As the twentieth century was winding down, the riches being racked up by the Renegades didn’t go unnoticed. A wave of business leaders feared they were missing out on the opportunity of their lifetimes. Frustrated executives from large companies made bold moves, while leaders of boring utilities sought to transform their stagnant monopolies into new age Internet giants. Investment bankers became Bandwidth entrepreneurs. Even those who sold out in the first wave fought their way back in.
The laser light carrying communications traffic through the fiber networks was shining bright gold. Fortunes were to be made.
The sale of MFS and Teleport marked the beginning of the Bandwidth Boom Gold Rush. The next three years were euphoric, with the stock market achieving record highs and Bandwidth providers achieving valuations in the tens of billions, often seemingly overnight. Tracking newly minted billionaires was the watercooler chatter.
For a short while, all was playing out according to their grand plans. But like all stampedes for gold, the risk of being crushed lingered in the air. The stampede that started in 1998 would continue into the new millennia. The wild ride was thrilling while it lasted.
The companies discussed in this section are no longer in operation. However, with one minor exception, their assets now belong to one of our four consolidators. The Gold Rush covers their brief years of glory, beginning with the guy who dove in first and deepest, Bernie Ebbers of WorldCom. He ignited the Boom with his $14.3 billion acquisition of MFS.
WorldCom (LDDS)—Bernie Ebbers#
After WorldCom acquired MFS, I spent a week working in its Jackson, Mississippi, headquarters. After days of meetings working on integrating the businesses, we trudged to the local watering hole for an after-work beer.
Bernie Ebbers was there, standing alone despite a number of his WorldCom employees at the bar. The 6’4” Ebbers had long gray hair, paired with a matching silver beard and accented with piercing blue eyes. He was intimidating, even to me. “He likes to drink alone while his team admires him from a safe range,” I was told. I regret that I didn’t walk up to him, introduce myself, and strike up a conversation. Now that I know his story, I suspect he had an unusually large thirst for attention.
Ebbers grew up in the Canadian city of Edmonton and attended the University of Alberta. He lasted only one year, departing because, as he put it, “my marks weren’t too good.” Ebbers transferred to Calvin College but only lasted two years, citing similar reasons: “my marks were not as good as they should have been, and I didn’t know exactly what I wanted to do at that time, or just a little confused about my major.”
Prompted by a basketball scholarship, Ebbers moved near Jackson, Mississippi, to attend Mississippi College. However, his college basketball career was cut short. “In between the first and second year I was mugged by a bunch of hoodlums and in the incident my Achilles tendon was cut,” Ebbers explained. “And when you have your Achilles tendon cut, you can’t jump anymore.” Bernie had a way with words.
After graduating from college in 1967, Ebbers lived in a trailer and settled into the motel business, managing twelve properties while also coaching a junior high school basketball team. During this time, he encountered a tiny reseller of long-distance voice services, Long Distance Discount Services (LDDS), an encounter that would put him on the unlikely path to being a top dog in corporate America. In 1983 Ebbers convened with his three partners at a Day’s Inn coffee shop in Hattiesburg, Mississippi, to brainstorm the first of many expansions and merger transactions the business would make. On this day they decided to extend LDDS service into the rest of southern Mississippi, thus igniting the massive growth years of the business Ebbers would come to rename WorldCom.
At the outset one of the others in that coffee shop held the position of CEO. However, in 1985 WorldCom was $1.5 million in debt and burning $25,000 a month. With confidence lost in the CEO, the investors turned to Ebbers.
WorldCom scraped by on thin margins, profiting from the difference between the retail rates charged to its business customers and the wholesale rates it paid for bulk capacity from AT&T and the local Bell companies. Ebbers kept the overhead costs low while ensuring superior customer service compared with the phone companies. Within six months Ebbers was earning a profit and doubling revenue year over year.
Ebbers saw the opportunity to increase margins by becoming bigger, and he did so by buying other long-distance resellers. He started with small rivals in third-tier markets. Revenue grew to $100 million with profits of $4.5 million.WorldCom purchased Telesphere Network in 1987, Com-Link 21 and Telephone Management Corporation in 1988, and Inter-Com Telephone in 1989. The $35 million spent on these acquisitions expanded WorldCom’s geography to include Missouri, Tennessee, Arkansas, Indiana, Kansas, Kentucky, Texas, and Alabama.
In 1989 WorldCom backdoored its way to public company status by merging with a public company listed on the Nasdaq exchange. This move provided Ebbers with publicly traded stock to use as currency to continue his rollup.
In the early 1990s, WorldCom continued its aggressive expansion by completing over ten acquisitions, including its first major acquisition of a public company.In 1990 Ebbers orchestrated the acquisitions of TeleMarketing Corporation of Louisiana and Mercury for a combined $26 million. The following year National Telecommunications of Austin, Phone America of Carolina, and MidAmerican Communications were purchased for a combined value of $90 million. Subsequent acquisitions in 1992 included Automated Communications, Prime Telecommunications, TFN Group, Telemarketing Investments, Dial-Net of Sioux Falls, and Touch-1 Long Distance in Alabama.
Also in 1992 WorldCom made its first major acquisition of a public company—Advanced Telecommunications Corporation, which served southern Florida and Texas. By late 1992 WorldCom revenue was approaching $400 million, and its stock price hit $40 a share.
In 1993 Ebbers elbowed his way into the three-way merger that included Metromedia Communications Corporation, which was part of Kluge’s Metromedia empire. WorldCom shareholders owned 68 percent of the combined company. To get Kluge to agree to the transaction, Ebbers agreed to name Kluge chairman and also altered the name of WorldCom to incorporate Metromedia’s brand.WorldCom-Metro Communications was the new name. It didn’t last long. WorldCom’s network now reached forty-eight states, with revenue that eclipsed $1.5 billion and a ranking as the fourth-largest, long-distance provider, trailing only AT&T, MCI, and Sprint. Ebbers remained the all-powerful CEO.
Ebbers continued his rollup of long-distance resellers in 1994, spending $900 million to acquire two companies that provided him reach to 150 countries, including a large revenue base in his home country of Canada.In early 1994 WorldCom acquired ACC Corporation for $204 million. Headquartered in Rochester, New York, ACC had significant revenue in Canada. In mid-1994 WorldCom added IDB Communications Group to its rollup. The $700 million acquisition added a strong international voice business that reached 150 countries to WorldCom’s product portfolio. “This is an important acceleration of our strategy to penetrate the lucrative segments of the international market,” declared Ebbers. “But it is only a step.”
Despite dozens of acquisitions, WorldCom had minimal fiber network. Consequently, Ebbers altered his acquisition strategy dramatically over the next few years to build a Bandwidth empire. In late 1994 WorldCom purchased WilTel for $2.5 billion, adding the freshly built national fiber network built in and along the gas pipelines of Williams Group.
In 1996 Ebbers added metro fiber networks throughout the United States by paying a stunning $14.3 billion to acquire MFS. UUNET, the world’s largest Internet Backbone, came along with the acquisition.Interestingly, “Ebbers did not understand UUNET and initially did not want UUNET to be part of WorldCom. He considered putting it up for sale. However, the positive accolades from Wall Street analysts convinced him to retain UUNET.” MFS’s CEO, Crowe, would replace Kluge as chairman.
Crowe jumped at the opportunity to sell, reaching agreement in only one hour. “I didn’t expect him to be as bold and forceful as he was,” Crowe said. “[Building MFS] was a labor of love, and I can’t sell it without having a bittersweet taste. But it’s only a 30-second feeling,” he added, hinting that his $150 million of stock was a more than adequate consolation prize. Chairman Walter Scott’s take was $425 million, and Richard “Rick” Adams, the founder of UUNET, received stock valued at $350 million.
“We are creating the first company since the breakup of AT&T to bundle together local and long-distance services carried over an international end-to-end fiber network owned or controlled by a single company,” Ebbers said.
WorldCom’s stock hovered in the low $20s per share after the deal was announced.
Ebbers wasn’t done. In 1997 WorldCom outlaid $2.4 billion to acquire MFS-copycat Brooks Fiber Properties, adding significantly more metro fiber markets to its portfolio.Robert Brooks launched Brooks Fiber Properties in 1991, initially under the name Brooks Telecommunications. Brooks was able to fund the company using the profits he made as a Cable TV pioneer. The company he founded, Cencom Cable, became the twenty-first largest Cable TV company. He sold it in 1991 to Hallmark. Later, the company became Charter Communications, which was purchased in 1998 by Microsoft co-founder Paul Allen for $4.5 billion.
Brooks Fiber’s strategy mirrored that of MFS, Teleport, and XO but focused on third-tier markets. It expanded mostly by constructing greenfield networks, though its growth was accelerated by a few key acquisitions. Brooks Fiber acquired Michigan-based City Signal and Phoenix Fiberlink. In 1996 Brooks Fiber went public on Nasdaq and, by 1997, operated in forty-four US cities. In October 1997 WorldCom purchased Brooks Fiber for $3 billion, which included $2.4 billion for the equity and the assumption of $600 million in debt. The combination of MFS and Brooks Fiber provided WorldCom with local fiber networks in eighty-six US markets.
Three Brooks Fiber executives would move on to other key industry roles. Brooks Fiber’s co-founder and CEO James “Jim” Allen would be chairman of Xspedius. COO D. Craig Young would become CEO of Canada’s Metronet Communications. Operations executive Mark Senda, an MFS veteran, would team with Allen to co-found and become CEO of Xspedius and team with Young to serve as COO of MetroNet.
Centennial Ventures—Colorado’s oldest Venture Capital firm, whose final investment was Zayo—invested in Brooks Fiber and did exceptionally well in the $2.4 billion exit. M/C Partners, which backed me at both ICG and Zayo, was also a Brooks Fiber sponsor. “The merger will greatly expand our total number of local networks and advance our entrance into more secondary cities,” Ebbers explained in a press release.
The additions of WilTel, MFS, and Brooks Fiber made WorldCom the largest owner of Bandwidth Infrastructure in the United States and, via UUNET, the largest Internet Backbone. On paper, he looked like the winner of the Bandwidth Revolution. The press saw the combination of MFS and WorldCom as particularly noteworthy, as reported by the Wall Street Journal: “The planned merger unites two of telecom’s more respected management teams and their CEOs.” MFS’s head of corporate communications added, “We believe we’re bringing together a dream team.”
As I reflect back, this sentiment captured our mindset as we entered Bernie’s world, though we quickly learned that we were delusional. The first glimpse of something amiss was during the period after the merger transaction was signed but before it closed. MFS executive Kevin O’Hara led a delegation of MFS’s network team to Tulsa to meet with legacy WilTel executives who transitioned to WorldCom. The WilTel team was led by their CEO, Roy Wilkens. I was surprised by how casual and lightheaded they were, poking at our naivety and smirking at our enthusiasm.
“Buckle your seat belts,” they warned us with smiles. “You have no idea what you’ve gotten yourselves into.” This was one of Wilkens’s final meetings as a WorldCom executive.Soon after Roy Wilkens left WorldCom, he became a board member of a start-up named Splitrock, which was founded by WilTel veterans Kwok Li and Bill Wilson. Clark McLeod was also on the board. Splitrock purchased the network of Prodigy, a rival of dial-up Internet providers AOL and MSN.
In 1999 Splitrock went public, raising $100 million at a valuation of $700 million. They used the proceeds to purchase sixteen dark fibers on the Level 3 network.
In January 2000, just five months after the IPO, Splitrock sold to McleodUSA for $2.1 billion, comprising $350 million in assumed debt and the rest in McleodUSA stock. Wilkens joined McLeodUSA’s executive team to lead the newly created data services business unit.
The ill-advised Splitrock acquisition contributed to McLeodUSA’s bankruptcy.
WorldCom completed its purchase of MFS on New Year’s Eve of 1996, naming the combined company “MFS WorldCom.” MFS’s top fifty executives were invited to a kickoff meeting at the posh Ocean Reef Club in Key Largo, Florida.
During our Tulsa visit, we were told that Ebbers would close and lock the entry door to his meetings at precisely the top of the hour. “Get to an Ebbers’s meeting on time or you will be locked out,” we were told. “If you leave to go to the bathroom during the meeting, don’t bother coming back.” We watched the doors to see if this was folklore. Nope, the doors were slammed shut just as the clock hit the meeting’s start time of 9:00 a.m.
Ebbers started out, with Crowe the only person on the stage with him.
Today, we will hear from our new Chairman, Mr. Jim Crowe, who will tell us why he is so excited about the launch of MFS WorldCom. Before I turn the mic to Mr. Crowe, I have a story to share.
Years ago, I took over as CEO of WorldCom, a small reseller of long-distance voice services. I bought a couple dozen small long-distance resellers. I had my eye set on Metromedia Communications Corporation, which had a great presence in the northeast. So I made a generous offer, but Metromedia owner John Kluge declined. I visited him again a few months later with an even higher price. He declined that as well.
Where was Ebbers headed with this story? It was out of context. Ebbers did not leave us hanging for long.
I flew back to Jackson and gave it some thought. I realized it was his ego getting in the way of the deal. He wanted to be in charge. So I flew back to their headquarters for another visit.
“What’s your new offer?” Kluge asked me. I told him the offer remains the same. However, I’d like you to be Chairman of the combined company.
He said yes. So we did the deal and he got to call himself Chairman. I’m not sure what it meant, because he’d still be working for me.
So, getting back to today’s agenda, allow me to introduce you to MFS WorldCom’s new Chairman, Mr. Jim Crowe.
Crowe gave his canned investor speech about the future of Bandwidth but without the passion we had become accustomed to. The attention of the audience was on the Ebbers’s introduction. The MFS delegation was stunned. The WorldCom insiders were smirking as if they saw this coming from a mile away.Bill LaPerch recalled a similar experience that occurred a year later, when Ebbers introduced MCI’s Bert Roberts as WorldCom’s new chairman: “At the first big meeting post-acquisition, with Roberts on stage, Ebbers showed an organization chart with Roberts as Chairman. The only thing reporting to Roberts was MCI’s flight organization. Ebbers told Roberts that his only responsibility was to get rid of the private jets and the pilots ASAP.”
That evening, we joined Bernie on his 150-foot yacht named Aquasition. The boat ride was the last time I saw Crowe in his role of chairman of MFS WorldCom.LaPerch shared a story on how Ebbers used Aquasition to torment executives who fell out of favor: “One of Ebbers favorite pastimes was to invite senior executives who recently sold their WorldCom stock for a trip on his yacht—in many cases, no doubt, to pay for their children’s college education or perhaps family illnesses. Once on Acquasition, Ebbers would fire them, leaving them to spend unwanted time on the yacht, waiting unemployed to return to port with no job.” And that day was the last time Ebbers referred to the company as MFS WorldCom.
As it stood WorldCom was well positioned after its acquisitions of WilTel, MFS, and Brooks Fiber. Its collection of freshly built metro and intercity fiber was the strongest in the nation. Combined with WorldCom’s long-distance services business and UUNET’s Internet platform, Ebbers could have turned WorldCom’s focus to execution.
Instead, he wanted more—a lot more! He saw his opening when the takeover of MCI by British Telecommunications (BT) hit a snag.
