Many people in upstate New York have been financially devastated by the collapse of Global Crossing's stock from US$$61.375 two years ago, to US$0.82 today
That is because Global Crossing Ltd, which aimed to build a worldwide fiber optic communications network, swallowed up the old Rochester Telephone, and many investors and workers in the region owned shares in that reliable, low-risk utility that were converted into shares in a high-risk start-up.
But some of Global Crossing's executives and directors have done quite well, cashing out to varying degrees the last couple of years.
Gary Winnick, a former sales executive at Drexel Burnham Lambert under Michael Milken, put up US$20 million to help found the telecommunications company in 1997. Since taking it public in August 1998, he has sold shares for more than $600 million, according to Thomson Financial/First Call.
Not a bad pretax return for anyone, even if the nearly 9 percent of the company he still owns has dwindled in value, knocking him off the Forbes 400 list of the wealthiest people in the US.
Long after the telecommunications bubble burst, Winnick, who is chairman of Global Crossing, continued to be a savvy investor. As recently as May, he locked in a profit on a big stake. Using a transaction known as a collar, in which he gave up some potential to gain, he guaranteed himself a minimum price of US$12.38 apiece for nearly 10 million Global Crossing shares. The deal was worth US$123 million.
"The company told me that the sale was for diversification," said Rick Grubbs, an analyst at Credit Lyonnais. "I can understand it in a fiduciary capacity. It is hard to have 80 percent or 90 percent of your assets in one stock. But is he getting out at what he perceives to be the top? Does he see something as an insider that we don't? There is a fine line between portfolio diversification and the perception of bailing out of a stock."
All along, Winnick has said that he and the Pacific Capital Group, an investment firm he controls, were selling for diversification. In May 1999, when the stock hit a closing high of US$61.375, Winnick made news by buying a Bel Air estate for more than US$60 million. He ranked as the nation's 68th wealthiest American on the Forbes list, with a fortune estimated at US$3.2 billion.
Winnick's remaining holding of roughly 68 million shares, warrants and options is now worth only about US$55 million, down from about US$986 million in May.
Other company insiders also sold earlier this year.
David Walsh, president and chief operating officer, sold more than 670,000 shares, not quite half his stake, according to a filing, for proceeds of US$8.7 million in May.
Joseph Clayton, director and division officer and president of Global Crossing North America, owned roughly 2 million shares and options, according to a filing in April. He sold about 49,000 shares for US$768,000 in May.
Lodwrick Cook, the company's co-chairman and a retired chairman of ARCO, sold about 763,000 shares either directly or through a family trust for US$8.9 million. He owned about 20.5 million shares, options and warrants.
John Scanlon, a director and one-time chief executive of the company, sold 70,000 of his 2.8 million shares and options for US$940,100.
Paul Elliott, an analyst at Thomson Financial-First Call, said all the selling was troubling. "You never like to see insiders selling when a stock is declining, and certainly not declining that dramatically," he said.
Winnick envisioned a telecommunications empire with undersea fiber optic cables that would become worldwide to transmit information via the Internet.
Part of the company's rapid growth came through acquisitions, including the Frontier Corp.
Rochester Telephone remade itself in 1995 when its president, Ronald Bittner, created a corporate parent named Frontier, which tried to become a player in long-distance, fiber optics and cellular services.
Employees of the telephone company were pushed into shares of Frontier and then of Global Crossing, actions opposed by their union because it considered the new stock risky. "It's almost worthless, and we are still stuck with it," said Linda McGrath, president of Local 1170 of the Communications Workers of America, which represents the telephone workers in Rochester.
The union had a traditional pension plan, under which retirees received a guaranteed monthly payment. But in 1996, that plan was frozen, and all workers were told that they would instead begin receiving Frontier stock for their retirement. Many workers also bought additional shares from the company."The company told us we were all going to be millionaires," said John Pusloskie, the union vice president, who said his stock is now worth less than US$100.When Global Crossing bought Frontier in 1998, the union argued that the workers should be able to diversify, saying that a company financed mostly with junk bonds was too speculative for retirement savings."They flat out refused to let our members out of Global Crossing stock," McGrath said, a point the company does not dispute.
Randal Simonetti, who as Frontier's spokesman defended the retirement change in 1996, said the value of his retirement and stock option plans had fallen by about $1 million from their peak.He did not sell when the stock began to slide, he said, because "you like to remain committed to the firm."
"It is a psychological investment," Simonetti added, "because when you own a significant number of shares, you want to work hard and make the company prosper so you will prosper."
Richard T. Hogan, 62, a lineman who plans to retire soon, saved for retirement mostly through the the Rochester Telephone 401(k) and stock purchase plans. He said he had US$480,000 at one point, but most of it is gone."I am still going to retire in three months," he said, though his plans of buying a recreational vehicle and traveling have vanished. "The pension I have, nobody can touch that. It is guaranteed, and no matter what happens I will still get that amount, while you are always at risk with any 401(k) plan when you invest in stock or mutual funds. The pension is much better."
On July 2, Global Crossing sold the local telephone companies in Rochester and dozens of other communities to the Citizens Communications Co. The workers were finally given a chance to sell their Global Crossing shares. But with the stock approaching US$9 a share, the union said, few people did. Citizens declined to say how many workers had diversified.
Clover Capital, an investment management firm in suburban Rochester, bought US$100 million of Frontier stock and got out for a quick US$80 million profit early on, said Mathew Kaufler, its chief strategist. But it started buying Global Crossing again a year ago. By August, it had US$17 million worth."We totally miscalibrated the extent to which the industry and, in particular, the fiber optic market was deteriorating," he said.
Kaufler said his wife inherited some Rochester Telephone shares and held them all the way down. "This is a community in which an enormous number of people bought Xerox, Kodak, Bausch & Lomb and Rochester and out of inertia were loath to sell them," he said. "Now pain is very deep and very widespread in Rochester."
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