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No. of Recommendations: 5
In response to some of Patient's questions:
(warning: this message is pretty long since our disagreement covers points requiring non-trivial explanations. For the quickie, just scroll to the end for the conclusion. Not you, Patient, you don't get off that easy.)

I am curious however why you would choose to promote TyCom and Tyco on the GX board.

The intent wasn't to promote TyCom (or Tyco) but to highlight Global Crossing information. My personal opinion is that more knowledge is better than less, even when it might not be bullish on your stock (in fact, knowledge is even more valuable when it isn't bullish, anyone can be a bull... or full of bull :)

TCM has a book value of $4.33, sales of 2.43B, and a market cap of 6B, with a share price of $11.56. GX has a book value of $14.10, sales of 3.6B and a market cap of 12B, with a share price of $14.50.

Book value is a ticklish subject. It's an excellent value for analysis and tells you what the historical cost value of the company's assets are. The problem is that it's historical. What it doesn't tell you is that many of Globl Crossing's purchased assets aren't worth what they used to be. The value of dark fiber and IRUs has plummeted and continues to drop rapidly. There's also the goodwill issue, which I'll get to.

Also, book value doesn't necessarily indicate profitability. In this case, it certainly doesn't. TyCom's core business has a low book value because it's primary service is construction where inventory and other "book" balances tend to be low. The value of fiber, cable, and ships is a small compared to a subsea cable system's cost (borne by the purchaser). The profit margin is based on the cost, not on the book balances.

Finally, Global Crossing's profitability isn't very well measured by it's plant because it is by nature a low gross margin business as it is structured today. They haven't executed yet on any of the pie in the sky value-added services that they talk about. Look at their filings: IRUs and wholesale services are the vast majority of their revenue. Wholesale voice has a gross margin of around 23-26%, doesn't leave much to pay for SG&A, capex, interest, etc. IRU sales are simple to do and that is all that TyCom is planning to do, thus, not much of a question of execution for TyCom.

Translation: The network doesn't exist. (and their ain't no money to build it). The GX network is about 85% complete and 100% fully funded.

Ain't no money to build it? Hmmm. First, this is a profitable company with earnings, which means that they can use those earnings to invest in their network. Second, a quick look at the balance sheet indicates over $2 billion in cash and marketable securities and debt of $654 million. The debt to equity ratio (D/E) is 0.30, indicating substantial capacity for additional debt. Thus, for the next couple of years, it appears that their capital spending plans are funded. The balance sheet is rock solid, their cash exceeds their debt.

A look at Global Crossing's balance sheet is equally instructive. Their debt load is $9.3 billion... whoa, I didn't realize it was that high. In any case, that's a D/E ratio of 0.59. Thus more highly leveraged. Although not a terrible ratio. However, there are also deferred charges of $2.1 billion. All this is backed up by cash and marketable equivalents of $1.25 billion, which makes you scratch your head and ask "Where is Global Crossing getting the rest of the money it needs?"

You were right to point out that Global Crossing has a relatively high equity book value (about $15.6 billion). Let's see what's behind that book value. We already said that there's cash and equivalents of $1.25 billion. There's also PP&E of $8.8 billion. However, the most massive chunk is intangibles of $10.64 billion. Holey moley, you don't see that kind of intangible very often!

A quick explanation of intangibles: when Global Crossing acquires other companies, the purchase value is ascribed to one of two categories: identifiable tangible assets (e.g., cash and PP&E) or intangibles. Most of the intangible line item is goodwill. Goodwill has no value, per se. It's an accounting convention to make the balance sheet balance. Essentially it's the purchase premium of an acquisition over the identifiable market value. Thus, from an operations point of view, goodwill is worthless (I know I'll get flamed for that, but we can discuss it further.) It boils down to this: Global Crossing's extremely high intangible balance is indicative of numerous corporate acquisitions where the company overpayed for the assets acquired.

To summarize: bookvalue of equity is $15.6 billion, but there's $10.6 billion in what is mostly goodwill. That should be taken into account and greatly reduces the quality of the $15.6 billion. To be fair, TyCom also has intangibles on its balance sheet, but it's only $313 million.

Anywho, this message is way longer than I wanted it to be, so last point:

TyCom Builds in the near-term:
Transatlantic US-UK subsea cable of 2.56 terabits per second, completed by mid-summer this year. Strictly owned by TyCom. Will compete directly with Global Crossing's AC-1 and AC-2 cables. Built at a much lower cost than Global Crossing's cables ($470 million for US-UK compared to $800 million just for AC-1. That's the integrated manufacturing advantage in real numbers).

Transpacific US-Asia subsea cable of 5.12 terabits per second, completed by mid-summer next year. Strictly owned by TyCom. Will compete directly with Global Crossing's PC-1 cable.

This is why I'm more bullish on TyCom than Global Crossing and why I switched my investment from Global Crossing to TyCom. Looking at Global Crossing's burn rate, revenue quality, and balance sheet resources, it seems to me that the company is at a disadvantage. TyCom's main problem is that (as you pointed out) their network has yet to be completed. But IRU sales are not difficult to do, Global Crossing did a great job when that's all that they did. Also, TyCom has a profit-making $2 billion per year construction business at its core to use as both a cash source and network building unit. This is, IMHO, a major strength.

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