Jim Crowe: We’re a company that’s
going to be generating a
significant amount of cash
It took a surprising seven years for Level 3 to achieve its
merger with Global Crossing, but at the beginning of October
CEO Jim Crowe finally achieved his ambition. Level 3 completed
its acquisition in a tax-free, stock-for-stock exchange that
valued Global Crossing at $3 billion, six months after the
merger was announced.
It’s "a hand-in-glove fit", says Crowe, who has
run Level 3 and its predecessors since 1997. And the expanded
Level 3 has the support of its customers for the deal, he adds.
"We did a fair amount of research with third parties who talked
to quite a large number of our customers, our employees
— from both companies," says Crowe. "And this
I’m sure may be somewhat obvious, but customers
— big, small, global — all say the same
thing: 'We want someone with the size, financial stability,
scope, reach and set of services that we get from the PTTs,
AT&Ts, Verizon, but is easy to do business with and cares
about our business.’ That’s what we
want to be."
The deal was welcomed in the financial markets too, he adds:
"We’re a company that’s going to be
generating a significant amount of cash. The pricing of our
bonds improved remarkably."
Now, Level 3 has "the financial capability, the size, the
scope, the set of services and the global reach to give folks
something they could only get from PTTs or some combination of
PTTs, but with a degree of customer service that
we’ve shown them in the past. That’s
The two companies have been working on integration since the
deal was announced in April. But Level 3 and Global Crossing
were talking for long, long before that. "We’ve
been working together now, talking about this acquisition and
talking in detail with teams on and off for seven years, and
intensely for a couple of years," says Crowe.
He notes: "Buddy Miller, who’s our vice chairman
and among other things runs mergers and acquisitions, checked
his files and said we made our first offer for Global Crossing
back in 2004, so that’s a long gestation period."
That was only a year or so after control of Global Crossing
— then in Chapter 11 bankruptcy protection —
was bought by Singapore Technologies Telemedia, an investment
arm of the government of Singapore. So what happened in April
that made ST Telemedia decide the time was right to accept a
Level 3 offer?
"Well, I can only speak for our point of view," says Crowe.
"We’re the buyer, so we obviously were interested
in moving forward." Both companies were performing well. "We
looked at the combination. That maybe made us willing to pay a
little more, and them willing to accept a little less because
they were accepting stock."
As it was a stock deal, ST Telemedia is now the biggest
shareholder in the new Level 3, with 25% of the company. Crowe
is delighted with that arrangement: "If we could, we would have
our company owned entirely by long-term investors who
understand our business, are supportive of it, and believe in
the industry over time." ST Telemedia "is just such an owner",
Level 3 has two other significant investors: Southeastern Asset
Management with about 20% and Fairfax Financial with 10%. "We
are very pleased to have that kind of stable, long-term
ownership. It allows us to focus on the long term, and
long-term shareholder value creation." There are about six
shareholders in all "who have been with us a long time who
between them own approaching two-thirds of our company".
ST Telemedia has three representatives on Level
3’s board, including two Singaporeans. "Our next
board meeting is going to be in Singapore," he notes. ST
Telemedia is "a very sophisticated group [that is] known as
savvy investors. They invest in communications and technology
around the world. So we certainly seek their advice and
Capital investment budget
One of the questions the board will no doubt be deciding is
where Level 3’s capital investment will be in
2012, when the company plans to spend $600-$700 million.
Where? He’s cautious. "We haven’t
made those decisions yet. We’re right in the
middle of it."
Level 3 is weighing up investment in the US and the UK "where
we already have dense network because where you have the veins
and arteries, investing in the capillaries gets you huge
returns", compared with "the growth rates, the tremendous
opportunity in LatAm, the tremendous opportunity moving east in
Europe. So we’ve got a lot of factors to weigh up,
and we’re right in the middle of it."
