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A Rush to Judgment on Global Crossing
June 13, 2000
A Rush to Judgment on Global Crossing
By Alec Appelbaum
GLOBAL INTRIGUE
GLOBAL CROSSING (GBLX) just keeps people guessing.
The international telecom company was America's hottest stock last spring, soaring from a split-adjusted $22.56 on New Year's Eve to a high of $61.38 on May 14, 1999. But investors quickly learned that the company's reach had exceeded its grasp. After a failed bid for U S West (USW), the stock's star fell faster than Hootie and the Blowfish.
But it wouldn't stay beaten down for long. This spring, new CEO Leo Hindery, who was wooed away from AT&T (T), promised to clarify a confusing management structure and use Global Crossing's assets to build a high-revenue business. Global Crossing owns a well-respected data center operation that handles traffic for many of the nation's busier Web sites, along with a network of fiber lines under the oceans that carries international phone traffic. Investors felt encouraged to bid up the stock this spring in part on Hindery's determination to make the company bigger ? and in part on the prospect that Global might get gobbled by a larger telecom fish. When Hindery told us that he "works for the shareholders," there was every reason to believe that some international phone company could buy Global Crossing at a nice premium.
Tuesday, things took another sudden turn. Reports in Tuesday morning's Wall Street Journal suggested that Global is shopping again. The Journal says it's champing at the bit to buy Equant (ENT), a little-known but highly valued Dutch data network, for up to $10 billion. A source familiar with the company confirmed that talks are ongoing, but characterized them as preliminary. On seeing the Global acquisition posse ride again, investors fell off the horse. Global stock dropped as much as 7% Tuesday morning before recovering in the afternoon rally to close at only a small loss.
But fleeing investors may have missed the point. When Global Crossing bid for U S West last May, Global shares slumped 17% in a week. U S West was, as telecom analyst Jeff Kagan described it, a 100-year-old company with a bureaucratic image and a slow-growth base of customers. Qwest (Q) outbid Global for U S West ? and quickly lost the valuation that comes with being a hotshot insurgent communications company.
Equant, by contrast, is a reservations system-turned-data network with operations around the globe, and it went public only last year. By grabbing Equant, says International Data Corp. analyst Melanie Posey, Global Crossing could enhance its business in a way that it couldn't by swallowing U S West. That's because Equant's bread and butter involves managing data services such as Web sites and email in more than 200 countries, while Global Crossing's involves linking countries with high-speed lines. Combining the two could produce a company that competes with the likes of WorldCom (WCOM) in selling all-inclusive services to global businesses and institutions. "Global Crossing needs to expand its footprint if it is to become a real player in what is becoming a battle of titans," Kagan said Tuesday. Equant could boost Global Crossing's growth too: In the first quarter of this year, Equant raised its revenue by 50%.
?Global Crossing needs to expand its footprint if it is to become a real player in what is becoming a battle of titans.?
Telecom analyst Jeff Kagan
Acquiring such a hot company would be expensive, of course, and Global Crossing stockholders showed their weak stomachs for expenses with Tuesday morning's sell-off. Global's stock makes feeble acquisition currency right now, trading at less than half its year-to-date high. Moreover, its announced plans to create a tracking stock for its GlobalCenter Web-hosting business no longer look so clever, since the bellwether tracking stock for AT&T Wireless (AWE) has proven a dud.
But unlike other New Economy neophytes, Global has a substantial war chest. It claimed $21 billion in assets at the end of its most recent quarter, which could back any bond issue or other financing necessary to make the deal. And while such financial derring-do might make investors cringe, it actually coheres with the company's sharpening focus over the past few months. Global announced in early June that Chase Securities and Merrill Lynch were drumming up options for selling the local phone business it inherited when it bought the network assets of Frontier last year. Moreover, it's closing on its $3.4 billion February acquisition of IPC Communications (IPI) and IXNet (EXNT), which manage network traffic for financial institutions. In other words, it's positioning itself as a service provider to busy, free-spending global businesses. A deal for Equant "might indicate that they've figured out what they want to do exactly," says IDC's Posey.
Of course, buying Equant would probably make Global quite expensive for huge carriers like Deutsche Telekom (DT) to buy ? and France Telecom (FTE) is also reportedly talking to Equant about an acquisition. But it wouldn't make Global too expensive. Kagan, commenting on the rumors Tuesday, points out that major telecom companies are now worth around $100 billion, and will be worth more than that as they seek to serve international customers. In a marketplace where AT&T is strengthening ties with British Telecom (BTY), Global Crossing would be second tier even with Equant inside it. So investors counting on a buyout may still have something to look forward to if the rumors pan out.
After last year's confusion, investors may harbor no patience for this mysterious company. But if it manages to buy a network as robust as Equant's, Global Crossing could have a more potent story to tell.
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