old Michigan native who also worked as a Latus engineer. "It's almost like Detroit in the '70s."

[telecom bust]

In many ways, it's worse. Like the massive declines in the nation's steel, oil and automobile industries in decades past, the disintegration of the telecom business is leaving deep wounds in the U.S. work force. But labor historians say telecom stands out for the unprecedented speed of the boom-and-bust cycle. After telecom was deregulated in 1996, it quickly expanded by some 331,000 jobs before peaking in late 2000. Since the downturn started, though, companies have announced layoffs that have wiped out all those new jobs and more -- a total of well over 500,000 workers, according to a tally by The Wall Street Journal. By contrast, it took two decades for the ranks of the United Auto Workers to fall to 732,000 from 1.5 million, as the auto industry was forced to become much more efficient in the face of foreign competition.

The number of telecom jobs grew faster and has fallen much harder than the overall job market, according to James Glen, an economist with Economy.com, a West Chester, Pa., research firm. He says the 12% drop in telecom jobs is still gaining steam, especially as the rout claims bigger and bigger companies such as Global Crossing Ltd. and WorldCom Inc. And the economic and human cost of the telecom bust far exceeds that of the highly publicized Internet crash, which by and large involved smaller companies.

Telecom has turned into one of history's biggest bubbles because so much money poured into the industry during the stock-market boom, creating some $470 billion in debt and a vast glut of capacity. Once a sleepy industry known for its modest growth, telecom took off like a rocket in the late '90s as companies rushed to lace the world with ultra-fast fiber-optic networks to carry an expected onslaught of Internet traffic. But after a frenzy of spending and hiring, it suddenly became clear in mid-2001 that the Internet wasn't growing nearly as fast as the 1,000-fold annual increases originally predicted. The huge run-up has now been replaced by a merciless ride down. Rumors of foreclosures and marital problems have replaced word of the latest IPO. Some laid-off telecom workers are even turning up in local homeless shelters.

So much money was spent buying telecom gear during the frenzy that there is now seven years' worth of excess inventory, says Lonnie Martin, chief executive of White Rock Networks, a Richardson start-up that is trying to hang on. He values the excess supply at some $160 billion. "That is an awful lot of exuberance to get rid of," he says.

There are few places where the hangover is more severe than here in the sun-blasted plains north of Dallas. Back during the boom years, developers couldn't throw up office buildings fast enough to keep pace with the demand. Telecom jobs doubled to 90,000 between 1995 and the peak of the bubble as big names such as Cisco Systems Inc. stormed into town and companies such as Nortel Networks Corp. quadrupled their work forces. Money was flowing so freely that countless start-ups emerged from nowhere. Now, vacancy rates in the area known as the Telecom Corridor have shot up to 34%. The vast expanses of empty parking lots make the area look like a corporate ghost town.

And the layoffs keep coming. While the Latus workers left stable jobs to join the start-up, they know plenty of colleagues who stayed behind and lost their jobs anyway. Big suppliers such as Nortel and Alcatel had already shed half their work forces before WorldCom's collapse. Xalted Networks Inc. just laid off most of its Texas engineers and issued a press release saying it's moving its software development to Bangalore, India, where it plans to hire 70 engineers in a bid to conserve cash.

Change of Fortune

The change of fortune is especially jarring to telecom's engineers, many of whom chose their profession because it promised a stable paycheck and seemingly limitless growth. Mr. Dugan, who has degrees in physics and electrical engineering, shifted into telecom after down-sizings in NASA's space program and the Texas oil industry, where he built support electronics for the oil diggers. Mr. Raeside came on after surviving layoffs at semiconductor companies through the 1980s.

During the boom, no one was more in demand than the eclectic band of optical engineers who had worked for years in relative obscurity transmitting millions of calls a second through tiny hairs of glass by using lasers of light invisible to the human eye. Their value soared in a climate where any innovation could quickly become the next hot IPO. Suddenly, companies were paying salaries well over $100,000 to lure top talent.

As some of the early start-ups were purchased by bigger companies in deals that made their founders rich, the walls of the big companies started to feel a bit confining. Mr. Dugan left Alcatel in January 2000, contemplating a few offers. He was hanging around his house one February morning when he was contacted out of the blue by Michael Zadikian, who had sold his company, Monterey Networks, to Cisco Systems Inc. for $500 million in 1999.

Mr. Zadikian had a new plan to launch four start-ups at once to develop a single system that phone companies could use for all of their needs. He wanted Mr. Dugan to focus on the so-called long haul, the cross-country and undersea networks that companies were racing to build. Mr. Dugan signed on.

