The Motley Fool Take on Monday, Jan. 28, 2002
Global Crossing's Undoing

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So, it's the St. Louis Rams and the New England Patriots in the Super Bowl. Who do you like -- the sure-thing Rams or the long-shot Patriots? Let us know in our poll on the Gimme My Sports discussion board. And remember, investing is not a sport.

The Dow Jones Industrials rose for their fourth straight session today, if you're counting. For the most part the major indices treaded water, though, with the FOOL 50 bumping up a mere 0.14%

In today's Motley Fool Take:

Global Crossing's Undoing

It is the fourth high-profile bankruptcy in the last two months, following on the tails of Enron (OTC: ENRNQ) peak market cap $66 billion), Kmart (NYSE: KM) (peak market cap $13 billion), and Polaroid (peak market cap $6 billion). From the standpoint of market caps, it is the biggest failure of all, since telecom company Global Crossing (NYSE: GX) at its peak was valued in excess of $80 billion -- several billion higher than Enron. And where it took Enron little more than eight months to unravel, Global Crossing was a tad more pedestrian at a shade below two years from peak to valley.

There are a few things that make Enron's bankruptcy more traumatic. First of all, where Enron employed 20,000 people at its peak and generated upwards of $100 billion in revenues, Global Crossing generated less than $4 billion, and had 13,000 employees spread all over the globe. And where Enron never once filed an operating loss, Global Crossing's losses have been consistent and large since its founding. In other words, Global Crossing's status as a high-risk stock should have been a surprise to no one, while Enron's was a stunner to a great many people.

Still, many people, including our own TMFOtter, have believed at points along the way that Global Crossing had a chance for survival. In the end, the debt became too unwieldy, and continuing deterioration of bank loan portfolio quality scotched any chance of a cash-starved company like Global Crossing of getting access to additional cash. The company's apparent squandering of the cash garnered from its sale of assets to Citizens Communications (NYSE: CZN) provided the final nail in the coffin.

Global Crossing's Chapter 11 filing comes as part of a takeover by two Asian companies -- Hong Kong conglomerate Hutchison Whampoa and Singapore Technologies Telemedia. As part of the agreement, the existing shares in Global Crossing will be wiped out.

We have received a number of questions from people who want to know whether or not buying some shares in bankrupt companies would be a good idea, "since they are so cheap." The answer is an unequivocal "no." In almost every bankruptcy, the equity shareholders end up with nothing since they come at the end of the line of creditors.

Enron's shares are going to end up worthless, as are Kmart's, and now Global Crossing's. In the last few years, precious few companies have emerged with any equity for existing shareholders. You'd be better off just buying lottery tickets than playing the bankruptcy sweepstakes. These companies are cheap for a reason: They're broke.

Toys "R" Us Not Playing Around

Like a stern parent asking to have toys put away, retailer Toys "R" Us (NYSE: TOY) will be slamming the door shut on dozens of stores and letting go of 1900 employees in a corporate restructuring. The timeout may appear puzzling at first. After all, the chain had reported a healthy 2% uptick in same-store-sales over the holidays as patrons flocked to load up on Harry Potter merchandise and the latest incarnation of next-generation video game consoles.

However, the company is in the process of revamping its stores. While the makeovers have come and gone like hot holiday toy trends, the latest blueprint hopes to outlast the next Beanie Baby, Pokemon, or Tickle Me Elmo craze. Just as the chain saw its video game sales take off once it began to block off its consoles, software, and other electronics into self-contained stores within its big boxes, the new Mission Possible format is looking to make the toy hunting experience a more rewarding and interactive experience. The new store layout consists of an oval track circling the selling area with open space niche areas replacing the old, cold rolling aisles.

Rather than give all of the units the Mission Possible treatment, the company has opted to let 64 stores self-destruct. The retailer's official stance is that it would be more "prudent" to close the stores than to doll them up in the makeover process. But, the more plausible reason is that the company just doesn't have to play the size game anymore.

While the company is relishing the press generated by shoehorning an operating Ferris wheel into its flagship location in New York City, it doesn't have to play big anymore. Wal-Mart (NYSE: WMT) has been the world's leader in toy sales for a few years now and it's not a race worth running for Toys "R" Us if it means keeping underperforming shops open. In short, the chain's Geoffrey the Giraffe mascot doesn't have to stick its neck out for the pursuit of quantity anymore.

The chain was smart enough to swallow its pride and team up with Amazon (Nasdaq: AMZN) to guide its online strategy. That helped Toys "R" Us grow its online sales by 27% over the holidays without the rash of negative news stories that appeared two years ago when the company missed a few Christmas deliveries. So, it's not whether you win or lose, it's how you show that matters. In many ways, Toys "R" Us is all grown up now.

