-- "Hype," by A.R. Ammons
The $1.9 billion takeover bid that Level 3 Communications
The two pure-play network systems are the largest of their kind. If you want to go any bigger in this space, you'll run into telecom services without fail. Verizon's
So what, exactly, is Level 3 getting for its $1.9 billion in freshly minted shares and $1.1 billion of assumed debt? For one, the merger joins Level 3's focus on metropolitan networks with Global Crossing's large array of transcontinental and undersea cables, creating a whole new set of end-to-end services on a global stage. That makes plenty of sense. Global Crossing brings $2.7 billion of gross networking equipment into the fold (or $1.2 billion of net physical assets), which is a respectable addition to Level 3's $12.5 billion of gross property or $5.3 billion, net.
Level 3 shareholders love this deal, pushing the share price up by 17% as of Monday's closing bell. That might be an overreaction, though.
You see, adding Global Crossing and its enormous network capacity does very little to heal what ails Level 3: profitability, or lack thereof. Despite a rash of high-profile customers that includes digital video wrangler Netflix, Level 3 remains a cash-burning operation. The company rarely reports positive earnings, and whatever operating cash that is generated gets eaten by high capital expenses.
There will be some synergistic cost savings, of course, but Level 3 would have been better off with a vertical move. For a similar sum, Level 3 could have bought SAVVIS
Instead of a growth-promoting move like that, Level 3 gets an impressive asset base with shrinking revenue and even less impressive cash flow trends. Looking back at this purchase five years from now, I'm betting it'll be through bloodshot eyes and not rose-tinted lenses.