Global Crossing Mulling Asian Merger

Sending out feelers to gauge reaction, the IP provider announced a possible merger of its Asian subsidiary on news of "significantly" lowered earnings projections. Investors apparently hated the idea.

by Jim Wagner of internetnews.com [October 5, 2001]

Testing for a reaction, Global Crossing (NYSE:GX) floated the idea of a merger with its Asian counterpart Thursday morning prior to its third quarter conference call.

It's likely the U.S. bandwidth provider, with a 59 percent ownership stake in Asia Global Crossing (NYSE:AX), will try to convince shareholders and directors to sign off on the merger. John Legere, Asia Crossing chief executive officer, is taking over worldwide operations immediately from Tom Casey, Global Crossing's vice chairman and chief executive officer. Casey will remain on the board of directors.

Legere said the merger comes at a good time for the company, as many companies in the high-tech sector look for solutions to stay alive in a depressed market.

"We have an historic opportunity to become the market leader as the global economy recovers," Legere said. "In its short history, Asia Global Crossing was able to establish the right partnerships in the leading markets of the Asia Pacific region, to accelerate our entry in each country and to extend our network to Asia's dynamic business centers. Now those vital agreements are in place, and we need a single focused company to capture opportunities along every point of our seamless global network."

Legere is correct in his assessment of the Asian company's success in deploying bandwidth throughout the Pacific Rim. Asia Global Crossing was the first to successfully link a trans-Pacific 2.5 Gbps fiber optic pipeline in the region.

But it's also true that the company has met with little success in selling the bandwidth it has available and paying off debts. While Asia Global Crossing reported it brought in $1.2 billion in cash revenues, "recurring adjusted EBITDA (earnings before interest, taxes, depreciation and armortization) is expected to be significantly less than $100 million," officials said.

Wall Street had expected $1.5 billion in revenues and approximately $400 million EBITDA.

Investors felt slighted by the numbers, probaby feeling they had been misled. Goldman, Sachs & Co. immediately downgraded the IP provider from the highest rating to a mid-level recommendation and issued a warning to its investors.

"With the clarity of hindsight, our positive investment opinion on GX was clearly wrong," the firm's statement read. "Even the top layer in the emerging carrier universe has been more weakened than our data suggested. Only a return to strong operating results can recapture investor confidence and enthusiasm for the space and the stock. Even with a top operating manager like John Legere at the helm, this will inevitably take some time."

Officials at the corporate offices have been fighting a mainly losing battle with their profit sheet this year. Earlier, officials had hoped to boost its Asian arm by moving the operations of two of its other Asian subsidiaries to the struggling bandwidth provider.

One of those two, IPC (a desktop trading system maker), is earmarked for divesture. Global Marine Systems has also been selected for release.

Now, its likely Global Crossing will seek to merge its operations to streamline operations and cut out redundancies. Legere, known as an apt manager, will head up the housecleaning.

There has been no comment, yet, from Microsoft Corp. (NASDAQ:MSFT) and Japanese investment firm Softbank, the two other majority shareholders in Asia Global Crossing.

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