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Exclusive: A few days ago, I had written a little something about Global Crossing and the recent run-up in its stock price. I was intrigued by what was driving the price up of this dog full of fleas. A few phone calls to right-placed sources later, […]

Exclusive: A few days ago, I had written a little something about Global Crossing and the recent run-up in its stock price. I was intrigued by what was driving the price up of this dog full of fleas. A few phone calls to right-placed sources later, I think I have a clear idea as to what’s driving Global Crossing stock up. And it has got nothing to do with Global Crossing’s fundamentals, and everything to do with Tyco Global Network.

The Bandwidth Bazaar is abuzz with rumors that Tyco Global Network is for sale, and there are at least eight parties interested in buying out the network. Two Indian telecom operators, Tata-owned VSNL and Reliance Infocomm are said to be the most serious bidders for the network. The others in the running include Singapore Technologies, the very same people who plunked down nearly $265 million for a big chunk of Global Crossing. Goldman Sachs, the New York-investment bank is managing the sale, and is looking for over $200 million for the network.

The Tyco sale should come as no surprise to anyone. On November 4, 2003, Tyco head honcho, Edward Breen had made it clear that he would sell the $3.5 billion white elephant as soon as possible. At the time Tyco expected to get about $400 million for the network, which has never made money, and has been bleeding cash.

One bandwidth trader explained to me: “When this sale is over, there will be seven parties who will be disappointed.” Global Crossing and the punters backing it are hoping that one of those seven would make a bid for GLX. Many well-placed bandwidth traders believe that Tata and Reliance are front-runners in the race to buy Tyco Global. “VSNL is looking at Reliance and saying we are going to buy a optical network too,” says this trader. Reliance in case you don’t remember had bought Flag Telecom out of bankruptcy and has been using that to wage a price war in the long distance voice market. A report in Hindustan Times last month said:

Reliance Infocomm has started an India call service from 22 states in the United States that have a significant presence of NRIs. Mirroring its domestic strategy, Reliance has extended its price warrior strategy to international shores by offering a cut price tariff to woo users. At 11.9 cents (around Rs 5.50) on a 60-second pulse, the Reliance service is nearly Rs 4 cheaper for people who call in from the US. The average existing call rate is between Rs 8 to Rs 9 per minute depending on the carrier and the channel.

VSNL would have to counter this “scorched earth” move. Still, no one should expect a wild move from VSNL, which is owned by more conservative and sensible Tata Group. Tyco and Tata VSNL have an exiting relationship which revolves around building am undersea cable network between Chennai and Singapore. Tyco Global would give Tata an instant global network and would help carry the lucrative data traffic to and from tech-hot houses of Madras, Bangalore and Hyderabad. These three cities are major centers for off-shore software and business process outsourcing.

Those familiar with the matter told me that, “They (VSNL) might move on Tyco if the price is right. But they are being rational about it and are all aware of the operating costs and will stay in control.” In other words, VSNL is really kicking the tires and taking everything including operational expenses into consideration. Many believe that Tyco Global’s one real asset is its pacific cable, which does not have too much competition. Atlantic Cable has too much competition and the prices are in a swoon. With a Tyco buy, VSNL can really stand-up to competition from two major Indian rivals, Reliance and Bharti Telecom, which owns a big fat cable that connects Singapore to Madras, India.

Nevertheless, whosoever ends up with Tyco, it is clear that Global Crossing and Dennis’ disaster cannot get away from each other. During the telecom’s bubble years, Tyco was the company that built undersea fiber optic networks for Global Crossing. The two companies were attached at the hip. As background Neil Tagare, one of the main architects behind Flag Telecom, proposed a new transglobal network, Project Oxygen, he signed up Tyco for construction of that network. Tyco, it is said dropped out under pressure from Global Crossing thus causing a fatal delay. (Project Oxygen’s financials were not really stellar either.)

Eventually Tyco thumbed its nose at Global Crossing and built its own network. Like everything else Dennis K touched, this too turned into a pure unadulterated piece of crap – good for a momentary pop in stock market valuation, and nothing more!

  1. Interesting analysis..VSNL has engaged Tyco to build a Madras(India)-Singapore undersea fiber cable. TGN currently has connectivity from Japan onward to US and Europe…if VSNL did this acquisition wouldn’t they have to further build a Singapore-Japan leg to complete the network?

    On the other hand Reliance thru their ownership of FLAG already has fiber to Japan…so this may make more sense for them.

    VSNL has already spent 100 million to build India-Singapore; add another 200 mil for TGN, plus another let’s say 100 mil for Singapore-Japan…pretty expensive.

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  2. hi ron … thanks for the email. i think by buying TGN VSNL will get a big chunk of pan-asian fiber, pan-pacific fiber and transatlantic cables. i guess they would not have to spend more on the cable buildout but mostly on maintainence of the networks.

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  3. rahul kapur Tuesday, May 3, 2005

    hi om,
    How soon do you think Tata’s will be able to recover their investment in TGN ?
    Do you rate it as a good deal for VSNL ?

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  4. not sure when they will be able to recover their money but this is still a good deal for tata, since they got a really fast growing route between india and pac rim and usa. that’s where all the traffic is going to see maximum growth so i would not be surprised if they start making money much faster than others.

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  5. Roshan Bijlani Tuesday, May 3, 2005

    Hi Om,

    By acquiring a US based company, what post merger integration issues in the areas of product management, contract biding and sales models do you see cropping up for Tata VSNL?

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