Weighing The Potential Success Of A Level 3 And Global Crossing Combination

Includes: GLBC, LVLT
by: Brian Nichols

The much anticipated purchase of Global Crossing (NASDAQ:GLBC) was finally agreed upon and completed by Level 3 Communications (NASDAQ:LVLT). Level 3 is a speculative stock that experienced a large amount of success over the last year, until the market sell-off in late July. Now that the purchase is nearly complete, we will see if LVLT can live up to its hype regarding the benefits that this expensive purchase will have on the company, bringing new found profits for many years to come.

Level 3 has lost more than 40% of its value from its 52-week high of $2.67 in early July. A large portion of the loss has been a result of market conditions with investors selling stocks that are speculative in exchange for secure stocks with long-term profitability. Investors have overlooked Level 3 and its dismal balance sheet, moderate growth and its long tenure of net loss in hope of long term success resulting from the Global Crossing acquisition.

I can understand why investors would be optimistic regarding Level 3. The company has been praised for its efficiency, which includes avoiding organizational extinction when all hope appeared lost at several points during the company's past, with realistic chances of bankruptcy and default. The company has always managed to fight its way through tough times and many believe the company is just steps away from a significant advantage within this competitive communications industry.

Many have speculated that the acquisition of Global Crossing could be the icing on the cake to bring this company to a new level of growth. Once again, I can understand this thought process. The acquisition of Global Crossing will give Level 3 more than 175,000 miles of fiber throughout three continents, which is more than any other communication company has to offer. Both companies have solid assets and have seen a recent increase in demand. Yet, with so much promise one cannot ignore the obvious problems that are presented within these two companies.

Level 3 has faced multiple financial issues over the last decade. And despite its strong accounting and emphasis on efficiency, the years of organizational issues will eventually catch up to a company. In the late 1990s Level 3 was among the leaders in communications with a stock price that reached over $130 in the year 2000. The company fell hard in 2001 and has been unable to recover ever since. Yet the last year has shown some signs of progress and has encouraged investors that the company is moving in the right direction. However, my fear with the company is its inability to post a profit.

The company's net loss has become a normal occurrence and after a large acquisition the company's financials just got a lot worse. Level 3 has a debt to asset ratio of more than 75% which has consistently increased over the last three years. And to make matters worse the company that Level 3 is acquiring, Global Crossing, has a similar financial situation with a debt to assets ratio that has increased each of the last five years and is near 75%. Therefore with each company unable to post a profit I question the belief that both companies together will be effective and I have even more concerns regarding the large amounts of debt on each company's balance sheet.

Level 3 seems very confident that this acquisition will result in profitability. I give the acquisition a 50/50 chance of being successful and producing long-term profitability. There are just too many questions regarding the financials of both Level 3 and Global Crossing, and although I have been bullish on this merger in the past, I believe the risks are great with significant downside potential. Level 3 has announced its plan to cut hundreds of jobs, but I believe it needs a much more drastic measure in order to cut back on costs. If this acquisition was to fail it could very well result in bankruptcy, and I doubt that solid accounting and strong leadership would matter.

I am hoping that this acquisition results in profit and long-term success for Level 3. I believe the company has a solid product and with Global Crossing the company can expand its operations into the heavily populated areas of Europe and Latin America while strengthening its crucial fiber-optics network. Yet investors must weigh all possible results of this acquisition before making a long-term decision. I believe it's a make or break purchase, and the company has taken a big chance with management understanding that a major change has to take place. And while I hope that this acquisition is as successful as investors believe, I fear that both Level 3 and Global Crossing have dug a hole that is simply too deep to crawl out and until I see that this merger will result in consistent profit I have to believe that two companies with loss do not equal a gain.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: All statistics and information regarding a stock was obtained from the company's earnings report. As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy.