Advanced Fibre Communications, Inc - Difficulties Arising in 1998

Difficulties Arising in 1998

In mid-1998 AFC was stunned by a series of adverse developments. First, selling to the larger regional Baby Bells proved to be more challenging than anticipated, requiring costly levels of custom design and operational support. As a result, the company was forced to lower earnings estimates for the second quarter of 1998. Next, AFC had to admit that it was having problems at its China operations and that it had lost its largest customer, GTE. To make matters even worse, Grivner quit in order to become CEO for the Western hemisphere operations of Cable & Wireless plc, a London-based international telecommunications company. Investors punished the company, quickly bidding down its stock. In just two months, the stock lost almost three-quarters of its value, and AFC was rumored to be a takeover target, despite a poison pill provision the board of directors had installed only months earlier. The company also was beset with lawsuits initiated by disgruntled shareholders. Green was forced to take over as CEO on an interim basis, faced with the challenge of putting out fires while attempting to recruit Grivner's replacement. He asserted that the company continued to have excellent prospects because "the fundamentals of the company have not changed." By early October he had a verbal commitment from AFC's top candidate for the CEO post, allowing the unnamed executive six weeks to complete an employment contract. At the end of that period, however, the candidate informed Green that he was now considering a counteroffer from his current employer. Green immediately withdrew AFC's offer, explaining to the press, "You should live by your word. The guy wasted two months of our time, which is the most annoying thing."

Back to square one in the search for a new CEO, Green continued to head AFC. Finally, in April 1999 the company settled on a new president and CEO, hiring 50-year-old John A. Schofield, a senior executive at Minnesota-based ADC Telecommunications. Born in Australia, Schofield had lived in the United States for nearly 20 years and boasted 30 years of experience in selling telecommunications equipment around the world. He took over a company that was clearly in turmoil, its reputation with investors in tatters. According to Schofield, AFC "was drifting, in terms of customer focus. It was drifting in terms of product focus. And the internal processes associated with development were not in the shape that they needed to be."

Schofield's first step in turning around the company was to lower investors' expectations, a move that gave him some breathing room to effect some changes. He shut down engineering projects that he did not think could help the balance sheet in the near term. More important, with the help of an outside consultant, the Massachusetts firm of PRTM, he revamped the company's two-headed engineering organization, which previously had prevented AFC from pursuing a focused, long-term strategic plan. Now there was a single manager overseeing a unified engineering unit. Schofield withdrew from marginal foreign markets, in the process cutting about 9 percent of the company's global workforce, instead electing to target large European telecoms and distributors. He also beefed up the company's domestic sales operations to improve sales in the United States.

These steps soon paid off, as within 18 months AFC was posting record results. In 2000 AFC recorded sales of $416.9 million and net income in excess of $77.5 million. Also of note during 2000 was the acquisition of GVN Technologies, a Largo, Florida company that developed integrated access device equipment, the addition of which expanded AFC's product portfolio.

In 2001 Green retired as AFC's chairman at the age of 70, adhering to an age requirement that he had instituted. Schofield assumed the added responsibility. Overall, it was a difficult year for the telecommunications industry and AFC in particular, due to the effects of a slowing economy and the September 11 terrorist attacks. AFC experienced a major drop in sales, mostly occurring in the fourth quarter. As a result, management was forced to cut its workforce by 9 percent. For the year, sales fell to $327.6 million. Nevertheless, AFC remained a cash-rich company and was well positioned to wait until economic conditions improved. In 2002 it was able to invest in the future by acquiring AccessLan Communications, a San Jose, California, company that strengthened AFC's bid to be a technology leader in the development of next generation networks.

To adapt to changing conditions, in 2002 AFC restructured its supply chain to accommodate customers' preference for "just-in-time" purchasing. With the telecom industry still in the doldrums in 2003, AFC laid off another 11 percent of its workforce. The company essentially treaded water and remained profitable while waiting for customers to once again invest heavily in infrastructure. It also remained receptive to investing in the future through acquisitions if the right deal appeared. In February 2004, AFC paid approximately $240 million in cash to acquire Marconi's North American Access Group, part of London-based Marconi Corporation plc. The deal added a successfully deployed "Fiber-to-the-Curb" solution, greatly enhancing AFC's product offerings.