In 1994 BT—the UK’s equivalent of AT&T—acquired 20 percent of MCI for $4.3 billion. The two companies formed a joint venture branded as Concert, which would offer multinational customers end-to-end network services managed by one global operator.
Two years later BT agreed to purchase the rest of MCI for $21 billion, which equated to $36 per MCI share, a 44 percent premium to MCI’s stock price. “If BT’s shares hold up, this is a great price,” commented a Merrill Lynch analyst. “It’s an offer that can’t be refused.”
“The companies promised a communications powerhouse with annual revenues of $42 billion and 43 million business and residential customers in 72 countries,” reported the Wall Street Journal.
“This merger creates the premier telecommunications company of the new millennium,” declared Bert Roberts, who succeeded MCI’s iconic founder, William “Bill” G. McGowan, as CEO.
Sir Iain Vallance, the BT chairman who was knighted by Queen Elizabeth and years later would sit in Britain’s House of Lords, would be co-chairman with Roberts. BT’s CEO, Sir Peter Bonfield, would be Concert’s CEO.
“All mergers have surprises, and I’m not going to tell you, because you wouldn’t believe me, that this merger won’t have its challenges,” Sir Peter told reporters at a press conference. He was correct—surprises were percolating.
The first came in the summer of 1997 with the regulatory approval process not yet complete. MCI reported huge losses, causing a 17 percent fall in its stock price and a $5 billion drop in Market Value. “This is a bomb, a major bomb” was how a Lehman Brothers’ analyst characterized MCI’s disclosure.
BT pressed for a price reduction. In August a revised agreement was announced with the $21 billion price being lowered to $18.9 billion. “We’ve survived the jolt and moved forward,” Sir Peter said in a news conference. Sir Iain piled on: “It could well be best for the MCI shareholders to have a smaller slice of a bigger cake.”
The second surprise was foreshadowed by a faulty phone connection.
US journalists participated in BT’s London news conference via a phone connection. “It never worked,” reported the Wall Street Journal. “One reporter tried three times, but her voice came out hopelessly garbled, with red-faced executives struggling to piece together the question. On a fourth attempt, there was nothing but silence from across the Atlantic.”
“That’s not an omen at all,” Sir Peter insisted. He was soon to be proven wrong.
MCI shareholders approved the higher-priced deal. However, for the recut deal to proceed forward, shareholder approval was again required. This created an opening for Ebbers, and he drove his muddy pickup truck through it. WorldCom launched a $30 billion unsolicited bid, causing unwelcome noise to the once-harmonious transatlantic Concert. The $41.50 a share easily topped BT’s $34 agreement. Though WorldCom’s $7 billion of revenue was far less than MCI’s $20 billion, WorldCom’s shareholders would own more than 50 percent of the combined entity.
BT was in a pickle. The British telecom giant already publicly acknowledged its first bid was too high. Responding with an even higher bid would be hard to explain to BT’s public investors.
MCI’s board also faced tough decisions. The merger agreement prohibited the MCI board from entering discussions with WorldCom until and unless it concluded that WorldCom’s offer was more favorable from a financial and strategic point of view. Though WorldCom’s offer appeared materially higher, the form of currency was WorldCom stock, not cash. BT’s offer as well was mostly in the form of stock. This meant that the board needed to evaluate which offer was truly superior, with due consideration to the relative strengths of each merged entity.
Would WorldCom-MCI or BT-MCI be a better company? Did one combination have more equity upside than the other? Which was riskier?
A unique complication was BT’s 20 percent ownership stake in MCI and the duo’s Concert alliance. Would BT elect to sell its 20 percent to WorldCom and end the Concert alliance with MCI? How should MCI’s board factor this into their valuation comparison?
The merger agreement spelled out the process that was to be followed if an unsolicited offer was made. The MCI board was required to inform BT whether it planned to terminate their deal and recommend the alternative offer to MCI shareholders. This presented another dilemma to MCI’s board. MCI would owe BT a $450 million breakup fee if the MCI board pulled out of the deal. However, if the BT merger was rejected by shareholders, the breakup fee would not apply.
As if Hollywood were writing the script, bad blood was also top of mind. Less than a year before the takeover battle, MCI shut down services in Jackson, Mississippi, over a billing dispute with WorldCom, leaving Ebbers and many others unable to make long-distance calls. The service was restored only after WorldCom paid a $41.5 million settlement to MCI. “How could WorldCom be more valuable than MCI?” must have been the angry comments ringing in the hallways of MCI’s headquarters.
Ebbers called Sir Iain to support WorldCom’s bid, roll BT’s MCI ownership stake into WorldCom, and invite WorldCom into the Concert alliance. Sir Iain’s cold British reply was that BT would respond at an appropriate time. A BT spokesperson called the conversation “brief but cordial.” Two days later the same BT spokesperson said, “This has a hell of a way to go before this thing is over.”
The following month brought another quake: GTE, made renegade by its purchase of BBN in 1997, lobbed in a $28 billion all-cash offer for MCI, along with expressing a willingness to substitute stock for cash if MCI or BT so preferred. If accepted, the transaction would be the largest all-cash acquisition in the history of business.
GTE’s CEO, Chuck Lee, explained his strategic reasoning: “This is a great target of opportunity. MCI jump-starts our strategy. We can still go it alone, but with MCI, we can move to where we wanted to be four to five years sooner.”
GTE’s all-cash offer commanded the full attention of MCI’s board. A $28 billion cash bird in the hand could be better than WorldCom’s all-stock $30 billion bird in the bush.
Lee said he would be thrilled if BT became a partner. “They’re an excellent institution. There are tremendous opportunities for us in the global arena,” Lee told the press. BT was believed to be favorable to GTE but not so keen on WorldCom.
Ebbers responded by raising his bid, this time to $37 billion. It was poised to be the largest merger in the history of business. Roberts would chair the board, and the merged company would be renamed MCI WorldCom. MCI’s stock price rose to $41.50.
Lee considered responding but chose not to. WorldCom’s stock price fell to $31, reflecting its investors’ disappointment that the bidding war was ending. Conversely, GTE’s stockholders were pleased that Lee backed down, as evidenced by GTE’s stock price jumping up to $45. BT was happy as well, as it collected $7 billion for its 20 percent MCI ownership, plus an extra $450 million for the breakup fee.
“We have aligned ourselves with a management team and employees who share our entrepreneurial spirit and continue to pioneer competition in our industry,” declared Ebbers.
Roberts chimed in, “In combining our unique strengths—our agility, innovative approach and competitive skills—we will be a new era communications company.”
The deal required the approval of both the US Justice Department and the European Commission. To satisfy regulators, WorldCom agreed to sell MCI’s Internet business to Cable & Wireless for $1.75 billion, a low price for one of MCI’s most valuable assets.
When the acquisition finally closed in September 1998, WorldCom’s vice chairman, Sidgmore, lamented, “It has been a very long struggle.” Was it worth it? The price paid was a gigantic premium to MCI’s share price. The Concert joint venture was terminated, opening the door for AT&T to knock out MCI as BT’s global partner. The highly valued MCI Internet business was sold.
Did Bernie win the bloody battle but lose the war?
When the FCC approved WorldCom’s acquisition of MCI, the FCC chairman warned that the telecommunications marketplace is “just a merger away from undue concentration.” Ebbers heard the message, telling investors, “The regulators told me not to come back with another big one.”
But Ebbers couldn’t resist.
WorldCom’s stock ascended significantly in the two years that followed the MCI merger. In June 1999 WorldCom’s shares peaked at $62, translating to a Market Value of $115.3 billion.
Despite warnings from the FCC to lie low, Ebbers lusted for an even grander transaction, and that October, a mere four months after indicating he would heed regulators and stand down on further big deals, he used WorldCom’s bloated stock as currency to interlope on an in-process acquisition of Sprint by Baby Bell BellSouth.WorldCom pursued an acquisition of the mobile carrier Nextel in 1999. John Sidgmore confided to John J. Keller, a former Wall Street Journal reporter turned CEO headhunter, that Ebbers pulled out of the acquisition on the day the purchase agreement papers were to be signed. Sidgmore said he had put together the deal. Recounting the story in 2024, Keller relayed to me: “Sidgmore told me that he and Ebbers were due to go to Nextel and meet with Nextel leaders to sign the papers. He went to Ebbers’s office and said, ‘Hey, Bernie, c’mon, we have to get going. [Nextel’s] expecting us soon.’ Sidgmore said Ebbers answered, ‘I’m not doing that fucking deal. Forget it.’”
Sprint was the third-largest, long-distance provider and was one of the largest wireless carriers. WorldCom’s bid of $115 billion, three times the amount WorldCom paid for MCI, was successful. All that remained was for Ebbers to convince the regulators to approve the transaction.
“Telecom is about scale, scale, scale,” said an analyst. “It’s no longer a national playing field. It’s a global playing field. . . . The game is ‘Clash of the Titans.’”
In WorldCom’s case it became “Crash of a Titan.”
Analysts were stoked: “[WorldCom/Sprint] would be the largest of any telephone company in the world,” said one. “It’s the most attractive set of assets that any carrier has.” Not to be outsold: “We believe that as in past deals, now is the best time to buy WorldCom shares,” coaxed another analyst, “after they drop due to merger news, but before merger benefits are given weight in the market.” Shilled a third, “We believe WorldCom’s current valuation level represents an attractive entry point into one of the premier telecom companies.”
Regulators begged to differ: In June 2000 they followed through on their stern warning to Ebbers, and the US Justice Department filed suit to prevent the takeover. The European Commission announced it, too, would block the merger on anticompetitive grounds.
Ebbers’s feistiness began to ebb. He had spent nine months pursuing approval from the government. Fighting the regulators would take at least another year when WorldCom’s stock had already fallen by 30 percent from its high. The companies pulled the plug on the WorldCom-Sprint merger. WorldCom’s shares climbed 8 percent on the news, but its $48 a share price was well off its $72 high two years earlier.
Despite the failed merger, Ebbers the gambler was unbowed. In fact, he was steaming. And for those not familiar, steaming is a Texas Hold’em expression for a player who overreacts to a cold streak by betting recklessly on subsequent hands. Ebbers, fatigued by the Sprint failure, forced a deal with regional long-distance company Intermedia Communications,Intermedia Communications provided local and long-distance services to ninety thousand customers in fourteen cities over its two-thousand-mile network in the Southeast. The debt-laden Intermedia put itself in play earlier in the year when it revised revenue guidance and was exploring strategic options. which included a majority stake in the web hosting business Digex.Intermedia owned a majority stake in the web hosting company branded as Digex. The spark for WorldCom’s acquisition of Intermedia was a call from Global Crossing CEO Gary Winnick to Bernie Ebbers, letting him know he was about to buy Digex. For reasons that were entirely baffling to Sidgmore, Ebbers determined he needed to outmaneuver Winnick. Ebbers steamed into buying Intermedia for $6 billion, with the transaction closing in early 2001. WorldCom’s stock dropped by 17 percent when the deal was announced. Intermedia gave Ebbers majority control of Digex, which he intended to use to force the rollup of Digex into WorldCom. Digex minority shareholders challenged the transaction. Their case was strong, as a special committee of Intermedia’s board that was set up to protect Digex’s minority shareholders voted against the WorldCom deal. To settle the lawsuit, WorldCom gave Digex shareholders an additional $165 million in WorldCom stock while also providing Digex a $900 million loan. Regulators remained feisty. They forced WorldCom to sell the vast majority of Intermedia’s remaining assets. WorldCom had trouble finding a buyer. Ebbers’s final acquisition was perhaps his worst.
WorldCom vice chairman John Sidgmore was blunt: “That is the stupidest deal of all time. We paid over $6 billion for a company that’s worth maybe $50 million.”
In April 2001 WorldCom disclosed it was paying a $10 million bonus to Ebbers. This seemed odd, as WorldCom’s stock price had dropped to below $20 a share. He was also awarded 1.2 million in stock options.
WorldCom also disclosed that Ebbers was forced to sell three million shares to cover a margin call on WorldCom stock. Ebbers had sold about 1.2 million shares of WorldCom stock for a value of $23.5 million. Additionally, WorldCom provided $100 million in loans to Ebbers. He explained the loans were to help cover the margin call so he wouldn’t have to sell more WorldCom shares, which could hurt the stock price.
Ebbers also signaled a for-sale sign by saying multiple times that he would support an acquisition of WorldCom for the right price. Verizon and SBC nibbled at the bait but didn’t bite.
“Verizon and SBC may have also been scared by WorldCom’s accounting practices, according to some telecommunications executives. Some investors and analysts have worried that WorldCom has used aggressive accounting techniques in the past, particularly in reporting revenue,” reported the New York Times in February 2002*.* “[More serious concerns], unsubstantiated thus far, [are that] WorldCom may be more aggressive than its peers in recognizing revenue.”
An analyst said, “There was some rumbling in the investment community that they may have done some things with the accounting in order to make their numbers.”
WorldCom’s Titanic-like iceberg was looming. The company’s stock price sank to single digits. The next few months would be a cascading series of events and discoveries that would reveal one of the largest scandals in the history of business.
Whether the Bandwidth industry knew it, the crash had begun, and WorldCom was to take center stage.
Level 3—Jim Crowe and Kevin O’Hara#
The Gold Rush welcomed a new entrant, Level 3, led by a familiar name: Jim Crowe.
I am certain Crowe’s sale of MFS to WorldCom was prompted by the fear he would soon disappoint Wall Street. Maybe he believed he was entering a long-term partnership with Ebbers. If so, the WorldCom onboarding must have been a thunderbolt to Crowe, as he listened to Ebbers making it clear to the room full of executives that Crowe was chairman in title only.
It may have been this humiliation that motivated Crowe to dive back in and become bigger and better than Ebbers. He was compelled to finish what he started at MFS. Crowe partnered again with Walter Scott of Kiewit, who did extraordinarily well when he backed MFS. Scott rinsed and repeated, backing Crowe again and bracing for another rewarding strike of lightning.
Crowe teamed up with O’Hara to lead the business. I joined shortly thereafter. Though I think of myself as the fourth person to join, this technically wasn’t true, in part because my separation from WorldCom would take multiple weeks to maneuver. In any case I was the first noncorporate, non-Omaha, and non-unemployed executive to join.
I worked out my deal directly with Crowe, as O’Hara’s non-solicit agreement with WorldCom prevented him from hiring me. What made my decision easy was the sign-on bonus of $500,000 to be part of Crowe’s yet-to-be-named start-up, which had yet to formalize on a business plan, but which had $2.5 billion of assets to invest.To fund Crowe, Kiewit put him in charge of Kiewit Diversified Group, a $2.5 billion collection of noncore businesses, such as an energy provider, coal properties, and a private toll road, that Kiewit accumulated over the years. Crowe’s task was to monetize these KDS investments and redeploy the money to build another fiber network provider. I, too, was eager for another bite at the apple.
When I joined, dozens of others followed. We handpicked the strongest. We reassembled our band.
