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 our goal."
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 counsel."
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 opportunities are.
"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
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
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
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 else's capacity."
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 network."
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
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 communications networks."
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 technology."
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." GTB
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