Latus was following in a rich tradition. The former MCI Communications Inc. started here in the late '70s, using the microwave technology deployed by Collins Radio to challenge AT&T Corp.'s monopoly. But microwave towers couldn't be placed more than 35 miles apart because of the curvature of the earth, leading MCI to push for advances in fiber-optic technology. In the early '80s, MCI embraced a new technology that used light waves to transmit calls on one strand of fiber, a signal that was so strong MCI only needed to install equipment to boost it every 1,000 miles or so. Companies rushed into Richardson to help give MCI a competitive edge, a customer and supplier relationship that has flourished for years, but which is now in jeopardy with the collapse of MCI's parent, WorldCom.

The goal of Latus was ambitious: to develop a system that could send data and voice traffic at higher speeds and longer distances than ever before. Optical networking was all abuzz about a technology called dense wave division multiplexing that could divide a single strand of fiber into dozens of channels by beaming different colors of light through it. The Latus system had 256 different channels, and was designed to go more than 1,200 miles before the signal needed to be boosted again so it could continue on.

[David Wolf]

The company didn't have a name until March, when Mr. Dugan, flying home from a convention, bought a Latin-English dictionary at an airport and found the word, "latus," meaning wide, open and expansive. Latus got $28 million in its first round of funding in July of 2000 from a group of investors eager to follow Mr. Zadikian's success.

David Wolf knew he was at a turning point as he decided whether to follow his former boss to Latus. A friend of his late father told him to do it because it was a once-in-a-lifetime opportunity. His wife, Susan, advised making the leap as well. The couple had just purchased some property north of their home in Allen, Texas, to build a bigger house to accommodate their expanding family.

"Do it, as long as you get paid the same," Susan told her husband. Even if it didn't work out, the couple reasoned that Mr. Wolf could take advantage of one of several other job offers. In a matter of days, Mr. Wolf found himself plunking down $5,000 on his credit card to buy a laptop so he could start work at Latus on Monday. He remembers thinking with amusement that there were no expense forms to fill out to get the money back, but he trusted Mr. Dugan.

They found some office space to rent and began hiring workers. "At every board meeting, they said, 'Spend the money. Spend the money,' " recalls Mr. Wolf. "The engineers were the hardest to find." Latus had to pay at least $100,000 and as much as $120,000, plus bonuses, for the very senior engineers, who often were playing more than three job offers off each other. The start-up handed out 20% of its total shares to employees, and those who joined first were given the largest number of options. Another start-up raffled off a new BMW to employees who referred their colleagues to the company.

Money seemed to be everywhere -- and in many senses, it was. Capital spending by telecom companies at the height of the boom soared to 106% of revenue, according to Mr. Glen at Economy.com. Historically, that figure had been just 38%.

[Ken Maxham]

At Latus, Ken Maxham jumped in as employee No. 11, Bruce Raeside as employee No. 16 and Amy Dugan as employee No. 47. Mrs. Dugan joined despite some nervousness about perceptions of nepotism. A respected engineer herself, she reasoned that joining her husband's company meant the two could work day and night on Latus.

The scramble began to get the technology ready for viewing at Supercomm, a huge trade show in June of 2001. The engineers sometimes put in 20-hour days working out kinks in the product, which looked like a bunch of refrigerators full of wires. "Our entire existence was hinged on meeting our claims," says Mr. Dugan. "I said there is no way we can go back and tell the board there appeared to be fundamental physics limitations."

What they didn't realize was that economic limitations would prove the bigger threat. Latus was launched precisely at the peak of the bubble, when money was flowing so freely in telecom that companies seemed willing to buy anything.

It was at Supercomm in Atlanta that the big buyers began showing signs of flagging demand. Mr. Dugan had to rush out to California in the middle of the show to give a funding pitch to one of the original investors. But the second round of financing for Latus became almost impossible as the spigot of capital shut off. An initial public offering became a distant dream.

Mr. Dugan was hoping the uncertainty was just a slight fluctuation in the market. That summer, the Dugans threw an even bigger party than before, and catered it for the first time, bringing in trays of Mexican food under a huge rented tent. Around that time, Susan Wolf started joking with Mr. Dugan about whether her husband would still be able to bring home a paycheck. An accountant, she works only during tax time to bring in a few thousand dollars. Mr. Dugan knew it was a joke, but he began feeling the responsibility on his shoulders.

The first layoffs hit the Richardson area in the middle of 2001. Susan Wolf began hearing stories in her neighborhood. "It is like the black plague. You hear it happening to someone your neighbor knows. Then her brother is laid off, and then it happens to you," she told her husband over dinner recently with a guest. "It goes from the edges in -- closer and closer -- and finally gets here."