WorldCom’s attorneys pulled out my MFS employment agreement, preparing to sue me for violating my non-solicit agreement. I imagine they were disappointed to find O’Hara’s signature representing MFS, but the line over my name was blank. I hadn’t countersigned the non-solicit, thus making it irrelevant.O’Hara got sued by WorldCom over numerous noncompete and non-solicit violations, including hiring me. O’Hara prevailed. The court dismissed all charges against him.
This was when I learned my original MFS offer letter said that I’d be eligible for pre-IPO stock options, which I never received. Shame on me for not paying more attention. Shame on MFS for not following through. In all the excitement of building MFS, we overlooked some important details.
Crowe turned his attention to how best to brand this new venture. True to his engineering background, he followed his technical instincts. The Open Systems Interconnection model was developed by the International Organization for Standardization in the late 1970s to “provide a common basis for the coordination of standards development for the purpose of systems interconnection.” Layer 3 is the network layer, which matched up with Crowe’s vision. So we settled on L3 Communications.
Oops. This name was already taken by another business. That’s okay. “We will buy them out of their name,” we all said with bravado—a hint of arrogance building among us. In fact, L-3 Communications was a multibillion-dollar aerospace spinout of Lockheed Martin. As Mo Green said to Michael Corleone, “I buy you out. You don’t buy me out.”
We went with plan B: Level 3 Communications!
Crowe viewed a split headquarters as a factor in MFS’s organizational dysfunction. This time he insisted we all needed to be together in one city. But what city? Crowe and his corporate lieutenants lived in Omaha. O’Hara and I, along with most of our recruits, lived in Chicago. Crowe was not moving to Chicago, and we were not headed to Omaha.
To resolve, Crowe commissioned a study to identify the best place to build a fiber and Internet company. Boston, Northern Virginia, Silicon Valley, and Colorado were the finalists.
East Coast Internet talent wouldn’t move to the West Coast, and Silicon Valley talent wouldn’t move to Boston or DC. Most, however, would consider Colorado. It was a beautiful place to live. A new international airport was under construction. Colorado was the home of the entrepreneurial Cable TV industry. Unlike the coasts, Colorado had limitless space to scale.
We selected Colorado, specifically Interlocken, a new business park close to Denver and even closer to Boulder.
When it came time to announce the birth of our company, Crowe did so with a splash, headlining *USA Today’*s business section on April 1, 1998. Yes, you read that correctly, Level 3 was announced on April Fools’ Day, underscoring Crowe’s flair for the dramatic.
The headline was “Fathers of Invention: How Level 3 Worked Its Way to the Main Floor.” Warren Buffett, Bill Gates, Walter Scott, and Crowe adorned the cover page. The article told of Buffett’s 1995 retreat in Dublin for thirty of his billionaire friends. Gates gave a presentation on the Internet that caught Scott’s attention. “My gut feeling was, if you weren’t part of it, you were going to be left behind,” Scott was quoted.
Upon Scott’s return to Omaha, he debriefed Crowe and inquired on the implications to MFS, emphasizing, in Crowe’s words, “Anytime anyone’s told him there’s a risk, there’s always been an opportunity.”
MFS launched Project Silver, with the team visiting twenty to thirty ISPs. This led to MFS’s acquisition of UUNET for a stunning $2 billion.
Then came the April Fools’ Day announcement: “Today, Level 3 is listed for the first time as a public company on Nasdaq. It begins life with a Market Value of $10 billion and a loud buzz.”
Level 3 did not raise money in the IPO. Instead, it transferred its 147 million KDS Class D shares from an over-the-counter bulletin board to Nasdaq. My $500,000 of KDS stock was now worth more than $2 million.
The Wall Street Journal and others in the industry were watching to see if Crowe would “make lightning strike twice.” One analyst said, “Crowe struck gold last time out. . . . He’s trying to recreate that miracle.” Another added, “It’s going to be a fantastic company, but now the Market Value is out of control.”
Crowe was unfazed. “Hopefully, our track record has something to do with it,” he countered about Level 3’s outsize valuation.
The Gold Rush madness pushed new entrants to make proclamations, one-upping their rivals. Crowe, with no shyness, announced his strategy was to build the first global system of Internet-based local and long-distance networks, challenging aging phone companies in major markets. “Moore’s Law has come to communications,” Crowe said, referencing the Intel co-founder Gordon Moore’s observation that semiconductor performance roughly doubles every eighteen months. “The current phone networks in place date from the turn of the century and were designed to handle primarily voice,” Crowe said. IP technology promised far faster transmission and lower operating costs than the legacy networks of AT&T and the Baby Bells.
Crowe had conviction on the competitive landscape: “For as far as the eye can see, the real competition is between the new entrants and the older companies.” This proved to be misguided, as competition among new entrants turned out to be the big obstacle.
USA Today fed the drama, reporting Ebbers as a “dangerous enemy” to WorldCom’s rivals and suggesting Ebbers remained rankled by Crowe’s leaving WorldCom just three weeks after the close of their deal and then enticing me and others to join his new Level 3 venture. “WorldCom would like nothing better than to bury Level 3 in the marketplace,” USA Today reported.
USA Today included Qwest in its soap opera. Crowe, who was put on Qwest’s board by Anschutz, told the newly hired Nacchio he might start a competing business. When Crowe picked Colorado for Level 3’s headquarters, Nacchio quibbled, “Jim asked me, ‘What is the best place to locate a company?’ I said Denver. I didn’t know he was going to be a direct competitor. If I’d known that, I would have said Pennsylvania.” Nacchio also suggested Crowe “was pursuing a ‘copycat strategy.’”
Adding to the drama was USA Today’s foreshadowing of Level 3’s disruption to the entire telecommunications industry.
[Level 3’s] business plan, if correct in its assumptions, could drive down the cost of long-distance phone calls to almost nothing and hasten the decline of the big phone companies.
Crowe is betting that the dominant networks of the world—the ones that carry phone calls using circuit-switching technology based on a 100-year-old design—are dinosaurs.
The article finished with a consultant’s quote that was thrilling for me to read at the time but chilling as I reread it twenty-five years later. “It’s a dream team with a dream network and a killer business plan. Just as long as they don’t screw it up.”
Before the move to Boulder, the majority of our team worked out of an office building in a suburb of Chicago. Our office space was divided in half with tape, reminding us that our rent covered only the west side of the vacant floor.
In an era where office size mattered, O’Hara had the biggest office, and mine was the second largest. All the network responsibilities were assigned to me. With the hoopla behind us, it was time to get to work. What, though, were we supposed to do?
At the time of Level 3’s unveiling, the Wall Street Journal wrote, “[Level 3’s] backers are hoping . . . that Level 3’s novel technology will be a hit.” I wondered what technology the journalist was referencing.
“Level 3 wants to spend $3 billion developing a national fiber-optic telephone network using Internet-protocol technology to send voice, data, and video over the same lines with lower costs,” explained the Wall Street Journal. That shed some light on the aspiration, but the question of how lingered.
We needed answers so that we could begin to execute on whatever it was we were going to build.
I had a restless week. The network team was looking toward me for guidance. Toward the end of the week, I decided it was best not to fake it. “Just ask others what they think” was my path to a solution.
So I asked the two members of my senior team. They both said, “I thought you knew and just weren’t ready to reveal it to us.”
On Friday I approached O’Hara. He was COO. Surely he would know. Nope. He, too, didn’t have the answer.
I didn’t sleep well that Friday and Saturday night. We had $3 billion in funding, the cover story in USA Today announcing our arrival, and no concrete idea of what to do.
On Sunday a lightbulb flashed. I drew pictures, documented call flows, and showed how phone call revenue and costs would pass between customers, local carriers, long-distance carriers, and the new breed of carriers—Voice over Internet Protocol providers—that used Internet technology for phone calls. I mapped how the IP would insert itself into the public switched telephone network and forever change the way traffic flowed. I called it the SS7 to IP Operating System (SIOS). I was excited and anxious to reveal this to my colleagues.
First thing Monday morning, I showed it to my team. As key team members on the MFS co-carrier effort, they had the technical and business background to understand the details. They knew immediately that this was the answer.
I showed it to O’Hara. His reaction was less certain and noncommittal. He decided the two of us should fly to Omaha to see Crowe.
A few days later, Kevin and I sat down with Crowe in his Omaha office. His right hand for corporate marketing was at his side, both still giddy from the USA Today article. I walked Crowe through the slides, showing how calls and cash would flow between our IP network and the Bell system. At the end he just chuckled and said something dismissive like, “Keep up the good work. It will lead to something useful down the road.”
As we waited for our return flight to board at Omaha’s Eppley Airfield, O’Hara asked, “How did you think the meeting went?” “Horrible,” I answered while wondering if I should have clung to WorldCom.
“Don’t be so hasty. Crowe likes to absorb new information before reacting,” said O’Hara. He added, “I suspect we will hear from him soon.” Did he know more than he was letting on?
Two days later Crowe called out of the blue. “I was looking at the SIOS materials. I think you are onto something. This is what we need to build.”
A few months later, we hired a young engineer at MCI who was working on how to use IP to route phone calls. From his MCI long-distance vantage, he did not understand the local carrier business. I showed him the SIOS material during the interview process, and he said, “Oh yeah, I call that a softswitch!” He joined us, wrote a patent for the softswitch, and led its development and deployment. Managed modem service, which was enabled by the softswitch, became the biggest source of revenue and cash flow during Level 3’s first seven years.
While we had the patent on softswitch, a company called XCom Technologies, run by Shawn Lewis, had a head start on us. Lewis, to put it mildly, was an interesting character. In his early twenties, he pleaded guilty to writing a series of bad checks and served a year in jail. The charge “was supposed to be expunged,” Lewis said.
Lewis’s grandfather bought him a build-it-yourself computer kit when he was thirteen. Lewis had an aptitude for computer programming. When he was released from prison, he partnered with a Boston businessman and co-founded XCom Technologies. From a strip club in Boston, Lewis wrote software that terminated dial-up modem traffic to the local telephone companies, generating a steady stream of cash flow for delivering these calls to Baby Bell NYNEX. Lewis was still in his twenties, and yes, he claimed to write the software while hanging out in a strip club in Boston.
Soon after Level 3 went public, Crowe stumbled across XCom, noting that what they built was the first commercially deployed version of what we called the softswitch.XCom’s architecture required a traditional circuit switch. Crowe concluded that Level 3’s and XCom’s engineers could eliminate the circuit switch from the architecture and thereby create the first true Softswitch. Our teams achieved this vision, and the multimillion-dollar circuit switch was now unnecessary. Level 3 sold the switch to Focal Communications, a start-up led by my MFS and Ameritech colleague Robert “Bob” Taylor. Crowe offered XCom 1 percent of Level 3’s stock—worth about $165 million. They accepted in a meeting that was said to last about five minutes.
“XCOM holds the rights to technology which provides key components of the bridge necessary to fully interconnect the public-switched telephone network with new networks based on the Internet Protocol, or IP” was the Wall Street Journal’s takeaway from Crowe.
“This bridge will allow Level 3 to offer a broad range of communications services, including voice and fax services, to customers at lower cost and over time with new features and enhancements,” Crowe explained. “Moreover, customers will be able to enjoy these benefits using their existing telephone equipment and without changing dialing patterns or adding additional devices.”
So Crowe was listening to me when I explained my SIOS concept.
I was told Lewis would report to me. Soon after the acquisition closed, Lewis visited Boulder. An engineering team that joined us from Internet MCI was charged with rewriting XCom’s software to industrialize it, allowing us to scale across all our geographies. We had a productive week of meetings. Knowing Lewis liked to party, a colleague and I hosted Lewis for a night out at Juanita’s, the infamous taco and margarita hangout on Pearl Street in Boulder.
“We were drinking a lot. Dan snuck a hundred dollars to the waitress, asking her not to put tequila in our next drink,” recalled my colleague. “When we tasted alcohol in the next round, the waitress explained, ‘Your friend Shawn trumped you by giving me $200.’” My colleague and I hung with him until the joint closed.
On Friday he said goodbye as he headed to the airport with his girlfriend, who had joined him on the trip. On Monday he didn’t call into the staff meeting. We didn’t hear from him on Tuesday and Wednesday. On Thursday I called his Boston office and prodded one of his engineers until he spilled the beans. “When Shawn’s flight out of Denver was delayed, he decided to fly to Alaska instead of Boston. From there, he and his girlfriend jumped on a cruise.”
“Where is he now?” I asked.
“Shawn met a girl on the cruise. His girlfriend got upset. Shawn had a helicopter pick her up from the boat, and he stayed on the cruise. That’s the last we heard from him.”
Lewis was about 6’1” and hit the gym hard. He liked wearing tight shirts that showed off his muscles. He was a control freak. Lewis kept the master version of his XCom software on a server under his desk in his locked private office at XCom’s headquarters in Boston, which was nearby but no longer in the strip club. If the server went down while Lewis was MIA, we were totally screwed.
A week or so later, we heard that Lewis was back in Boston. I had a colleague join me on a surprise visit to Boston on Level 3’s private plane. We showed up to the XCom location unannounced and walked into Lewis’s private office. I told Lewis we would be taking the server with us back to Boulder. Lewis stood up, put his chest into mine, and neither of us said a word while my colleague disconnected the server and took it to our black SUV. That was the last time I ever saw him.
Lewis moved to Miami’s South Beach. He met a former Miss Hawaiian Tropic and then-current Miami Dolphins Cheerleader. Within weeks of meeting her, he bought her a $30,000 six-carat diamond ring, and she accepted his marriage proposal. He arranged for a $1 million wedding on a private island. As the wedding day approached, they had a spat, and the wedding was canceled. The island bash money was already spent, so Lewis threw a party without her. The festivities included eight hundred oysters, four kilos of beluga caviar, rivers of champagne, dwarfs dressed as jesters, and women in mermaid costumes. O. J. Simpson was among the guests. Deborah Norville covered the story on Inside Edition in an episode called “The Million-Dollar Wedding with the Surprise Ending.”
A few weeks later, Lewis convinced Miss Hawaii to marry him. During the honeymoon they split up again for good. The terms of the prenuptial agreement were sealed in a court settlement.
Lewis bought multiple clubs in Miami, including the Krave Nightclub, the Living Room, and the Red Lounge. Florida’s Division of Alcoholic Beverages and Tobacco and Department of Revenue crashed his clubs after being tipped off about his ten-year-old felony conviction in New Jersey. He sold his clubs soon thereafter.Shawn Lewis returned to telecom, applying his software engineering skills to several voice companies. According to LinkedIn, he was chief technology architect for TTEC Holdings in 2023.
In the end XCom turned out to be a great acquisition for Level 3. We rewrote the code, used our knowledge of local interconnection and our fiber networks to build the nation’s largest managed modem termination network, and raked in millions of dollars a month of high-margin revenue that was instrumental in keeping Level 3 out of bankruptcy during the industry’s meltdown.
The softswitch and managed modem service were a sideshow to Level 3’s main story, which centered on fiber. In April 1998 the Wall Street Journal published “Surge in Internet Optimism Fuels Decade’s Biggest Junk-Bond Deal,” which covered Level 3 completing a “blockbuster $2 billion bond deal.” A Yankee Group analyst said Level 3 “has not only a ‘Dream Team’ but also extremely deep pockets going for it.”
