MARKET COMMENT
Brother, Can You Spare A Dime?

By David Kuo (TMFDragon)
January 25, 2002

Carburton Street, London -- It's sometimes said that if you throw enough money at a problem then there is a pretty good chance that the problem will go away. But it is important to have plenty of money at your disposal should you go down this route. It is also important to understand the nature of the problem and decide whether intervening with further pots of money is going to do the trick. Don't throw good money after bad, as others would say.

Both the US and the UK Governments have both employed a mixture of fiscal and monetary policy to intervene in the slowdown of their respective economies. It works because the fundamentals of the two economies are intrinsically strong and intervention by increasing both money supply and stepping up government spending helps to smooth out the dips in the economic cycle.

We saw last night that Alan Greenspan was uncharacteristically bullish over the state of the US economy commenting the country was emerging from recession and even questioned the need for further fiscal stimulus. And in the UK, today's numbers from the Office for National Statistics showed that the economy grew albeit at the slowest rate for almost three years.

So what about ailing businesses? Should money be thrown at these companies to bale them out of trouble?

The same rules that apply to the macro economy should also be applied to businesses. It is only worthwhile baling out companies, through injection of funds, when and only when, those businesses are founded on sound business models. The telecom services sector is perhaps a good case in point. The woes at Energis (LSE: EGS), which were revealed yesterday, and to a lesser extent the troubles reported by Fibernet (LSE: FIB) today, are the result of a temporary oversupply in the market.

But it should be recognised that the surplus of telecom capacity is only transitory and proposals that are under consideration by the Government are expected to stimulate demand for broadband in the UK. These measures, which include the raising of consumer awareness, stimulating broadband content and aggregating government requirement, are expected to address the issues of stalling demand for broadband services.

The issues at both Energis and Fibernet are by no means company specific but a general malaise that is affecting a host of other alternative telecom companies. The ability for these troubled businesses, to weather the telecom glut, depends greatly on their ability to throw enough money at the problem and ride out the downturn. And in some cases this is not completely assured unless investors are willing to put their hands into their pockets yet again. The old Bing Crosby song "Brother, Can You Spare A Dime?" starts to wear a bit thin after a while.