Optical/IP Networks

GlobalX: The Burst Bubble

Global Crossing Ltd. (NYSE: GX) started as founder Gary Winnick's dream: a next-generation fiber optic network to span the world. It grew into a symbol of the money-madness that swept the telecommunications industry at the close of the millenium.

The sheer numbers are staggering: The company raised billions of dollars in capital, laid thousands of miles of fiber optic cable across multiple continents, and generated hundreds of millions of dollars in wealth for the founders and insiders.

But then there's this: After burning through roughly $10 billion, the company never earned a penny of profit before filing for bankuruptcy earlier this year.

Many still point to Winnick's vision as original and influential –after all, it inspired a whole generation of copycat businesses in the so-called "greenfield carrier" space. But poor execution and excessive financial leverage led to the company's collapse. Now Winnick's dream has devolved into a complicated knot of companies tangled up in bankruptcy, lawsuits, a federal investigation, and bickering shareholders.

On the scandal scale, Global Crossing's profile is rising. Take Winnick himself – by most measures, he made off with close to $1 billion, while common stockholders and employees have been left with worthless stock. With thousands having lost their jobs, Winnick remains comfortably ensconced in his $40 million Beverly Hills estate. Declining to give interviews, he hides behind his new “media crisis handler,” Howard Rubenstein of Rubenstein Associates, who is famous for representing people like George Steinbrenner, Leona Helmsley, Donald Trump and Rupert Murdoch, to name a few.

Comparisons to the Enron debacle are often made. But Global Crossing's failing is perhaps even more spectacular, given the amount of raw capital that that was burned and the wealth it generated for its insiders. Enron's CEO Kenneth Lay took home tens of millions of dollars – Winnick made off with hundreds of millions prior to his company's bankruptcy.

Now that it's turned sour, it's up to the lawyers and courts to decide how Global Crossing will be restructured. At the core of the assets are the company's crown jewels – its fiber optic network.

By the company's estimates it's successfully installed 100,000 miles of fiber optic cable throughout the world. But amid the current capacity glut and overall telecom recession, it's unclear how much anybody is willing to pay for it. So the question is: Who gets it? And at what price?

Read on, for the grim details: — Eugénie Larson, Reporter; R. Scott Raynovich, US Editor; and Marguerite Reardon, Senior Editor, Light Reading
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COMMENTS Add Comment
jamesoid 12/4/2012 | 10:28:14 PM
re: GlobalX: The Burst Bubble "Compared with a Chapter 13 filing, which liquidates a company's assets, Chapter 11 just means the company has to reorganize"

I beleive the preceeding statement is in error as regards a public company. Chapter 7 is the filing under which public company assets are liquidated to satify creditors.
fhe 12/4/2012 | 10:27:43 PM
re: GlobalX: The Burst Bubble 3. Lawyers
2. Analysts
1. Stock Market (which itself is the biggest pyramid scheme in the history of mankind)

What happened when all three worked together and scamed the public?

The telecom bubble!
rs50terra 12/4/2012 | 10:26:08 PM
re: GlobalX: The Burst Bubble It may sound out of line, but I have never heard anybody complaining when the Market went up. So you left your job and dreamed being a millionaire. It didn't work. OK.
Why blame the others? I agree analysts don't know S#@& and I agree they are corrupt. (by the way, I am not sure I understand why do the lawyers belong to your list other than people always like to hate and blame lawyers.
I can sympathize with old ladies who were foolish enough to trust their brokers and get into the Internet and technical 'miracles' stock.
But I cannot feel any sympathy for engineers who jumped to any crazy half-baked company. These were companies active in a space you were supposed to know. If greed got the better of you, tough luck and no sympathy.
fhe 12/4/2012 | 10:26:06 PM
re: GlobalX: The Burst Bubble Sorry that I misled you, I should have said "all three worked together and scamed the public caused the 'stock market bubble'"...

and I did not point my fingers to telecom/optical start-ups only, established companies has major contribution to the burst. Fuzzy accounting, secret insider trading, under-the-table deals with investment banks, to name a few.

btw, do you think it was some office clerk Joe who came up with Enron's convoluted accounting scheme??? Have you ever thought that it might be the legal advisors (lawyers) who had the knowledge to exploite the system?
netskeptic 12/4/2012 | 10:26:04 PM
re: GlobalX: The Burst Bubble > 1. Stock Market (which itself is the biggest
> pyramid scheme in the history of mankind)

Good thing is that it keeps inflation low - stock market burns excessive liquidity on a regular basis.



wilslo 12/4/2012 | 10:25:03 PM
re: GlobalX: The Burst Bubble The regulations for filing for Bankruptcy should be tightened... Nowadays every Tom, Dick & Harry are applying for Bankruptcy. I do agree that the market situation is not so good but then companies which have got a lot of money from Shareholders should respect their investment and should work towards the gain of the companies as well as the shareholders/investors....
1. Currently almost everyone is starting a company without a proper market study & future plan(for e.g. a lot of those well known DOTCOMS.)
2. They hype a lot of things and the people fall for it(the investors should have brains too....they should analyze first before investing)
3. They run their companies and keep on issuing stock, but do not show any profits(People are greedy & they keep investing)

What we can do about it rather than whining & complaining
1. Be aware as to where our money is being invested(if it is being done thru mediators)
2. Try to Study the companies before investing(A tough thing but still....)
3. Don't be too greedy to join the startups for big salaries
4. Save some money for the rainy days.