The construction of fiber networks was the main thrust of Level 3’s business plan. Crowe determined intercity networks were more important than metro this time around, though later we also built metro fiber networks.
These weren’t novel thoughts. Qwest, Broadwing, and others were already building a new national fiber network. AboveNet, MFS (now part of WorldCom), Teleport (now part of AT&T), XO, and others were deploying metropolitan fiber networks.
So what would make Level 3 unique? Crowe changed the focus from fiber to conduits, with a vision that a multi-conduit network would allow for future proofing. Fiber technology would improve every few years, Crowe reckoned. To prepare for these continuous technological advancements of fiber, Level 3 would build multiple conduits and keep all but one vacant for new fiber technologies. Over time, according to Crowe’s hypothesis, other fiber networks would become economically obsolete by quickly and cost-effectively pulling new generations of fiber through the empty conduits.
“Our goal is not simply to deploy one generation but to build an entirely new model that assumes technology will change quickly, and at times, unpredictably,” Crowe said.
The question was, How many conduits were needed? Crowe hired operations research scientists to answer this seemingly all-important question. The Project Max team built wickedly complex optimization models that hinged on entirely unknowable assumptions and, not shockingly, confirmed Crowe’s intuition. Six was optimal.
Then Qwest claimed they would be able to put two fiber cables in each of the three smaller tubes (innerducts) that were tucked in its larger tube (duct).
At Crowe’s urging, our operations research scientists studied the problem more. The unknowable assumptions were tweaked. Now the answer was conveniently twelve, which also provided extras for leasing or swapping with rivals.
The cost of the network went up materially from these added conduits. In expensive build geographies (e.g., cities, river crossings, and mountain passings), construction methods were more limited. For this and many other reasons, the construction costs were going up and up. The initial estimate for the nationwide build was $3 billion. We spent in the vicinity of $5 billion.
This period, 1997 through 2000, is a thick Gold Rush fog for me, and I was working nonstop. I built up an organization of hundreds of people in the United States and Europe. We hired Kiewit to be our general contractor. We built fiber networks that connected the major cities of the United States and another one connecting those of western Europe. We also built metro networks in most of the major cities.
On top of that, we built a tier-one Internet Backbone that soon eclipsed all others. And we built data center facilities in most of the big cities.
We deployed a vast softswitch network with an interconnection network that made us a local exchange carrier throughout the United States. We used this network to provide managed modem services, becoming the largest network for connecting consumers and businesses to the Internet.
In a sign of confidence, Level 3 executed a 2:1 stock split in July 1998.
The following May, Crowe announced plans to sell four thousand of his shares a day for the next 250 days. Assuming the price remained steady, this sale of one million of his eleven million shares would amount to $85 million of proceeds. Instead, the stock doubled over the next ten months, reaching its peak of $130 a share in March 2000. Between 1999 and 2001, Crowe sold $115 million of stock.
I should have pulled my Bandwidth Boom head out of the fiber trenches we were digging and dumped all my vested stock. Instead, I held, which, as we will see, proved to be a costly mistake.
Around the turn of the century, 70 percent of Level 3’s organization worked for me. The network organization, which included network planning, construction, engineering, and operations, reported to me. As we looked forward, this would undoubtedly evolve. Sales professionals, marketing and product development, information technology, and corporate would grow faster than the network organization. Still, if unchanged, my scope would represent 50 percent of the company.
In late 1999 Level 3 decided to do a major reorganization to prepare for commercialization. Crowe’s vision was to create a matrix organization. Each region—North America, Europe, and Asia—would have its own president. Most of the network organization would report to the regional president. I was assigned to be the group vice president of Global Network Services. I would be “dotted line” responsible for the network.
I don’t think it is a self-serving exaggeration to say I contributed as much as anyone, other than, of course, Crowe, during Level 3’s first three years. Yet the new organizational plan placed me in an untenable role as an influencer. Though I remained in one of the senior-most positions on the organization chart, this didn’t sit well with me.
In hindsight I should have just gone along with it. I should have slowed down, enjoyed the reduced workload, and focused on my family. I should have sold the $65 million of my stock that was already vested. And I should have enjoyed watching others work hard while the remaining $65 million or so vested. Then I should have quit, bought an oceanfront home in South Beach, and acquired the Miami nightclubs that Shawn Lewis was forced to sell.
That, unfortunately, wasn’t how I played the cards. I lasted in the role for less than a year and hated every moment. From the dotted line role, I couldn’t drive execution. I watched as others less competent than me chipped away at what I had created. I became an unpleasant distraction to the senior team.
I requested to be removed from the role. The logical conclusion would have been for me to leave Level 3. Instead, Crowe created a position for me to take a deep dive into how Level 3 could scale. I hated this as well, but I learned a lot about systems, data, and processes that I applied for the rest of my career. Yet my role as an annoyance to the senior team intensified.
Mid-2001 was upon us. The Bubble was beginning to burst, and Level 3 was in full panic mode. The only good news was my time-out was about to end, and I once again was to become one of the most important executives at Level 3.
Global Crossing—Gary Winnick#
Next up is the crazed story of Global Crossing and its investment-banker-turned-Bandwidth giant, Gary Winnick. He sniffed out the Gold Rush and became a leader of the Boom stampede.
“For most of his 56 years, Gary Winnick’s life followed a storybook plot: a kid from humble circumstances vaults, like a Horatio Alger character, into the upper tiers of American business and wealth,” wrote the New York Times in its 2004 article titled “A New Legal Chapter for a 90’s Flameout.”
Winnick’s father died when Winnick was eighteen years old. “Two hours after dinner he . . . went to his Thursday night card game [and had a heart attack],” Winnick told the Times reporter. “I got the call. My mother handed me his [diamond-and-ruby wedding] ring that night and I’ve worn it ever since.”
Winnick commuted to a nearby college while working to help with school and family expenses. After graduating with an economics degree, he became a furniture salesman. A few years later, he transitioned to Wall Street, becoming a successful bonds salesman. Then he opened up an investment firm in Beverly Hills, pounced on a big investment idea, founded a company, raised $20 billion in debt and equity, took his company public, saw its stock value rise to $47 billion, and watched his net worth skyrocket to $6 billion.
Alas, the above summary left out some salacious details, including the un-fairytale ending.
The juice behind Global Crossing was junk bonds. Drexel Burnham Lambert was the Wall Street firm that launched Winnick’s financial career. Winnick started as a salesman on the bond desk. His associate was none other than Michael Milken, who was on his way to become the king of junk bonds.
Milken was the visionary who pioneered the lending of large sums of money to support high-risk ventures. The high-yield loans became known as “junk bonds” and became a major funding source to support the build-out of Cable TV, mobile, and fiber networks. Milken, who ran Drexel’s high-yield bonds business, further rocketed the use of junk bonds to fuel corporate takeovers and to fund the build-out of the cable and cellular empires. Den of Thieves and Barbarians at the Gate: The Fall of RJR Nabisco, two of my all-time favorite books, chronicle the junk bond era. These junk bonds were risky and, as such, carried much higher yield rates than traditional corporate debt.
When Milken moved his junk bond operation to Beverly Hills, Winnick followed. Before long, Drexel’s relentless ambition and perpetual success led to SEC investigations of Milken. In 1989 Milken was accused of insider trading and related crimes, which led to him pleading guilty to securities fraud. He served twenty-two months of a ten-year sentence, paid $600 million in fines, and was barred for life from the securities industry. Milken was pardoned by Pres. Donald Trump in 2020.Following his release from prison, Milken has dedicated his life to philanthropy for education and medical research through his Milken Family Foundation and the Milken Institute think tank. His contributions to cancer research and educational reform are particularly noteworthy.
Winnick, who prospered at Drexel, received immunity after agreeing to testify against Milken.
Winnick left Drexel in 1985 and launched Pacific Capital Group. In the March 2002 article “The Rise and Fall of Global Dreams,” the New York Times outlined two foreshadowing transactions: RB Furniture and Ortho Mattresses. In both, Winnick might have profited by selling his interests a few years before the companies filed for bankruptcy.
In 1996 Winnick targeted AT&T. “I knew the company was in turmoil. I thought there might be some crumbs swept off the table that would be good opportunities,” Winnick said.
AT&T was laying fiber cable to connect New York to London, a project named Atlantic Crossing. Winnick took over the financial responsibility for AT&T’s $750 million project.
In the past undersea fiber cables were constructed by consortiums of traditional telecommunications carriers such as France Telecom and British Telecom. The consortiums, or “clubs” as they were called, would split the cost and divide the capacity among them. The club members would haggle over details such as the specific path for laying the cable and where to land it so it could be attached to land networks, completing the transoceanic connection. The projects took years to complete, as the monopolists were not known for their urgency. Technology evolved slowly, leading to high prices for the constrained capacity.
Ten previous cables had been built; the most recent was in 1996 and involved seventy-five partners. “It was like doing business with the United Nations,” a senior Global Crossing executive said.
Atlantic Crossing consisted of eight strands of fiber, which together would carry more capacity than the ten existing cables. Winnick was off to the races.
In March 1997 Winnick raised $750 million, including $20 million of his own money, mostly in the form of junk bonds. And Global Crossing was born.
In August 1998 Winnick took Global Crossing public, raising $399 million in the IPO at a share price of $9.50. The price jumped to $13.40 on the first day of trading. Another $500 million was raised three months later. When the stock price peaked at $64 a share in 2000, the Market Value of Global Crossing was $47 billion, which valued Winnick’s $20 million investment at $6 billion.
“Ambitious, yes; implausible, no,” summarized Forbes’s assessment in its 1999 feature titled “The $20 Billion Crumb.”
In October 1997 Winnick hosted customers at a Marriott on New York’s East Side. He told them he would charge $8 million for each unit of Atlantic Crossing capacity, which was 40 percent of the existing market price for capacity across the Atlantic. The rapid growth of the Internet and limited supply of transatlantic Bandwidth made for a seller’s market. During the meeting he sold 10 percent of Atlantic Crossing capacity for an aggregate price of about $350 million, already recouping half the cost of the project.
Bolstered, Global Crossing soon announced several more projects: New York to the Virgin Islands; Pacific Coast to Panama to St. Croix; United States to Japan, a Pan-European cable; and even another cable across the Atlantic.
With Global Crossing’s success, Winnick lived large. The company had five private planes, including a Boeing 737 and a Gulfstream. Winnick paid $65 million for an estate in Bel Air, the former home of the famed hotelier Conrad Hilton. He made his office in Beverly Hills, California, a plush Hollywood setting that previously housed the leaders of MCA Studios. “I visited Winnick in his office,” recalled CEO headhunter and former Wall Street Journal reporter John Keller. “It had a Hollywood Mogul over the top vibe with supermodel assistants and Art Masters hanging on the walls.”
Winnick claimed his new best friend was David Rockefeller, after Rockefeller gave him a private tour of the Museum of Modern Art, prompting, in turn, a $5 million donation from Winnick. He gifted a Rolls-Royce to Lodwrick Monroe Cook III, his Global Crossing co-chairman and the former chairman of oil giant Atlantic Richfield. Constantine II of Greece was among Winnick’s 240 guests who dined on Aberdeen Angus at Claridge’s Hotel in London; US Secretary of Defense William S. Cohen was the featured guest speaker.
All the while Winnick kept the media hype machine humming, boasting to a Sunday Telegraph reporter, “Right before I left home, I had a call from the President of the United States to talk about something.” He added, “Yesterday, I got a call from Buckingham Palace because one of the people there wanted me.” Perhaps this call was to invite him to the one hundredth birthday party of Britain’s Queen Mother, which Winnick attended in August 2000.
In April 1998, Winnick plucked Motorola executive Jack Scanlon to be Global Crossing’s first CEO. In an interview the executive expressed his excitement at “a chance to build a global telecommunications company.” His chance didn’t last long. Ten months later he was replaced. No worries. He retained options worth $170 million while continuing as a board member and, later, the head of Asia Global Crossing.
Scanlon’s short stint as CEO began a mad game of CEO musical chairs, with five executives sitting in the chair during Global Crossing’s first four years.
Bob Annunziata was the second, following his second departure from AT&T. The first time was in 1983, when he resigned to become CEO of Teleport. The second time Annunziata left AT&T was in February 1999, eight months after he sold Teleport to AT&T for $12 billion. Winnick gave him a $10 million signing bonus and stock options worth another $10 million.
Annunziata said he joined Global Crossing for the opportunity to “build a company from start to finish.” He lasted longer than the first CEO but just barely—thirteen months. Though his tenure was short, Annunziata left his mark.
On his seventeenth day of joining Global Crossing, Annunziata cut a deal to buy Frontier, the independent phone company headquartered in Rochester, New York, which had acquired fiber strands on Qwest’s under-construction network, for $11 billion. In month four he signed an agreement to acquire Rocky Mountain Baby Bell U S West for $32 billion. Both were odd transactions, as each company was a bland, traditional telephone company.
Did Global Crossing know its stock was inflated? Was the end game to ensure it had a viable business underpinning its story-driven stock price by merging with local telephone companies?
Qwest, under CEO Nacchio, was in a similar situation as Global Crossing. They, too, had a soaring Market Value based on a network that was under construction. Nacchio decided to crash Global Crossing’s party.
Both Frontier and U S West were public companies. Like most acquisitions involving public companies, the merger agreements allowed a window of time—called a go-shop period—for other bidders to offer a higher price. Qwest offered a price of $35 billion for U S West while also signaling they would also interlope on the Frontier merger.
The Global Crossing-U S West merger agreement included a provision that required U S West, even if another bidder prevailed, to purchase 9.5 percent of Global Crossing for $62.75 per share. This became a lucrative bargaining chip for Winnick.
After initially threatening to match Qwest’s $35 billion offer, Global Crossing instead negotiated with Qwest and U S West. Qwest agreed to drop its pursuit of Frontier. Global Crossing agreed to terminate the Global Crossing-U S West merger agreement. U S West and Qwest agreed to purchase 9.5 percent of Global Crossing for $2.4 billion, paying $62.75 per share, which was a 26 percent premium to the market price of $49.75. Qwest also agreed to pay Global Crossing $400 million, which was half of the breakup fee.
On July 19, 1999, Qwest signed the agreement to purchase U S West. As payment, Qwest issued 882 million shares to U S West shareholders when the deal closed in July 2000. Qwest stock had risen to $50 per share, which drove the cost of the acquisition to $44 billion, up from the $35 billion when it was announced.
At first, Nacchio’s outmaneuver of Winnick was seen as clever. Qwest’s stock, which went public at $22 per share, rose to $50 per share during the year it took to close the U S West acquisition. Qwest, post the combination with U S West, was valued at nearly $100 billion. Yet Nacchio’s behavior during the closing process suggested something was amiss.
Especially in light of what was soon to transpire, Winnick was the big winner. He personally pocketed $350 million by selling shares to U S West at the inflated price of $62.75 per share.
Frontier shareholders were the big losers. They received Global Crossing shares valued at $62. Soon after the merger, these shares would become worthless.
