Global Crossing: Survival of the fittest
Global Crossing has emerged from the dark days of the early part of this century with its business transformed, as Ian Chard reports.
On the day that John Legere became the fifth CEO in four years at Global Crossing, he boarded a private jet and flew from Beverley Hills to New York. A helicopter then hurried him from the airfield to the facility he’d been sent to inspect. A couple of months later, the 13-strong aviation crew and all the helicopters were gone.
“Instead of Beverly Hills, I found myself living in a budget motel not far from our head office in Florham Park, New Jersey,” Legere recalls. “I had a two-bedroom place that – if you listed its top five amenities – the microwave and La-Z-Boy chair would be among them. And we stayed there because it came with free breakfast. That, for me, is a survival technique.”
Rise of the carrier's carrier
Survival measures would have been inconceivable for Global Crossing as it pitched to investors in the late 1990s. The internet was still an emerging medium and even though most users had dial-up,rising data volumes meant demand for capacity was surging. Historically, fibre backbone builds had been the domain of incumbents who would also tightly control the terms of provision of that capacity to third parties.
Global Crossing and others turned the industry on its head. It constructed privately-funded subsea cable systems, making the capacity openly available to sell or lease bandwidth to other organisations or carriers, thus effectively positioning it as a “carrier’s carrier”. “This was a pendulum switch at the turn of the century,” says Erik Kreifeldt, senior analyst at Telegeography. “Such a model is now widely viewed as being dead, since the cost of building a global network is huge and simply couldn’t be done again.”
However, the financial restructuring in the telecoms industry during the early part of the decade ensured these projects were able to endure. “It meant that assets that had been very expensive to build had become an incremental cost in terms of adding capacity,” says Kreifeldt. “The knock-on effect has been an industry phenomenon whereby prices today reflect the fact that the original build costs have been wiped away.”
Founded in 1997, Bermuda-based Global Crossing was among the first of the privately-backed companies to enter the global carrier market. It constructed a transatlantic cable system called Atlantic Crossing; within a year, it had signed an agreement to construct the Pacific Crossing subsea cable with Marubeni Corp and KDD-SCS of Japan and Tyco of the US. The company went on to build subsea cables linking the Caribbean (MAC) and central and south America (PAC and SAC), as well as terrestrial systems such as Pan European Crossing (PEC).
In late 1998, Global Crossing listed on the Nasdaq, raising almost $400 million. It continued to expand rapidly through a combination of acquisition and network construction. In 1999, it acquired the Global Marine business of Cable & Wireless for $885 million. It also bought US ILEC Frontier, financial datacomms company IXnet, and the UK’s Racal Telecom, providing it with fibre in the ground and an array of retail operations. However, the internet and corporate data markets were not evolving as anticipated, whilst a rapid succession of management changes saw Global Crossing hire four CEOs within just three years of operation.
In 2001, it faced a perfect storm of negative pressures. Over-capacity, the shock of 9/11 and price erosion affected the ability of Global Crossing to execute its strategy. “Much of the Global Crossing vision boiled down to a global network based on the capacity needs driven by fundamental internet access, and this was based on a simple equation of internet times population, and then looking at current and projected penetration rates,” says Kreifeldt. “Granted, the demand for capacity more or less materialised, but it was the revenue associated with it that was the problem.”
The difficult environment in the early years of the decade saw a number of carriers sink under mounting levels of debt. By the latter half of 2001, Global Crossing was burning through cash, incurring losses of up to $400 million per month. The suggestion of a Chapter 11 bankruptcy filing had offended John Legere when he first took the reins at Global Crossing in October 2001. Yet it soon became clear that this had to be done, and quickly. “I truly believed I could align this company and take it to its rightful place,” he says. “However, I learned about banks, covenants and loans at the end of 2001, in the school of the hard way.”
A business transformation
In January 2002, Global Crossing filed for Chapter 11 bankruptcy protection. It was the fourth largest such filing in US history. The filing also occurred in the midst of investigations by the FBI, the Securities and Exchange Commission and two congressional committees into alleged accounting violations and corporate fraud. However, unlike Enron and Worldcom, Global Crossing was subsequently found not to have broken any rules.
“There was an air in the industry of wrongdoing, and this took time to correct itself,” Legere concedes. And as the world media attacked, it became hugely brutal and personal. “The reality was that we had one way out of the battle. If we put our heads down, if we were successful, at some point, people would look back and write the real story about us.”
