gripping the telecommunications industry:
Global Crossing. In its short life, it has been
involved in a series of massive mergers and
audacious takeover attempts. But, says
Bob Annunciata, its chief executive
(and a man passed over for promotion by
AT&T), you ain't seen nothing yet ...
For a company that began life less than two years ago with one sub-sea Atlantic cable, Global Crossing has been attracting a lot of attention lately. It's the kind of attention the company's CEO Bob Annunciata has been planning. Aggressive moves, like last month's pounds 1.1bn purchase of Racal Telecom, followed this week by a $1.2bn (pounds 800m) agreement with Hong Kong's Hutchison Whampoa to develop high-capacity fibre networks in Hong Kong, are part of a hectic series of deals aimed at putting together a global data communications network that reaches into the buildings of some of the biggest corporations in the world.
It's an almost absurdly ambitious strategy which pitches the company based in Hamilton, Bermuda, against well-established long-distance carriers of communications traffic and those providing local connections. So far, it seems to be working. Few companies better epitomise the frenzied pace of deal-making that has engulfed the telecommunications industry than Global Crossing.
Its plan is no less than to recast the global map for data communications. Mr Annunciata runs a high risk of overextending himself, but if Global Crossing plays it right, the rewards could be huge. The Internet phenomenon, combined with deregulating markets, has brought about a seemingly insatiable demand for telecommunications capacity. More data, more e-mails, more e-commerce all equals more bandwidth required. Forecasts by Data International Group show more than a billion people will be subscribing to the Internet by 2005, generating revenues of $1 trillion.
And those figures could get a lot bigger fast. On Monday, the same day Global Crossing signed its deal with Hutchison Whampoa, the US Trade Representative Charlene Barshefsky said China has agreed to allow foreign firms to hold 49 per cent stakes in Sino-foreign telecom ventures as part of the deal for Peking's admission to the World Trade Organisation. This is a complete about-face from the full block on foreign telecoms owning any part of a Chinese communications venture.
With characteristic understatement, Hutchison Whampoa's managing director Canning Fok told a Hong Kong press conference this week that the new Hutchison- Global Crossing venture would be "very interested to build a fibre-optic link into China". You could almost hear the increased heart-beats of the Global executives gathered for the conference call. "Chinese Internet users will surpass US users by 2004," said one.
In some respects, Bob Annunciata, a 51-year-old New Yorker who took the helm at Global Crossing just nine months ago, has been here before. In the early 1980s Mr Annunciata was one of the first to challenge the US local telephone monopolies by building competing city networks. That was when he was a founding executive and eventually chairman of Teleport Communications Group, a company that from a few hundred million of equity capital was eventually sold to AT&T for $12bn in 1998.
An irony of that deal is that Mr Annunciata worked at AT&T for nearly 17 years, leaving only after he had been passed over for promotion because he lacked a college degree. "Bob is a New York City kid who skipped college and got through by guile and pure smarts," said one former AT&T colleague. "I guess selling TCG back to AT&T had a sweet revenge."
By Mr Annunciata's reckoning, the opportunity at Global Crossing is to take the already aggressive global long-distance network strategy that had been the original idea and add to it. Global Crossing's founder is the former Drexel Burnham banker and Michael Milkin confidante Gary Winnick. His big idea was of a network that spanned five continents and two oceans, delivering high-capacity fibre to nearly 160 cities worldwide by the end of next year. After leaving Drexel, Mr Winnick set up Pacific Capital Group, a Beverly Hills-based investment bank that put together the initial Global Crossing IPO last year.
Altogether Mr Winnick and his PCG partners have raised $7bn for Global Crossing, to fund acquisitions and build new networks. "Gary pulled all the strings, and he certainly knows how to raise money, but by the end of last year he needed a name guy in the business to give the company some gravitas", said a former colleague of Mr Annunciata.
Company lore has it that Mr Winnick hired the straight-talking New Yorker because he reminded him of Bill McGowan, who was looking for funding in 1981 and came to Drexel. Mr Winnick heard out Mr McGowan's plan to compete head-to-head with AT&T and decided he liked his brash vision and conviction. Drexel was the first to back him. Over the next five years Drexel would raise more than $2bn for MCI to build the first advanced fibre-optic network in the US.
From the start of his tenure at Global Crossing, Mr Annunciata wanted to bring the network closer to his customers. Shore to shore was good, but city to city was better, and soon he would be preaching building to building. Barely two weeks after joining the company on March 1 this year, Mr Annunciata bid $11.7bn for Frontier Corp, the fifth-largest long-distance operator in the US. He soon followed with a proposed $37bn stock swap for US West, the Bell operating company based in Denver, Colorado.
For many, this looked like a deal too far, and Mr Annunciata found himself facing something then almost unheard of in this fast-growing industry - stock market scepticism.
As it turned out, Mr Annunciata's grand plan was scuttled by a rival bid from another aspiring alternative telco, Qwest Communications. The fight had bitter moments and it ended by pulling down Global Crossing's share price.