The company was notified that it lost its funding the morning of Sept. 11. Mr. Dugan was waiting for a conference call among the Latus board when the second plane hit the World Trade Center, but the call went on as investors notified them that funding would be cut off. The founders were given only 10 days to find a new backer -- an almost impossible feat because any potential bidders would have had to travel by bus to visit the company, since all flights were grounded for days by terrorism fears. "We got bombed twice," says Mr. Dugan, who doesn't blame the investors for their decision given the climate.

On Sept. 12, he called an all-hands meeting and told his fellow Latus employees to update their resumes and finish their projects. "It's not over, but it doesn't look good at all," he told them.

On Sept. 23, Mr. Dugan invited them all to the local Omni Hotel, the place where all the deals were made during better times. He told them that Latus would be shut down, and its doors padlocked as the bank cleared out its equipment. Everyone would lose their jobs immediately. Mr. Dugan made arrangements to sign them up for unemployment benefits on the spot, and then the Dugans paid for drinks for all. "A lot of these people were my friends. They didn't hold it against me," says Mr. Dugan. "But I felt badly for them."

When Latus shut down, the Wolf family cut down on spending as they could. They stopped hiring babysitters and going out to dinner, and cut back on groceries.

David Wolf stayed at home looking for a job, surprising his children the first time that he picked them up from school. To fill his time, to the slight irritation of his wife, he plunged into another start-up with Mr. Dugan and a few others to develop another optical product. They even paid out of their own pockets for Mr. Dugan to present the product at a show in California earlier this year. But with the downturn so pronounced, they received little interest. The fiber-optic amplifier is now sitting in a case in Mr. Dugan's living room.

As he flung himself into a new start-up, Mr. Dugan and others held meetings at the local Starbucks, which had become the unofficial meeting place for the unemployed. He says it is a strange experience to run into people during the middle of the day. "It is like, 'Oh, this happened to you, too,' " he says.

Mr. Maxham started looking for a job immediately. Even though he is 59, he was perhaps worst off financially because he had invested 30 years of retirement savings in tech stocks after leaving Alcatel. "I was a believer, but that was a bad decision," says Mr. Maxham, who lost "hundreds of thousands" of dollars. Initially, he was mystified by the scarcity of jobs because he had turned down seven job offers before joining Latus. As he searched every day for jobs, unemployment benefits of about $300 a week kicked in.

To ease the tension, Mr. Maxham plays electric bass guitar in a band of engineers called Signal2Noise. But it wasn't much of an escape: At one point, half of the band was out of work. He felt increasingly guilty about his precarious financial situation and apologized at one point to his wife, Penny. "I am not angry," she told him. "I sort of know that we are going to be OK." Still, it was rough recently when she had to accept money from her parents to travel back to Idaho to visit them.

For months now, the bottom has been getting deeper. Robert Shapiro, head of the local telecom branch of the national engineering association, thinks the cycle must be at the bottom. "How could it get any worse?" asks Mr. Shapiro, who is working a temporary job after months of unemployment. Attendance at the group's monthly meetings at the local Holiday Inn has doubled since engineers now have extra time. Mr. Shapiro estimates that half of the association's members have been laid off. Meetings now start with job-hunting tips.

Part of the problem is that there is no place for the highly specialized engineers to turn as the tech industry continues to slump. Krish Prabhu, the former chief operating officer of Alcatel who lives in the Dallas area, hears the desperation as companies ask for money and former colleagues call for job tips. A partner with Morgenthaler Ventures, a venture-capital firm, Mr. Prabhu says it will be tough for any start-up to survive. "There is a nervousness about whether this downturn is part of a cycle or a fundamental change that telecom has become a commodity like the computer industry," says Mr. Prabhu.

The ripples are spreading. The city of Richardson is being hit by a drop of more than 20% of its sales tax and a coming hit to its property taxes from all the empty office buildings. Foreclosures in Collin County, where many telecom workers live, are up 79% over last year, especially for homes worth $250,000 or more. The process is brutally efficient in Texas: Once a house is posted for foreclosure, the owner has only 21 days to come up with the money before it is auctioned.

Howard Dahlka, executive director of the Samaritan Inn, a homeless shelter in nearby McKinney, is seeing the shell-shocked faces of telecom workers who have lost their homes. "It is a whole new breed, what we are seeing here," he says.

People in Trouble

Just in the past week, Samaritan has received 15 calls from people who are expecting to lose their homes, and he worries whether his 58-bed shelter will have to turn people away. Bill Kewin, an engineer who was laid off from WorldCom six weeks ago, says many WorldCom workers are in very bad financial shape because their 401(k) plans are worth virtually nothing. Many have put their homes on the market and don't know where they are going next. "There are a lot of people who are in trouble," he says.

