Rise and Fall of Global Pipe Dream

By MICHAEL STREMFEL and ANTHONY PALAZZO

Staff Reporters

It all happened so fast.

In 1996, AT & T; Corp. decided to dump some dud assets, including a unit that laid telecom cables under the ocean. Financier Gary Winnick and partners at his Beverly Hills investment firm, Pacific Capital Group, decided to make a run at it. Their close ties to deep pockets enabled them to raise the $750 million purchase price in a matter of months.

And so Global Crossing Ltd. was born, with a subsequent ramp-up that rivaled any in corporate history. Along the way, all the early investors got fabulously wealthy. But in the end, a far greater number were left holding the bag.

“It was a story that had warning signs big flashing red lights, but allegedly savvy people like me were enthralled,” said telecom industry consultant David Isenberg, who personally lost money on Global Crossing stock. “I didn’t want to get out because I believed in the story. I still believe in the story.”

The story, told compellingly by Winnick and his partners, centered on Global Crossing’s manifest destiny to be nothing less than king of the exploding digital telecom realm. It would take boatloads of cash, which Winnick was adept at raising, and egos big enough to believe and convince others that the realm’s existing giants could be overtaken.

“There was such a voracious appetite to be king of the hill, but it turned out to be an anthill,” said one source close to the company. “I knew these acquisitions were bad at the time they were overpaying for assets because they had plenty of cash and lots of access to capital. Now the acquisitions look horrendous.”

Global Crossing officials declined to comment.

The company’s meteoric rise and subsequent meltdown illustrates how a confluence of forces can come together at exactly the right moment to override the common sense of even the savviest investors. In the case of Global Crossing, those forces included the razor-sharp sales skills of Winnick and his revolving-door cast of senior executives, the Internet craze, deregulation of the telecom industry and Wall Street’s willingness to provide essentially unlimited capital.

“Winnick is bright, aggressive and has a huge ego,” said one veteran L.A. financier who has known Winnick for years. “When you give somebody with those personality traits access to a lot of capital, this is what happens.”

After its 1996 launch, Global Crossing’s growth came fast and furious. Its first big deal was announced in March 1997. It involved laying a trans-Atlantic cable connecting the United States to Germany and the United Kingdom. In December of that year, two more big deals were announced, one for a cable linking California and Latin America, and the other to link the U.S. and Japan. By early 1998, Winnick and his team were steadily inking major deals with such industry titans as Deutsch Telekom, Tyco International and Marubeni Corp.

Dealmaking was the stock in trade of Winnick, who had honed his sales skills while working with Michael Milken at Drexel Burnham Lambert. Bravado and unabashed name-dropping stoked the fires. After all, Global Crossing’s backers included such heavyweights as Loews Corp., the Canadian Imperial Bank of Commerce, Union Labor Life Insurance Co. as well as influential angel investors like Democratic powerbroker Terry MacAuliffe, now chairman of the Democratic National Committee.

Even more horsepower was added with Winnick’s spring 1998 hiring of former Atlantic Richfield Co. chairman Lodwrick Cook and senior Motorola Inc. executive Jack Scanlon, who assumed the posts of co-chairman and chief executive, respectively.

In August of that year, Global Crossing went public, raising $399 million in an initial public offering at $9.50 a share.

“It appears to be a sane way to play the Internet,” asserted a Barron’s article that month entitled “Global Crossing Looks Like Long-Term Winner.”

About three months later, Global Crossing added to its war chest with a $500 million preferred stock offering. By year-end 1998, a mere four months after its IPO, Global Crossing’s market value had more than doubled.

The geyser was just beginning to spout.

High-octane hire

Global Crossing shifted into hyperdrive with the February 1999 hiring of telecom industry veteran Robert Annunziata as chief executive, replacing Scanlon. (The first of many changes at the top.) Annunziata had resigned his post as president of AT & T; Corp.’s business services group so he could “build a company from start to finish,” he told The Wall Street Journal at the time.

Annunziata lasted just a year in the job, but during that short tenure he and Winnick undertook a breathtaking acquisition spree that catapulted Global Crossing and its stock into the stratosphere.

