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Level 3 Swallows Global Crossing! So What?

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Last Friday, the FCC and the Justice Department approved Level 3 Communications' (Nasdaq: LVLT  ) acquisition of rival Global Crossing (Nasdaq: GLBC  ) , and on Tuesday, Level 3 announced that it was a done deal. So what will this newly engorged Level 3 give us?

First of all, with the click of a calculator, its stock price will increase via a 1-for-15 reverse stock split. Whoop-de-doo ... At least it gets it out of penny stock range. Oh, and the combined company will keep Level 3's ticker symbol but move its listing from the Nasdaq to the NYSE. This is to be effective Oct. 20, according to the company's news release.

What benefits will stockholders receive?
The word "synergy" has been used to describe the advantages of many corporate couplings. Level 3 uses a form of it multiple times in its announcement, including saying it expects to achieve "Total synergies ... [to increase EBITDA by $300 million] ... within 18 months."

And, that the company also expects the merger to improve its "... credit profile and reduce the company's financial leverage from approximately 6.8x net debt to [2010 adjusted EBITDA ] to approximately 4.4x after realization of expected synergies."

These are "expectations," of course, so all that remains to be seen.

Another synergistic effect of the merger is the departure of Global Crossing's CEO, John Legere, and his $4,696,871 total compensation package for 2010. But is that a fitting reward for the person who oversaw Global Crossing's rebirth after its near-demise almost 10 years ago? Oh well, Level 3 CEO James Crowe is still around with his total 2010 compensation of $6,398,268.

If you really wanted synergies, though, wouldn't you get rid of the more expensive executive? That's usually what happens to "redundant" middle management -- and what is in fact going to happen to hundreds of mostly American workers, according to Crowe.

Could I be more sarcastic?
To say that Level 3 has had a hard time turning a profit would be understating it; the company has lost money 10 out of the last 10 years. And Global Crossing hasn't done much better, failing to make a profit since 2003 -- the year it came out of bankruptcy after overexpanding at the time of the dot-com collapse.

(A vitriolic disclosure: Unfortunately, I was one of those original Global Crossing stockholders. To those pre-bankruptcy holders of General Motors (NYSE: GM  ) stock: I felt your pain.)

Do the math
At least AT&T's (NYSE: T  ) proposed acquisition of Deutsche Telekom's T-Mobile USA unit makes potential sense -- for AT&T, at least, if not for Sprint Nextel (NYSE: S  ) -- though if it goes through or not is anybody's guess. But what will the mating of two notoriously unprofitable companies like Level 3 and Global Crossing produce? Could the spawn of this marriage be more disappointing than the iPhone 4S rollout? I'd bet on it.

Want to follow along with Level 3 Communication on its post-merger journey? It's easy! Just click here to add Level 3 to My Watchlist.

Fool contributor Dan Radovsky owns shares of AT&T and has gotten over most – but not all – of his early investing disappointments. Motley Fool newsletter services have recommended buying shares of AT&T and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (7) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 07, 2011, at 3:21 PM, ddm08 wrote:

    "To say that Level 3 has had a hard time turning a profit would be understating it; the company has lost money 10 out of the last 10 years. And Global Crossing hasn't done much better, failing to make a profit since 2003 -- the year it came out of bankruptcy after overexpanding at the time of the dot-com collapse."

    If LVLT's earnings have been so disappointing, what the heck is the Motley Fool Management doing holding 704K of LVLT? Does the word, "HYPOCRITE" means anything at your office?

    MOTLEY FOOL ASSET MA... 6/30/2011 703,760 0 0.00% $1,133

    Instead of outright bashing LVLT with your words, put your money where your big mouth is and short it!

  • Report this Comment On October 07, 2011, at 3:36 PM, TMFZahrim wrote:

    @ddm08, the asset management section of the Fool is entirely separate from anything we humble writers do. In fact, I feel queasy even explaining this fact to you because we've been told in no uncertain terms that it would be immoral and possible illegal to even hint at trying to move share prices in a direction that the asset guys would like. Thus, I have no earthly idea what they're holding over there and have no desire to find out. I'm sure Dan feels the same way. So whatever the reasoning may be behind that holding, we don't know, shouldn't know, and have no obligation to agree with.

    Just so you know.

    Anders Bylund

    Aka TMFZahrim (another Level Crossing skeptic, by the way)

  • Report this Comment On October 07, 2011, at 3:43 PM, XMFDRadovsky wrote:

    Hello ddm08,

    I have nothing to do with Motley Fool Asset Management, but they obviously have a different view on LVLT than I do.

    As for shorting, frankly, I've never done it. I suppose I should learn, but it seems like too much work.



  • Report this Comment On October 07, 2011, at 10:50 PM, carlkiefer wrote:

    Hmm, this is very visceral commentary filled with what comes across as a vengeful or envious tongue. Very negative, very negative, indeed.

