I saw a notice recently that Gary Winnick died. He was the founder of Global Crossing. This is worth a way-back machine look because the Global Crossing story is the perfect metaphor for remembering the craziness of the telecom industry in the late 1990s.
Winnick founded Global Crossing in March 1997 with a $35 million equity investment from himself and the Canadian Imperial Bank of Commerce. 1997 was right after the Telecommunications Act of 1996, and there was huge money pouring into the U.S. telecom industry due to the opportunity to create Competitive Local Exchange Carriers (CLECs) that were suddenly allowed to compete for local telephone service using the networks of the largest telephone companies.
Winnick’s original vision was to build the first privately financed undersea fiber network connecting North America, Latin America, Europe, and Asia.
Winnick and the other executives were highly successful in raising money and raised $800 million in debt by June 1998. Global Crossing went public in August 1998, raising an instant $399 million from the IPO. Like many other telecom stocks at the time, the stock price saw a meteoric rise, and by the end of 1999, the company’s stock had grown to an amazing market capitalization of $47 billion.
The sudden success of the stock changed the direction of the company, and Global Crossing went on an acquisition tear based on its increased stock price. In May 1999, GlobalCrossing made the news when the 2-year-old company made an offer to buy US West but was outbid by Qwest. In July 1999 the company paid $885 million for the undersea maintenance business operated by Cable & Wireless. At the end of 1999, the company entered the telephone market by buying Frontier Communications for $9.9 billion and renamed it as Global Crossings North America. It also paid $1.3 billion for SB Submarine Cable and $1.65 billion for Racal Telecom.
Within a relatively short time, the company had trouble meeting monthly debt payments and sold Frontier Communications for $3.65 billion in the summer of 2001. Global Crossing never made a profit. In the fourth quarter of 2001, the company had losses of $3.4 billion on revenues of $792 million. In January 2002, Global Crossing filed for bankruptcy. This is the fourth biggest bankruptcy in history and was huge financial news at the time. But the Global Crossing story was not extraordinary in the telecom sector as the entire CLEC industry was also imploding.
There was instantly a raft of lawsuits accusing the management team of accounting fraud and of not disclosing the real financial position. Between 1998 and 2001, Winnick sold $420 million of company stock while other executives sold $900 million, much of it after internal company reports of impending financial problems. While there were some large settlements by the company, the executive team got off with relatively minor contributions to lawsuit settlements.
Global Crossing emerged from bankruptcy at the end of 2003. The company made a few more acquisitions and eventually sold to Level 3 Communications for $3 billion in 2011. It’s ironic that the remnants of the upstart that tried to buy US West ended up being absorbed by CenturyLink, the US West successor when it merged with Level 3.
Global Crossing came literally out of nowhere after the passage of the Telecom Act and leveraged a relatively small equity investment into many billions of market value. Global Crossing and other new telecom companies were able to go public and see big stock price gains without ever getting close to making a profit. But the bubble didn’t last long, and the CLEC crash was part of the overall dot.com crash, where investors lost huge amounts of money when the two sectors collapsed.
For those working in the industry, the crazy stock valuations at the time made no sense. I can remember half a dozen startup CLECs who raised money, each promising to win a 30% market share of the Atlanta telecom market. Money was thrown at the fledgling industry, including a huge amount of funding provided by telecom vendors.
The Global Crossing story is worth remembering because it demonstrates the excesses that can come quickly when outside capital floods into an industry. I am seeing some of this same craze today, with dozens of venture groups pouring money into the broadband sector. However, it’s not as nearly as superheated today as the late 1990s, but I still have to wonder where these investors expect to find high returns. But we will probably never see another telecom company that will burst onto the scene and then implode as dramatically as Global Crossing.