The enriched shares became a powerful weapon in Global Crossing’s financial arsenal. Less than a month after Annunziata was hired, Global Crossing stunned the telecom industry by agreeing to buy Frontier Corp. for $11.2 billion. Less than two months later, an even bigger deal was announced a $37 billion definitive merger agreement with U.S. West, one of the Baby Bells.

Those two takeovers would have created a behemoth with annual sales in excess of $15 billion and a global workforce of over 63,000 employees. The news sent Global Crossing’s stock soaring above $60 a share.

The brazen move to simultaneously undertake two multibillion-dollar buyouts drew the attention of Qwest Communications International Inc., which initiated a bidding war. It was the first significant setback for Global Crossing since its Cinderella-like emergence. Investors grew concerned that the acquisitions might end up costing more than was warranted. The damage was compounded by a steep market sell-off, attributed at the time to Y2K fears.

Qwest eventually won U.S. West, and Global Crossing got the less-coveted Frontier, after being forced to sweeten its bid in response to a shareholder lawsuit opposing the original deal. As part of the penalty for tying its fortunes to Qwest, U.S. West was required to buy 10 percent of Global Crossing’s shares at $62.75, at which point Winnick tendered 5 percent of his shares, pocketing $350 million. Other insiders also sold at that time.

But other investors were not so fortunate. By the time the dust cleared in September 1999, Global Crossing’s stock had plummeted from its May peak of $61.38 to about $20.

Renewed acquisition flurry

The failed bid and corresponding stock collapse was immediately followed by Global Crossing’s acquisition of a 49 percent equity stake in S.B Submarine Systems Co. Ltd., a Chinese company that installs and maintains underwater cable systems. A couple of days later, Global Crossing announced the formation of Asia Global Crossing, a joint venture with Microsoft Corp. and Softbank Corp. devoted to building a high-speed telecom network in Asia.

Momentum was back. A couple of weeks later, the Frontier acquisition closed and Global Crossing took its place in the Standard & Poor’s 500. Winnick, who garnered attention when the Business Journal named him L.A.’s richest resident that year, donated grandly to charities and political campaigns. He even gave his maid Global Crossing shares and made her a millionaire in the process.

“Natie is part of our home. We adore her,” Winnick told the Sunday Telegraph, at the time. (Winnick was in London hosting a dinner for the British royal family.)

Indeed, Winnick had become de facto royalty himself.

“Right before I left home, I had a call from the President of the United States to talk about something,” Winnick told a reporter. “Yesterday, I get a call from Buckingham Palace because one of the people there wanted me.”

The fourth quarter of 1999 and first quarter of 2000 were the glory days. The company’s North American network was completed, as was the first phase of its pan-European network. Then it snatched Racal Electronics plc for $1.6 billion, just days before U.K. rival Energis was to ink a deal for the firm. At the same time, Global Crossing announced plans for a $2 billion senior note offering. A month later, it issued $500 million in preferred stock. And a month after that, it filed to issue another $1.23 billion in convertible preferred.

But amid the mania, doubts were surfacing.

“(Some industry sources) question whether Global is doing too much too quickly even in a market expanding at such speed,” assessed the Sunday Telegraph after the Racal buy. “One critic argues that it is a hard company to evaluate precisely because of the rate at which it keeps buying things.”

But Winnick was merely doing what he’s good at raising money, buying assets and cutting deals.

“There was much more of a gap at Global Crossing than you would see at WorldCom or Level 3 or AT & T;, between the people in the executive suites, whose background was much more in finance as opposed to telecom, and the technical people,” said Gordon Cook, publisher of the Cook Report on Internet.

Cook said he had difficulty reaching Global Crossing officials who could walk him through technical aspects of its network. Some of the technicians he did reach expressed frustration with the aloofness of its financial executives, he said.

None of that friction ever came to the attention of Wall Street, which eagerly kept the capital spigot wide open.

“What blows my mind is that Wall Street stood by and said, ‘Sure, here’s the money,'” said one local investment banker. “But it happens time and time again. A lot of guys on Wall Street are dependent on those transactions, and the investment community has a very short memory.”

At December 1999, U.S. West dumped 24 million of its 39 million shares of Global Crossing stock for $1.15 billion, or $48 a share. It had paid $62.75. Yet other investors remained steadfastly bullish through the first quarter of 2000 (ultimately to their detriment), and Global Crossing kept buying assets. It picked up intranet provider IXNet Inc. in February 2000 for nearly $3.5 billion.

