Global Crossing

What Is Global Crossing?

Global Crossing was a multinational telecommunications provider that was acquired by Level 3 Communications in October 2011. Prior to its acquisition by Level 3 Communications, Global Crossing attracted widespread media attention after filing for bankruptcy in January 2002. This bankruptcy occurred amidst an accounting scandal in which it had allegedly inflated its reported earnings figures.

Understanding Global Crossing

For many investors, Global Crossing is memorable as an example of the irrational exuberance that occurred at the height of the dot-com bubble. In this respect, it is often cited alongside the infamous energy company, Enron Corporation.

The comparison between Global Crossing and Enron is not without its merits. In 2001, for instance, the two companies explored a potential transaction in which they would inflate their respective revenues by $650 million despite no actual goods or services changing hands. Although this transaction was never completed, it is a cogent example of the types of aggressive and arguably fraudulent strategies pursued by both companies in their attempts to propel their growth.

In the end, Enron declared bankruptcy in December 2001, with Global Crossing following less than one month afterward. At the time, Global Crossing's bankruptcy was the fourth-largest in U.S. history. In 2005, it settled with the Securities and Exchange Committee (SEC). Under the terms of this settlement, it was determined that Global Crossing had failed to comply with numerous accounting laws.

Capacity Swaps

One of the ways Global Crossing inflated its earnings was by the use of so-called capacity swaps. This method refers to the practice of legally exchanging telecommunications capacity rights among providers so as to justify the recording of new revenues. This practice was often done without any money, goods, or services actually changing hands, thereby creating the illusion of productive activity.

Example of Global Crossing

At the time of its bankruptcy in January 2002, Global Crossing held assets of over $20 billion. These assets were gradually sold off, and the company emerged from bankruptcy in April 2004 following the settlement of numerous lawsuits involving the company’s alleged acts of securities fraud.

Following its emergence from bankruptcy, Global Crossing pursued new growth opportunities through a series of acquisitions throughout the world. In October 2011, the company was itself acquired by Level 3 Communications in a deal valued at $3 billion.