Level 3 Acquiring Global Crossing For $2 Billion
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.
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.
Category: Stocks
