Covad: Why Investors Hung Up

Worries over an abrupt strategy shift sparked a sharp sell-off at the DSL provider

Robert E. Knowling Jr., chief executive of telecom startup Covad Communications Group Inc., is nothing if not self-confident. When he announced on June 16 that Covad, which sells speedy digital subscriber line (DSL) service to Internet service providers, would spend about $200 million to acquire a small Southeastern DSL retailer called Bluestar Communications Inc., unhappy investors clobbered Covad's stock. Shares dropped 27% in one day, wiping out $1 billion of market value. Even if he had known what the reaction would be, Knowling says, he would do it again--but he wouldn't have slept for a month beforehand. "I'm going to prove them all wrong," he says. "I'll have the last laugh on this one."

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