    Charles Munger says it best, when he describes envy as the deadliest of all mortal sins, since that one only hurts themselves when practicing this vice.

    A lot of times, I see an Akamai cheer leading squad from this source of stock analysis, assuming stock analysis is the right description for what is being done here, when they are criticizing Level 3.

    On the other hand, today, it may be AT&T, one of the greatest wealth destroyers of investor capital without providing adequate returns or benefits to their investors, but probably more importantly, to their customers since Ma Bell was broken up almost thirty years ago!

    Sadly, putting her back together again, is not going to be any prettier for all parties concerned, I can assure you.

    As for Akamai, I heard Jim Crowe say recently, it's high noon and high time that they go find somewhere else to play as a result of not owning the "bandwidth" inside the network. Things are only going to get tougher for them ahead because they just don't own a physical network.

    If you're mad about Legere's compensation, maybe you should go hit him on the head for better satisfaction. I am just kidding, of course, since violence is not a means to a more favorable end. Good communication based upon facts is.

    I'll tell you what I did in the case of Jim Crowe, though. I asked him to forgo his salary and bonuses at this pivotal period in his company's history, in order to send a message to FOOLS like you that LVLT's pay day is closer than some think. The jury is still out on that one, but there is always hope.

    I think the important thing you fail to understand; however, is that the amount of investment capital inside the Level 3 Amalgamation with Global Crossing stands at $37.5B in conservative PP&E, today, representing the known internet for providing seamless, end to end connections from content creation to consumption including adding human eyeballs into the communications equation.

    What you're actually looking at, is the company who has enabled the Google's, Amazon's, Apple's and the rest of those embracing the internet paradigm to make the world a more creative, productive, fun and entertaining place. Don't knock it, join it!

    I don't think there is another company in the public universe today, being priced so inexpensively compared to its forward opportunities. Stated differently, it's dimes or twenty cent pieces on dollars in unrecognized intrinsic value.

    Right now we're at $6.2B in sales and very high factory margins because of all the "fixed costs" that are behind us.

    I don't know what you are not seeing, but you should look a little harder at this company's new numbers and how they're going to take us into the 21st century with very high growth rates both organically and inorganically. This is representative of them being the low cost provider of essential communications services as well as The Natural Consolidator of the previous overbuilds from The Great Tech Bust.

    It's probably not by coincidence that only Level 3 is still left standing after all the market suffering when comparing them to the emerging communications space fraught with bankruptcies before them, some of which came back as dead men walking.

    I guess that is why the NYSE/EURONEXT is accepting the new communications market leader, the one who is carrying the majority of internet traffic across the globe measured in IP bits, at next Thursday's opening bell ceremony!

  • Report this Comment On October 07, 2011, at 11:28 PM, ddm08 wrote:


    "I feel queasy even explaining this fact to you because we've been told in no uncertain terms that it would be immoral and possible illegal to even hint at trying to move share prices in a direction that the asset guys would like."

    Have you guys at ever heard of the phrase, "Eat your own cooking"? That was the most COP OUT B.S. of an excuse if I have ever heard one.

    Gone are days of the writers put up articles and back that up with their own money. Remember those wonderful homeruns that the hit with Amazon and AOL?

    These days, all I see are bashing articles and articles to just grab headlines to get eyeballs to your website.

    "I feel queasy even explaining this fact to you because we've been told in no uncertain terms that it would be immoral and possible illegal to even hint at trying to move share prices in a direction that the asset guys would like."

    Please read carlkiefer's post. You should invite him in as a writer. He has more facts and good investment advice than this trash you guys are putting up here...

  • Report this Comment On October 08, 2011, at 12:04 AM, JPS73 wrote:

    What do you know? Stocks are and always will be a crap shoot. Not really much difference between investing in the market and betting on a three team football parlay this Sunday right? What is the savings rate now? What is the CD rate? What is the money market rate? Long term Treasury's are probably the best and safest bet in the Mutual Fund arena. Not quite the volutarity of the stock funds. LVLT? 31.46% year to date capital gain, not too shabby! After all timeing is everything right? Penny stock according to Wall Street! But, then again what do they know?

  • Report this Comment On October 10, 2011, at 11:02 AM, awsure wrote:

    Wow, I think the author touched a nerve here on some die hard Level3 apologists. Facts are stubborn things. Neither of these companies demonstrated an ability to turn a profit since their inception and somehow by combining two piles of manure you expect an alchemical transformation into something resembling gold?

    This ill fated marriage of a zombie and an undead (I am trying to get into a Halloween groove) will result in a slightly larger foot dragging, drooling, carcass with no pulse that somehow roams the earth.

    Let the synergies begin! Rochester, New York...say goodbye to a bunch of folks. Here's Johnny!!

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