Global’s Lost Connection
Few companies have raised such huge sums of money, built so vast a global enterprise or grown as quickly as Global Crossing Ltd.
In a little more than four years, the Beverly Hills-based telecommunications company formed by Los Angeles financier Gary Winnick rounded up $20 billion to construct a fiber-optic network that today connects 27 countries on four continents. Almost overnight, the company rose to challenge such established giants as AT&T; Corp. and British Telecom, which have been in business for more than a century.
But Global Crossing’s spectacular rise is nothing compared with its stunning descent. Saddled with billions of dollars in debt and losses, a stock price under $1 and slack demand for its network, the company is fighting for its life.
“A lot of people are panicking . . . [and are] questioning the company’s viability,” said Pat Comack, a telecommunications analyst at Guzman & Co. Indeed, before a money-saving restructuring was announced last week, Global Crossing had enough cash to last only six months. Some on Wall Street have given up the company for dead.
The 54-year-old Winnick, a burly former Drexel Burnham Lambert bond salesman who is Global Crossing’s chairman and largest shareholder, is unhappy, defensive and determined to survive.
“This company’s only 4 1/2 years old. . . . Give me a break,” he said. “They expect us to be AT&T; and to bench all the big guys. It doesn’t work like that. It comes in small steps.”
Restructuring Plan Is the First Step
Winnick, however, doesn’t think--or act--in small steps. From the beginning, he set out to build a company that would help redefine the telecommunications industry, with high-capacity connections between continents that could handle skyrocketing Internet traffic and the growing flow of international business.
Saving Global Crossing will be no less a herculean effort, and the restructuring plan is but the first step. It involves the sale of two units, a possible merger with an affiliated company and a management shake-up that put the fifth new chief executive at the helm.
But Winnick needs more than that: A sharp rebound in a gradually worsening global economy and taking market share from established players as well as from wounded rivals are musts.
Takeover speculation, usually rampant about struggling companies such as Global Crossing, is nonexistent because of Global’s more than $9 billion in debt. Many potential suitors, including AT&T;, British Telecom, WorldCom Inc. and Deutsche Telekom, have their own financial troubles and cannot risk a major acquisition right now.
Many companies would rather wait to see whether Global Crossing ends up in Bankruptcy Court, where its formidable assets might be for sale at a greatly reduced price.
Winnick and John Legere, his newest CEO, reject any suggestion that the troubled company might follow the long line of sputtering telecommunications companies into insolvency.
In weighing the options, “there are no versions that have this company going away,” Legere said.
Winnick and Legere are working frantically to calm investors, lenders, employees, customers and Wall Street analysts, trying to convince them that the company’s cash and cost-cutting plans will work.
If successful, it may prove to be Winnick’s greatest sale yet, and that’s saying something. Before Global Crossing was formed, no single company had ever installed commercial undersea fiber cables with private funding. The few transoceanic links had been the work of powerful and well-financed consortiums made up of AT&T;, British Telecom, Japan’s KDDI and other international phone giants.
Winnick already was a millionaire and running his own investment company, Pacific Capital Group, which has holdings in real estate, financial services, health care and biotechnology. He had spent 13 years at Drexel Burnham Lambert, where he was head of the company’s convertible bonds department, working alongside junk-bond king Michael Milken.
He also became a man of influence in Los Angeles, donating heavily to political causes, funding a children’s petting zoo and pledging $40 million to the Simon Wiesenthal Center to help fund a peace and tolerance institute in Jerusalem that will bear his name.
Tapping his Wall Street connections and using an uncanny ability to sell an idea, Winnick raised $20 billion to build the Global Crossing network--which is 95% complete--in just under four years, an absurdly short period.
That network, the most expansive owned by a single company in the world, spans 101,000 miles and four continents. Using it, Global Crossing sells long-distance links, Web-hosting and other services to customers ranging from the British government to the New York Stock Exchange and Microsoft Corp., and provides network space on a wholesale basis to rivals such as AT&T;, WorldCom and Deutsche Telekom.
Global’s Losses Grew With Its Operations
Network construction was a big part of the company’s strategy, but it was supplemented by a series of acquisitions along the way. Fueled by cash and an escalating stock price, Global Crossing bought four companies in two years, picking up key land-based operations in the United States and Britain and helping boost sales from zero to nearly $4 billion in four years.
Unfortunately, Global Crossing’s losses grew by similar proportions and are expected to hit $2.5 billion this year. The company also burned through four CEOs, each seemingly unable to please or perform under Winnick’s guidance.
“This is unprecedented, this many CEOs. . . . It’s worse than a baseball team,” said Comack of Guzman & Company. Winnick is “like the [meddlesome New York Yankees owner] George Steinbrenner of telecom, except he hasn’t won the World Series.”
Winnick, a native New Yorker, doesn’t like the comparison.
“George Steinbrenner runs a business,” Winnick said. “Global Crossing is run by a board of directors, and no decision has been made about a CEO that has not been unanimous.”
Potential Clients Curtail Spending
At Global Crossing, the financial picture has been declining steadily and the CEO and other top executives are being held accountable, Winnick said. Cumulative losses are expected to top $4.8 billion by year’s end.
Just as Global Crossing was nearing the completion of its network, the U.S. economy fell into what many fear may become a steep downturn, causing thousands of companies--and potential Global Crossing clients--to sharply curtail spending.
In response, the company’s shares have fallen more than 98% from their peak, reducing Global Crossing’s market value to $550 million, from $54.5 billion. That turned Winnick from the richest man in Los Angeles--his stake was worth $6 billion at its peak--to just one of dozens of fat cats, his 9% stake now worth $65 million. (In the last four years, Winnick sold more than 43 million Global Crossing shares, grossing more than $600 million, according to review of regulatory filings by Thompson Financial/First Call.)