Top-line focus

In its quarterly financials, Global Crossing increasingly stressed top-line pro forma performance, and downplayed its accelerating losses. It raved about generating $1.1 billion in fourth-quarter 1999 revenues, and $325 million in adjusted earnings before interest, taxes, depreciation and amortization. Its $199 million net loss, more than triple the year-earlier quarter, was considered nothing to worry about.

“These outstanding results demonstrate the rapid pace at which we continue to expand,” said Annunziata in a company release.

The next day, Global Crossing announced it was weighing several options to raise more cash to further accelerate capital spending. By that time, it had become clear that the explosive expansion of telecom capacity was grossly exceeding demand.

Jonathan Rosenthal, a restructuring expert at Saybrook Capital in Los Angeles, likened Global Crossing to a runaway train, and Wall Street to “the guy who kept selling them coal to stoke the fire, even though they could have seen, or should have seen, that the track had run out.”

The reason? “No one wants to say the party’s over,” he said.

But the party did indeed end in the spring of 2000, with the tech bubble bursting. Telecom stocks plunged, and Global Crossing’s fall was especially precipitous. From a high of $61 on March 10, Global Crossing’s stock had sunk to $25 by April 24. Annunziata resigned in early March, and was replaced by Leo Hindery Jr., a veteran from Tele-Communications Inc. who had joined Global Crossing a few months earlier to head its Internet services unit.

At the end of March, the company filed for an offering of $2.5 billion in common and convertible preferred shares, but two weeks later cut the size of the offering in half. A few days later, Abbott Brown, one of the original co-founders with Winnick, bailed out to launch a venture capital firm with the hundreds of millions of dollars he had reaped.

Likewise, many of the other early investors had cashed out all or most of their holdings for astounding gains prior to the spring 2000 collapse.

Fabulous parting gifts

A Global Crossing spokesman confirmed the big numbers: Laurence Tisch and his family, through Loews Corp., pocketed capital gains in excess of $1 billion. CIBC walked away with more than $3 billion from its initial $35 million investment, and ULICO made more than $500 million on its $7 million investment.

Winnick pocketed a second windfall $260 million from Global Crossing’s April 2000 offering. The next month he diversified into bricks and mortar by acquiring a 70 percent equity stake in L.A. real estate investment firm Colony Capital.

In the months that followed, there were signs of cracking. Global Crossing filed a $1 billion lawsuit against Tyco International, alleging fraud and theft of trade secrets. It pulled out of talks to buy Dutch telecom giant Equant NV after complaining that the $10 billion price was too high.

To raise cash, Global Crossing began turning to asset sales. In July it dumped its local phone business for $3.5 billion, prompting analysts to speculate that the company might be positioning itself for sale.

In August, the company crowed as had been its custom that its top-line second-quarter growth was phenomenal. But even the dubious pro forma parameters of success were wearing thin. The company responded by playing up comparisons of second-quarter “cash revenues” and “adjusted EBITA” to its prior-quarter results, and downplaying the conventional year-earlier comparisons, which were less impressive.

Hindery steadfastly projected the company would be cash-flow positive by early 2002, but then two months later, in October 2000, he quit. Throughout that fall, institutional investors dumped millions of Global Crossing shares. Meanwhile, the company was generating more publicity for its NASCAR racing sponsorship and rescue attempt of a sunken Russian submarine than for any business triumphs.

By early 2001, the only news that seemed to buoy Global Crossing’s stock were announcements of asset sales or job cuts. It eliminated 650 jobs in the U.K. in January and that same month sold its GlobalCenter Web-hosting subsidiary to Exodus Communications Inc. for $1.8 billion in stock (a deal that would net the company zero when Exodus filed for bankruptcy protection months later).

Also by early 2001, online businesses and emerging telecommunications carriers two customer groups that Global Crossing had been relying on to build traffic for its network were fading fast.

Walt Disney Co. announced a retreat from its money-losing portal, Go.com; eToys warned it was about to run out of cash. Among the carriers, Northpoint Communications Group followed GST Telecommunications into bankruptcy protection, beginning a parade of telecom names that would file through the year.