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Verizon's Not-Quite 3G Rollout

American technophiles, rejoice. The long-awaited 3G, or third-generation, wireless technology is finally here, even if it's the not-ready-for-primetime version.

Verizon Wireless, a joint venture of Verizon Communications (NYSE: VZ) and Vodafone Group (NYSE: VOD), became the first U.S. company to launch what it calls a "sizable 3G footprint," utilizing Qualcomm's (Nasdaq: QCOM) CDMA2000 1X technology. (CDMA2000 1X has been available in Korea for nearly a year.)

Verizon's "Express Network" will allow users full Internet access from their wireless phones or laptop computers at about the same speed as normal home dialup connections -- or about twice as fast as previously possible. The service rolled out today to customers along the eastern seaboard, as well as the San Francisco and Silicon Valley areas in California, and 2002 Winter Olympics host Salt Lake City, Utah.

Today marks the first step in a long journey that should eventually see all the major wireless players -- among them Sprint PCS (NYSE: PCS), AT&T Wireless (NYSE: AWE), and Cingular Wireless (a joint venture between BellSouth (NYSE: BLS) and SBC Communications (NYSE: SBC)) -- roll out full-scale 3G networks. When that happens, on-the-go users will have high-speed Internet access through their mobile devices at speeds that will allow fast transfer of large files as well as videoconferencing... applications that are not possible with Express Network.

Today should be viewed as only a first step, and it should be noted that many industry watchers feel 3G players will realize little-to-no earnings for their efforts. Those interested in learning more about the potential profits and pitfalls of 3G should start with this Dueling Fools feature.

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Quick Takes

Who would have thunk it? First Amazon.com (Nasdaq: AMZN) reports a net profit, and now Xerox (NYSE: XRX)! Xerox announced fourth-quarter earnings of 108 million, excluding restructuring charges and currency effects. That's up from a loss of $161 million a year ago. (Although revenues for the quarter were down 13% over year-earlier levels, to $4.3 billion.) Gross margins jumped by 3.2 percentage points year-over-year, to 38.3%, while selling, general, and administrative costs dropped 25%. The firm's cash hoard grew to about $4 billion, from $1.7 billion last year. In sum, things are looking up -- copy that?

2001 was a year most investors would like to forget, but the real estate industry feels differently. Sales of new homes jumped by 5.7% in December, with a record 900,000 new single-family homes sold last year, according to the Commerce Department. According to The National Association of Realtors, 5.25 million existing homes were sold in 2001, an all-time high.

Auto-industry watchers are also smiling. While some were expecting sales to slump in 2002, as promotions such as 0% financing disappeared, it appears that sales are remaining strong. A Wall Street Journal (WSJ) article (subscription required) details bullish comments from representatives of most major industry players.

Shares of Palm Inc. (Nasdaq: PALM) popped up today, on news that the firm's eagerly anticipated wireless PDA is finally hitting stores. The new i705 offers a built-in antenna for wireless Web access and secure, "always-on" access to e-mail and instant messages. Until now, the only PDA featuring an integrated "always-on" connection was Research In Motion's (Nasdaq: RIMM) BlackBerry unit.

Investors and analysts may not agree on whether Tyco's (NYSE: TYC) proposed break-up will profit shareholders, but it's clear that one group stands to gain a lot: investment banks. A Financial Times article today pointed out that Wall Street firms stand to pocket more than $300 million, with Tyco forking over more than $200 million in underwriting fees alone. The standard underwriting fee on Wall Street is 7%, which would net around $500 million, but Tyco may be able to negotiate a somewhat smaller bill.

As Enron Turns: In today's episode, Vice President Dick Cheney stated that the White House will go to court to fight the release of documents that may reveal Enron's influence in developing the Bush administration's energy policy.... On the Today Show, Linda Lay, wife of erstwhile Enron CEO Ken Lay, said, "My husband is an honest, decent, moral human being who would do absolutely nothing wrong."

And Finally...

Today on Fool.com: Tom Jacobs has fun with discounted cash flow analysis, trying to set a fair price for Johnson & Johnson and ImClone.... Zeke Ashton says buying cash flow at good prices will lower the risk of your small-cap portfolio.... The winners are announced in our Sell Us a Stock Contest.

Brian Bauer, Bob Bobala, Robert Brokamp, Jeff Fischer, Tom Jacobs, Bill Mann, Selena Maranjian, Rex Moore, Rick Munarriz, Dayana Yochim

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