This month, the company delivered more unsettling news: Third-quarter results will be far below forecasts, even after eliminating 2,000 jobs--about 15% of its work force--and shuttering 100 of its 600 offices.
Winnick said Global Crossing’s results in the July-September period took a hit because the company turned away as much as $900 million in capacity “swapping” deals with other carriers, labeling the proposed contracts “bad business.”
Over the last year, analysts have become suspicious of such transactions because they can appear as cash sales when in fact no money changes hands.
Global Crossing has $2.4 billion in cash--a more-than-plentiful cushion for most businesses--but precious little for a company that burned through about $1.2 billion in the quarter ended Sept. 30.
As part of the restructuring, Global Crossing will slash capital spending by more than 50%, to about $1.5 billion, in 2002. With much of its network built, analysts say the spending cuts are doable without harming business prospects.
In addition, the company’s plan to sell two non-core units could raise $600 million to $1 billion in cash.
Global Crossing also hopes to merge with affiliate Asia Global Crossing to save $10 million to $25 million a year in operating expenses. Global Crossing is the majority shareholder in publicly traded Asia Global Crossing; Microsoft and Japan’s Softbank are minority owners.
Asia Global Crossing, also heavily in debt, has met its financial targets. It has benefited from being one of the most comprehensive undersea cable operators in a region where demand remains strong and competition has not undercut pricing.
“We are fully funded, and with the asset sales, we’re looking at that as an additional cushion,” Legere said. “Cash is the key right now in this industry, and we have it and will use it wisely.”
Legere and Winnick plan to further relieve the financial pressure by asking lenders to ease the strict financial targets that are required under Global Crossing’s bank loans. The company said it now is in full compliance with those requirements. The company also has the option of deferring payment of $236 million in annual preferred stock dividends.
Those moves could well be enough to carry Global Crossing through its financial crisis and the downturn in demand, analysts say. But Comack says that “is no longer a foregone conclusion.”
“They’ve got to be pretty aggressive in their cuts,” said David Takata, an analyst at Girard, Klauer & Mattison. “It’s going to be a tough period.”
Competitors Are Scaling Back Projects
If Global Crossing’s financials hold steady, analysts say, the company has the most complete network and is in the best position to scoop up a big share of the uptick in demand that is expected to begin next year.
With the company’s future in doubt, however, finding more business among skittish multinational corporations could be tough.
“The edge that Global Crossing has is that their network covers more locations than anybody else, so there’s value in that,” said Blaik Kirby, a vice president at Adventis, a consulting firm. “There were a lot of cable [systems] that were planned in Asia and Latin America, and they are not being built.”
Large competitors, such as Flag Telecom, Teleglobe and CTR Group, also have substantial networks, but lack the breadth to provide worldwide connections without hopping on and off different systems.
In addition, several ambitious competitors, who announced plans for major subsea connections, are finding it tough to raise the necessary money and many are scaling back or abandoning their projects.
360 Networks, a Canadian firm with international network aspirations, is in bankruptcy. TyCom Ltd., which in late 2000 laid out plans to build a 155,250-mile network over 10 years, is about to be absorbed by parent company Tyco, a move that may signal a wavering commitment to the project.
“The battle is going on strongly, and they’re carting off the wounded,” Legere told analysts during a recent conference call. “We’re moving ahead, we’re moving forward, and they’re moving out.”
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Here’s a look at key events in the short history of Global Crossing:
March--Founded by Los Angeles financier Gary Winnick.
May--Raises $800 million in high-yield bond offering.
August--Raises $400 million in initial public stock offering, selling shares at $7 each. Stock closes at $19 in first-day trading.
March--Stock splits 2-for-1.; company announces deal to buy long-distance company Frontier Communications in a stock swap worth $11.2 billion.
April--Announces deal to buy Cable & Wireless Global Marine, an underwater cable construction and maintenance firm. Deal, worth $908 million, completed in July.
May--Announces bid to buy US West, a local phone company in 14 Western and Midwestern states, in $37-billion stock deal.
June--Qwest Communications makes surprise bid to buy US West and Frontier for a combined $55 billion, sparking weeks of intense negotiations among the companies.
July--Global agrees to buy Frontier. Qwest agrees to buy US West.
September--Frontier agrees to sweetened buyout offer from Global, in deal worth about $10 billion; announces plan to create Asia Global Crossing in a joint venture with Softbank of Japan and Microsoft.
November--Buys British network operator Racal Telecom for about $1.6 billion in cash.
February--Announces plan to buy IPC Communications. The $3.2-billion deal closes in June.
April--Announces plan to sell shares in its GlobalCenter Web-hosting unit and create a tracking stock.
July--Rejects offer by Exodus Communications to buy Global’s Web-hosting business for stock valued at $6.5 billion; announces deal to sell local phone service operations to Citizens Communications for $3.65 billion in cash.
September--Announces deal to sell Web-hosting business to Exodus for stock worth $6.5 billion. Deal closes in January, worth $1.95 billion.
October--Asia Global Crossing raises $455 million in initial public stock offering and $408 billion in a debt offering. Global keeps 57% stake.
January--Raises $1 billion in private debt offering.
June--Completes sale of local phone business to Citizens Communications, resulting in $208-million loss.
August--Announces restructuring that includes laying off more than 2,000 employees and closing 100 of 600 offices worldwide.
September--Exodus, a major Global customer, files for bankruptcy protection. Global owns 19% of Exodus’ stock.
October--Appoints fifth chief executive in 4 1/2 years and warns that third-quarter revenue and earnings will be significantly below projections; stock is removed from the S&P; 500.