America's No. 1 financial conglomerate

Chapter 634 Income and Future Planning

At four o'clock, Ivan Setonberg went into his office, ending the auction for the dedicated line seats that had lasted for more than two hours.

He looked tired, but deep in his eyes was an undisguised excitement.

In the office's lounge area, Ernst was reclining on a leather sofa, a cup of coffee between his fingers, looking relaxed.

Anne, sitting not far from him, was elegant and perfectly embodied the qualities of a well-bred young lady.

"Is it all over?" Ernst saw him come in, slowly put down his coffee cup, his tone relaxed but expectant.

Setonberg sat down next to him, first raising his hand to rub his temples, then pursing his lips, trying to suppress the corners of his mouth but ultimately failing and turning them up.

He handed the report to Ernst, his voice trembling as he said, "All fifty seats have been auctioned off, with an average price of $4450 million per seat."

Ernst's relaxed smile froze instantly, and his expression darkened visibly, as if he had just heard not a huge sum of money, but a disappointing figure.

Setonburger observed this scene, a hint of confusion creeping into his heart. With a slightly odd expression, he asked, "You don't actually think the price is too low, do you?"

A seat costs $4450 million, with a five-year trial period, which translates to an annual cost of $890 million.

In the current telecommunications market, the average annual price of similar leased line services is only around US$30, while the price of mainland China's telecommunications leased lines is nearly thirty times higher than the conventional market price.

For any company, such a premium is astonishing.

Still not satisfied?

Ernst shook his head, a hint of reluctance in his voice. "I just feel that we went too easy on Goldman Sachs and Citigroup."

Segerberg lowered his head and secretly rolled his eyes, his lips slightly parted as if he were cursing.

Ernst quickly forgot about his displeasure and, after doing some mental calculations, said, "A single core seat is worth $44.5 million, so fifty seats would total $2.225 billion."

"Lehman Brothers signed a separate cooperation agreement earlier, totaling $4.5 million; Citigroup and Goldman Sachs secured 24 five-year special seats, each priced at $4000 million, totaling $9.6 million; plus the 116 standard seats subscribed by other Wall Street giants, each at $2000 million, bringing the total to $23.2 billion."

He paused for two seconds, then quickly gave the exact total: "A total of $59.55 billion, nearly $60 billion."

As soon as he finished speaking, the gloom in his eyes vanished instantly, replaced by undisguised joy. He even couldn't help but exclaim softly, "Wow, all things considered, the result is not bad."

This time, not only Setonberg, but even Annie couldn't help but roll her eyes, unsure of what to say.

Is this what you call "not bad"?

Let alone their peers in the telecommunications industry, even Wall Street would probably be moved to tears if they saw the revenue and profits of China Telecom.

When the initial plans were made to lay this dedicated communications line from Chicago to Wall Street, the finance department's initial budget was no more than $10 billion.

However, the global telecommunications industry is developing at an exceptionally rapid pace. The widespread adoption of Internet technology has generated massive communication demand, and various communication equipment companies are facing long queues of orders, causing the prices of core equipment, dedicated cables, and related components to soar, reaching new highs almost every month.

In addition, labor costs have increased significantly in order to meet deadlines.

Due to a combination of factors, the final total cost of this dedicated line reached $13.8 billion.

Even so, this investment was still incredibly profitable.

The first five-year service contracts alone brought in nearly $60 billion in revenue for China Telecom.

Although there are objective reasons for this, even without these reasons, this dedicated line could still collect around 35 billion to 40 billion.

With this gross profit margin, you call this "not bad"?

After a brief silence, Setonberg's helpless expression vanished, replaced by a serious one. "But I must warn you, those investment firms won't give up easily."

"Given the chance, they would definitely pounce on you fiercely and take a bite out of you."

Ernst, however, seemed unfazed. A slightly mocking smile played on his lips as he chuckled, "Do you think that even without today's incident, those guys would have let me go when they saw an opportunity?"

Setonberg opened his mouth, wanting to refute, but found that he couldn't find the right words for the moment.

The answer is obvious—no.

Wall Street has always believed in the principle of profit-seeking, and there is a famous saying: "Never let go of a dollar of stable profit."

In the world of capital, there are no permanent allies, only permanent interests.

Since this wasn't really his concern, Setonberg decided to steer the conversation to a more practical level: "How should we plan and operate this huge sum of money that's about to be deposited into our accounts?"

Ernst looked at him. "What are your thoughts?"

Setonberg said, "First, we acquired AT&T's broadband business, which we estimate will cost about $20 billion."

Regarding the price, we still need to discuss it.

However, since Wall Street offered it up lucratively, it's impossible for them to ask for a high price.

The broadband business of Telephone & Telegraph Corporation is valued at between $80 billion and $100 billion.

Ernst is quite certain that the final acquisition price will be lower than the market price, possibly even below $70 billion.

They will allocate around $20 billion, with the remainder financed through loans. The loan-to-value ratio is not low in the telecommunications industry, but it's not particularly high either.

"As for business development, my original idea was to achieve it through mergers and acquisitions."

