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Being Global Crossed
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February 13, 2002: 5:39 p.m. ET
Investors in other telecoms are likely to suffer fall-out from the demise of Global Crossing.
By Adam Lashinsky
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SAN FRANCISCO (CNN/Money) - Everyone's in search of "lessons learned." Well, here are the obvious lessons of Global Crossing, the latest killer earthquake rumbling on Wall Street: Investors understand little about the stocks in which they invest. More, the establishment of professionals that are supposed to help -- investment bankers, research analysts, accountants, financial journalists -- apparently don't know much more. At least think about that next time you buy a stock whose business is confusing.
In Global Crossing's case, the now-infamous asset swaps it conducted with other telecom companies weren't secrets. When they got big enough, Global Crossing disclosed them. Almost no one paid attention. But the swaps were important because they inflated revenue. And in a world of funky financial metrics, where price-to-sales is as important as anything else, revenues matter.
The details are important at this point mostly to understand what happened and how it will slam others in the industry. Global Crossing essentially traded access to its fiber optic network for access on the networks of other operators.
There's nothing wrong with that. It's analogous to a rental-car agency that's strong in the Pacific Northwest and another that's strong in the Northeast trading a few cars in each other's markets to satisfy customer demand outside their core service areas. The catch is accounting for the purchase of access as revenue and the expense of acquiring access as a capital expenditure, rather than as a business expense. The former boosts the top line; the latter doesn't detract from the bottom line.
Worse, in Global Crossing's case the Securities and Exchange Commission is investigating whether some of the swaps had any legitimate business purpose or were merely a shell game intended to create the appearance of revenue. But even the apparently legal transactions and their accounting showed how the pros were confusing investors while times were good.
Now times are bad, of course, and being Global Crossed is akin to suffering from Enron-itis. Qwest shares, already pummeled this year, fell further Wednesday, to $8.59. The Securities and Exchange Commission has asked Qwest, an entrepreneurial cable-laying firm that bought the Baby Bell U.S West, for information about its swap arrangements with Global Crossing. Another victim is Cable & Wireless, the British telecom company that Wednesday disclosed its own asset swapping. Its Big Board-traded stock tumbled to a $10.00, a new 52-week low (former: $10.30).
So where do we go from here? Paul O'Neil, a portfolio manager with the Canadian asset-management firm Knight Bain Seath & Holbrook, has a unique and frightening insight that suggests the stocks of Qwest, Cable & Wireless and, notably, Worldcom, could be in for more pain. "Global Crossing's network is real," he notes.
Ditto for hobbled Level 3 Communications, and McLeodUSA. McLeod has already filed for bankruptcy. It and Global Crossing are likely to emerge from bankruptcy, in one form or another, with strengthened balance sheets because their debt will be converted into equity. The result: The upstart networks will make for fresh headaches for the survivors, including a still richly valued -- and heavily indebted -- Worldcom.
In other words, a lot of investors are going to feel Global Crossed for some time to come.
Send e-mail to Adam at adam_lashinsky@timeinc.com.
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RECENTLY BY ADAM LASHINSKY
