Editor’s note: Russ McGuire is the online director of Business Reform Magazine. Each issue of Business Reform features practical advice on operating successfully in business while glorifying God.
On September 28, 1999 Global Crossing completed the acquisition of Frontier Corporation for approximately $11 billion. In some respects, the deal turned Global Crossing into a “real” company. In some respects, Frontier may represent the flaky keystone that could crumble the company into liquidation.
Let’s travel back in time to telecom-land in the late 1990s. On October 21, 1996 two companies announced they were going to jointly build a new nationwide fiber network. This announcement sparked a huge cross-country construction boom in telecommunications. The two companies building this first network: then-unknown Qwest and Frontier, formerly known as Rochester Telephone, with a long history as the “Bell” company for part of upstate New York.
In hindsight, these two companies were extremely wise in their initial project plan. Both companies wanted a new nationwide fiber network to pursue real explosive market opportunities driven by Internet growth and the Telecom Act of 1996. But instead of foolishly pursuing parallel competing builds, they decided to team together and complete one network making efficient use of critical resources and minimizing irrational competitive behavior.
Three months later, on January 8, 1997, two other companies with new national ambitions joined the fray. Vyvx, Inc., a division of the Williams Companies, and IXC Communications similarly wisely teamed up to build a new nationwide network. The rapidly growing market could easily support two next-generation fiber networks.
Unfortunately, as the stock market took off, and as investment bankers started throwing different telecom valuation models against the wall to see what would stick, even Vyvx (later renamed Williams Communications Group) and IXC (later acquired by Cincinnati Bell and renamed Broadwing) would abandon their early wisdom and build new parallel networks. By the end of the decade, more than a dozen different companies were involved in building nationwide next-generation networks. In sum total, the amount of fiber put in the ground may prove to be the right amount given the 20+ year planning cycle for fiber networks, however, as we all know in hindsight, the irrational competitive market created by 10-20 different new entrants battling each other with undifferentiated commodity offerings destroyed the telecom industry.
However, getting back to our story… On March 20, 1997 Global Crossing emerged on the telecom scene with the announcement of their first fiber build – Atlantic Crossing 1 – connecting the U.S. with the U.K. and Germany. By the end of 1997, Global Crossing had also announced projects connecting the U.S. to Bermuda and the Caribbean, the U.S. to Central American countries, and the U.S. to Japan – all undersea fiber builds. Global Crossing was operating with a small crew merely focused on managing these construction projects and selling the capacity – not operating the networks in competition with AT&T, Worldcom, Sprint or others.
In August 1998 Global Crossing completed their Initial Public Offering (IPO) of stock on NASDAQ. Although the company had quarterly revenues of only $117.7 million in their first public report, the exuberant stock market valued the company at over $5 billion. That number would rapidly grow. By March 1999, when they first agreed to purchase Frontier, the stock market value of Global Crossing had increased to $30 billion. In that quarter, Global Crossing still only had $178 million in revenues!
So what did Global Crossing get out of the Frontier deal? They became a real company – one that stood a chance of living up to the incredible valuation placed on it by Wall Street. Most noticeably they acquired revenues, customers, and employees. The first quarter revenues for 1999 (pre-Frontier) and 2000 (post-Frontier) tell the story in dramatic terms. In 1st quarter 1999, Global Crossing had $178 million in revenue. In 1st quarter 2000, Global Crossing had $1.12 billion in revenue.
Oh yeah, they also got the nationwide U.S. fiber network that Frontier had built with Qwest, along with a bunch of top-notch web hosting centers and a local telephone company. Over the next couple of years, Global Crossing wisely sold off the hosting business, maybe not so wisely sold off the local telephone company, but did their best to hold onto the mature talent, systems, and processes that had come with Frontier. And, oh yeah, they held onto the U.S. fiber network and made all the same irrational competitive moves as the other dozen or so players hawking commodity bandwidth in a crowded market.
Well… speeding up the time machine a bit… six months after acquiring Frontier, the bottom fell out of the telecom stock market. By August of 2001, Global Crossing’s CEO Tom Casey had to issue a public statement to try to steady the stock price. By the end of the year, it was clear the company was headed for bankruptcy. That move was made official on January 28, 2002 in combination with the announced takeover of the company by Hutchison Whampoa and Singapore Technologies for $750 million (later reduced to $250 million).
Now, as of last week, Hutchison Whampoa has dropped out of the deal. Although Singapore Technologies has picked up Hutchinson’s portion, the circumstances surrounding the fracture point more strongly than ever towards liquidation of Global Crossing assets.
Here’s my gripe with Global Crossing… The deal with Hutch/Sing has been in the works for nearly a year-and-a-half. All three parties have fought long and hard (and expensively) to make the deal work, and yet it has fallen apart. Why? Because Global Crossing refuses to let go of the Frontier U.S. network. In the wake of 9/11, the U.S. government is rightly concerned about handing ownership of a national network carrying sensitive government traffic over to a Chinese company with strong ties to the communist government. Over the past couple of weeks, it became clear to Global/Hutch/Sing that this deal would not be allowed to go through.
But why does Global Crossing need a U.S. network? Global Crossing has always been all about the global crossings, not the “national connectings.” Global’s worldwide network is unmatched in its ability to connect together different regions of the world with a high-performance, low-cost network. Although some of the routes Global serves suffer the same commoditized, irrational competition challenges as the U.S. market, the portfolio as a whole is impressive and valuable. Especially considering Global’s bankruptcy restructuring, the company should be able to strongly and profitably compete in most of the markets it serves. Maybe all of the markets except North America that is. In the U.S., Global will not be the only, or even the first nationwide network to emerge from bankruptcy with an attractive balance sheet. Worse, the U.S. market is still under tremendous pressure and is preparing for a second round of major price wars among those emerging from Chapter 11.
In fact, in the U.S market, it is much better to be a buyer of capacity than a seller. Global Crossing can probably buy capacity from Qwest or Williams or Broadwing or Level 3 or Worldcom or 360 Networks for less than it costs them to run their own North American network. Financially, they would be better off shutting down the U.S. network, at least until those assets become valuable again. Doing so would allow them to build a strong strategy around their unique, defensible and powerful assets and capabilities in connecting together different world regions.
When I worked for a strategy consulting firm, we recognized that some of our clients were all about STRATEGY and some, no matter how hard we tried, were all about STRAGEDY. Unfortunately, it looks like Global Crossing falls into the later camp.
Russ McGuire is Online Director for Business Reform. Prior to joining Business
Reform, Mr. McGuire spent over twenty years in technology industries, performing various roles from writing mission critical software for the nuclear power and defense industries to developing core business strategies in the telecom industry. Mr. McGuire is currently focused on helping businesspeople apply God’s eternal truths to their real-world business challenges through Business Reform’s online services. He can be reached at [email protected].