Ernst nodded silently. This idea was quite normal. The simplest way for a company to develop rapidly was through mergers and acquisitions.

"But given the current situation, this method doesn't seem suitable for mainland China Telecom." Ivan Segerberg said, glancing at Ernst before remaining silent.

"Are you saying that we're not listed on the stock exchange, and the overall valuation of the telecommunications industry is too high?" Ernst understood what he meant.

Is it unwise to engage in large-scale mergers and acquisitions at this time?

Setonberg nodded, his expression somewhat conflicted, and said, "That's right."

"For unlisted companies, mergers and acquisitions are unlikely to maximize profits and may even lead to an operational crisis due to high debt."

"The core logic of mergers and acquisitions is essentially to drive up the company's stock price by acquiring high-quality assets, and then use the high market value as a basis to continue a new round of financing and expansion."

"But since our mainland telecommunications companies are not listed, there is no core leverage such as stock price. Blindly engaging in large-scale mergers and acquisitions will only increase the company's debt. If subsequent business does not meet expectations, the cash flow may break down."

"More importantly, the current development of the telecommunications industry has shown a clear trend of irrational prosperity." Setonberg's tone was tinged with worry. "Not only have the valuations of Internet companies skyrocketed, but the market valuations of various telecommunications companies have also deviated significantly from their normal value range."

"Making acquisitions under these circumstances is tantamount to buying at the top, which carries enormous investment risk. No one can predict whether the industry will undergo a correction in the next few years, or whether those overvalued assets will revert to their intrinsic value."

Ernst is quite impressed with Ivan Setonberg's prudent approach; at least he hasn't blindly followed the current booming market.

"What if we choose to develop slowly and take the path of endogenous growth?" Ernst suggested another possible direction.

Setonberg gave a wry smile, which was the reason for his dilemma.

"You should know very well that the telecommunications industry is a typical long-cycle, capital-intensive industry."

"What we need to build is not a point-to-point dedicated line like the one we have now, but a line that covers an entire region. It will take at least one or two years to see any results."

"What I'm worried about is that by the time our regional communication networks are fully deployed and high-throughput transmission is achieved, those telecommunications giants may have already completed the integration of small and medium-sized telecommunications companies in various regions and firmly controlled most of the market share."

"By then, it will be extremely difficult for us to enter the market."

Ernst fell into deep thought. Organic growth was too slow, and expansion through mergers and acquisitions was too risky. He seemed to be in a dilemma.

He reached for the coffee on the table, and when he inadvertently glanced at Annie, who was sitting quietly not far away, her eyes fixed on him, a flash of inspiration struck him.

"Home broadband".

"Home broadband?" Setonberg repeated, then his eyes lit up.

"That's right. Right now, all the telecom companies are fighting for the enterprise broadband market, and nobody is paying attention to this aspect at all."

The United States has the highest computer penetration rate in the world, but no one could imagine that the household broadband penetration rate in the United States is less than 1%.

Almost all households use dial-up internet access via telephone lines, which occupies telephone line channels, and there are no dedicated broadband lines at all.

However, broadband will be an essential service for every household in the future, so Ernst plans to take the lead in this area by "encircling the cities from the countryside".

By the time those telecom giants realized what was happening and started laying lines, mainland China's telecom lines had already connected to various communities, providing access at any time.

"But isn't that too much of a burden?" Ivan Setonberg then frowned.

The reason why broadband penetration in American households is so low is because the investment and return are disproportionate.

If you run the same line in a commercial area, how many customers can you connect?

Even if you install a broadband line in the community and every household gets broadband access, what difference does it make?

Moreover, broadband costs are currently high, so many families prefer to use telephone lines rather than dedicated lines.

"Then we'll give up on fiber optics," Ernst said.

"Absolutely not!" Ivan Setenburg quickly interjected, his face showing some anxiety as he advised, "Fiber optics is the future. Copper cables have too low a transmission rate and will definitely be phased out."

Ernst waved his hand, telling him to calm down. "I'm not saying we should abandon fiber optics, but rather adopt a transmission medium that combines fiber optics and coaxial cable."

"Fiber optic cables are used for the main line to improve the transmission rate over long distances and reduce signal attenuation, while coaxial cables are used for the access point of the secondary line to reduce costs."

"Coaxial cable," Setonberg muttered to himself.

He knew about this; it was a newly developed cable in recent years, and essentially a type of copper cable.

However, unlike the copper telephone lines used for dial-up internet access, coaxial cables, while not as fast as fiber optic cables, are more than five times faster than copper cables.

However, this also has a problem: "Coaxial cables have very poor interference immunity, which will affect the user experience."

Ernst thought to himself, "They're about to eat, and they're complaining about the food being bad."

Even if it's unstable, it's still more than one or two times better than dial-up internet.

"Moreover, we can develop it; as for interference resistance, I don't think that's a big problem."

Setonberg nodded, looked at him, and asked, "Still Bell Labs coming?"

Why not?

Ernst's answer was exactly what Setonberg had expected.