What the Government could do
1. The government should tighten the regulations linked to filing of bankruptcy
2. The companies should not be allowed to continuously raise millions thru secondary public offering(or by filing for shelf registration) unless they are able to show some minimum ROI
3. Try and reduce the corruption(Though a Herculean task, if this is done then a lot of things will become streamlined & there wont be much of under the table dealings or sideline dealings).
4. Every now and then the Govt. should pick up a few companies randomly(I stress RANDOMLY) and do an investigation on their accounting practice's rather than waiting for the eventual fall & then doing an analysis(nobody gains anything out of it except for the Chairman, CEO & their beneficiaries)
5. Every major stock sale should be monitored keenly(No Corruption over here please!)
6. The assets of the Chairman, CEO & all major powers should be investigated & maybe the govt can sell of all the assets above a particular level(which should be enough to make a decent living for the next 1 or 2 years) and reinvest the money gained thru it in the company.
This will ensure that people don't easily file for bankruptcy
7. And if the bankruptcy is accepted by the Govt. a consortium should be formed of the major investors and one of them should be a representative to run the company so that all the investors(including the shareholders) are paid back

I know a lot of people have other good/better ideas to add to this......and i hope to see them too.....

Let the recession recede,

rafaelg 12/4/2012 | 10:19:49 PM
re: GlobalX: The Burst Bubble EXCELLENT ARTICLE!!!!!
I hope that anybody, (just anybody!!) gets the assets other than Verizon. If so, the master plan for the ILECs will be completed...
flanker 12/4/2012 | 10:19:07 PM
re: GlobalX: The Burst Bubble This story is a rehash of lexis nexis quotes from other magazine articles.

There is no original analysis, and I've never met an industry insider without a good GX war story. Where are the war stories? Dont you have anyone on the insude?
MyDayOff 12/4/2012 | 10:18:26 PM
re: GlobalX: The Burst Bubble I am uncomfortable in the position of defending Global Crossing. And I can imagine that over time more issues of ugliness will be uncovered from within the company, which make this defense even more unpalatable. Still, letG«÷s be honest in assessing Global Crossing, not just rush to stomp on the carcass. This article could use some basic level of perspective. (I never worked for Global Crossing.)

First, Global Crossing did not die because of poor execution and leverage. Actually in the construction phase the company had a very strong track record (albeit it depended heavily on third-party contractors, especially in the early years.) Yes, they had debt, a lot of debt. They also had equity, a lot of equity. Relative to their non-incumbent peers at the time, they actually had less leverage.

And yes, they spent lots and lots of money without generating a profit. I guess it would sound stupid to say that this was the plan. But it was. Telecom services is like the commercial real estate business. You have to build the building before you collect any rents. Also, you canG«÷t just build a couple of floors and see how the lease-up goes. You have to build it all up-front. So, you have to spend network construction capital up-front. Also, any company in the start-up and development phase will have to fund its operating needs, as did Global Crossing.

Strategically, their development plan was excellent. They built the Atlantic cable and earned a lot on the sale of capacity over this route. That cash could then be used to fund construction of other cables. That meant that they did not have to borrow vast sums of debt that others did.

In a very classic way, they started as wholesales during the network build stage and moved towards retail upon completion of the network. This showed a lot of intelligence and (dare I say it?) conservatism.

So what killed Global Crossing? What killed most of the competitive telecom companies? Sure, some of them were stupid. Some management teams were slimy. This was not Global Crossing. The most common factor is that these companies had not yet reach sufficient maturity by the time the market changed. Go back and look at the bankruptcies. The least mature companies died first and the more mature companies died most recently. Global Crossing never got sufficient retail traction and always knew that the wholesale margins would get squeezed. Moving to retail is very difficult to start with (anyone remember IXC?) Global Crossing seemed especially bad at it. You can probably point to weak execution here. Also I have got to believe that Winnick drove many quality CEOG«÷s out of their jobs and that revolving door was unsettling to retail customers. As a consequence they had presented trophy contracts that likely came with negative profit margins in order to G«£primeG«• the market.

Now, how about the lie-cheat-and-steal phase? Not surprisingly management of a company sees problems before anyone else and rather than let the ship go down gracefully, they try to cover it up. Not ethical to be sure. We have seen this from a lot of companies. We will learn shortly if Global Crossing was involved in this, but I wouldnG«÷t bet against it. Was Wall Street sleeping? No. The problem is there was no way to know if the capacity swaps were covering legitimate business needs (in fact we still donG«÷t know). But look back to all the leading analysts in the second quarter of 2001 and you will find this was a big concern and frustration.

So, what do we have? Global Crossing wasnG«÷t a stupid idea. It wasnG«÷t the G«£symbol of the money-madness that swept the telecommunications industry at the close of the millennium.G«• It was a bold idea. Execution was good. Capitalization was decent. But the bell rang and Global Crossing wasnG«÷t ready. They may have cheated to keep the company alive a little longer. Sorry, maybe the real story wouldnG«÷t sell so many newspapers.

As for the shareholders left penniless? ThatG«÷s a load of trash! Remember, lots of people rode that stock up to a $38 billion market cap. And lots of people rode all the way down. I would be willing to bet to a large degree, those that traded in and out on the way up were that same as those on the way down.

As for the employees, I think you have a point. One for you.
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