One of the crazy little rules in accounting has to do with gains for companies that emerge from bankruptcy. So when newly emerged Global Crossing
Please, don't do this. Global Crossing has just emerged from bankruptcy into a telecommunications sector that is still fraught with overcapacity. The company, which operates a large undersea fiber-optic network, had reduced revenues by more than 6% for the quarter as compared to a year earlier -- from $765 million down to $719 million. CEO John Legere said management had largely been trying to maintain its revenue base through customer retention during its time in bankruptcy, but also said, "Now that we have emerged, we expect to grow our business by both adding new customers and enhancing services for existing customers."
Legere says Global Crossing now has a clean balance sheet, strong corporate governance, and seasoned management, and that he would "steer the company into a leadership position" in telecommunications.
The stock dumped more than 30% after the earnings release, and rightfully so. People seem to have been buying into the notion that a telecommunications company could wipe its debt away, emerge back into the business and, voilà ... operate profitably. But Global Crossing's results show that this view is largely fantasy, in particular due to pricing pressure.
First of all, the fourth quarter of 2002 should not have been a tough comparison to overcome. This was a point in time when there was substantial question whether the company would emerge at all instead of being liquidated. That the business has lower revenues now is miserable. But more than this, Global Crossing is operating in an industry that is still beset by massive amounts of bad capital investment and over-competition. Level 3
Ah, but Global Crossing is going to grow its business by adding new customers and enhancing services. News flash: That's what every telecom company seeks to do. Even with its old debt overhang out of the way, it needs financing to continue to operate or to have much of a hope at growth or profitability.
This market is still way too crowded for anyone to have a reasonable shot at long-term profitability. Global Crossing may have much more to recommend itself this time around, but it cannot help that it operates in a business where too many firms are chasing too little business -- and with many, the clock is ticking. Until a few more companies are taken out of the gene pool, this will remain a mess.
Bill Mann owns none of the companies mentioned in this story. For ideas on companies in businesses that aren't as crowded, consider a subscription to The Motley Fool's Hidden Gems.