Global Crossing's like a telecom 'wake-up call'
By Simon Avery
Associated Press
LOS ANGELES — Global Crossing's sudden implosion has done more than sting shareholders, creditors and employees. It has burdened the suffering telecom industry with new worries about solvency and accounting irregularities while prompting some investors to flee the sector.
"Global Crossing was a wake-up call for a lot of people that didn't realize how bad the telecom sector had become," said Scott Cleland of the Precursor Group, a research firm in Washington, D.C.
The $300-billion-a-year industry has been staggering under excess capacity, falling prices and mounting debt since the technology market bubble burst in March 2000.
In the process, some 500,000 telecom jobs have disappeared and investors have absorbed $2 trillion of paper losses.
Telecoms that filed for bankruptcy protection or went out of business before Global Crossing include Mcleod USA, 360networks, Winstar Communications and Northpoint Communications.
Their financial problems began at least three years ago when the industry overestimated demand and overbuilt supply.
"The industry extended capital way beyond the headlights," said John Gonsalves, vice president of Adventis, a Boston-based management consulting firm.
Global Crossing's slide into bankruptcy court has raised some new and serious questions about the industry's long-standing practice of hyping growth and pushing accounting practices to the legal limit.
"There's been plenty of smoke here. Now the regulators are going to check for fire," Cleland said.
This past week, both the House Energy and Commerce Committee and Financial Services Committee said they would investigate the Bermuda-based firm's accounting practices and executive sales of company stock.
The Securities and Exchange Commission and the FBI are also investigating the bookkeeping practices of Global Crossing, which operates out of offices in Beverly Hills, Calif., and Madison, N.J.
Global Crossing denies any wrongdoing, and no charges have been filed.
Meanwhile, Worldcom Inc. and Qwest Communications International Inc., two of the nation's largest phone companies, have come under SEC scrutiny.
The SEC requested documents from Worldcom for an inquiry focusing on customer bills and sales commissions, loans by the company to its officers or directors, and a pretax charge taken in the quarter ended Sept. 30, 2000. Worldcom said its accounting practices have complied with all regulations.
In Qwest's case, the SEC asked for information about how it recorded revenue from selling optical capacity to customers. The transactions included deals with Global Crossing.
The inquiry also focuses on equipment sales that Qwest made to customers such as KMC Telecom Holdings Inc., which sold Internet services back to Qwest.
Steve Hammack, a Qwest spokesman, called the SEC investigation a "routine request for documents" and said all the carrier's dealings were recorded properly.
For investors, the investigations heap credibility concerns on top of existing fears about weakening balance sheets and operating abilities.
Patrick Comack, a telecom analyst with Guzman & Co., an investment bank in Miami, said credibility will remain the No. 1 issue for the telecom sector this year.
"There's a very good chance there will be more shoes to drop, more negative news," he said.
The extent of investors' jitters was made clear in the week after Global Crossing filed for bankruptcy on Jan. 28, when Worldcom lost one-third of its market value. Shares of the nation's No. 2 long-distance provider were rebounding until news broke on Tuesday that the SEC was investigating it.
Since late January, Worldcom shares are down more than 40 percent, Qwest shares lost more than 30 percent, and Sprint shares dropped about 20 percent while the Dow Jones telecommunications index is down 5 percent — compared with an 8 percent rise of the benchmark Dow Jones industrials.
Qwest said a soft economy more than anything else is to blame for the sector's woes.
As far back as September, the company noted a significant shift in market conditions when customers began buying capacity month to month. Previously, buyers had committed to contracts as long as 20 years, Hammack said.
Still, financial analysts see Global Crossing as the bogeyman casting a shadow on the neighborhood.
"I don't think that Qwest, Worldcom and Sprint's valuations would be as suppressed as they are if it had not been for Global Crossing," said Drake Johnstone, a telecom analyst with Davenport & Co., an independent brokerage in Richmond, Va.
Investor concerns have been heightened by a cash crunch in the telecom industry.
Global Crossing's bankruptcy, piled on top of earlier telecoms' Chapter 11 filings, has left banks more reluctant to lend to the sector and caused the bond market to demand higher yields, Johnstone said.
Williams Communications Group is one telecom feeling the new credit pinch. The fiber-optic company's bank lenders recently rejected its request for more cash, causing the firm to warn this month that it might follow Global Crossing into bankruptcy.
