Level 3 Acquiring Global Crossing For $2
Billion
The Dynamic Wealth Report
April 14, 2011
by Jay Chernoff, Editor
Merger mania continues on Wall Street!
It seems like there’s a new merger announced every day. After a quiet
couple years, we’re really seeing the merger and acquisition space heat
up… and in a big way.
The latest – Level 3 Communications (LVLT) is gobbling up
Global
Crossing (GLBC) in a $2 billion all-stock deal.
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That’s roughly a 60% premium for shares of Global Crossing.
You may remember Global Crossing. They were quite the darling of
investors back during the Dot.com bubble.
I’ll get back to that in a minute. First, let’s take a quick look at why
this merger is going down…
Level 3 is a broadband provider with a big presence in the US and
Europe, particularly in major cities. They’ve been unprofitable since as
far back as 1998. That’s a long time for a company to be around without
turning a profit.
Why’s it so hard for Level 3 to earn profits?
Basically, there’s a glut of telecom capacity because of the
overbuilding that took place during the Dot.com bubble. And all but the
largest telecom companies are having problems overcoming it. In other
words, it’s not just Level 3 having issues in the industry.
That’s where Global Crossing comes in.
Global Crossing is also a broadband provider. They’re known for their
undersea fiber-optic lines… the company’s cables run across the Pacific
Ocean. And, they also have a big presence in Latin America.
But, Global Crossing is also struggling. They haven’t been profitable
since 2003.
(Hmm… two unprofitable, struggling companies merging… what could go
wrong?)
Here’s the thing…
In theory, merging these two companies create a much better overall
company.
Combined, the companies will have networks in 50 countries and over $6
billion in revenue. And since the companies own networks in different
parts of the world, there’s a definite synergy to the deal.
What’s more, both management teams expect the merger to create
$2.5 billion in overall cost savings. And, they anticipate positive cash flow
will be generated from this deal by 2013.
Given the companies were going nowhere on their own, it seems like a
reasonable gamble to merge.
But what I find really interesting about this deal isn’t the future…
it’s the past. What I’m talking about is Global Crossing… and why this
is an amazing deal for the company.
As I mentioned earlier, Global Crossing was huge back during the Dot.com
boom…
Back then, internet companies were all the rage. People in the industry
would talk about a world where huge amounts of data would travel across
the web. And Global Crossing was the one who was supposed to build the
infrastructure to carry all that data.
Global Crossing was the champion of broadband communication… until they
went bankrupt.
That’s right. Global Crossing went bankrupt in 2002.
When the Dot.com market crashed, it took down high flying Global
Crossing as well. At the time, it was one of the biggest, highest
profile bankruptcies in the history of the US. Pre-bankruptcy, the
company was worth a whopping $30 billion.
However, Global Crossing reemerged from bankruptcy in 2003. The company
was restructured and much smaller… but they survived. And now (after a
60% premium) they’re worth about $2 billion.
What makes this deal so impressive for Global Crossing isn’t the buyout
price. (Although $2 billion is a premium valuation… keep in mind, this
company was once worth $30 billion.) No, what’s amazing is that just
eight years ago this company was worth virtually nothing.
So what’s the moral of this story?
In a nutshell, bankruptcy doesn’t have to spell the end of a company.
And it may even help a company out in the long-term.
History is littered with companies who have emerged from bankruptcy in
better financial shape than they had ever been. General Motors (GM) is a
good, recent example. Before that, it was United Airlines (UAL).
Of course, there are plenty of companies who went bankrupt and stayed
bankrupt… but those are usually more extreme cases. Think Enron, Worldcom, or Lehman Brothers.
Bankruptcy can be an important strategic decision for a company. In the
long-run, it may be just what a struggling company needs to get back on
its feet. Global Crossing is a perfect example. Now, let’s see if Level
3 can take advantage of this merger. Otherwise, they may be the next one
filing for Chapter 11.
One of the most active ETFs this week is the iShares Silver Trust ETF
(SLV). It’s up nearly 2% today and a whopping 120% over the year. SLV
tracks the performance of silver by purchasing the physical metal. Silver prices are soaring on high demand for precious metals.
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