During 22 months of bankruptcy, Global Crossing implemented measures to streamline operations and retain customers. It was able to retain 90% of its customer base and reduced its operating expenses by more than 60% between 2001 and 2003. “It was an elimination of cost beyond anything anyone has ever experienced in business,” Legere declares. “We restructured many layers of management into just two to three between myself and the customer. We also knew we were not going to get new customers while we were restructuring, so we learned how to hang on for dear life to those that we had. We now have a differentiated customer experience and culture because of it.”
Global Crossing closed down several million square feet of real estate, putting employees into technical facilities co-located with PoPs. It also set about divesting non-strategic parts of the business, selling its Small Business Group, Trader Voice and Global Marine, and retrenching its consumer division.
A return to growth
Global Crossing emerged from bankruptcy in December 2003 with a new owner in the form of ST Telemedia, who had acquired a 60.5% stake in the company for $250 million. It also emerged with its core network and key personnel intact, and with the ability to invest. In 2003/04, the carrier migrated to an IP-only internal platform that reduced corporate operating expenses by 57%, increased order flow volumes, bettered response time by 80%, consolidated dozens of old systems and increased customer satisfaction.
“This process now serves as a model for our customers,” says Legere. “During our turnaround, we decided we had to practise what we preached. We had set tremendous targets, but we have achieved a tremendous amount via our streamlined strategy and our network’s capabilities.”
In 2006, Global Crossing’s consolidated revenues returned to growth and in Q2 this year it posted record order volumes of $4.6 million. “Today, we have free cash of $60 million and believe this will continue as we execute our strategy to grow revenues 30% from $347 million last year,” says Gary Breauninger, CFO for north America and carrier at Global Crossing. “Growth becomes very predictable across lean cost structures and creates good cash flow at operating level. All this is based on continued growth from our existing customers.” Offering a wide range of data, voice and collaboration services, Global Crossing now serves approximately 40% of the Fortune 500, as well as 700 carriers, mobile operators and ISPs worldwide. “Much of our expansion is thought of in terms of what we need to do to stay competitive and win in the global enterprise and government space,” adds Legere.
Global Crossing milestones
1997: Founded by Gary Winnick and three associates to meet demand for internet capacity; plans to build Atlantic Crossing (AC-1) transatlantic cable system
1998: John Scanlon appointed first CEO; agreement to construct Pacific Crossing (PC-1) subsea cable connecting the US and Japan; listed on Nasdaq; IPO raised almost $400 million
1999: Robert Annunziata replaces Scanlon as CEO; agreement to acquire Global Marine for $885 million; acquired US ILEC Frontier for $11.2 billion and Racal Telecom for $1.65 billion
2000: Bought data services provider IXNet for $3.4 billion; Leo Hindery appointed as CEO; acquired financial services company IPC Trading; listed on NYSE; Hindery replaced by Thomas Casey
2001: Sold Globalcenter to Exodus Communications for $6.5 billion; core network is commissioned, spanning four continents, 27 countries and 200 major cities; sold Frontier to Citizens Communications for $3 billion; John Legere hired as CEO; sold IPC Trading to investment group
2002: Files for Chapter 11 bankruptcy protection; delisted from NYSE; sold Hutchison Global Crossing and Asia Global Crossing
2003: Emerged from bankruptcy in the form of ST Telemedia, with a new management team and long-term debt slashed from $11 billion to $200 million
2004: Relisted on Nasdaq; sold Global Marine Systems for up to $132 million
2005: Sold Trader Voice to Westcom for $25 million in cash, plus additional fees for provision of wholesale-related services
2006: Sold Small Business Group; completed public offerings, for total gross proceeds of $384 million; acquired Fibernet for $94.6 million
2007: Acquired Impsat Fiber Networks for $347 million
2008: Announced expanded capacity on Mid-Atlantic Crossing (MAC) subsea cable; new submarine cable on Costa Rica’s Pacific coast
2009: Expanded capacity on AC-1 subsea network and on MAC, PAC and SAC subsea cable systems; opened data centre in Amsterdam
2010: Announced plans to significantly expand capacity on MAC, PAC and SAC; Q2 order volumes post company record of $4.6 million