Telcos' future valuations uncertain
It's been a difficult time lately for the high-flying new breed of long distance telecommunications companies, as the stratospheric stock valuations of a few months ago have come crashing back to Earth.
Companies such as Qwest Communications 
International, Global Crossing, and
Level 3 Communications have lost as much as 50 percent of their value over the course of the summer--even as some of these have launched stock-based merger bids aimed at dramatically expanding their reach.
In large part it is these mergers, and the intense scrutiny of the companies that has followed, that have helped deflate the telcos' collective stock bubble, analysts say. In many cases the market has found the companies' strategies lacking critical components.
For example, in the face of its lower stock valuation, Global Crossing has increased its bid for Frontier to ensure the deal is finalized.
Global Crossing and Frontier's complex, months-long series of negotiations, renegotiations, and fluctuating stock prices underscore the difficulty of valuing telecommunications companies--those new carriers building networks, as well as the more established carriers with concrete assets and customers that want to reshape themselves as Internet-based data carriers.
"These new-age, high-bandwidth companies are getting a closer look," said Rex Mitchell, a telecommunications analyst with Bank of America Securities. "I don't think they can ever be high fliers again without getting local assets."
The distinctive pop of a bursting stock bubble has echoed outside the telecommunications sphere in recent months as well. Internet stocks also lost much of their value over the summer, as investors began turning a critical eye on Web companies that have little chance of reaching profitability soon.
Unknown commodity
Earlier in the year, the new breed of telcos--which have spent several years laying vast networks of high-speed fiber-optic cable across the nation and overseas--existed in a comfortable niche between Internet and traditional telecommunications stocks.
They had little or no track record of revenues or earnings, but promised to provide the conduits for data communications underlying an Internet-centric future. Investors wary of the hype of Net stocks could take comfort in knowing that the telcos actually owned tangible networks. Those networks were steadily growing, if still providing relatively small short-term returns.
Investors initially liked this story and bid the companies' shares prices higher.
But warning signs in the form of falling per-minute long distance prices and a growing interest in linking the local and long distance networks began in earnest early in the year. For example, AT&T, the biggest and oldest long distance carrier, made a $110 billion bet on providing local telephone service through cable-TV lines by making two major acquisitions.
March madness
The latest round of telecommunications merger mania was kick-started by Global Crossing's attempt to buy Frontier in March. A proposed combination in May of Global Crossing and US West led to a backlash on Wall Street, opening the door for a competing offer for both Frontier and US West by Qwest.
As negotiations continued into the summer, Qwest's stock price also plummeted, forcing it to revise its offer. Ultimately, both Global Crossing and Qwest walked away with a merger partner by splitting the spoils, but a hard look at the companies' bottom lines--coupled with Wall Street's aversion for uncertainty and a cooling summertime stock market--led to significantly lower share prices for all.
Global Crossing shares are trading about 50 percent lower than they were when the international fiber-optic network builder first bid on Frontier, and the stock is down significantly from its late-spring highs in the 60s. Frontier stock is nearly 20 percent lower since the Global Crossing offer was introduced.
Similarly, shares in Qwest are off nearly 40 percent since the company first announced its intentions to join the merger fray, while US West shares have slipped 10 percent.
The critical eye also spread to other new long distance carriers. Level 3 has lost close to 35 percent of its value since peaking in May. IXC Communications dropped sharply earlier in the year but stabilized after its merger with local provider Cincinnati Bell in July.
Tony Ferrugia, an equity analyst at A.G. Edwards, said Global Crossing shares, and those of other new-age telecommunications companies, have ridden the Internet hype for much of the year.
"I would expect that Global Crossing probably will not decline much more. [The share price] probably reflects more the fundamentals of the combination," Ferrugia said.
Honeymoon over?
The future for the Global Crossings and Level 3s of the world is less than certain. The companies have valuable assets, but without a local network component--or new services and technology that can distinguish their long-haul networks from those of the growing number of competitors--they will be hard-pressed make new strides forward, analysts said.
"The market has realized that long distance assets without local assets--or some very smart capabilities that are not easily replicated--are not as attractive as they once were," Bank of America's Mitchell said.
Thus, for the telecommunications high-fliers, the honeymoon may be over.
Mitchell added that he expects most of the companies to follow Qwest's lead in some fashion and partner or merge with local providers. But this may take some time, as the biggest local phone companies are prevented from offering long distance service.
In the meantime, Wall Street is taking a harder-nosed approach to telecommunications newcomers.
"Ultimately the markets are pretty savvy," said Bruce Raabe, a financial analyst with Collins & Company in San Francisco. "You can call your company what you want, but ultimately it's going to come down to a track record of growth and earnings."