What do you suppose has happened to the telex business with the rise and rise of facsimile? You guessed right. It’s not a problem for monopoly PTTs around Europe, which benefit from the vast additional telephone traffic generated by fax as their telex revenues decline, but the picture looks rather different in Upper Saddle River, New Jersey. That’s where the company with the legendary name – but not too much else these days – Western Union Corp lives. Western Union has seen it all before of course: it was responsible for one of those famous last words back in 1876 when it told Alexander Graham Bell that spoken communications would never catch on with businesses used to sending their messages via Morse code over the telegraph. That time around, the predecessor company to AT&T got rich and famous and over time the growth of the telex system, a little more capable than Morse tapped out by hand, enabled Western Union to resume living in the manner to which it had become accustomed, but with digital communications proliferating at the end of the 1970s, the writing was on the wall again and Western Union cast out in all directions looking for diversifications, most of them niche businesses unable to sustain a company of its size. Chapter 11 bankruptcy was looming when Bennett LeBow arrived on the scene in late 1987 with an option in his pocket on ITT Corp’s telex business and a plan to combine it with that of Western Union in the expectation that the economies of scale would more than make up for what was then a steady rate of decline in telex business, and LeBow and his cronies, and Western Union’s long-suffering shareholders would be in clover. The downside was a massive financial restructuring with very little equity and an enormous burden of junk bond finance.
Along comes fax
Along comes fax and all the assumptions fly out of the window: telex traffic, which had been declining by 6% a year, went into a nosedive, and the rate of decline soared to 35% to 40% a year with no sign of levelling off. According to the Wall Street Journal, Western Union now has a negative net worth of $766m, long-term debt of $1,000m and only $70m cash flow. Its shares, $30 in 1984, are trading at 87.5 cents and an unfortunate wheeze dreamed up by Drexel Burnham Lambert to guarantee the value of a $500m junk bond issue means that the ratchet that required the rate paid on the bonds to increase if their value fell to restore the price to 101% of par means that Western Union is now having to pay 19.5% on the things, will have to pay even more on the next turn of the ratchet, and can’t possibly afford to do so. Frantic efforts to replace the debt with new lines at a lower coupon are under way and LeBow remains optimistic that the company can still be turned around. The current white hopes are the not-very-widely-known Easylink electronic mail service and a dash for growth in the the money transfer business, where competition is growing. While those still addicted to the idea of junk financing say the precipitous decline in the telex business could not have been foreseen, the majority will see the company’s woes as just another reason why the whole idea of replacing equity with an enormous burden of super-expensive debt is simply littering the US corporate landscape with very nasty accidents looking for somewhere to happen.
