Global Crossing: A Matter of National Security?

Carl Icahn is lobbying to keep it in American hands -- his

Carl C. Icahn is on the warpath. In late May the 67-year-old billionaire launched a $700 million hostile offer for bankrupt telecom provider Global Crossing (GBLXQ ) Ltd. Since then he has challenged a rival deal from Singapore Technologies Telemedia in bankruptcy court, lobbied Washington officials to get the Singapore bid disqualified, and spent $165 million putting together a controlling stake in Global Crossing's bank debt. Icahn hopes to merge Global Crossing with XO Communications (XOCM ) Inc., a telecom provider he took out of bankruptcy in January, to create a juggernaut out of the industry's rubble. "This is like the railroads in the 1880s," he said shortly after announcing his offer.

Icahn's robber baron-era analogy may hit too close to home for Global Crossing. The company has branded him a "corporate raider" in bankruptcy-court filings and, worse, charges that one of its own former execs is improperly helping him. Global Crossing says it believes that the exec, onetime COO Carl J. Grivner, whom Icahn hired to run Reston (Va.)-based XO in April, may have violated his previous employment agreement by sharing confidential information with Icahn. Grivner denies this, but Global Crossing went to court to force Icahn to turn over documents relating to its former executive.

Bankruptcy court is a battlefield few know better than Icahn. The New York City financier became the largest shareholder of Texaco Inc. after its 1987 bankruptcy and later followed Trans World Airlines Inc. twice into Chapter 11. But now the fight has moved onto unfamiliar turf for Icahn. Busy with his takeover of XO, he entered the Global Crossing contest too late to dissuade a New York bankruptcy court from approving the Singapore bid on July 1. So Icahn is now counting on a secretive Washington committee that is considering whether to nix the deal on national-security grounds. If it does, Icahn's controlling stake in Global Crossing's bank debt could give him a leg up back in bankruptcy court.

The 12-member Committee on Foreign Investment in the U.S. is as heavyweight as they come. It's chaired by Treasury Secretary John W. Snow, and four of his Cabinet colleagues are members, too. A 45-day period to vet the Singapore deal ends in early September, and then the decision goes to President George W. Bush, who has 15 days to sign off. Foreign companies have purchased telecom assets before, but this is the first major deal since September 11, and authorities are concerned that Global Crossing's network could be used against the U.S. by spies and terrorists. The departments of Defense and Homeland Security are expected to oppose the deal, while State and Commerce will argue in favor. Singapore Technologies, owned by the Singapore government, is hanging tough. "The U.S. and Singapore have been friends and allies on so many fronts, I'm very optimistic approval will be granted," says Lee Theng Kiat, the company's CEO.

The outcome may have little to do with Singapore. "This will be a classic case of whether national-security fears override trade and economic desire," says Scott C. Cleland, CEO of Washington investment adviser Precursor Group. "My gut is they want Global Crossing to remain American."

As recently as last year, Global Crossing didn't seem like a prize worth fighting over. Founded in 1997 to lay high-speed fiber-optic cables under the Atlantic Ocean, Global Crossing built one of the world's largest telecom networks. The company was a stock market darling, valued at $47 billion at its peak, then collapsed into bankruptcy in January, 2002, amid a capacity glut and charges of aggressive accounting. When few bidders emerged in a bankruptcy-court auction last year, Singapore Technologies was able to reduce its offer to take control of the company from $750 million to $250 million.

This year, however, the market for telecom assets is improving. Traffic on Global Crossing's network is up. The company has slashed costs, taking its head count from 8,000 to 4,200. Vik Grover, a telecom analyst at brokerage firm Kaufman Bros., figures that combining Global Crossing's long-haul network with XO's collection of local switches could save as much as $400 million a year in network-access charges and overhead and lift the combined $3.8 billion-a-year company to profitability.

That idea doesn't sit so well, however, with Global Crossing's management and bondholders, who have pressed on with the Singapore investment. In a bankruptcy-court hearing in late June, an attorney for Icahn questioned whether Global Crossing's top execs were supporting the Singapore deal merely to save their jobs and receive equity in the new Global Crossing. But they're likely to receive nothing and be out of work if XO acquires the company. John J. Legere, Global Crossing's CEO, denies that is his motivation. "We believe in the merits of the [Singapore] investment and view it as the best means to emerge from Chapter 11 for all affected parties," he said in a statement.

Global Crossing's bondholders rejected Icahn's offer because they stand to get more from the Singapore deal, according to Igor Volshteyn, an analyst at Tejas Securities Group. They'll get newly issued Global Crossing stock, while bank lenders would receive mostly cash and notes worth about 23 cents on the dollar. Icahn looked at that and starting offering an immediate 22 cents on the dollar for the bank loans. He now owns just over one-third of the debt -- enough, under court rules, to block other offers if the Singapore transaction is shot down by federal authorities and returns to bankruptcy court. And that's a place where Icahn is known to win.

By Christopher Palmeri in Los Angeles, with Lorraine Woellert in Washington

— With assistance by Lorraine Woellert

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