(FORTUNE Magazine) – Back in the go-go 1980s, Gary Winnick was one of the big boys on Wall Street, selling junk bonds alongside Michael Milken at Drexel Burnham Lambert. A decade later Winnick resurfaced as master of a new universe: telecom. In 1997 he began building the biggest and best broadband communications network in the world--huge fiber-optic pipes that would traverse the Atlantic and Pacific and four continents, zipping voice, data, and Internet traffic just about everywhere.

Four years, five CEOs, $15 billion, and 85,000 miles of fiber later, Global Crossing is staggering toward bankruptcy. Its loss will widen from $2 billion in 2000 to $2.7 billion this year (on sales of $5.2 billion). Its stock has lost 90% of its value since Jan. 1. And its debt has ballooned to $7.6 billion--quite a load for a company whose market cap is under $1 billion. "With our prospective results in the fourth quarter, we are potentially in violation of some of our bank covenants," admits John Legere, Global Crossing's newest CEO. That's often the first step toward restructuring.

Some of Global Crossing's woes spring from Winnick's imperial style. At one point last year, three CEOs were on Global Crossing's payroll. Winnick's stake was valued at $4 billion. He bought the old Hilton estate in Bel Air, Calif., for a reported $40 million--the highest price ever paid in the U.S. for a single-family residence. His workspace is a replica of the White House Oval Office. Clearly Winnick learned the mantra of the 1980s: Greed is good. Too bad he didn't pick up on the decade's one lesson: Debt is bad.

Winnick's profligacy tells only part of the story, though, and disguises what may have been Global Crossing's biggest problem: The business model of the new telecom industry just doesn't work.

A few short years ago the plan seemed to make plenty of sense. The premise was that by owning and operating an end-to-end broadband network, Global Crossing could offer corporations with offices scattered around the world new high-end communications services, such as virtual private networks and voice over Internet. It could do so with greater quality and security than incumbent carriers like Deutsche Telekom, NTT, and AT&T, which must hand off traffic to partners whenever the signal crosses a border. Since Global Crossing's network would be new, its costs would be lower too.

The plan certainly impressed investors. The company's market cap soared to $40 billion after its August 1998 initial public offering. Winnick used Global's stock to buy U.S. long-distance carrier Frontier and was narrowly outbid by Qwest for US West in 1999.

Alas for Global Crossing, corporate customers didn't take the bait. "The fact is, Deutsche Telekom, NTT, and AT&T are huge brands, and we ignored the strong barriers associated with brand," says Legere. "Companies give a majority of their services to their branded carrier. We said we were a next-generation network that everybody was going to migrate to, but that's just not how it works."

For now, Global Crossing is most urgently preoccupied with its heavy debt load. One well-placed source says the company has just hired bankruptcy counsel. Legere wouldn't comment on that report, but he did say that the company is trying to renegotiate terms with lenders and find new investors. He might also try to swap new shares for outstanding bonds, which are currently trading at 12 cents on the dollar.

Global Crossing has plenty of company in its misery. Other next-generation carriers like Level 3 and Williams Communications also raced to build end-to-end communication superhighways, and their future is dim too, with weak demand and a glut of fiber knocking down prices worldwide. Boston's Pioneer Consulting estimates that only 13% of undersea cable is actually in use, and that telcos will have to wait until 2005 to see that figure approach 50%. The price of bandwidth along some major routes, such as New York to London, has plunged as much as 90% in the past 18 months. "This industry is starting to look a lot like the satellite industry," says Susan Kalla, an analyst at Friedman Billings Ramsey & Co. "Eight or ten companies launched three or four satellites apiece, and that was just too many. Some of the satellites are still floating around, but the companies have shut down."

With their business plans stymied, some of the new carriers have looked to a new source of revenues--each other. Telcos often swap capacity to fill in gaps in their networks, usually in the form of long-term leases for use of a stretch of fiber. The company leasing out its fiber records the transaction as a sale, and the company paying for the fiber records the purchase as a capital expenditure. Most of the deals are perfectly kosher. But some analysts charge that telcos have entered into mirror transactions for buying and selling capacity never used to carry paying traffic, thus using capital expenditures to pump up each other's revenues. What is more, by booking their costs as capital expenses--which are amortizable over a number of years--they boost current earnings as well. "It had the appearance of a Ponzi scheme or shell game," says Rob Rock, a fixed-income analyst at John Hancock mutual funds. "The question is, Was there an end user for all this capacity, or were they just manufacturing revenue?" Rock worries that in some cases the answer was clearly the latter.

Legere admits that telcos left investors in the dark about the deals. "The industry gave no information," he says. "We showed a huge cash number, but we didn't answer questions about price, supply, capacity, or the number of units." While he won't say the practice was wrong, he does allow that shareholders may have been confused about the robustness of revenues. This year lease payments from rivals will account for about $1.6 billion of Global Crossing's revenues. When asked how Global Crossing used capacity it bought from rivals--at a cost of about $1.3 billion this year--Legere says he doesn't know the specifics of deals completed before he arrived.

Global Crossing compounded its woes with a fast-money corporate culture and a chairman who hired high-profile CEOs but wouldn't relinquish control. "It's the CEO-of-the-Month Club over there," jokes one Wall Street analyst. Says a former employee: "Gary was running the place like he was still at the bond desk at Drexel in the '80s. People were bought, and money was thrown around."

Winnick lured some of telecom's brightest stars with the promise of riches and perks. Former AT&T executive Bob Annunziata received a $10 million signing bonus when he replaced CEO Jack Scanlon in February 1999. Thirteen months later Annunziata got the boot in favor of cable executive Leo Hindery, another AT&T alum. Hindery was CEO for only seven months, but his severance deal gives him $1 million a year and a Manhattan apartment rented at $20,000 a month through late 2002. If Legere, a former Dell executive, manages to stay on through 2003, he won't have to repay the $15 million no-interest loan he received in October. Winnick declined to be interviewed for this story.

Should Global Crossing go bust, Winnick may have a hard time selling off the pieces. The market is already flooded with cheap broadband assets. Wireless operator Teligent is liquidating itself piecemeal after a group of investors couldn't raise enough money to buy the company. Viatel, which has broadband pipes stretching across Europe, has also come up empty in its search for a suitor. The likeliest white knights--the Baby Bells--are more apt to snap up a wounded carrier such as AT&T or WorldCom, which already have a lot of paying corporate customers.

Maybe Global Crossing will follow the example of XO Communications, a debt-laden fiber-optic carrier that announced a restructuring in November. Investor Forstmann Little & Co. and Mexican carrier Telmex offered $800 million in cash for a 78% equity stake. Bondholders would wipe out $5 billion in debt for a 22% stake. And the stockholders? Their shares would be worth nothing.

As for Winnick, so far he has cashed in $633 million of Global Crossing shares. If stockholders now get stuck with worthless scrip, it will indeed feel like the '80s all over again.

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