Now that Level 3 and Global Crossing are together, how has that
changed the expanded operator’s offer? "It all
starts with the customer, doesn’t it?
I’ve always felt our industry hasn’t
kept up with the globalisation of our customer base," he says.
He puts this down to "the historical nature and government
ownership or near ownership or heavy regulation of what used to
be the PTTs, the dominant flag-carrying phone company in each
country". Companies in the industry tend to be limited to
national boundaries. In the US, "we make it pretty painful for
people who want to buy communications assets in this country",
But there are customers, large and small, that need
international services. "And where do they buy them? From
consortia, from systems integrators, who then turn around and
buy from the local PTTs," he says.
"Our goal, our opportunity almost uniquely is to use what
we’ve put together to begin developing the first
local-national-global communications company.
We’ve got a ways to go, but we’ve got
a good start. And the key here is always focus on the customer
and the customers’ needs."
That implies that Level 3 may be looking for further deals. Is
he talking to any potential acquisitions at the moment? "I
wouldn’t tell you that if we were," says Crowe.
But he gives a pretty thorough run-down of where the
"In Latin America, we’ve got about a $2 billion
network," he says. "It’s local and
it’s in nine countries. It crosses the Andes. And
all kinds of opportunities to continue to invest in one of the
fastest growing parts of the world. Half the population is in
Brazil, and all sorts of opportunities there."
Global Crossing had an extensive network in the UK, thanks to
its 1999 dotcom-era purchase — before its excursion
into Chapter 11—of Racal Telecom, a company that had
just made an operating profit of only £2.6 million on
annual sales of £199 million. Global Crossing, founded
only two years before, paid a remarkable £1 billion, then
worth $1.6 billion.
Racal — the founder of Vodafone, from which it had
already demerged — had earlier bought the British
railway system’s telecoms infrastructure, giving
it access to the centre of every city and town. More than a
decade later there are "opportunities to extend that network
directly into the buildings where it is already close", says
Crowe. "There are thousands of locations our network passes by,
but we’re not in those buildings.
That’s an opportunity."
Eastern European opportunity
The European continent "is another place where we really get
excited because while it’s not that much fun
competing with the PTTs in their service territory, in their
countries, we think there are all sorts of opportunity to go
across border", he adds. "And Eastern Europe is the wild West,
in effect. Huge opportunity. There are risks, of course, but
huge opportunity given the growth rates and broadband uptake.
So we don’t lack places to invest."
Will he be doing it by construction of new networks or by
acquisition? "Where we see an opportunity to acquire that
creates more value than building, that’s what
we’ll be interested in doing," says Crowe.
Level 3 is used to integrating acquisitions. In the US, under
Crowe’s management, it has successfully taken over
three long-distance companies before Global Crossing: Genuity,
WilTel and Broadwing.
But integrating long-distance companies is relatively
straightforward. "The networks are already interconnected, and
you can literally sit at terminals and groom networks. You can
move traffic off of AT&T locally and onto Level
3’s local connections, or Verizon’s,
or CenturyLink’s. That’s done all day
long as a matter of course."
Integrating companies with local networks is a bit more of a
challenge. "When you seek to integrate two local companies that
actually own fibre in New York and LA, when you provision
service there, you actually have to roll trucks," he says. "You
have to put equipment in buildings. It’s physical
work, and the workflow there and the processes and systems and
inventories are very complicated."
Level 3 has had "some process problems that caused us to
disappoint our customers and ourselves" in the past, when it
took over local operations. "That’s all behind us.
We were pretty open about it, but we did learn a lot."
At the merger, Global Crossing did not own local facilities in
the US. "They own long-haul facilities, generally.
I’m speaking in absolutes. The world
isn’t black and white, but in general in the US
they don’t own local facilities. So
that’s pretty straightforward," he says.
"In LatAm, we don’t own any facilities.
