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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.

Next:
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.

Conclusion:
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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, goodwill is worthless (I know I'll get flamed for that, but we can discuss it further.)

NicolaiNJ you are my only favorite fool. This analysis is as insightful and well thought out than anything I'm currently paying for, probably better than most. You're a good man for posting it here. I'll bet the GX board hates you.

None-the-less, that little accounting change has gone largely unnoticed. I don't hear a lot of talk about it in the financial media. The acquistion point you make is spot on. It makes you wonder about the value of some growth companies who grew during the bubble. My mind goes to CSCO and JDSU.

Wow, again, thanks!

ehh!
Long TCM



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This is why I'm more bullish on TyCom than Global Crossing and why I switched my investment from Global Crossing to TyCom.

Which begs the question, for me anyway, why do so many TCM and GX holders see this as some death match zero sum game? Do they believe that only one of these companies is going to be successful? Do they believe there is only enough demand to support one big winner? When TCM eventually gets a system built and starts winning customers, those customers can only come at the expense of GX? We're buying stocks here, not trying to pick the winner of horse race. And it's good to remember that in betting, the second place horse often pays more than the winner :-)

I happen to own both now. I happen to believe they are both going to be very successful in this space. Each has it's own merits or weaknesses right now, but long term, if one believes in the bandwidth story there is going to be enough business for both to be very successful.

I own TCM because I just bought it at a price I felt was fair value for the constuction business. That gives me a short term foundation while their system strategy unfolds long term. The criticism of GX's mgt lacking experience is more aptly placed on TCM, at least in the carrier space. Another reason I own TCM now is because I also own TYC and know how they manage their business. If they want TCM to be a major player they will be, it's really as simple as that. I would look for them to build TCM the same way they have their other business units. Buying TCM at 10 is a price worth waiting for the story to unfold.

But that's longer term. Shorter term GX is in the enviable position of being a next generation carrier with a system very nearly complete, giving them a considerable first mover status. Comparing GX and TCM today is really comparing apples and oranges for the next couple of years. Ultimately they may get to the same place, but they're going to look very different getting there in the short run.

I'm not going to get into a tit for tat about financials, we can disect them forever. I'll just leave it with my own bottom line that TCM has the resources to build/buy and pay for their system and grow the company want. GX has the system, the momentum, and the growing customers to pay for what they've already built and continue growing the company they want.

I've placed bets on two companies I believe are going to be major suppliers in this space. I don't believe for a minute that only one will dominate. From where I purchased them I'm guessing both will return 5 to 10 times my investment. Don't see any reason to do that once when it could be twice as nice.

RC

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Thanks for the compliment, EHH1443!

I'll bet the GX board hates you.

Members of the GX board certainly aren't happy with my opinions. However, the more informed members are open to discussion and are doing their best to convert me! :)

Thanks again.
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RCDarcy:
why do so many TCM and GX holders see this as some death match zero sum game?

Excellent point! It certainly isn't. But it's more fun to argue as if it were! :)

Each has it's own merits or weaknesses right now, but long term, if one believes in the bandwidth story there is going to be enough business for both to be very successful.

I certainly can't argue with that. You bought TCM at an excellent price, IMO. And based on your post, GX is also a good stock for you to own.

Anywho, I didn't post my last "GX versus TCM" post on this board because it's really morphed into a GX-only discussion.

Nick
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Hey Nicolai, just visiting from the GX board and no we don't hate you. I always welcome contrary opinions to whichever holdings I own, it sure beats the cheerleader rah-rah stuff and makes me rethink why I have invested in a particular company. Anyways your analysis forgot something~

Just one comment: SHOW ME THE MONEY!
I think you are forgetting one small detail Nicolai-GX selling their LEC to Citizens communication for $3.65 Billion CASH!!
http://www.globalcrossing.com/news.html?bc=News
Theres your $, our network will be completed within a year. When will TYCOMs be? Not to mention the contracts we have with EXDS filling our pipes. Don't forget to include that when judging the Frontier deal, not to mention some of the network we picked up. Brilliant. Not to mention we can easily double capacity on our AC1, where others need to lay a cable. Plans include to lay another cable across the atlantic. We have out network built, but I think GX will always be expanding. I have great faith in Winnicks business acumen.

Oh yeah, GX reitterated guidance for cash revenues in 2001 between $7.1-7.3 billion

Can you say first mover?

http://www.globalcrossing.com/pressreleases/pr_021401.htm

I also think a down economy will help GX beleive it or not. Williams, Level 3, et all will be very cash strapped and have a difficult time completing their networks anytime soon. Interest rate cuts will help GX with their debts. GX will be the onestop bandwith provider while others struggle to complete their networks, leaving us around to collect gobs of $. Cha-Ching

Regardless, eventually TYM will have their network, Williams, WCOM, Level3, it wont matter. Bandwith demand is gonna keep going up expotentially. IMHO there will be never be a glut, by the time we reach that there will be technologys that guzzle bandwith.

Fool On,
Peter

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I think you are forgetting one small detail Nicolai-GX selling their LEC to Citizens communication for $3.65 Billion CASH!!
If you look at the fine print, what they're really getting is $2.75 billion in cash, after tax. For sure, it's a nice onetime gain. But now that their cash cow has been put to pasture, what will they do for more money? Global Crossing isn't a profitable business until around 2004, according to Tom Casey.

Not to mention the contracts we have with EXDS filling our pipes.
That's $4 billion over 10 years. Not exactly a large part of their business plan when they're supposed to be doing $5 billion in one year RIGHT NOW. Where's the future growth? I hear words but no substance.

I also think a down economy will help GX beleive it or not. Williams, Level 3, et all will be very cash strapped and have a difficult time completing their networks anytime soon. ... GX will be the onestop bandwith provider while others struggle to complete their networks, leaving us around to collect gobs of $.

Holy cow. Have you seen Global Crossing's balance sheet? We must be talking about a different company. Global Crossing's business plan is predicated on a decent economy, without it, the company will have to return to the markets. That could be disasterous.

Also, what do you think will happen if Level 3, Williams, and/or 360networks go bankrupt? The assets will be bought by incumbents with the money and resources to deploy them. In other words, there'll be no shortage of competition. Then the incumbent can use the standard line "Do you want to do business with an established and well known company? Or with a company that might not be here in two years?" In part, that was what destroyed the CLECs.

First mover? Big deal. AT&T was a first mover and look where they are now.

See my post on the Global Crossing board for more. This isn't the place for it as it doesn't involve TyCom anymore.

http://boards.fool.com/Message.asp?mid=14636063



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