Annunziata declared of the Frontier transaction: “Clearly, [the Frontier] fiber optic network in the US puts us in an end-to-end situation globally.” Annunziata’s “clearly” said something else: he appeared to be stretching to make sense of the acquisition.
Annunziata wasn’t finished with his acceleration of Global Crossing’s plan. In September 1999 Global Crossing announced a $1.3 billion joint venture with Microsoft and Venture Capitalist Softbank to construct a seven-thousand-kilometer fiber network that was envisioned to eventually connect a dozen countries in Asia. He and his partners called the venture Asia Global Crossing.
“The future of our business and telecommunications is increasingly linked, and our interest in the telecom field is broad,” said Microsoft president Steve Ballmer. He added, “Global Crossing and Softbank have complementary capabilities that make them ideal partners for Microsoft.” Microsoft and Softbank each committed to purchase $200 million of Global Crossing network capacity.
Later in 1999 Annunziata acquired a UK Bandwidth provider for $1.65 billion in cash, adding a five-thousand-mile fiber network that reached more than two thousand cities and towns in the UK. With Gold Rush bravado, Annunziata explained to a reporter, “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 percent.”
Annunziata’s final 1999 magic trick was another Asia joint venture, this one in Hong Kong. Hutchison Whampoa, one of the largest public companies in Hong Kong, operated a Hong Kong metropolitan fiber network. To do the deal and own 50 percent of the combined entity, Global Crossing contributed $400 million in stock, $50 million in cash, its 50 percent ownership in the Asia Global Crossing venture, and $350 million worth of capacity on the Global Crossing network. The total value ascribed to the Hutchison Global Crossing joint venture was $1.2 billion. Annunziata declared, “We are executing on our strategy to be the most enviable fiber-optic network worldwide.”
Annunziata’s transaction spree continued in early 2000 when he acquired a minority ownership position in a private company that did not own a fiber network. The peculiar transaction required Global Crossing to provide stock for a 27 percent stake in a company valued at $3.4 billion. The company provided communications services to the financial sector, including most of the largest investment banks.
“We will now move to the next level beyond providing building-to-building connectivity in major cities—providing desktop-to-desktop connectivity for multinational corporations worldwide,” said Annunziata. “Hmm” was my reaction, seeing through the grand folly of this pronouncement.
In Global Crossing’s earnings release in the first quarter of 2000, Annunziata framed a positive story: “These outstanding results demonstrate the rapid pace at which we continue to expand.” Revenue for the fourth quarter of 1999 was $1.1 billion. However, net losses of $199 million had tripled since the fourth quarter of 1998. The day after the earnings release, Global Crossing announced it was weighing several options to raise more cash to further accelerate capital spending.
Annunziata resigned from Global Crossing in early March. The stock had hit a high of $61 that month. The following month, in April, Global Crossing’s stock plunged to $25—less than half its price when Annunziata joined.
Around the time of Annunziata’s departure, Level 3 CEO Jim Crowe had Kevin O’Hara and me tag along for lunch with Winnick and co-chairman Cook. We met at Dark Horse, Boulder’s oldest beer and burger joint. Winnick was dressed in a three-piece suit, something rarely seen in circa 1999 Boulder. Crowe was quite the contrast, dressed as if he were a Stanford engineering professor in his first meeting with a Venture Capital firm. We discussed how to combine Global Crossing with Level 3. I was struck by the craziness of having cheeseburgers and fries with two billionaires discussing the possibility of a gigantic merger. The boy from Glenwood, Illinois, had come a long way.
All was chummy at lunch, with both CEOs expressing confidence in their business models. Reflecting, we all were hiding our growing nervousness about what loomed over the horizon.
Next up in the Global Crossing CEO lineup was Leo Hindery Jr., the former head of AT&T’s cable television and Internet unit. Hindery joined Global Crossing a few months before being named CEO in April 2000; he resigned seven months later, taking with him Global Crossing stock valued at $247.5 million.
Two months into his short reign, Hindery sent a memo to Winnick and two other executives, warning of a disastrous outcome.
Like the resplendently colored salmon going up river to spawn, at the end of our journey our niche is going to die rather than live and prosper. . . . The stock market can be fooled, but not forever, and it is fundamentally insightful and always unforgiving of being misled. . . . Without looking like we are shaking our bootie all over the world, [we must] sell ourselves quickly to whichever of the six possible acquirers offer our shareholders the highest value.
The memo was not disclosed to the public shareholders. Its existence was uncovered years later by the House Energy and Commerce Committee as part of its investigation into Global Crossing’s wrongdoings. Winnick sold shares valued at $100 million after the memo was received. Does that smell like insider trading to you?
With his colored salmon analogy in mind, Hindery abruptly changed his swim path from Annunziata’s buying spree and began a sell-off of Global Crossing assets.
In July 2000 Global Crossing agreed to sell the local telephone business it acquired from Frontier for $3.6 billion in cash, a small fraction of the $11.2 billion Global Crossing paid to acquire Frontier. I guess Hindery concluded a bird stuffed with cash is worth three plumply overvalued birds stuck in a bush.
Later in 2000, Hindery agreed to merge GlobalCenter with data center operator Exodus Communications. Global Crossing received $6 billion of Exodus stock, which represented 17 percent ownership in Exodus. As part of the transaction, Exodus agreed to purchase 50 percent of its future non-Asia network capacity from Global Crossing for the next ten years.
In actuality both Exodus and GlobalCenter were wildly overvalued. By the time the transaction was completed in January 2001, the 17 percent stake in Exodus was valued at $1.8 billion because of a steep decline in Exodus’s stock price. Exodus’s financial duress continued, resulting in a bankruptcy filing in late 2001. The shares Global Crossing received and Exodus’s ten-year commitment to purchase capacity were basically worthless.
The final event that happened during Hindery’s short CEO stint was the IPO of Asia Global Crossing. Winnick had to push hard to execute this IPO. Global Crossing had hoped to raise over $900 million by selling shares at $15 each. However, with market receptiveness soft, the shares were priced at only $7 per share.
Demand was so limited that Winnick had to pressure his bankers—Goldman Sachs and Salomon Smith Barney—to buy fourteen million of the shares. A colleague of Winnick’s explained how Winnick strong-armed Goldman and Salomon to buy the shares: “‘I don’t want to hear any whining from the bankers,’ Winnick snapped.”
Hindery must have been spooked. He resigned on October 12, 2000, six days after the Asia Global Crossing IPO.
Batting cleanup was Global Crossing’s vice chairman, Thomas J. “Tom” Casey, a lawyer who was cohead of the global telecom investment banking group from Merrill Lynch before joining Global Crossing in late 1998. Keeping with the pattern of his predecessors, Casey lasted eleven months as CEO before returning to the board.
Casey was a close confidant of Winnick. In stark contrast to Hindery’s dire warnings, Casey offered a positive outlook for Global Crossing, positioning that the decline in the stock price was due to the broader economy: “The fact that we’re in a troubled environment is causing people to lose sight of the substantial accomplishments that Global Crossing has made over the last four years.”
Casey reaffirmed Global Crossing’s strategy and executive team: “Our strategy is not changing. . . . My job as chief executive is to lead a team that is already in place.” Casey also reiterated targets for 30 percent growth in cash revenues and 35 to 40 percent growth in profitability.
How, though, was Global Crossing going to deliver on these financial promises? Accounting gimmicks turned out to be the answer. And when this was uncovered, Global Crossing would forever be remembered as “Global Crashing.”
Qwest—Joe Nacchio#
Nacchio swiped U S West from Global Crossing and, in doing so, saw his rival Winnick put $350 million in his personal bank account. Nacchio whined that Crowe left his board and copycatted Qwest’s strategy, then watched Crowe sell $115 million of his $1.1 billion Level 3 stock. Were these the early indications that a mad dash to cash in before the Gold Rush was soon to unravel? If so, when and how would Nacchio get his payday before the Boom exit window was to slam shut?
In March 2000, rumors swirled that Qwest, which had not yet closed the U S West merger, was considering selling itself to Germany’s phone company. “[Qwest] could still end up striking a deal with Deutsche Telekom. Such a deal would allow [Nacchio] to walk away with hundreds of millions of dollars and [Anschutz] to expand his bankroll by billions,” wrote the New York Times.
The pending U S West deal proved to be an insurmountable hurdle to the potential sale. Qwest’s interest in the deal raised questions. “It smacks of Monday-morning quarterbacking to point out that the deep strategic rationale underlying Qwest’s bid for U S West was not crystal clear when it was announced last summer,” the New York Times reported. “The conventional wisdom at the time was that rather than being about far-reaching strategic synergies, the deal was more about Qwest’s using its high-flying stock to go after an undervalued company, with concrete assets and customers.”
On June 18, 2001, Nacchio’s crosstown rival, Crowe, announced that Level 3 was lowering its earnings forecast and was laying off almost a quarter of its employees. The next day Nacchio poured salt into Crowe’s wounds by reaffirming Qwest’s financial guidance. “Despite some softening in the general economy, we believe that demand for communications services is stronger than what others have reported,” Nacchio told Forbes in its article titled “Is Qwest the Best?”
Forbes praised Nacchio: “Nowadays the Bells are looking a lot stronger than most of the upstarts, and Nacchio is looking like a genius for having a foot in each camp. [A Merrill Lynch analyst] reiterated his buy rating on Qwest, which he hailed as a ‘unique hybrid’ of next-generation network and traditional local service provider, ‘supported by a very strong management team.’ And the man heading that team, one Joseph P. Nacchio, appears stronger than ever.”
Perhaps Forbes and others were focused on the wrong question. Instead of asking whether Qwest would achieve its revenue targets, they should have been asking how.
Broadwing—Ralph Swett#
In the Renegades we learned that Broadwing’s founder, Ralph Swett, cashed in his chips by selling his long-distance fiber company to Cincinnati Bell for $3.2 billion. The Gold Rush lured the quiet and long-static phone company into a bold and, in the end, unwise action. It was an uncharacteristic move that defied Cincinnati Bell’s century-long evolution from its start as the City and Suburban Telegraph Association in 1873.In 1903 the name was changed to Cincinnati and Suburban Bell Telephone Company. The company was founded to provide telegraph services in the Cincinnati area. Five years later, in 1878, the local service provider was awarded the Bell telephone franchise in Cincinnati and became the tenth telephone exchange operator in the United States. In 1961 the business was rebranded as Cincinnati Bell, reinforcing the phone company’s geographic focus on Cincinnati and the surrounding area.
In early 1999 Cincinnati Bell was granted permission to compete with the Ohio Bell division of Baby Bell Ameritech. Since Cincinnati Bell was not a spin-off of AT&T, Judge Green’s consent decree did not apply, and the business was permitted to offer long-distance services. Cincinnati Bell’s leaders surveyed the landscape of competitive fiber buildouts and decided to remake their company from a boring telephone company into a national Bandwidth provider, thus their acquisition of Broadwing for $3.2 billion.The $3.2 billion price paid by Cincinnati Bell for Broadwing included $1.1 billion in assumed debt and stock that was valued at $2.1 billion.
“We will be able to offer long distance, local, data, and the full suite of telecommunications services,” proclaimed Cincinnati Bell CEO Richard G. Ellenberger.
Cincinnati Bell’s shareholders were not enamored. They invested in the Bell company for its dependable, steady stream of dividends. Now the transformation would turn the low-risk Bell company valued on earnings and dividend yield into a high-risk stock valued on revenue growth and profitability multiples.
Ellenberger’s solution was for the old shareholders to exit. He raised $400 million from investor Robert M. Bass, one of the billionaire children of the founder of Bass Brothers Enterprises. Ellenberger used half of Bass’s investment to buy back stock from existing shareholders. Cincinnati Bell’s stock price dropped from $49 to $41 per share.
Soon after the merger was closed, Cincinnati Bell announced it was changing its name to Broadwing. Beaming with confidence, Ellenberger declared on a conference call, “The broadwing hawk soars at about 1,000 feet above its prey. And when it strikes, it strikes.” Dennis Hopper, best known for directing and acting alongside Peter Fonda and Jack Nicholson in Easy Rider, was featured in a series of commercials that touted Broadwing’s ability to fly while characterizing AT&T and the Baby Bells as dinosaurs.
In addition to completing the construction of a 16,500-mile network, Broadwing developed a data center and a web hosting business. At its peak, Broadwing, excluding the value of Cincinnati Bell’s local telephone companies, was valued at approximately $5 billion.
In April 2001 Broadwing issued a press release. “In a period where established providers are losing market share and emerging providers are struggling, Broadwing continues to shine,” said Ellenberger. Before long, the shine would lose its luster.
PSINet—Bill Schrader#
With UUNet part of WorldCom and BBN absorbed into GTE, PSINet came to be the only remaining standalone national Internet Backbone. In his Gold Rush celebration, Schrader committed $100 million for the naming rights to the Baltimore Ravens’ new stadium. This was a small price to pay for a company whose Enterprise Value soared to $10 billion.
PSINet acquired over seventy companies to chase Schrader’s vision to deliver “all media to all the customers on earth.” Most of these were small regional ISPs, both in the United States and other parts of the world. For example, in 1998 PSINet exchanged $25 million of its stock for a Canadian Internet provider, which made PSINet Canada’s largest ISP.
Schrader must have been feeling pressure to use acquisitions to bulk up revenue and diversify his product offerings. In 1999 he bought Transaction Network Services (TNS) for $720 million in cash and stock. TNS was founded in 1990, went public in 1995, and became a leading global provider for the high-speed, secure electronic fund transfer of credit card and automatic teller machine transactions. TNS’s product focus was a departure from PSINet’s positioning as an ISP.
PSINet entered the new millennium with a lot of confidence. On January 10, 2000, the company announced its quarterly revenue was expected to nearly double from the fourth quarter of 1998—from $93.9 million to $185 million. The forecast update included the expectation that cash burn would also double—growing to $17 million from $9.9 million. The market responded positively, as PSINet attributed the increase in losses to its expansion initiatives.
“We are now set up for 2000,” said PSINet’s treasurer. An analyst with Wasserstein Perella put a positive spin on the announcement: “They are investing in their business and finding strong demand across the wholesale end, web-hosting end and e-commerce end.” Wasserstein Perella was an underwriter for PSINet’s TNS acquisition.
In a show of grand confidence, Schrader launched LeapFrog in February 2000—a $1 billion corporate venture program using a services-for-equity investment model. Instead of collecting cash from its start-up, Dot-Com customers, PSINet would provide services in exchange for equity. What could possibly go wrong?
In late February 2000, less than two months after the market responded positively to PSINet setting expectations of its fourth-quarter revenue and cash burn, PSINet reported its results and the resignation of its CFO. Operating losses jumped to $135 million, which was more than double the $53 million in the fourth quarter of 1998. This time the market’s response was not so chummy, driving PSINet’s stock price down by 15 percent to $39 per share.
Schrader stated that PSINet remained on track to profitability in 2002 and dismissed the likelihood of being acquired: “We have exactly what the largest telephone companies want—network, hosting, expertise, and customer base—but at this point, we’re not for sale.”