As November turned into December, Mr. Dugan had found no work. His wife, Amy, thankfully did land a job for $100,000 a year at a telecom manufacturer, giving them a degree of financial stability they are grateful for. But it isn't easy for Mr. Dugan, who has 13 patents to his name. He eventually got a little work consulting for a start-up, but expects to lose that job in about a month. Something permanent feels pretty far off. He's even thinking of going back to school to study medicine. "I don't have a sense of accomplishment," he says. "I still have more to do."

Across town at the Wolf household, tension rose as Christmas approached and David still didn't have a job. The couple fretted about Christmas, and how to contribute to the gift-giving rituals with their extended family. They didn't want to ask for help but were happy to accept cash gifts to help ease the pinch. Susan Wolf was most worried about the $10,000 bill for private school for one of their children with some special needs. Her parents stepped in to help foot the bill late last year.

Finally, in January, David got a job at Yotta Networks, another local start-up that is focusing on long-haul networks. He makes about $100,000 a year, but Yotta has gone through two sets of layoffs and is set to run out of its funding in a matter of weeks. Company officials are negotiating with a promising new customer, but the start-up is burning through $1 million a month.

The Wolfs estimate they have only enough savings to last three months. "I'm getting nervous," says Mr. Wolf. "I've got a lot of people who are telling me just to get out of telecom. I don't want to end up on the street again." Susan Wolf says that if she needs to, she will resort to anything to pay this year's school tuition. "I'll move into an apartment if I have to."

In April, Mr. Maxham thought his prayers had been answered. A company called Celion Networks Inc. needed an engineer. He quickly called to arrange an interview. Then a friend tipped him off that Mr. Raeside, his old colleague from Latus, was also in the running for the job. After agonizing the day before the interview, he decided to deal with the competition head-on. "I put a good word in for him," says Mr. Maxham.

He felt the interview went well. The job seemed like a perfect fit. They needed a systems engineer -- a big-picture guy who supervises the hardware design of a new product. But while he was waiting to see if he'd get another interview, the phone rang with some disquieting news. It was Mr. Raeside, letting him know as a courtesy that he'd been asked back for a second interview. He called again when he got hired.

The two men remain friends, but Mr. Raeside seemed sheepish when he spotted him this year at Mr. Dugan's party. "I was lucky," he said softly. "I am really convinced that it came down to either one of us. We were both perfect for the job."

The job only lasted four months. Mr. Raeside was laid off on Friday.

The party itself was much tamer this year. Guests were asked to bring potluck dishes, and the biggest attraction was a big tent Mr. Dugan designed himself to save money.

Mr. Maxham attends job workshops run by various churches in the area. As every week passes, he notices more and more of the unemployed coming. Lisa Miller, the executive director of Career/HiTech Connection, the biggest workshop in the area, makes it her mission to keep spirits high. "You will find a job," Ms. Miller told the crowd packing the Preston Hollow Presbyterian Church one recent Tuesday night as she explained the importance of networking. But as the telecom crisis deepens, Mr. Maxham becomes less convinced there are even jobs to be had. He sat with a grim look one recent night as job openings were called off, none of them for engineers.

As Mr. Maxham's savings account dwindles to under $10,000, things are getting very shaky. He now buys only food that is on sale, looks for the cheapest gas and has put off replacing his wife's 10-year-old car. He won't go to a food bank because he says they give away too much meat, which he doesn't like. Repairs are going undone. Recently, Mr. Maxham set out with sealant to repair some leaks on his roof. If he doesn't find any work by September, he says that money will "get very tight."

It already has. Penny Maxham says that she is trying to ignore a toothache because the couple has no dental coverage. She quit her job a couple of years ago to fulfill a dream of getting a Ph.D. in neuroscience, but she is considering going back to work.

Once there was a time when Mr. Maxham vowed never to leave engineering. His father was an engineer, and his three grown children are engineers. But a month ago, Mr. Maxham's unemployment benefits ran out, and he is reconsidering. He recently applied to teach physics at a community college. A friend recently asked him to help install some computers in cars. He is open to anything because he really needs the money.

"It's frustrating," says Mr. Maxham, who in his 30 years as an engineer earned seven patents. An eighth just arrived in the mail last week. "I just enjoyed being an engineer so much. I was born like that and I passed it along to my children. ... But maybe I will become a teacher, just like my dad did in the Depression."

Write to Rebecca Blumenstein at rebecca.blumenstein@wsj.com1

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Updated August 19, 2002





 

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