Global Crossing's Harrowing Trek

Will deals and Web hosting lift the former highflier?

Global Crossing's debut read like a Hollywood script. The telecom upstart hit the scene with grand promises of building the world's first global Internet-ready communications network--all 101,000 miles of it. Just seven months after going public in August, 1998, Global's shares jumped threefold. By last February, its market capitalization surpassed $47 billion, eclipsing that of General Motors Corp. Insiders from former President George Bush to Global Crossing receptionists cashed out with millions. And founder Gary Winnick, who is based in Beverly Hills, became a billionaire. "We set out to build an unprecedented network," he says.

But just six months later, the happy Hollywood ending is suddenly in doubt. Telecom stocks are getting pounded. The main concern: too much capital invested in a market growing slower than expected. Profits could be depressed for years, particularly in Global's domestic markets. And Global, expanding beyond its original undersea market, lost out to Qwest Communications International Inc. in its bid to acquire regional phone company US West Inc. And so, shares of the Bermuda company are down almost 50% this year, to 32.

Forgive Winnick if he takes the troubles personally. His fortune has fallen 50% from its height, to about $3 billion. He hasn't been helping investors keep the faith, either: He sold 8% of his stock this year.

Now, the 52-year-old chairman is trying to reverse the slide with a decisive campaign to rebuild Global's stock. His goal: a share price of $50 or higher. People familiar with the matter say Winnick needs to boost the stock so the upstart can command a hefty takeover premium. The company says it isn't that simple. "The thought that we have been fixing the company to position it for sale couldn't be farther from the truth. We have been fixing the company simply for the benefit of the shareholders," says CEO Leo Hindery.

"INCREDULOUS." How will they do it? For starters, Winnick, the former Drexel Burnham Lambert bond salesman who learned finance from Michael Milken, is summoning his experience as a dealmaker to push the carrier into high-growth, high-margin Net businesses such as data transmission and hosting Web sites for corporations. The next deal may be around the corner, BUSINESS WEEK has learned. Just two weeks ago, the company resumed partnership talks with Web-hosting powerhouse Exodus Communications Inc. Global would spin off its own Web-hosting operation, called GlobalCenter, combine it with Exodus, and take a 25% stake in the new entity, people familiar with the talks say.

More deals could be on the way. Global plans to issue shares of Asia Global Crossing, a joint venture with Microsoft and Softbank to build the first pan-Asian broadband network. If the Exodus deal falls through, the company may issue a tracking stock for GlobalCenter, which it acquired last year as part of its $11 billion acquisition of carrier Frontier in Rochester, N.Y.

Still, it may take more than dealmaking to revive Global's stock. The company's fate ultimately rests on a unique telecom strategy of building the first seamless global network. By keeping traffic on its fully funded $8 billion network, the company will reduce the need to share revenue with rivals. Global, for example, says it charges 10% less than rivals on routes between Stuttgart and Tokyo. Yet margins on those routes are believed to be 80% to 90%--more than twice the industry average. Global also says its network is faster because Internet traffic stays on a single network. One customer, Fujitsu Ltd., says it has tested a number of carriers and found Global's Japan-U.S. routes to be 25% to 75% speedier than those of other carriers.

Nonsense, say rivals. Lewis O. Wilks, president of Qwest's Internet and multimedia units, says he is "somewhat incredulous" about Global's claims. "Unless they are using a set of technologies unavailable to the market as a whole, it's hard to believe anyone has a sustainable advantage."

ASIAN STAR. Gary Winnick is an unlikely telecom king. He grew up on Long Island, N.Y., worked his way into finance, spent the '80s selling bonds alongside Milken, and then invested in health care and real estate. In 1996, Winnick approached AT&T about getting involved in telecom. As a result, AT&T built a transatlantic cable for Winnick and Global Crossing.

Since then, he has been forced to find new markets. Margins on the undersea-cable business are still 80%, but the market is becoming tougher, thanks to newcomers such as 360 networks. Prices for bandwidth are falling by up to 50% a year.

So Web hosting is key. A merger with Exodus would likely be structured along the lines of the deal the two companies nearly closed in July. Earlier this summer, they came close to an agreement in which the GlobalCenter unit would have been combined with Exodus. Global would have taken a 25% stake in the new business, which would have hired Global to carry traffic. The talks fell apart over price. Negotiations resumed in early September to compete more effectively against WorldCom Inc., which inked a deal to buy Web-hosting power Intermedia Communications.

Even without Web hosting, Global is a standout in the Far East and Latin America. Asia Global Crossing, which is set to be split off in a public offering that could be valued at $10 billion, is building the first Asian broadband network. Qwest lacks its own subsea cables, and its network does not reach into Asia or Latin America.

Global also is diversifying toward higher-margin services. Some 60% of telecom revenues come from data, while 60% at rivals such as AT&T come from low-margin voice, says Merrill Lynch & Co. Thanks to that mix, cash revenue was $1.23 billion for the second quarter. That beat Merrill Lynch's estimate by 11%. Revenue for the full year is expected to hit $5.2 billion, up from Wall Street's earlier target of $4.8 billion.

Still, the company faces huge challenges, such as the need for more retail customers. Last year, Global was trumped by Qwest's bid to buy US West and its 25 million customers for $44 billion. Instead, this year's $2.1 billion purchase of IXnet Inc. will give Global access to 60% of the world's financial-services firms. Qwest's Wilks argues that's just a "niche" strategy.

Can Global Crossing regain all its early glory? Probably not. The stock was overvalued at the height of Internet mania. But analysts give Global an excellent chance of unlocking up to $16 billion in shareholder value with the upcoming deals. It also could help the company finance its most urgent need--moving from wholesaler of capacity to seller of high-end telecom services. Maybe then Winnick will bask in the glow of a classic Hollywood ending.

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