The following month PSINet announced the $1.9 billion acquisition of Metamor Worldwide, a professional outsourcing services firm that migrated its traditional systems to web and e-commerce applications. Like the TNS acquisition, this purchase was a major departure from PSINet’s core business of being an ISP. Proforma, the combination of the three companies, represented $1.1 billion in annual revenue and ten thousand employees.
Schrader did his best to explain the rationale: “What we had before this deal was the best long-haul fiber carrier and also the best [data center] facilities. What we were missing was the skills to . . . build the system it takes to live on the Internet.”
In March 2000 the New York Times published an article titled “An Iconoclast Goes It Alone; on the Net PSINet’s Schrader Is a Force to Reckon With,” glowing that “PSINet, with fiber optic lines around the globe, some of the world’s most advanced Internet systems and a fast-growing customer base, looms as a highly attractive acquisition candidate—one whose shares are up nearly 300 percent since October, as investors have noted its potential takeover value.”
PSINet’s COO added fuel to the acquisition speculation. “Some day, they will buy us and we will be sold, and my job is to make it more expensive for them every day that they wait. What they could have bought for $200 million, they will now probably have to pay $20 billion for.”
“They” waited longer, and then “they” paid almost nothing for Schrader’s PSINet.
Touch America (Montana Power)—Bob Gannon#
Robert “Bob” Gannon, the CEO of a power utility in the sparsely populated state of Montana, was not to be left out. Fiber, he concluded, was his path to glory and riches. Gannon risked everything with an all-in Gold Rush bet.
The Wall Street Journal published “For Montana Power, a Broadband Dream May Turn Out to Be More of a Nightmare” in August 2001 and brilliantly captured an unfolding disaster.
This is a gamblers’ town. More than a century ago, Marcus Daly turned a bet on a copper vein under Butte into the giant Anaconda Co. The gambling game Keno was invented here for bored miners. In 1974, stuntman Evel Knievel, a Butte native, made headlines betting—unsuccessfully—that he could jump the Snake River Canyon on his rocket-powered motorcycle.
Now, Bob Gannon, another Butte native . . . is betting he can pull off his own breathtaking stunt: He plans to turn his staid 89-year-old utility into a high-tech high-flier.
In one dizzying two-year stretch, the Butte-based utility has sold just about all its assets—power plants, transmission lines, dams, gas, coal, and oil fields—pouring much of the $1.6 billion into a coast-to-coast fiber-optic network. By the end of this year, Mr. Gannon boasts, Montana Power will have 26,000 miles of fiber in the ground, a new corporate name, Touch America, and it will be among the nation’s largest half-dozen broadband companies.
So far, Mr. Gannon’s gamble seems to be following the same trajectory as Mr. Knievel’s. The joke around here is that at least Mr. Knievel wore a parachute.
Snake River Canyon, located in the Magic Valley region of southern Idaho, is 500 feet deep and 0.25 miles wide. Knievel was a famous motorcycle stuntman known as much for his bone-breaking crashes as for his record-breaking jumps. His capstone jump over the Snake River was September 8, 1974. A rocket-powered cycle, featuring steam that heated the engine to five hundred degrees, was custom designed for the stunt. A parachute malfunction doomed the jump, leaving Knievel sailing to the bottom of the canyon, landing a few feet from the water on the same side of the canyon from which it had been launched. Knievel, who was strapped to the cycle, said he would have drowned if he had landed in the water. Instead, he had only minor physical injuries. Building upon the Wall Street Journal analogy, Gannon landed in the water.
The Montana Power Company was the electric utility company headquartered in Butte that served Montana from 1912 to 2000. In the late 1980s, Montana Power, similar to many other power companies, monetized its pipeline rights-of-way by constructing fiber networks. Instead of leasing land rights to telecommunications carriers, though, Montana Power favored owning the fiber, lighting it up, and providing Bandwidth services.
In June 1999 Montana Power completed the route between Spokane, Washington, and Boise, Idaho. This route connected the utility’s Chicago-to-Seattle route with its Seattle-to-Los Angeles route. Denver to Dallas was completed in late 1999. In May 2000 Montana Power announced a partnership with Sierra Pacific Resources to construct a fiber route between Sacramento and Salt Lake City.Montana Power also built fiber rings in Denver, Reno, and Las Vegas.
This was just the beginning. “Contracts are pending for system expansions from Los Angeles to Dallas through San Diego and Phoenix, from Dallas to Houston through Austin and San Antonio, and from Houston east to Florida through New Orleans,” touted Montana Power’s president. “These and other builds will increase our network to 18,000 route miles by year end 2000 and 23,000 route miles by year end 2001.” In late 1999 Montana Power was one of the three companies that AT&T selected to partner on a nationwide fiber network deployment.When Qwest merged with U S West in 2000, the combined company was required to sell Qwest’s mountain-west, long-distance business. Gannon paid Qwest $200 million and gained 250,000 long-distance customers.
In March 2000 Gannon announced that Montana Power was exiting the power business to fund its transformation into a national fiber company. Wall Street reacted positively, as evidenced by the stock price jumping to an all-time high of $65 a share, implying a Market Value of $6.5 billion. In previous years the stock typically traded between $10 and $14 per share.
Montana Power sold its hydroelectric dams, coal mines, power plants, oil and gas assets, and energy distribution business for a combined $2.1 billion.Montana Power sold the company’s hydroelectric dams, coal mines, and power plants to Pennsylvania Power and Light in 1998. In the early 2000s, the oil and gas business was sold to a Canadian company. Westmoreland Coal purchased the coal unit. When Montana Power sold its energy distribution business to Northwestern Corp. for $1.1 billion in October 2000, the exit from power was completed. In total over $2.1 billion was raised by selling the assets. To capstone this business transformation, Gannon rebranded Montana Power as Touch America. The story of its reboot might best be titled “Oops!”
WilTel 2 (Williams Communications Group)—Howard Janzen#
When Williams Companies sold WilTel to WorldCom in 1995, it agreed to not compete with WorldCom for three years. The noncompete expired just as the Boom was exploding. After watching Jim Crowe jump back into Bandwidth Babylon, Williams Companies crafted its reentry, naming it Williams Communications Group and, a few years later, most was carved out and rebranded as WilTel. I will refer to Williams Communications Group and the new WilTel as WilTel 2, to avoid confusion with the original WilTel that was sold to WorldCom. In its deal with WorldCom, Williams kept its video unit Vyvx, which rolled into WilTel 2. Vyvx’s leader, Howard E. Janzen, was named the CEO.
WilTel 2’s first announcement was a joint venture with Enron and Touch America to construct a $100 million, 1,620-mile route connecting Los Angeles, Salt Lake City, and Portland, Oregon. “We’ve studied the hot fiber routes, and this is definitely one of them,” said Janzen. He set a goal of having a 19,000-mile network in place by the end of 1998.WilTel 2 also announced an 1,800-mile build from Houston to Washington, DC, using its Transcontinental Gas Pipeline right-of-way. WilTel 2 promised Broadwing fiber on this route in exchange for fiber on Broadwing’s 4,500-mile fiber network. WilTel 2 also acquired a 350-mile fiber network connecting Jacksonville, Florida, to Miami from MediaOne.
Williams’s announced reentry into the fiber business got a thumbs-up from the market, and its stock shot up by 51 percent, hitting a fifty-two-week high of $30. Some were skeptical. The New York Times questioned “whether the nation needs another high-speed communications network.”
But in early 1999, WilTel 2 speared a whale. The San Antonio–based Baby Bell SBC committed to a $500 million investment in WilTel 2.Intel invested $200 million in WilTel 2. “We’ve said all along that we want to be a global telecommunications player,” said SBC CEO Edward E. Whitacre Jr., who will come up later in our story. Referencing SBC’s pending acquisition of Ameritech, Whitacre added, “The alliance with [WilTel 2] gives us the line to connect all these dots.” The alliance made SBC a strategic customer of WilTel 2. SBC grew to be WilTel 2’s largest customer, generating $400 million or one-third of WilTel 2’s 2002 revenue.
Shares in Williams Companies, which remained the owner of WilTel 2, rose to $36. Plans were underway to spin WilTel 2 into a separate publicly owned company.
In preparation for the IPO, WilTel 2 executives were loaned $13 million to purchase shares of WilTel 2 at management-friendly prices, of which $5.6 million was allocated to Janzen. The expectation was that Janzen would eventually sell the stock that was purchased using these loans, paying capital gains instead of income tax, and retaining a hefty profit after paying back the loans. I suspect the board never thought through what they would do if the value of WilTel 2 cratered before the loan repayments. When the stock did indeed collapse, the handling of the loans became a thorny problem.
WilTel 2 executed its IPO in September 1999, achieving a Market Value of over $10 billion.$300 million was raised in the IPO, with the stock opening at $23 per share and closing the day at $28. The investments by SBC and Intel made earlier in the year resulted in a 6 percent ownership position. Williams Companies continued to own 86 percent of the company. Janzen was pleased with the market’s reaction: “Becoming a publicly traded entity . . . will give telecom-focused investors and analysts the opportunity to better value WilTel.”
Through construction and fiber exchanges with other network providers, WilTel 2 grew the network to 33,000 miles connecting 125 cities on five continents. The stock price peaked in mid-2000 at over $40 per share, implying a value of $15 billion.
The future looked sunny indeed. In July, WilTel 2 moved into its newly built fifteen-story, high-tech Tulsa headquarters, right next to the home of its former parent. I hope the move-in party was a hell of a bash, as the WilTel 2 team would have no more reasons for celebrations.
AT&T—Robert E. Allen and C. Michael Armstrong#
The once all-mighty AT&T wasn’t about to be stampeded by the Gold Rush! The company’s brass were obsessed with reclaiming AT&T’s prior glory as the unquestioned leader of the telecommunications world.
To put this in perspective, while rivals such as MCI had been seeking to kneecap their giant rival and compete, AT&T, with its vast resources, was still able to be the architect of the consent decree that Judge Green approved. AT&T’s actions in reaching that divestiture accord implied that the company believed it would remain in the driver’s seat post breakup, albeit in a transformed, upscale vehicle. Yet one decade later, AT&T found itself highly vulnerable in the fiber-Internet Boom. What would AT&T’s response be to Qwest, Teleport, MFS, AboveNet, Broadwing, WorldCom, and XO? And could AT&T prepare well for its burgeoning battles with its Baby Bell offspring?
These questions developed under the reign of Robert “Bob” E. Allen, who became CEO in 1988, just a few years after the Bell System breakup. Born in Joplin, Missouri, and raised in Indiana, this tall, soft-spoken Hoosier spent his entire forty-year career at AT&T, starting with AT&T’s Indiana Bell upon graduating from tiny Wabash College in 1957.
Allen’s biggest accomplishment was leading AT&T post-divestiture and into mobile services with the 1993 acquisition of McCaw Cellular, the nation’s largest independent mobile services business, for $16.5 billion. This made AT&T the largest wireless carrier in the United States. Allen’s biggest blunder was acquiring National Cash Register (NCR) for $7.5 billion in 1991, only to spin it out for a loss in 1995.
Allen, in search of answers in the wake of the NCR debacle, concluded the first step was to name his successor. He surveyed his executive team. The leading candidate had been his president, Alex Mandl, who, as CFO, had executed the McCaw deal. However, Mandl resigned in April 1996 when he was offered a $20 million sign-on bonus to lead a wireless telecom start-up that was backed by Microsoft and Nippon Telegraph and Telephone (NTT).Teligent went public in 1997, and the stock price peaked at $97 per share at the height of the Boom. MFS’s Buddy Pickle was named COO. However, Teligent’s wireless access service didn’t gain traction. Pickle departed in 2000, Mandl resigned in April 2001, and Teligent declared bankruptcy in May.
Earlier, I mentioned Joe Nacchio’s departure from AT&T. Nacchio, who led AT&T’s consumer and small business unit, also would have been a leading candidate, but Allen and Nacchio had a difficult history, and Allen didn’t want to hand the reins to Nacchio. Nacchio resigned to become Qwest’s CEO.
After an extensive external search, Allen picked John R. Walter, the CEO of R.R. Donnelley & Sons, the world’s largest printing company. For unclear reasons, Allen thought Walter’s twenty-seven-year career printing Yellow Pages was sufficient preparation for running the very complex and increasingly high-tech AT&T.
The Washington Post conveyed Wall Street’s tepid reaction to Walter in “Heir Is Unknown, Undaunted.”
Allen needed a new president—someone who could succeed him at the helm in a couple of years, pep up the company’s anemic earnings, battle an invasion of new competitors and push AT&T into such new markets as local phone service, the Internet and satellite television. So yesterday he and the AT&T board hired an unknown guy who prints phone books.
Noting AT&T’s stock dipped on the announcement, a Legg Mason investor expressed the general confusion surrounding the Walter hire: “As best as I can tell, it’s very difficult to get a good fix on John Walter’s executive abilities.”
In any case AT&T named Walter president and Allen’s would-be successor in October 1996. AT&T had expectations to promote Walter to co-CEO in early 1998 and, upon Allen’s retirement in late 1998, to CEO—with the AT&T board’s approval, of course.
“The best laid plans of mice and men often go astray,” as Allen and Walter were soon to learn. Soon after Walter joined, Allen lost confidence. Allen confided to a Wall Street Journal reporter at the time that Walter had failed to deliver on the very first order Allen had given to his new president. “I told him to fire Nacchio,” Allen said. “And he didn’t do it.” It took several more months for Nacchio to leave and join Qwest.
In July 1997 the New York Times reported that AT&T executives “began to have doubts about Walter almost from the moment he came to work last November. These executives said Walter . . . did not immerse himself in the mechanics of the telephone business.”
The New York Times added that “people familiar with [AT&T] said Walter found himself at loggerheads with Allen on basic strategic issues: whether the company should aggressively enter the local phone business [Walter argued that it should not]; whether it should continue to invest heavily in wireless [he said no], and where AT&T should put its resources [he favored international investments over domestic initiatives].”
The tension between Allen and Walter was exposed when Baby Bell SBC expressed interest in merging with AT&T in the spring of 1997. The Wall Street Journal broke the news: “The $50 billion-plus plan [for AT&T] to combine with SBC Communications Corp. could, in one swoop, erase years of unsuccessful strategies under Allen and allow him to retire on high ground.” Allen expressed his support for SBC’s CEO, Edward Whitacre, to be named the CEO of the combined company.
The merger faced stiff backlash. “The forces of evil unleashed by the new telecom act are now obviously running far ahead of the forces of good. This cannot happen. This can’t go forward,” said the research director of the Consumer Federation of America. A former Justice Department antitrust chief who lobbied in favor of the telecom law added the proposed merger “creates huge competitive problems. This isn’t what was supposed to happen.”
In June, Whitacre called Allen and told him SBC no longer wanted to pursue the merger. The Wall Street Journal reported that Whitacre blamed Allen, writing that SBC “bailed out because the chances of winning approval for a merger were hurt by Mr. Allen’s unusual public campaign in support of the idea of a Bell merger.” Specifically upsetting to SBC was Allen’s repeated claims that “the Bells weren’t opening up their markets as federal law demands.”
With the merger now dead, Allen and the AT&T board had to deal with the CEO succession quagmire. AT&T’s independent directors concluded Walter was the wrong person for the CEO job.
