Today it came to light that Leucadia National (NYSE: LUK ) , a diversified holding company that operates along the same lines as Warren Buffett's famed Berkshire Hathaway (NYSE: BRK.a ) , plans to snap up half the shares -- a controlling interest -- of troubled telecom provider MCI. (I know nobody needs any reminder, but MCI, formerly WorldCom, recently emerged from bankruptcy after having had the dubious distinction of being the biggest-ever bankruptcy.)
Leucadia's MO is to swoop in and snap up companies that are out of favor, or even in serious trouble, and infuse them with enough cash to survive for a hoped-for turnaround. Last fall, Leucadia bought another struggling telecom company, WilTel Communications; its other business lines include health-care services, banking and lending, real estate activities, and insurance.
Meanwhile, consider the situation recently facing another telecom company, Citizens Communications (NYSE: CZN ) . Its specialty is to provide telecom services to customers in rural areas that aren't covered by some of the big telecom heavyweights like AT&T (NYSE: T ) , Verizon (NYSE: VZ ) , Sprint (NYSE: FON ) , and SBC Communications (NYSE: SBC ) . However, it's not a line of business that's allowing it to ramp up much growth at all; a look at the company's cash flow statement shows a recent scaling back of capital expenditures as it considered its strategy.
Citizens tried to put itself on the sales block but didn't find any takers. Instead of driving itself down into more money-losing ventures like increased acquisitions, it has decided to use its free cash flow to return cash to investors instead. It plans a $2 special dividend and will institute an annual dividend of $1 per share.
Both of these events equal a much better outlook for MCI and Citizens shareholders than often comes to pass in situations like these. Both stocks, of course, gained in this morning's trading.
Each of these events underscore the intrinsic troubles in telecom. My Foolish colleague Bill Mann recently wrote about AT&T's decision to stop marketing new local and long-distance services in some states. Given the heated competition in the telecom arena, he pointed to the salient fact that "Too many companies are competing for too few telecommunications dollars." In addition to competition, there's also the deteriorating influence of new technologies that have bred brand-new rivals, like Voice over Internet Protocol (VoIP).
Investors should beware the temptation to try to call a "bottom" for telecom stocks right now. It's obvious the industry is still troubled. During the long and painful process as telecom companies struggle to survive or thrive, some shareholders may not be so lucky.
Are you interested in reading more about the difficulties in the telecom industry? Take a look at the following articles:
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Alyce Lomax does not own shares of any of the companies mentioned.
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