“Credit expansion and inflationary increase of the quantity of money frustrate the common man’s attempts to save and to accumulate reserves for less propitious days.” Ludwig von Mises, in Human Action.
This month, Integra Telecom announced plans to permanently move its headquarters out of Oregon, where it had been located since its birth in the early 1980s. It was a sad day in a state that finds itself increasingly incapable of creating and keeping jobs. Republicans were quick to jump on the theme that this move was a result of an unfriendly business environment and inordinately high business taxes. While that is true to a certain extent, the real reason for Integra’s move was rooted in something that Friedrich Hayek and Ludwig von Mises warned us about almost a century ago – the perils of easy credit.
As an employee in the Credit and Collections Department, I had a front row seat for a significant portion of the most transformative period in Integra’s history. I witnessed the race to expand and acquire competitors so that Integra could stave off being acquired itself; the rapid evolution of technology; the near death of the company as the financial crisis caused widespread panic; and my own education in things I never thought I’d learn, things like credit default swaps, subprime lending and the Community Reinvestment Act.
Integra Telecom was a homegrown Oregon success story. Born from deregulation of the Bell Telephone System under Reagan, Integra began its life as the humble campus telecommunications system of the Oregon Graduate Institute in Hillsboro. By the late 1990s and early 2000s, however, it had entered the marketplace and grown into a western states powerhouse among competitive local exchange carriers (CLECs) – telephone companies that weren’t allowed to exist before deregulation, and which provided competition to the incumbent local exchange carriers (ILECs) such as Pacific Bell, US West, Southwest Bell and the like.
CLECs provide a unique economic model – competition to local telecom monopolies. Essentially, before fiber optics really took over as the dominant technology, CLECs were allowed to ‘rent’ lines from ILECs and run their own telecom traffic over existing phone lines. ILECs liked the added extra revenue, and CLECs didn’t have to invest in building their own copper network, which would have been prohibitive to entering the marketplace.
Integra grew slowly throughout the 80s and 90s, making acquisitions here and there of CLECs and smaller ILECs until the point that it had a profitable presence in 7 western states, stretching as far east as Minnesota. When I first joined Integra in 2006, they had just finished acquiring Electric Lightwave (ELI) in Vancouver, WA. This acquisition began the rapid evolution that Integra underwent – it was very much a culture change at the company. For the first time, Integra owned its own 12 state fiber optic network that ELI had built from the ground up.
But this acquisition came at a price. In order to make this acquisition, Integra had to finance it. The credit covenants that Integra entered into would be both a blessing and a curse – they would allow the company to grow exponentially faster than they ever dreamed, but these same covenants would ultimately be Integra’s undoing.
The problem was compounded a year and a half later when Integra acquired its biggest CLEC competitor, Eschelon Telecom – again using easy credit to finance the acquisition. The word around the water cooler for years had been that either Integra would acquire Eschelon, or it would be the other way around – it was only a matter of time. So in a sense, peer pressure caused Integra to expand its credit covenants even more to make the acquisition. When this happened, Integra had positioned itself to dominate the CLEC market west of the Mississippi, but they also carried a massive debt load. That debt load was manageable in the economic boom days of 2006 and 2007. When the market crashed, however, Integra entered an extended period of upheaval that would see 3 CEOs in 14 months and constant worry about meeting the credit covenants that all of a sudden had become more burden than asset.
Integra’s clientele has always been 95% business customers. So when the market crashed in 2008 – 2009 and many businesses were unable to survive, that put Integra in peril as well. I will never forget seeing the looks in the eyes of managers, directors, and vice presidents as they described how the crash of Lehman Brothers destroyed the LIBOR market, deeply impacting our daily cash flow; and how the burst of the subprime lending market bubble affected the company’s credit rating.
In fact, as reported in The Oregonian, Integra was very close to bankruptcy in 2009. That year saw widespread layoffs, salary reductions for most retained employees and revenue reductions that required the company to completely rethink its business model. Looking back, it’s truly amazing that the company survived at all. When hard economic times hit, most companies with small debt loads can contract operations and ride out the storm. But companies with huge debt loads, like nations or states in similar situations, lack the flexibility to adapt to rapidly changing conditions.
All while this was happening, significant inroads were being made by competitors into the business telecom market – new technologies and better balance sheets allowed these competitors to further erode Integra’s market share and revenue generation. Had Integra not been so encumbered by creditors, it may have had the capacity to be more nimble and adaptive to the changing marketplace. Instead, repeated credit downgrades required Integra to answer more to its creditors than the marketplace. All of this led to steep declines in revenues and steep increases in interest rates for several years in a row. Instead of being in a position to compete in a more lucrative market – large enterprise business accounts – Integra found itself continually having to stave off creditors as its previous customer base, small and medium businesses, dried up significantly.
Integra has finally started to emerge from this nightmare, recently refinancing its debt and better positioning itself to compete in the marketplace. And as it emerges and prepares to grow once again, Integra has come to the realization that being located in the dense urban center of Portland, with its high property values, is no longer feasible:
Employees have said for months that Integra was considering a move from its offices dispersed around Portland’s Lloyd District, and The Oregonian reported last month that Vancouver was a possibility. The company’s current Portland leases expire next year.
Integra said it decided to move because the 85,000-square-foot site on HP’s old campus had the space to consolidate its employees in one building. Currently, they’re divided among two buildings on multiple floors near the Lloyd Center, and in a network operations center in Vancouver.
The Oregonian went into further depth describing why Oregon has trouble holding on to large employers:
But when Integra had the choice between squeezing into an urban area well served by light rail, or relocating to the outer fringes of the regional transit system, to a suburban campus that has no light rail and not even a bus stop within a half mile, Integra decided to leave the state.
Oregon doesn’t grow many big tech companies, and it has an agonizingly difficult time holding on to the few that do emerge.
The bottom line is that the state’s tech sector rests on very few pillars. As we saw last week, it doesn’t take a lot to shake that foundation.
It would be nice to blame Integra’s move out of Oregon on our state’s unfriendly business environment and out of balance tax system. But that only tells one part of the story. The much more significant cause is that easy credit can have unintended consequences. When a company is forced to cut costs in an attempt to stave off creditors, it will look to cut those costs wherever it can – just like a family budget. Combine that with the State of Oregon’s inability to provide incentives or cost effective property and infrastructure that would entice a company to stay, the need for the company to evolve in a stagnant economy and the need to make capital investments in new technologies, it only makes sense that the company would find a less costly alternative to site its headquarters.