That, combined with concerns about Internet stocks and the downward pressure on long-distance prices, conspired to knock two-thirds off the stock's value between May and September. But a climb-back was kick-started on 9 September, after the announcement of a $1.3bn joint venture to roll out networks and service in Asia with Microsoft and Japan's Softbank. The stock rose $5.25 or 25 per cent to $25.56 that day and was the most active Nasdaq stock, with 42 million shares traded.
Before Mr Annunciata joined, Global Crossing had begun building international cable systems. And it was building these cables fast, typically taking about 18 months from concept to submarine cable, compared to the two-year- plus schedules of the so-called "cable clubs" of incumbent international carriers.
Recognising the importance of speedy builds and good maintenance, Mr Annunciata last summer bought a fleet of cable-laying ships with the purchase of Global Marine Systems Ltd from Cable & Wireless.
To jump-start his terrestrial European network presence, Mr Annunciata outbid Energis for Racal Telecom, setting a new valuation benchmark with the pounds 1.1bn he thumped on the table. Mr Annunciata was unrepentant. Racal may have been pricey, but the benefit of a local sales force, revenues and fibre that is within five kilometres of two-thirds of all UK businesses, seemed a good trade.
"If the market is going to be worth $1 trillion by 2005, about a third of the traffic will be in Europe and a third in the US, so we were very clear that in our strategy we wanted to make sure we could have and own our own network here in Europe 100 per cent," says Mr Annunciata.
A month later and he's capped the Racal deal with the Hutchison Whampoa tie-up. "This is a facilities-based network with end-to-end connectivity in Hong Kong from building to building," Mr Annunciata told analysts. "We are executing on our strategy to be the most enviable fibre-optic network worldwide." The booming demand for bandwidth has spurred the 21st-century equivalent of railroad tycoons, those who are building the new data trade routes across the globe. But it's a highly competitive business. Time to market, the right capacity and value-added services like web-hosting facilities, are increasingly key to commanding premiums, not to mention customer loyalty.
Racal and Hutchison Whampoa are examples of how Mr Annunciata hopes to turn Global Crossing from a simple purveyor of bandwidth capacity to a provider of integrated business solutions. In some respects he's behind the pack. Other operators such as KPNQwest are farther along in their network builds in Europe. But with the present buoyant mood in stock markets, there's no shortage of appetite for the grandiose strategy.
Global Crossing plans to have 16 European cities up and running on its PanEuro Crossing network by the end of the year. But such is the pace of growth that the company may need to add network more quickly than it can build it.
European acquisition targets such as Colt Telecommunications are probably too pricey even for Mr Annunciata, although the values put on Mannesmann's mobile and fixed telecoms business seem to have no ceiling. An alternative target might be Global TeleSystems Group, which includes the Hermes pan- European network built beside railway tracks.
Bob Annunciata's track record at Teleport proves he can create shareholder value, but there's another side to the man. During the World Trade Center bombing in New York, Teleport's network facility began to fill with water, threatening to submerge the equipment and short out the facility. There were several people working hard to prevent it, but Mr Annunciata was first to swing a sledgehammer in the basement to help drain the water from the electronics.
Global Crossing may or may not be one of the winners from the global telecommunications revolution, but this "sleeves rolled up" approach gives an entrepreneurial edge which stands it in better stead than many.
A Brief Life: Global Crossing's Short History
Market Capitalisation: $17.5bn at 12 November 1999
Revenues: $2.793 bn
Cash flow (EBITDA): $887m
Key Executives: Gary Winnick, chairman and founder; Bob Annunciata, CEO; Jack Scanlon, vice-chairman and CEO Asia Global Crossing
March 1997: Company foundedLate 1997: Began laying 8,400-mile fibre- optic undersea cables from London to New York. Went active in May 1998
March 1999: Bob Annunciata becomes CEO. $11.7bn bid for Frontier Corp, of Rochester, NY, fifth-biggest long-distance carrier in US; $9.3bn deal completed in September after GBLX stock dropped 50 per cent
April 1999: Acquired Cable & Wireless PLC's undersea cable maintenance business C&W Global Marine for $885m. Completed in July 1999
May 1999: $37bn stock swap between Global Crossing and US West; Qwest counterbids for US West and Frontier, winning US West and forcing Global Crossing to renegotiate Frontier purchase
September 1999: Acquires 49 per cent of SB Submarine Systems Co Ltd. Partner is China Telecom. Installing a US-China cable system and maintaining Asia Pacific cables. Completes purchase of Frontier for $9.3bn. $1.3bn Asia Global Crossing venture with partners Microsoft and Softbank Corp to build a fibre-optic network in Asia linking Japan, China, Singapore, Hong Kong, Taiwan, South Korea, Malaysia and the Philippines. Global Crossing to contribute its 57.7 per cent stake in Pacific Crossing to new venture. Pacific Crossing, linking Japan and the US, owned with Japan's Marubeni Corp and KDD Corp
October 1999: $1.65bn deal for of Racal Telecom, which operates 4,526- mile network in the UK
November 1999: $1.2bn joint venture with Hutchison Whampoa to own and operate Hong Kong fibre network, with potential extension into China