That’s straightforward. We don’t have
people down there." In Europe "Global is relatively strong,
much stronger in the UK where we [the old Level 3] have a
minimum of facilities." As a result, "this is a much more
comfortable integration than the ones we did back in 2005".
Today, the combined operation has "about $37 billion invested
in our global network", he says. "That’s the
original investment in the two companies and the acquired
Owning network is important. "For the services that we provide
and the kind of focus we have, we need to own and control our
network. It’s hard to develop, for instance, a
better service if you’re reselling somebody else.
And that’s been fundamental to Level 3 from the
start," he says. "You cannot create new services, offer new
products, have a superior customer service if you resell
someone else’s network."
Telecommunications is vital to companies’
existence. "If you’re cut off from your
communications facilities, you rapidly go out of business," he
warns. "You need diversity." But two suppliers may use the same
local facilities and same fibres. They may "both use BT or they
both use AT&T’s local facilities or
Verizon’s or Deutsche Telekom’s.
That’s not providing the kind of service we
believe our customers want."
The lesson he has learned "in 25 years of this business is if
you resell another company, sooner or later you’re
going to end up selling out or bump up against the wall", he
says. "You can only go so far reselling someone
So that means he’s actively looking?
"There’s plenty of gaps and plenty of
opportunities to continue to invest and grow, but if you want
to know where we plan to focus, it’ll be where we
can own network. So that’s UK, Europe,
that’s LatAm, US — and Africa is pretty
interesting," he adds. "You can own network in Africa. You can
own undersea. You can’t own largely in Asia
Pacific on the land."
That implies Level 3 plans to spend heavily in the next few
years on new network — built or bought. With what? "We
expect, plan, and want to generate hundreds of millions of
dollars of excess cash a year," says Crowe. "You can expect us
to put it in those places where we can expand our network right
directly to customers, to their locations."
Maybe even in the US, where the company already has "an
enormous footprint, comparable on a national basis to AT&T
and Verizon", he says. "They have more density in their service
territories, but not nationally. It’s a very big
There has not been a lot of landline construction in the US
since the dotcom bubble burst in 2002, he notes. There is "a
lot of focus on wireless by the larger companies,
that’s where most of their capital is going, but
not a lot of landline".
Yet over that time "the locations that justify fibre have moved
out of just the central business districts of cities. There are
neighbourhoods that use as much bandwidth as all of New York
City did only a relatively short time ago."
Wireless broadband will drive a lot of this demand in the
future. "Wireless is still a relatively small contributor to
overall traffic, but I don’t talk to anyone, and
we’re in this category, who doesn’t
believe that over time, given its growth rate,
you’re going to need fibre to every tower. So
there is an enormous opportunity to continue to build without
end here in the US."
And the possibilities continue to grow. In an interview with
Global Telecoms Business in mid-2003 he lamented that it was
still cheaper to ship video on DVD than by fibre. He said at
the time: "I’ve always felt it’s one
of the great indictments of our industry that it’s
still cheaper to distribute information on truck networks and
airplane networks and ship networks than it is on
That was the year the economics changed. Today he says: "In
2003, it became cheaper to move a standard definition signal,
video, over an IP optical network versus other distribution
mechanisms. In 2006, it became more economical to move an HD
That’s led to the development of content
distribution networks. "We’re the only big
carrier, really, that’s deployed at scale.
We’ve said from the beginning, this is a carrier
CDNs started out with resellers, but "if you resell other
people’s capacity, sooner or later
you’re going to run up against the wall
technically or economically. CDN is and will be a necessary
carrier technology. We’re a leader, and
we’re taking share. We’re a technical
leader and we’re a leader in the marketplace."
Further reading from Global Telecoms Business:
Level 3 completes Global Crossing
buy 04 Oct
Level 3 to acquire Global
Crossing 11 Apr
consolidation and acquisition 01 Jun 2007
Surviving on the level
01 Jul 2003
James Crowe on the level
First mover advantage in going into
Chapter 11 01 Jul