Border crossing

Take eight tiny pieces of fiber, stretch them across the Atlantic Ocean, pay someone else to do the labor, and a few years later you have a $20 billion company.

Global Crossing's founder, Gary Winnick, envisioned that future fortune in what AT&T considered a burden, and his vision was right. If Global Crossing successfully acquires long-distance carrier Frontier Corp., that fortune will soar to $30 billion. And in a more recent development, if Global Crossing merges with U S West, the number will leap even further to about $75 billion.

Currently, Global Crossing's only operational cable is the original one dropped across the Atlantic, but more are on the way around the globe - both undersea and on land (Figure 1).

That founding link across the Atlantic was developed in 1997 during AT&T's rocky stage, and Winnick sensed a potential opportunity in what might be discarded by the interexchange carrier - for a price. After numerous negotiations, the companies agreed that AT&T would construct the undersea cable, between the United States and Europe, that it had been planning if Global Crossing could raise $750 million to pay for the build. So Winnick scrambled and came up with the financing. In turn, Global Crossing covered its building costs within a year - and with plenty to spare - by selling a small portion of what it built.

After the Atlantic Crossing was constructed, plans for several other undersea networks started trickling out, which would give Global Crossing more of a global rather than United States-to-Europe focus. One after another, announcements to link to the Caribbean, South America, Asia/Pacific Rim and a terrestrial network in Europe surfaced. But something was missing: the great frontier of North America.

Global Crossing wanted to come up for air.

Where the ocean meets the land

Without a presence in North America, its landing points on the coast limited Global Crossing. But if the carrier had its own fiber optic network as well as a way into residences and businesses, things could be very different.

"Overall, it was fairly expected that Global Crossing would try to do something like this - it was the next logical progression," says Michael Ruddy, a senior fiber optics analyst with Pioneer Consulting. "They had announced the construction of four submarine fiber links and the terrestrial Pan-European Crossing, so they had a huge fiber optic network, both terrestrially and submarine, but they didn't have their own network in North America."

With the acquisition of Frontier, Global Crossing will make its fiber network coup, while the merger with U S West will offer local voice, data and Internet services, broadband access and a wireless and wireline network.

Global Crossing had made a prior attempt to loose its amphibious feet through an agreement with Qwest Communications for capacity. But Global Crossing was hindered in the deal because of a dark fiber non-compete clause, Ruddy says. "The Qwest agreement was very restrictive and really didn't mesh with Global Crossing's plan of becoming an independent, self-supported operator," he says.

A few of the emerging carriers were likely targets for Global Crossing's terrestrial acquisition - Williams, Level 3 Communications, Frontier and maybe Qwest - but Frontier emerged as the most promising prospect, Ruddy says.

The Frontier acquisition "was a very wise move from Global Crossing's standpoint because it gave them terrestrial connectivity where they needed it most," Ruddy says.

Global Crossing CEO Robert Annunziata made mention of that need at the press conference announcing the merger in March. "Frontier will give us an up-and-running high-speed U.S. fiber network providing long-distance and local connectivity, a wide range of data and Internet services and extensive sales and support capabilities," Annunziata said. "This was a great merger for us because Frontier has a U.S. network, and Global Crossing is an international network. Now we are looking at how we will set up services worldwide."

But as evidenced with the planned U S West merger, part of the schematic for worldwide services involves the western United States.

"This merger brings together the first mile, the last mile and everything in between," said Sol Trujillo, chairman, president and CEO of U S West at the press conference announcing the merger last month. "It combines all the elements necessary for building the data-centric telecommunications network of the future for both residential and commercial customers."

A tangled web they weave

The U S West merger will enable Global Crossing to provide seamless access to voice, data and Internet services, Annunziata says. Ironically, Annunziata was the founder of Teleport Communications Group - the first competitive local exchange carrier to go up against regional Bell operating companies.

But both Trujillo and Annunziata feel that history will not be a problem. "Today we are joining forces with a former [RBOC] that knows how to compete and offer customers an array of integrated voice services," says Annunziata. Furthermore, both U S West and Frontier will give Global Crossing a significant hold on the local market, Annunziata says (Table 1).

"Global Crossing is unique in that they are going into cities," says Chuck Mancini, vice president of network financing and corporate development at Frontier, who is spearheading the merger with Global Crossing. "They are unlike the consortiums that put in landing stations and invite carriers in but then force them to purchase backhaul from various PTTs, which is very costly."

