Global Crossing: Telecom's Enron?
WASHINGTON, D.C. -- With the Enron Corp. (NYSE: ENE)
scandal slapped on the front page of most major newspapers every day, the bankruptcy of Global Crossing Ltd. (NYSE: GX), a large next-generation carrier, has ignited emotions in the telecom industry (see Global Crossing Falls Overboard).
Just days after the filing was announced, attendees at the Comnet tradeshow in Washington expressed disgust but a lack of surprise at the news.
“It’s another Enron,” says Alex Jordan who was at the show representing his company, Advanced Research Diagnostic Systems. “They’re a fraud. They were spending money like drunken sailors without any purchase orders. It was mismanagement -- period.”
"I'm used to all these bankruptcies by now," says Joseph Samuel, a sales manager for Optical Cable Corp. "The fact of the matter is that they were selling products without customers. Companies like Global Crossing are running fiber for customers that don’t exist yet."
But some viewed such comparisons as extreme, and customers hoped the product would continue to be delivered. John Perseo, a senior LAN administrator for Netcom Solutions International, says his company has been pleased with the T1 service it has gotten from Global Crossing:
“To be honest, it’s been a lot easier dealing with them than some of the other incumbent providers around. We’re keeping our fingers crossed that the service continues.”
Those suffering most from the Global Crossing bankruptcy will be equity investors and the company’s creditors. Included in that list are some of the most prominent names in the networking and service provider world.
For example, Lucent Technologies Inc. (NYSE: LU) is owed roughly $31.3 million, Alcatel SA (NYSE: ALA; Paris: CGEP:PA) $31.0 million, Nortel Networks Corp. (NYSE/Toronto: NT) $13.8 million, Cisco Systems Inc. (Nasdaq: CSCO) $12.6 million, and Juniper Networks Inc. (Nasdaq: JNPR) $3.6 million.
And then there are the service providers, which combined are owed over $40 million. Level 3 Communications Inc. (Nasdaq: LVLT), itself in precarious financial trouble, is the most exposed. Global Crossing owes it $10.1 million. The list goes on to include other big-name carriers, including AT&T Corp. (NYSE: T), Bell Atlantic, BellSouth Corp. (NYSE: BLS), MCI Telecommunications, Qwest Communications International Inc. (NYSE: Q), SBC Communications Inc. (NYSE: SBC), and Sprint Corp. (NYSE: FON).
So what happened to Global Crossing?
Its plan was to construct a worldwide fiber optic network to provide managed broadband services to global enterprises and carriers. This high-capacity IP network would enable Global Crossing to offer managed IP services, Internet access, data, and voice services to telecommunications carriers and business customers on a cost-effective basis.
After more than four years of construction and billions of dollars of spending, the network is now 85 percent complete, with about 100,000 miles of cable installed throughout the world. Global Crossing installed 75,000 miles itself and acquired the remaining 25,000 miles through acquisitions.
The company’s crowning glory is the 13,200-mile subsea transatlantic cable network that connects the U.S. to Europe. It also has laid 20,000 miles of terrestrial cable across North America; 11,000 miles across continental Europe, and another 13,000 miles under the Pacific to connect the U.S. to Asia, plus many other routes in Central and South America.
Except for the East Asia Crossing Phase II, all the segments are finished and in service. East Asia Phase II -- which spans from Japan to Malaysia, the Philippines, and Singapore -- is expected to be fully complete in the first quarter of 2002.
But Global Crossing’s dream has been an expensive one to fulfill. In the beginning, it seemed that the equity and debt markets understood this “build it and they will come” attitude, as evidenced by the billions of dollars they were throwing at the company.
And then the recession hit. Saddled with over $12 billion in debt and other commitments, the company has been unable to sign up enough customers to build its revenue to a break-even level. The financial collapse of many of its service provider customers has certainly affected its bottom line. What’s more, a skittish investment community has essentially slammed the door on further funding.
Hutchison Whampoa Ltd. and Singapore Technologies Telemedia Pte. Ltd. are jumping in to acquire the assets in what appears to be a fire sale.
As for what will happen next, it's really anyone’s guess. Other carriers, like Deutsche Telekom AG (NYSE: DT), SBC, or WorldCom Inc. (Nasdaq: WCOM), could swoop in and make their own offers for the company. Also, the deal presented by Hutchison Whampoa and Singapore Technologies could be rejected by antitrust investigators. One investment bank analyst interviewed at the Comnet show, who asked not to be named, said all of the above is possible.
“Bondholders and equity investors will definitely get smacked,” he says. “But I’m just not sure what will happen here. It’s far from being over and still very unclear.”
— Marguerite Reardon, Senior Editor, Light Reading