Prompted by Wall Street Journal reporter, John J. Keller, at a hastily called press conference to elaborate on why it had been decided that Walter shouldn’t succeed Allen as CEO, an AT&T board member said the board had determined that Walter “lacked the intellectual leadership to lead AT&T.” The board member added, “He’s a bright guy, but the complexity of the business is far greater than he might have realized.” The fallout of these comments certainly provided employment attorneys a mess to clean up.
Reacting to the decision, Walter countered, “I believe I am perfectly qualified to be CEO of AT&T right now.” Nonetheless, Walter exercised a clause in his employment contract that enabled him to leave with a large severance payment if he was not elevated to CEO by January 1997. He received a one-time payment of $3.8 million, plus the $22 million enticement he had been promised to leave his Donnelley CEO role—not too shabby consolation for nine months of craziness.
The AT&T board still had to sort through CEO succession. The urgency was apparent to the Wall Street Journal, which reported, “In undermining his designated successor, Allen may, in fact, have inadvertently hastened his own departure.” To attract a strong replacement, the board needed to offer the CEO title from the start.
The search led them to C. Michael Armstrong, a 1961 graduate from Miami University of Ohio who spent thirty-one years rising up the ranks of IBM, where he pinnacled as the president and chairman of Europe, Middle East, and Asia. In 1992 Armstrong left IBM to become CEO of Hughes Electronics, a satellite communications company owned by General Motors. During his five-year stint at Hughes, Armstrong built DirecTV into the leading satellite television service.
Armstrong’s reputation as an aggressive transformational executive with experience in complex industries made him an attractive candidate to AT&T’s board, who chose him as Allen’s successor in October 1997.
Armstrong’s compensation package included stock and stock equivalents valued at $15 million. Interestingly, AT&T guaranteed the minimum value of the equity would be $10 million after five years. With his downside protected, Armstrong was incentivized to swing for the fences.
Though its traditional long-distance phone service business was in steady decline, AT&T was the nation’s largest wireless carrier. AT&T had a strong balance sheet, with annual cash flows in the billions of dollars and, resulting from its $3.5 billion sale of its credit card business, was almost debt-free.
Investors reacted positively toward the choice of Armstrong, as evidenced by AT&T’s stock price rising 44 percent in Armstrong’s first few months, to over $60 a share, resulting in AT&T’s value reaching $105 billion. Armstrong was fully armed and, with swagger, ready to make his mark.
Armstrong got to work quickly. He struck the deal to acquire Teleport for $11 billion in January 1998, an event that further ignited the Bandwidth Boom.The transaction also required AT&T to complete Teleport’s pending purchase of ACC for an additional $1 billion.
“This is a good deal for us, for business-phone customers across America, and a good deal for the shareholders of both companies,” explained Armstrong to investors in a conference call. “Teaming with Teleport will speed our entry into the local market.”
The Wall Street Journal captured the market’s positive reaction to the announcement. “From AT&T’s perspective, it solves the critical question mark that hung over the company’s head for some time: What is their local strategy?” said an analyst at Deutsche Bank. “[Teleport] is by far the most strategic asset in the telecom business today.”
A Lazard Frères & Co. analyst added, “It makes the most sense to go after the biggest piece of the puzzle first. Having the marketing clout of AT&T behind Teleport will make Teleport that much stronger a player. It justifies the premium they’re paying.”
“This is the best news they’ve had in a long time,” another telecom analyst agreed.
Annunziata, who left AT&T fifteen years earlier to be Teleport’s CEO, seemed eager to partner with Armstrong. Annunziata said returning to AT&T was “a great feeling. . . . This is a new AT&T.” Annunziata’s great feeling must have been a reference to his newly bloated bank account, as less than a year later, he resigned to become CEO of Global Crossing.
Teleport was AT&T’s answer to metropolitan fiber. Armstrong’s transformation also required an intercity fiber network. Acquiring Qwest, which recently went public and was now valued in excess of $5 billion, was a possibility. Broadwing, which was not yet acquired by Cincinnati Bell, was another potential target, with a more reasonable price tag of $3 billion.
AT&T presumably conducted a build-versus-buy analysis. Instead of buying Qwest or Broadwing, they would fund their own fiber build-out. Their plan was to leverage their existing rights-of-way to allow other fiber companies to deploy a state-of-the-art fiber network. They issued an RFP with a design that matched their existing paths. The RFP allowed respondents to place extra facilities for their own use, enabling AT&T to benefit from more aggressive bids.
I was the leader of Level 3’s response to the AT&T RFP. At Crowe’s direction we teamed with WilTel 2, which was building out an intercity fiber network, to provide a joint bid. We saw ourselves as the two primary contenders and, by teaming up, would make it difficult for AT&T to leverage us against one another. Since both of our networks were under construction, our response deviated significantly from AT&T’s specific routes.
AT&T wasn’t happy, both because of our teaming approach and the noncompliant design. Moreover, I suspect AT&T viewed Level 3 and WilTel 2 as competitors, and as such, it was not in AT&T’s best interests to support our business plans. So AT&T decided instead to fund three start-ups—Velocita,See appendix 3, “More Bandwidth Stories,” to learn more about Velocita. CapRock,CapRock Communications was founded in 1981 in Dallas, with a focus on providing remote communications to oil and gas customers. As the fiber build-outs gained momentum in the mid-1990s, CapRock aspired to become “the leading facilities-based telecommunications provider in the Southwest region.” They undertook a fiber expansion with the goal of building 6,100 miles of fiber across Texas, Louisiana, Arkansas, Oklahoma, New Mexico, and Arizona. In 1999 AT&T selected CapRock as one of its three partners to build out a national fiber network. CapRock’s stock price leaped to a high of $58.50, which implied a Market Value approaching $2 billion.
As the Bandwidth Bubble began to burst, CapRock’s stock dropped to $10 per share, which led to McleodUSA purchasing CapRock for $535 million, of which $335 million was in assumed debt. A total of 5,200 miles of fiber were complete at the time of the sale.
McleodUSA soon found itself in bankruptcy, which led it to sell CapRock to Texas investors for significantly less than it paid a year earlier. CapRock, whose ownership changed two additional times in the ensuing twenty years, continues to operate its southeast communications business under the name SpeedCast. and Touch America.
“AT&T is responding to unprecedented growth in demand for high-speed Bandwidth and Internet-based services by building a new, state-of-the-art fiber-optic network that will link 30 major metropolitan areas nationwide,” explained an AT&T executive.
Next, Armstrong turned his attention to AT&T’s biggest competitive gap—how to reach its customers without relying on its Baby Bell offspring. Armstrong concluded the solution was to acquire Cable TV providers.
Perhaps Armstrong was egged on by Cable TV Cowboy John Malone. Soon after AT&T announced Armstrong as CEO, Malone said, “I’ve met every AT&T chairman since 1964, and this is the first one that gets it.”
When Malone pays a CEO a compliment, CEOs wise to their ways know to grip their wallets.
Malone was a major investor in Teleport, so he had already benefited from Armstrong’s dealmaking. However, Malone had something else that Armstrong coveted. TCI was the second-largest Cable TV provider with eleven million subscribers.TCI also jointly owned with other CATV operators an additional eleven million subscribers. TCI’s cable systems passed one out of every three American homes.
Led by Malone, the Cable TV industry made a compelling case that its architecture, which was based on coaxial copper cable, was a better thoroughfare into the home than the twisted pair copper used by phone companies.Hybrid fiber/coax is an architecture where fiber is used between the Cable TV headend and a node in a neighborhood. Coaxial cable then carries the signal from the node to a cluster of homes. The use of the fiber allows more information per home. The fiber also enabled additional services, such as voice and Internet, to be bundled together with the Cable TV service. A hybrid fiber/coax architecture would allow Cable TV companies to compete with the local phone company for voice while also providing a higher bandwidth Internet service than the dial-up access offered by the phone company.
In June 1998 Armstrong agreed to buy TCI for $48 billion.The $48 billion price consisted of $31.8 billion in AT&T stock and the assumption of $11 billion in TCI debt. The deal was completed in eight days. As part of the deal, AT&T also agreed to purchase, for $2.8 billion, the AT&T stock that TCI received when AT&T bought Teleport. Malone joined the AT&T board and became AT&T’s biggest individual shareholder.
AT&T’s stock dropped by 10 percent. Unfettered, Armstrong sought more Cable TV assets.
In March 1999 Comcast, the third-largest Cable TV provider with six million subscribers, announced an agreement to acquire MediaOne, the fourth largest with five million customers, for $48.6 billion. If completed, Comcast would have over eleven million subscribers, slightly surpassing AT&T to become the second-largest Cable TV provider.Time Warner Cable had 12.6 million subscribers.
“Today, with one fell swoop, we have created the pre-eminent broadband company in the world,” said Comcast president Brian Roberts. Armstrong called Roberts and congratulated him on the announcement.
Then Armstrong reflected on the situation. The terms of the deal included a forty-five-day window for MediaOne to accept a superior proposal from another suitor. If this were to happen, Comcast would be owed a $1.5 billion breakup fee.
Armstrong decided to go hostile, penning a letter to MediaOne’s CEO and publishing it in the Wall Street Journal:
April 22, 1999
Mr. Charles M. Lillis Chairman and Chief Executive Officer MediaOne Group, 188 Inverness Drive West Englewood, Colorado 80112
Dear Chuck:
AT&T is pleased to offer to acquire all of MediaOne Group for cash and AT&T common stock. AT&T will pay $30.85 in cash.
. . . Our offer represents a 17 percent, or $8.6 billion, premium to the value of MediaOne’s previously proposed merger with Comcast. . . . This is a 44 percent premium to the trading price of the MediaOne shares prior to the announcement of its merger agreement with Comcast and a 26 percent premium to today’s MediaOne closing price.
. . . With the addition of the MediaOne local broadband systems, we will offer customers superior connections for not only traditional video services, but also new competitive voice and data services. In particular, this will enhance our ability to deliver competitive local telephone services to millions of Americans.
Given the clear superiority of our offer to the proposed Comcast merger, we would like to meet with you and your advisors as soon as possible to finalize a definitive agreement between our companies.
Sincerely, C. Michael Armstrong
The hostile takeover ploy worked. In June 2000 AT&T completed its purchase of MediaOne. AT&T was now the biggest Cable TV provider with sixteen million subscribers. The $5,000 price per subscriber was 67 percent higher than the $3,000 Armstrong paid for TCI subscribers.
AT&T’s stock was now down to $31 per share.
Acquiring Teleport, constructing fresh intercity fiber networks, and being the number one Cable TV provider wasn’t enough for the ambitious Armstrong. He also sought to cement AT&T Wireless as the top dog in US wireless. In 1999 AT&T acquired Vanguard Cellular Systems for $1.5 billion.
In 2000 AT&T added $3.3 billion of mobile properties—assets that Vodafone and Bell Atlantic were required to divest when they combined to form Verizon Wireless. The result made AT&T the largest wireless carrier in the world.
Armstrong’s ambitions were global. Continuing with his “go big or go home” style, AT&T snagged the partnership with BT after MCI was purchased by WorldCom. Both AT&T and BT would merge their international operations into a $10 billion joint venture. AT&T began to sell Concert services in late 1998.Armstrong’s international ambitions included Canada. See the Appendix section on Allstream/AT&T Canada to learn how Armstrong’s Canuck adventure played out.
As the century was coming to a close, Armstrong had nearly every item on his transformation checklist covered.
- ✔ Local Services to Enterprise Customers: Acquire Teleport
- ✔ Deploy state-of-the-art intercity fiber network: Partner with Velocita, CapRock, and Touch America to build a fourteen-thousand-mile fiber network connecting thirty major cities
- ✔ Be the largest rival to the Baby Bells in providing broadband and voice services to households: Acquire TCI and MediaOne and partner with Time Warner
- ✔ Cement position as largest mobile service provider: Acquire multiple wireless properties
- ✔ Be the leading provider of global communications services to multinational enterprises: Align with BT using Concert as platform
But one big item did not have a check next to it.
- ✘ Maintain a strong balance sheet and high stock price
By the time midnight bells rang in the new century, the Wall Street Journal captured the doubts that were mounting on Armstrong’s transformation.
Armstrong’s bet is one of the biggest ever in business. . . . He is gambling that he can transform an American icon into an entirely new company. And he is doing it at a time when his firm’s core business is being hammered by low-cost competitors. But already, some on Wall Street have expressed concern about how AT&T—never known for nimble management—will absorb all of its acquisitions.
Armstrong was not in denial. “There is great risk in our future, and I don’t mind. I don’t think the sky is falling,” he said with words that lacked clarity or conviction. His executive Leo Hindery, who would soon leave AT&T to join Global Crossing, also acknowledging the challenge ahead, added, “Mike is turning this aircraft left when it used to go right.”
As it turned out, the sky was falling, and the aircraft was difficult to navigate and losing altitude. The events, as they played out, would lead to the end of an icon.
360networks—Greg Maffei#
Ledcor Group was seen as the Kiewit of Canada. Ledcor observed how well Kiewit did on its MFS investment and no doubt took notice when Crowe was backed again by Kiewit to launch Level 3. Armed and dangerous, the Ledcor executives were anxious to wet their fiber beaks.
William “Bill” Lede founded Ledcor Group in 1947 in Vancouver, British Columbia, and became one of North America’s largest privately held industrial companies. Lede died in 1980, when a large gravel pile collapsed on him at a job site. His sons, Herb and Dave, took over as chairman and president.
At the time Ron Stevenson, who later became vice chair of Ledcor Group, was executive vice president for Ledcor Industries. Stevenson invited Kevin O’Hara and me to visit Vancouver in 1998. David Lede and Stevenson took us to their private club, where we followed up a round of golf with dinner and plenty of expensive wine. They spent the day and evening picking our brains on MFS, Level 3, and the fiber industry in general.
“What was that all about?” I asked O’Hara on the way home.
“I don’t know, but I suspect we will find out,” he replied.
Ledcor launched 360networks on May 31,1998, when it acquired the rights to construct fiber alongside Canadian railroad tracks.360networks’s original name was Pacific Fiber Link. In 1999 it was renamed Worldwide Fiber Networks. 360networks was adopted when Maffei joined in 2000. When 360networks expanded into the United States in 1999, Ledcor doubled down and then some by hiring Greg Maffei, the former CFO of Microsoft, as CEO.In Maffei’s last year as Microsoft CFO, he completed ninety investments or acquisitions valued at $10 billion. In July 2000, after Maffei’s departure, Microsoft announced a $4 billion write-down of its investment portfolio, which Microsoft attributed to cable and telecom stocks bought by Maffei. Microsoft offered a nonfinance job to Maffei in late 1999, which was perhaps a contributing factor to his resignation. They also plucked away our colleague Jimmy Byrd, who had recently been named as Level 3’s president of North America.
Maffei took 360networks public in March 2000, just months after his start day. He touted an ambitious plan to construct eighty-nine thousand miles of fiber network across many parts of the world. Four months later the stock hit its peak valuation of $24 per share, a 70 percent increase from the IPO price of $14. 360networks was valued at $15 billion, and on paper Maffei was a billionaire.