The Frontier network will help Global Crossing avoid costs "not only in backhauling from our cable landing sites to the major cities, but also throughout the U.S.," Annunziata says.

With the combined networks, "people will be able to pick up the phone, call us and get bandwidth from San Francisco to Chile [or wherever] in a very short period of time," Mancini says. But Frontier will focus on North American network management and operations while Global Crossing will concentrate on undersea and international deployment, he says.

Annunziata points to those areas as synergies, but Ruddy sees the beginning of problems.

"The only drawback is that Frontier is a provider of services to the end user. Global Crossing's business plan has always been to remain independent and be a carrier's carrier and not compete with customers," says Ruddy. "So the Frontier acquisition sort of skews [that business plan] right now."

Annunziata tried to paint a different picture when the acquisition was first announced. "Basically, the Global Crossing strategy has been on a wholesale basis, and the Frontier services have been on a wholesale and retail basis," he said. Previous statements reveal that Annunziata believes Global Crossing will be able to provide wholesale services as it grows and to provide retail services as well. "This telecommunications marketplace can only [be sustained] when you put every bit of traffic and every packet of traffic that you can on these networks to make them efficient. That's why we aren't just a carrier's carrier anymore."

Once again, Ruddy takes a different stance from Annunziata. "I view the acquisition as primarily for the fiber network, not so much for the business - it still doesn't mesh with the plans," he says. He also noted that Global Crossing's primary interest in U S West is most likely for the customer base.

Global Crossing thrived because carriers like to focus on their strong suit, which is marketing services, and they try to distance themselves from actual network operations, Ruddy says.

Furthermore, carriers and their carrier customers really don't mix, so rather than seeing a convergence of the two, the industry is starting to see a strong separation. "I suspect, in the near future, they will spin off [the competitive local exchange carriers and long-distance] segment of the business," Ruddy predicts.

In light of the U S West merger Ruddy says his stance has not changed. "[By changing its model], Global Crossing will disrupt its previous success and it is silly for them to abandon that," he says.

Frontier CEO Joe Clayton denies any plans to sell off the CLEC business. "In our discussions with Bob, we have no plans to spend the LEC," Clayton says.

Annunziata backed up that comment, as did Global Crossing's move to merge with U S West. "We just continue to work and serve the current local exchange customers very well, and then grow our CLEC business at a rapid pace," he said.

Landline bumps

So what other difficulties will the combined entity face? Mancini says Global Crossing is "a relatively new company, and we had to get comfortable with that first." Considering Global Crossing's ability to move at phenomenal speed and be in the right markets at the right time, their strength was clear, Mancini says.

But as in any merger, there will always be corporate culture challenges, Mancini says. "They have been a lean team [of 200 employees] while we have a traditional telecommunications organization [of 9000]. Their roles are more fluid while ours are more strict," he says. He also points out that Global Crossing is a start-up and that as it develops, it must merge with Frontier very carefully.

Perhaps the more daunting tasks will be combining the leadership teams of

U S West and Global Crossing and convincing shareholders that the merger will be fruitful. The agreement is planned as a "merger of equals," where Annunziata and Trujillo will serve as co-CEOs. "Sol and I both will be chairing the company and I believe there is plenty of work to go around, [so there shouldn't be conflicts]," says Annunziata. But the merger of equals started in a rough spot as both companies' stocks dropped significantly upon news of the merger.

As far as network integration challenges, Mancini says the companies will be able to merge the Frontier and Global Crossing networks seamlessly. "Ours hits New York and theirs does too, so we are working now on interconnecting the two," he says. The two companies will collaborate on integrating points of presence with fiber and are trying to ensure there is route diversity, Mancini says. "Network operations will be able to monitor the whole [combined network]."

According to Annunziata, that seamless connectivity will extend to U S West's network as well.

If the Frontier acquisition, which will consist of an $11 billion stock transaction, goes through, the combined entity will link 159 cities in 20 countries. With U S West, another 44 cities and 40,444 route miles will be added to the tally, giving Global Crossing a total of 185 cities on the network and 115,344 route miles. "This will jump-start Global Crossing into the next phase in our strategic development: fully integrated retail services, both business and residential, on a global basis in the years ahead," says Annunziata.

So with the network integration plans buckled down, the acquisition from Frontier approved and the merger with U S West pending, little is standing in the way of Global Crossing's land-locked footprint. And with that Frontier/U S West footing, Global Crossing will be ready to take on the stalwarts such as AT&T and BT.