Now unloading assets as hastily as it had assembled them just two years earlier, Global Crossing placed the local telephone operations it had acquired in the Frontier merger up for sale.

Keeping a stiff upper lip

Nevertheless, Global Crossing kept up a positive front.

On Jan. 7, the company released ambitious financial goals for 2001. Thomas Casey, who became chief executive after Hindery quit, reiterated targets for 30 percent growth in cash revenues and 35-40 percent growth in adjusted EBITDA. One month later, as the company reported strong fourth-quarter earnings, Casey portrayed Global Crossing as a survivor.

But concerns were emerging about the legitimacy of certain revenue-producing transactions the company entered into during the first and second quarters of 2001. Roy Olofson, a former vice president of finance, recently went public with allegations of accounting irregularities that, he maintains, inflated Global Crossing’s reported results in order to meet Wall Street expectations, despite an actual business slowdown.

Olofson claims that, in May 2001, he had voiced concerns about alleged “last-minute swap transactions” with customers from whom Global Crossing also purchased services. One of the alleged deals involved a $100 million exchange of capacity with Qwest; another was a transaction in which Global Crossing purchased $200 million of capacity from 360Networks, which bought $150 million in return. Another deal allegedly was completed on April 4, 2001, after the first quarter had ended.

Olofson claims that after raising these concerns, he was threatened “implicitly” with termination. He later formalized some of the allegations in an Aug. 6, 2001, letter to Global Crossing’s internal lawyer.

The Securities and Exchange Commission is investigating Olofson’s allegations. The audit committee of Global Crossing’s board, whose current members were told of Olofson’s letter on Jan. 29, also is investigating. Global Crossing’s outside auditor, Andersen, was told of the letter on Jan. 28, the day Global Crossing filed for Chapter 11 bankruptcy protection.

Company response

Global Crossing officials have maintained that Olofson’s allegations are false, and that he threatened to file a lawsuit unless the company paid him a substantial amount of money. The company said the financial and reporting topics raised in the letter had been reviewed internally and by Andersen in its audits and reviews of the company’s financial statements.

Olofson’s allegations are considered significant because the timing of the allegedly inflated results coincides with a large, final round of insider sales at the company. A spokesman for Global Crossing said the sales were in keeping with SEC guidelines.

As 2001 wore on, Global Crossing notched a few milestones. On June 21, the company completed its core network, spanning four continents, 27 countries and 200 major cities. It completed the sale of its local telephone-company business on June 29.

Through it all, Casey continued to express confidence in the company’s strength. Global Crossing officials maintained this view for so long that many Wall Street analysts were surprised when the company filed for bankruptcy protection.

But other indicators pointed to a situation that was fast coming unglued. In October 2001, the company announced that it was in discussions to merge with its 59 percent-owned unit, Asia Global Crossing, and named John Legere, chief executive of the Asian unit, to head both companies. The company also pre-announced disappointing third-quarter results, and said that it planned to dispose of its Global Marine Systems division, which it had purchased in 1999.

Wall Street roundly denounced the deal, and Global Crossing’s share price sank further. By then, it was below $5 a share, and Global Crossing’s bonds were trading at a steep discount to their face value. Finally, on Nov. 5, the merger discussions were terminated.

Final descent

On Dec. 20, Global Crossing revealed that Asia Global Crossing had requested $400 million from a credit line granted at its spin-off in October 2000. Global Crossing refused to fund the line. A month later, on Jan. 28, the company filed for Chapter 11 bankruptcy protection.

Simultaneously, a letter of intent was filed to sell control of the company (79 percent) to a joint venture between Hong Kong billionaire Li Ka-Shing’s Hutchison Whampoa Ltd. and Singapore Technologies Telemedia.

The agreed-upon purchase price: $750 million the amount Winnick and his original backers had paid AT & T; for its cable-laying unit back in 1996.

Now, Li Ka-Shing and his partners hope they can pick up the ball where Winnick dropped it, and score a multibillion-dollar windfall like their predecessors did.

“They have a gold-plated network, which should allow whoever fixes this thing to make a lot of money,” said Vik Grover, a telecom industry analyst at Kaufman Bros. in New York.

Time will tell.