Global Crossing Crosses Over to the Dark Side

Tech bull George Gilder sees one of his favorites -- the undersea optical-network builder -- file for bankruptcy.
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Say what you want about the wafflings of some stock pickers. Tech guru George Gilder remained a staunch

Global Crossing

(GX)

supporter till the end.

For the past two years, he urged readers of his widely followed trends-in-technology newsletter to invest in the undersea optical-network builder. In fact, he liked the stock so much that he even poured his own family's money into it; exactly how much isn't clear. In any case, it emerged Monday that he and his followers will have nothing to show for their support, adding a familiar chapter to yet another New Economy meltdown.

That's because the other shoe finally dropped at Global Crossing, which has been in steep decline since the easy-money boom of the late 1990s went bust. Monday morning, the company filed for

Chapter 11 bankruptcy protection and sold itself to a group led by Hong Kong's Hutchison Whampoa. As is often the case in Chapter 11 cases, shareholders will come out of the proceedings empty-handed. Global Crossing was halted Monday at 51 cents, down from a 52-week high of $23.70.

The Way It Was

Global Crossing was perhaps the purest bull market phenomenon in telecom. The company was built on two assumptions: that applying new tech would always keep it ahead of old-line phone rivals, and that new crops of communications-intensive customers could always be available for harvesting.

Crossing Signals
Global ambitions defeated?

The plan went swimmingly for the first year, beginning in mid-1998. As long as investors kept pouring money into the operation and the operations of all its customers, Global Crossing could continue to spread cheaper communications capacity to more corners of the world. The stock cleared $75 a number of times in the months leading up to the

Nasdaq's

March 2000 peak.

But without perpetual cash inflows to fuel the growth furnace, fixed costs and debt payments quickly overcame the company's funding capacity. Shareholders caught on, fueling the steep decline of the last two years.

"A lot of these players had business models built on an assumption they would acquire lots of new Internet-based customers who had lots of money and would add lots of traffic to their networks," says Jefferies & Co. analyst Richard Klugman. "But as the capital markets slammed shut on tech upstarts, that business model was made vulnerable very quickly."

Crowded House

Global Crossing was itself among a handful of new generation telcos with big bandwidth ambitions and aggressive spending plans. Some, like

360networks

and

TyCom

, met early exits when capacity quickly hit oversupply. The remaining players, including

Level 3

(LVLT)

,

Williams Communications

(WCG) - Get Report

,

Flag Telecom

(FTHL)

and

Qwest

(Q)

, have seen their stocks plummet by more than half in the past year, as financing concerns and weak pricing have taken their toll.

"It's the classic recession ripple effect," says Klugman, who has a buy on Qwest and hold ratings on

Sprint

,

AT&T

and

WorldCom

. It starts when residential consumers hesitate to sign up for fast Net access, or when businesses trim back on their telecom capacity purchases. That causes the carriers to shelve network expansion plans and cut capital spending.

This in turn reduces demand for new networking gear from suppliers like

Cisco

(CSCO) - Get Report

,

Lucent

(LU)

and

Nortel

(NT)

. And those companies start canceling orders for components and system parts from outfits like

Corning

(GLW) - Get Report

and

JDS Uniphase

(JDSU)

.

"I don't know where we are in this cycle, and I don't see any immediate signs of a giant comeback," says Klugman. "There's certainly not much expectation for an upturn in the first half of the year, but there remains hope for the second half. Optimists need something to hold on to, and six months out seems like the common time frame."

The Gilder Age

Gilder, who insists that he focuses purely on the value of a company's technologies and ignores investing issues such as earnings or valuations, rarely vacillates about what's ascendant. For a time, at least, that made his picks absolutely fabulous in the go-go era -- and utterly calamitous in the subsequent bear market.

Now, Gilder's personal investment portfolio is clearly suffering. Going by his public disclosures, Global Crossing and

Qualcomm

were Gilder's only two stock holdings as of the end of 2001. And even before Global Crossing's demise, his bets were in trouble: Gilder told Web site readers that as of Dec. 12, his portfolio was down 85% for 2001.

While Gilder has certainly been a solid contrarian indicator through the past few years, not all of his picks have gone belly-up. But in the telecom services sector, he's racked up some real money-losers for investors, including 360Networks, Exodus,

Neon

(NOPT)

and

Metromedia Fiber Networks

(MFNX)

. Some subscribers, clearly miffed by the disappointments, have proposed rather ghoulishly to change the name of the monthly newsletter from

Gilder Technology Report

to Gilder's Bankruptcy Report.

"What we've been saying for some months is that Global Crossing will be a great company if it survives, but we've been frank with people about the challenges to its survival," says Richard Vigilante, publisher of the

Gilder Technology Report

.

For all the blowback Gilder is getting from his followers, he has another, more important constituency to worry about. As one reader posted on the Gilder message board: "GG should be real popular at family reunions and church gatherings."