The Emperor of Greed. With the help of his bankers, Gary Winnick treated Global Crossing as his personal cash cow--until the company went bankrupt.
FORTUNE
Monday, June 24, 2002
By Julie Creswell with Nomi Prins
Michael Nighan couldn't believe his eyes. As Global Crossing's North America director of regulatory affairs, one of Nighan's tasks was to review all of the startup telco's marketing and sales material. But what confused him in late 1999 was a map of Global Crossing's network that showed a fiber-optic loop around the continent of Africa. "What's this?" asked Nighan. He was told it was Africa One, an undersea broadband cable that Global Crossing planned to build for a group of telecom carriers. "But I said it didn't belong on a map of our network because one, it doesn't exist, and two, even if it did exist, it wouldn't belong to us," says Nighan, who left Global Crossing last November. The response Nighan got was, "Gary wants it there." So it stayed on the map.
Gary Winnick had never worked in the telecom industry before he founded Global Crossing in 1997. He had never run a public company before either. Yet in the late 1990s, Chairman Winnick was hailed as an industry giant, the creator of a telco that a year after going public in 1998 was valued at $38 billion--more than Ford. A little over two years later, Global Crossing is in bankruptcy and fighting to survive, part of an industry collapse that wiped out $2.5 trillion in market value. Investors and regulators are struggling to figure out what went so wrong so fast. But the real question is how such a company could survive--indeed prosper--for as long as it did.
The answer captures all of the insanity and money fever of the telecom and dot-com bubbles, which saw billions of dollars vanish in pursuit of business that never materialized. Like a lot of other overreaching companies, Winnick's Global Crossing rose swiftly and fell even faster. Its business plan changed with the phases of the moon. So did its CEOs (there were five in four years). It had a huge market value and a teeny cash flow. Global Crossing inflated its revenues by swapping capacity with other carriers, say analysts, and lured customers and investors by overstating the reach and capabilities of its network--a $12 billion "state-of-the-art" system that, several former employees told Fortune, simply doesn't work that well. It exploited its relationships with both Wall Street and its bankers on a scale unrivaled in the industry. "Winnick used to walk around the office saying he owned Jack Grubman and Jimmy Lee," says one former colleague, referring to fees paid to key underwriters at Citigroup's Salomon Smith Barney and J.P. Morgan Chase. A spokesperson for Winnick denies he made such statements.
What's inarguable, as our story will document, is that billions of dollars flowed out of this company and into the pockets of insiders. Gary Winnick and his cronies are arguably the biggest group of greedheads in an era of fabled excess. Not only did Winnick sell off stock at huge profits while investors who jumped in later watched their stakes burn to nothing, but he treated Global Crossing from the get-go as his personal cash cow, earning exorbitant fees from consulting and real estate deals between Global Crossing and his own private investment company. In all, Winnick cashed in $735 million of stock over four years--including $135 million Global Crossing issued to his private company--while receiving $10 million in salary and bonuses and other payments to the holding company. Enron's Kenneth Lay doesn't even come close. He sold only $108 million of stock. (The telecom boom's cash-out king may be Qwest Chairman Philip Anschutz, who dumped $1.9 billion in stock. But Qwest, at least for now, is afloat.)
Winnick wasn't the only executive getting rich quick. Other insiders sold a whopping $4.5 billion in stock in three years. Co-chairman Lodwrick Cook, the former chairman of Atlantic Richfield, sold $36 million of stock. (In 1999, Cook told the Los Angeles Business Journal that every day he says, "God bless America, and God bless Gary Winnick.") Combined stock sales for directors Barry Porter, David Lee, and Abbott Brown, longtime business associates of Winnick's, totaled $516 million.
Wall Street partners fared well too. Canadian firm CIBC World Markets, which was an early investor in Global Crossing and at one time had five employees on its board, earned $56 million in banking fees even before Global Crossing's 1998 IPO. It turned a $41 million investment into a $1.7 billion windfall and exited the board just as the telecom bubble was bursting. Global Crossing paid more than $420 million in fees to Wall Street firms in three short years. As one investment banker recalls, "People wanted to do business with Winnick because he was the best game in town."
Needless to say, most outside investors never saw that kind of payday. Global Crossing's market valuation, which peaked at $47 billion in February 2000, deflated to about $70 million when it filed for bankruptcy earlier this year. Investors and creditors have almost zero chance of recouping any of the $20 billion that Global Crossing raised. The company is seeking a buyer, but a bid from two Asian partners fell through at the end of May. It is looking to restructure now. In all likelihood, though, Global Crossing will be broken up and stripped for parts.
The sad fact is, Global Crossing had a decent shot at survival. Its initial business plan was simple. It planned to build an undersea broadband network that would link continents together and serve global carriers like Deutsche Telekom and AT&T. Early estimates of construction costs were around $2.7 billion--certainly a princely sum for a startup but not one that would crush the company if it could drum up even modest revenue.
But like so many other telcos in the wake of the 1996 deregulation, Global Crossing got carried away on the tide of easy money. It raised more capital than it needed and built a network with more capacity than the world demanded. By the time Global Crossing collapsed, its long-term debt had ballooned to $7.6 billion (total liabilities were $14 billion), and it simply didn't have the cash to make its interest payments.
These were years when Wall Street struck an unholy bargain with a constellation of shaky companies, and in each of the three phases of its existence, Global Crossing enjoyed a special relationship with a different Wall Street firm. First came CIBC, a Canadian bank that raised cash to get the company going; then Salomon Smith Barney, which became a cheerleader for its stock and helped guide it through a merger and acquisition binge; and finally J.P. Morgan Chase, a one-stop global bank wannabe that helped Global Crossing hoover up mountains of cash through loans and bond sales at the height of the market frenzy.
Given Winnick's prior experience, the incestuous relationship with Wall Street shouldn't come as too much of a surprise. A native of Long Island, Winnick had an unremarkable upbringing. His father ran a restaurant supply business, and after graduation from C.W. Post, a local college, Winnick worked as a furniture salesman. His life took a turn in the early 1970s when he joined Drexel Burnham Lambert. He developed a taste for the high life after he made his way to the Los Angeles office, where he worked on the bond sales desk alongside Michael Milken. While Milken ended up in jail for securities and reporting violations, Winnick escaped Drexel untarnished and founded Pacific Capital Group, an investment firm in Los Angeles.
Making Out Like Bandits
Gary Winnick wasn't the only one to profit during Global Crossing's run. Board members and backers cashed in too.
Gary Winnick, chairman (Total: $750.8 million)
Stock sales
$735.0 million
Salary and annual bonuses
$2.8 million
Consulting fees
$7.2 million
Aircraft ownership interest
$2.0 million
Office renovations
$3.8 million
Other directors' stock sales (Total: $582.3 million)
Abbott Brown early senior VP
$125.5 million
Joe Clayton former Frontier CEO
$21.5 million
Dan Cohrs CFO
$8.7 million
Lodwrick Cook co-chair
$36.1 million
David Lee early pres. and COO
$216.3 million
Barry Porter early senior VP
$174.2 million
The five CEOs (Total: $104.9 million)
Combined stock sales
$85.4 million
Salaries and annual bonuses
$19.5 million
Early investors' stock sales (Total: $3.8 billion)
CIBC World Markets
$1.7 billion
Loews/CNA Financial
$1.6 billion
Ullico
$0.5 billion
Grand Total: $5.2 billion |