Maffei leveraged his Microsoft credentials to attract John Malone of Liberty Media and Kevin Compton of Kleiner Perkins to his board. He enticed Rupert Murdoch of News Corp and Michael Dell of Dell Computers as advisors. A combined $1 billion investment was made before the IPO by Comcast, Liberty Media, Shaw Communications, and Michael Dell.
In 2000, 360networks constructed an $850 million undersea cable in the North Atlantic Ocean. Dubbed Hibernia Networks, the fiber would connect Canada, the United States, Ireland, the United Kingdom, and mainland Europe.
Maffei opened a fancy headquarters in Dublin for Hibernia. “Surrounded by a landscaped moat stocked with koi, the sleek $70 million facility was designed to project 360networks’ global ambitions,” wrote the Wall Street Journal in 2003. Before long, the building was yet one more symbol of the excess of the Bandwidth Boom.
In early 2001 Maffei told his shareholders, “People around the globe will be able to see and hear one another immediately, with superb [nearly unimaginable] clarity, at the cost of pennies.” 360networks assured the market that its business plan was fully funded, and there was strong demand for its network services.
In September Maffei told the Wall Street Journal, “We are surviving the telecom nuclear winter.” Despite this bravado Maffei must have known he was putting lipstick on a pig. Maffei’s survival of the deadly winter would include a bankruptcy filing.
Genuity—Charles Lee#
CEO Chuck Lee was swept by the same Bandwidth Boom euphoria that nabbed the CEO of Cincinnati Bell. He, too, was determined to transform his quiet regional phone company, GTE, into a global Bandwidth leader.
We encountered Lee twice earlier in our story: first, in “The Inventors of the Internet Backbones,” when GTE acquired BBN, and second, earlier in this section, when Lee took a valiant run at outbidding WorldCom during its hostile takeover of MCI. The Wall Street Journal described Lee, who was named GTE CEO in 1992, as a “Country Boy” who learned business leadership early in life.
[Lee] grew up in rural Wexford, Pa., 25 miles outside of Pittsburgh. He worked as a boy on his grandfather’s farm. A neighbor gave young Chuck a steer, which he sold for $600, using the proceeds for a used car, “a dirt-brown Chevrolet” he called the Beer Wagon. After his father had a heart attack at age 35, the younger Lee had to support the family.
. . . in those days when you had a heart attack the doctors didn’t let you work anymore; [my dad] died when he was 52,” Mr. Lee says. “I was 29.”
GTE, short for General Telephone & Electronics, traced its roots to a Wisconsin telephone company founded in 1926. GTE was formed in 1955 and, in 1959, merged with Sylvania Electronics, which produced flash cubes for still cameras, consumer light bulbs, and color TV picture tubes. GTE owned 50 percent of Sprint and other wireless ventures, and it dabbled in Cable TV services.
In the 1960s GTE acquired multiple telephone properties. By the early 1990s, with the acquisition of Continental Telephone, GTE was the largest telephone company that was independent from AT&T.
In 1986 GTE Laboratories announced it had discovered the first efficient, practical way to send two light waves of different frequencies through the same fiber with little deterioration in either signal. Dense wavelength-division multiplexing (DWDM) paved the way to fiber leapfrogging copper in telecommunications networks and becoming the technology breakthrough that spiked the Bandwidth Boom.
GTE sold the businesses that were viewed as noncore, including GTE Sylvania, its 50 percent interest in Sprint, and other wireless holdings. Armed with fresh cash, Lee wanted in on the flamboyant valuations being enjoyed by AboveNet, Broadwing, MFS, Teleport, Qwest, and XO. He set the course to transform GTE from a local telephone company into a national communications powerhouse.
Lee made 1997 a busy year of transformation for GTE. Early in the year, GTE acquired BBN for $616 million in stock. Next, GTE entered into a $485 million contract to buy fiber from Qwest on its under-construction national network. Late in 1997 GTE purchased Genuity, a web hosting provider based in San Francisco that boasted Microsoft and Excite among its biggest customers.
Lee explained, “We are undergoing very dramatic, fundamental change in our industry. We are becoming a nationwide provider of telecommunications services—voice, data, and video.”
In late 1997 Lee made his bold run at MCI. GTE was likely fortunate that it lost the MCI takeover battle.
In 2000 the brand Genuity was chosen for the business unit that combined BBN, the Qwest fibers, and Genuity. Paul R. Gudonis, Genuity’s CEO, explained, “We researched and considered a number of possibilities for the new name and Genuity was selected because we felt it captures the ingenious, creative spirit, and new focus of our organization and provides us with a name that will sustain us well into the future.” If “well into the future” meant only two years, he was spot on.
Genuity’s chief strategy officer added,
It’s not about just having great technology, fiber miles, modems or individual services. It’s about understanding your customers’ business and architecting infrastructure solutions that advance their time-to-market.
Only a company with a fully operational, next generation network, Tier One Internet Backbone and a comprehensive set of e-business services can deliver on this vision.
Genuity is that company.
But this was not to be.
GTE, with its new entity Genuity, caught the attention of Bell Atlantic, the Baby Bell that combined with NYNEX in 1997. The merged Baby Bell had a Market Value of $50 billion. NYNEX’s CEO, Ivan G. Seidenberg, was named Bell Atlantic’s CEO in June 1998.
Seidenberg immediately set his sights on GTE, with his interest being in both GTE’s local phone properties and the Genuity subsidiary. Bell Atlantic agreed to buy the GTE phone business in a stock swap valued at $53 billion. Upon closing, the combined company was rebranded as Verizon, becoming the largest telephone company in the United States, with a Market Value of $125 billion.
Since the Baby Bells remained prohibited from providing long-distance services, Seidenberg had to be creative in structuring Genuity. Verizon would initially own 9.5 percent of Genuity while having a five-year option to increase its ownership to 80 percent. The remaining 90.5 percent of Genuity would be spun out in the form of an IPO.
In September 2000 Genuity unveiled its new platform, named Black Rocket, with the tagline “Do You Want to Change the World?” Genuity CEO Gudonis explained, “We have created an entire new industry category: Network Services Platforms.” He defined this platform as the combination of Internet access, security, and web hosting.
Genuity lined up an all-star list of partners, including Cisco, IBM, Capgemini, Ernst & Young, and PricewaterhouseCoopers. Genuity named them ePartners, responsible for developing, building, and deploying solutions in eCommerce, eMarkets, eMedia, eSupply Chain, and eCRM.
“Enterprises are accelerating their moves to do business on the Internet,” proclaimed Gudonis. “And now here comes Genuity with a complete solution.”
The announcement was bold and brash, and many of us thought it was nonsensical. Genuity spent $20 million on the marketing campaign to promote Black Rocket.
Bolstered by its partnership with its shareholder Verizon, Genuity launched its IPO in June 2000, raising $1.9 billion at $11 per share and representing a $2.1 billion market valuation. On the first day of trading, the stock dropped to $9.40 per share and never traded higher. At the time of its IPO, Genuity had $1.5 billion in debt.
In 2001 Genuity entered Europe through a $114 million acquisition of Integra Telecom, a French web hosting company. The French target’s chairman said his company had gotten itself out of a tight spot by selling to Genuity. “The market had concerns about the ability of the company to raise funds,” he said. “It’s why we have decided . . . to find a big brother.”
Soon, Genuity would need a big brother. Would they find one?
XO—Craig McCaw and Dan Akerson#
As the 1990s were coming to a close, XO had Gold Rush mojo. In late 1998 an analyst touted, “With XO, McCaw has a winner. In terms of management, there’s no better team. They have the McCaw clout, which gives them the money that they need, and they are good executors.”
Chicago, Atlanta, San Francisco, New York, and New Jersey were its newest markets, with Miami, Dallas, Denver, San Diego, and Seattle soon to follow.
In a bold Bandwidth Boom maneuver in 1998, XO acquired two conduits and twenty-four fibers across Level 3’s intercity build for $700 million up front, plus recurring expenses.The transaction was completed by Internext LLC, a new joint venture that was equally owned by XO and McCaw’s family office, Eagle River. In late 1999 XO purchased Internext’s 50 percent ownership for $220 million in XO shares. At that point Internext had invested only $50 million, netting a fourfold return in the flip from Internext to XO. XO’s lead negotiator was Wayne Perry, who joined McCaw in 1975 and was his long-trusted dealmaker on spectrum auctions and other acquisitions. Perry was viewed as McCaw’s most savvy negotiator. I was Level 3’s lead negotiator. It was a mismatch in their favor, but sometimes, the underdog holds his own.
Deep into the negotiation, Perry was stuck on the dynamics around future fiber pulls. Though XO had two extra conduits, they didn’t want to shoulder the full cost of adding fiber to the spare capacity. Perry pushed, saying, “Perhaps, instead, we could participate in your future fiber deployments. Sharing the costs between us would be good for both parties.” We were not keen to give XO this right, fearing future opportunities to differentiate ourselves would be compromised. This remained a hurdle to the very end.
I came up with a concept called tag-along rights, which provided XO an option to take up to a certain percentage of future fiber in a cost-sharing arrangement. Crowe wasn’t pleased when I told him of the solution. The tag-along rights served its purpose—it got the deal over the hump, and it turned out to have no value for XO.
Later in 1999 Daniel F. “Dan” Akerson transitioned from being the CEO of McCaw’s wireless provider Nextel to becoming CEO of XO. Akerson was previously the CEO of General Instrument (GI), where he succeeded former United States Secretary of Defense Donald Rumsfeld. Earlier, he was COO of MCI. Akerson’s transition to XO during the Gold Rush indicated that both McCaw and Akerson viewed XO as its biggest opportunity.
Akerson saw XO as a platform that could combine wireless with fiber as solutions for its customers.XO paid $695 million to acquire WNP Communications, of which $152.9 million in cash went to the FCC for wireless licenses. Akerson also paid $137.7 million to Nextel to acquire the 50 percent interest in Nextband that was not already owned by XO, which gave XO full ownership of more than forty wireless licenses. An analyst captured Akerson’s vision: “‘They are one of the few [Internet providers] that offer [metro fiber, intercity fiber, and wireless access], so there is no limitation on the type of customer they can serve, and that allows them to optimize their margins.’ . . . For example, XO can operate in metropolitan areas with its fiber-optic network and offer broadband wireless connections to those in less-populated areas.”
At that point XO was valued at close to $9 billion.The value of XO included over $1.5 billion in indebtedness. An investor identified XO as a company whose shares would likely appreciate 50 to 100 percent over twelve to eighteen months. In late 1999 famed investor Theodore J. “Teddy” Forstmann of Forstmann Little & Company elbowed his way into the fiber fury by purchasing $850 million of XO shares at a valuation of $7 billion.Teddy Forstmann led the founding of Forstmann Little in 1978 with a focus on leveraged buyouts (LBOs). Forstmann was featured in the epic LBO takeover book Barbarians at the Gate: The Fall of RJR Nabisco. Forstmann Little lost the epic takeover battle to its archrival Kohlberg Kravis Roberts & Co. (KKR).
XO wasn’t Forstmann’s only Bandwidth Boom investment. In 1999 he invested $1 billion in McLeodUSA and, during the Bust, an additional $100 million. Forstmann Little ended up losing its entire $1.1 billion McLeodUSA investment. See appendix 3, “More Bandwidth Stories,” to learn more about McLeodUSA.
Decades later, KKR would be part of a consortium that sought a hostile takeover of Zayo. Forbes reported, “At the center of McCaw’s new empire is [XO],” and quoted McCaw saying, “It’s the best thing I’ve ever done.” Actually, McCaw would learn it turned out to be his worst venture.
Forbes continued, “McCaw’s secret weapon at [XO] is its chairman, Daniel Akerson, the former president of MCI. Akerson quit MCI in 1993, and he still seethes that the storied upstart ended up being bought by WorldCom. Now he relishes the chance to counterattack.”
Akerson identified AT&T and WorldCom as the targets that he would overtake. “[XO] has $275 million in annual revenue, and Akerson maintains that he can take it to $15 billion in a few years,” Forbes reported.
Wall Street was buying this story, as XO’s Market Value reached $10 billion. Yet a warning was included in the article: “[McCaw, the] famously private and self-deprecating billionaire, will need lots of luck to make all of it pay off. [XO] has $3 billion in cash, but it could run out in a year, and its main wireless technology is unproven.”
In 2000 XO extended its agreement with Level 3 to include Europe, with intentions to piggyback on Level 3’s Europe expansion. Though this deal was executed, no money would ever change hands, an XO expansion to Europe would be dead on arrival, and XO would enter a fight for its survival.
AboveNet (MFN)—John Kluge and Steve Garofalo#
The early Gold Rush years of 1998 and 1999 were glorious for MFN, the company that would come to be known as AboveNet. The business signed a $33.2 million contract to provide services to PSINet and formed a joint venture with a UK company to create a fiber route between the United States and Britain while also expanding to the West Coast, focusing on San Francisco Bay and Southern California.
Early in 1999 the deals continued with AboveNet announcing a strategic relationship with Bell Atlantic (later called Verizon) that included a $1.7 billion investment in AboveNet and Dark Fiber leases valued at $550 million. These leases had a twenty-year life and, as I gleefully learned when we were pursuing AboveNet in 2012, had no renewal rights.
What followed was unforced, monumental, Gold Rush–inspired errors.
In mid-1999 AboveNet announced its $1.76 billion acquisition of a San Jose company that positioned itself as a provider of higher-layer network services that reduced Internet congestion by directing online traffic to Internet Backbones.At the time of this acquisition, the name AboveNet was not yet adopted by MFN. As MFN navigated bankruptcy, it used the name of this acquired company, AboveNet, as its post-bankruptcy name. The acquisition represented a meaningful departure from AboveNet’s focus on core Bandwidth Infrastructure. Investors reacted poorly, resulting in an 11 percent decline in AboveNet’s stock. Less than a year later, AboveNet made another ill-conceived acquisition, this time a $1.4 billion purchase of a provider of managed services.AboveNet’s president explained the logic behind the scope creep of its strategy: “[AboveNet] plans to extend its leadership position in the market by combining fiber-optic infrastructure, world-class data centers, Internet connectivity, and managed services.”
In 1999 AboveNet also announced a vast European expansion that targeted eleven markets in seven countries. To fund the capital, Verizon augmented its investment with an additional $975 million, this time in the form of convertible notes.
In actuality the $3 billion combined price of these acquisitions, and the grand expansion across Europe, was a gigantic and untimely strategic blunder just as the industry was becoming a Weeble that was wobbling and about to fall over.
In the early 2000s, the valuations of the fiber companies were ridiculous.
AT&T, Qwest, and WorldCom all topped off in the vicinity of $100 billion. The other heavyweights—Global Crossing and Level 3—each enjoyed valuations of over $50 billion. 360networks, AboveNet, PSINet, WilTel 2, and XO each surpassed $10 billion. Even Broadwing, Genuity, and Touch America attained peak valuations of several billion dollars.
Soon, the combined Market Value for all these companies combined would tank to $15 billion. The Bandwidth Gold Rush glow faded to dark.