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Technology Stocks : Global Crossing - GX (formerly GBLX) -- Ignore unavailable to you. Want to Upgrade?

To: Ally who wrote (13185)	8/5/2001 1:16:31 PM
From: Sir Francis Drake	Read Replies (2) \| Respond to of 15615

Looking at the balance sheet, the cost of building the network (i.e. buying and installing equipment and tangible facilities) was around $10B. If we were today to build a similar network, it would be reasonable to assume it'll at least cost $10B, if not more. No, it would not be "reasonable to assume". In fact, the opposite is true. If you are talking about "installing equipment and tangible facilities", then the cost today would be SUBSTANTIALLY lower. Equipment costs have come down dramatically and the fact that equipment manufacturers are under pressure from weak demand means you can get even further reductions in price. Even Casey spoke about that - and that is one factor in why GX's capex will be lower going forward compared to original plans. Point number 2 - the type of equipment you can install today, AND WILL BE ABLE TO IN THE FUTURE, as opposed to when GX started building, is of dramatically greater capacity, efficiency and productivity. Thus, the "per unit" cost drops drastically, and is cheaper to operate. This means it is CHEAPER to buy the same capacity than it was in the past - hence you'd never spend $10 bln. to buy the same capacity today. That's a double whammy on the cheaper side (manufacturer discounts due to demand weakness, and greater efficiency of equipment). This is also, why the following statement is false: Replacement cost alone is equivalent to $11 per share. The market is telling you in no uncertain terms, through the share prince, that the BV as carried, is too high. Here you have to come back to the fact that apart from whatever mythical replacement value there may be (much lower, as I argued above), the market only cares about tangible (or liquidation) value. That in turn is drastically lower yet - you couldn't sell GX's "equipment and tangible facilities" for anywhere near what GX paid for it - not even laughably close. First because of the aforementioned problem: today you could buy much more efficient equipment for much, much, much less money. But second, you couldn't even sell that stuff for fair REPLACEMENT value - on account of lack of demand... or haven't you heard Casey say that nobody seems anxious to pick up the assets of bankrupt builders like TSIX for even pennies on the dollar... as a matter of fact, for almost any price. It costs a lot of $ to activate those assets and operate them - and in an environment where there is a radical imbalance between supply and demand, why would anyone take those assets EVEN IF THEY WERE FREE?? Think of an analogy to real estate. When there was a period of hotel overbuilding, you couldn't give away a hotel - because it cost $ to run it, and there was not enough demand. It would have been silly to walk into a RE office and say: "I'd like to sell my hotel for what I paid for it to build"; or "Hey it would cost you $XYX to replace one by sheer building costs (even if those have come down)" - point is NOBODY IS INTERESTED IN BUYING OR EVEN TAKING IT FOR FREE, since there is excess capacity and it cost a lot of MONEY to run. That's how you get abandoned and vacant buildings. Bottom line: the tangible (or liquidation) value for GX's "equipment and tangible facilities" is DRAMATICALLY lower than whatever is carried nominally on the books - and the shareprice is reflecting that. Forget about the $11 - it's a pipedream. Shareholders don't give a rats behind how much GX paid for what, and how much it would cost to replace - if you can't liquify those assets, they are as useful as a vacant hotel in an area with massive hotel overbuilding. Sure, there are other costs associated with duplicating GX's network (though even there, some have fallen), but again, it comes down to "who wants it", or the "hotel problem" I described above. The key is the demand side of the equation, and even more importantly, what is GX's cost of revenues. As a sidenote, observe that TCM has barely started on their network. TCM in fact has a huge advantage over GX when it comes to building and costs of "equipment and tangible facilities". Not only because costs have come down, but because they have a lot of manufacturing and cable laying inhouse which would drastically lower costs (listen to TCM's investement conference and CC's from some months ago) - to a level which GX cannot possibly match (GX was CONTRACTING TCM's services - you can figure, TCM was making a profit, and that's a cost they'd avoid). The problem for TCM is not cost - but demand (among others). I'm not trying to dismiss your overall analysis, but you need to dig a lot deeper, IMHO. Good luck! Morgan