No one could appreciate the size and scope of the Bandwidth mess. After all, it was the biggest Boom and Bust in human history.
Many of the iconic companies—AT&T, Genuity, PSINet, Touch America, and WorldCom—never recovered from the Bust. Others navigated through bankruptcy and regained momentum but were vulnerable prey hunted by predators seeking to rollup Bandwidth providers on the cheap. Qwest became part of a rural telephone company named CenturyLink.
Level 3 barely avoided bankruptcy and didn’t sell out. “We talked about ‘the pace of change’ and about ‘enormous revolution,’” Jim Crowe reflected in 2002. “I guess what I didn’t appreciate is just how messy revolutions can be.”
In this environment of fear and uncertainty, dozens of smaller fiber companies were sorting through their own bankruptcies or distress.
Forbes, in its 2002 article titled “Telecomeback,” looked ahead.
By picking through this titanic wreckage, new fortunes will be made. . . . In the aftermath, . . . hard assets are selling for pennies on the dollar. That sets up the next telecom revolution, the next bout of wealth creation. It offers riches for the survivors and for investors bold enough, or crazy enough, to bet on the coming chaotic consolidation.
“The telecommunications industry is going through a period of unprecedented turmoil,” said Level 3’s Crowe to Forbes in its 2002 article titled “When Buffett Buys, a Bottom Must Be Near.” Crowe added, “At the same time, the ongoing shakeout is creating extraordinary opportunities, as telecommunications companies, their network assets, and customer bases become available.”
Forbes wrote, “The telecom sector remains shrouded in gloom, but clearly the potential consolidators are starting to raise their heads a bit and sniff around for opportunity. If Buffett is buying into a fiber-optics play like Level 3, that’s a sign that telecom valuations finally have fallen low enough to tempt prudent value investors. Let the bottom-feeding begin.”
Wired magazine was more brass in their 2002 article titled “Surviving the Fiber-Optic Fire Sale: “Incredible assets are up for grabs. . . . Vulture capitalists are circling, ready to pick the losers’ bones. To win takes nerve, cash and luck. And the game could drag on for years.”
While investors were frozen with fear, a new breed of entrepreneurs became greedy. I was one of them.
ICG—J. Shelby Bryan and Dan Caruso#
I felt like a failure when I left Level 3 in 2003. Given the disastrous events of the early 2000s, I’m sure plenty of my industry colleagues did as well. Many never recovered, carrying the burden of their role in the meltdown through the remainder of their lives. Most of the leaders in the industry who remained never fully grasped the difficult lessons that needed to be learned.
I did. I deeply reflected on what had transpired in both the industry and throughout my career. I used my failures, and the failure of the industry, to carve a better path forward.
I applied the lessons I learned to achieve outcomes that earned me a Hall of Fame spot with nearly all my financial sponsors. For my first two investors, I achieved the largest internal rate of return (IRR) (>400 percent) and investment multiple (twenty-five times) in their combined fifty years of history.Columbia Capital and M/C Partners were my Private Equity partners. These two sponsors backed me in my next venture, and they, alongside a few other investors, achieved the highest Absolute Return in their combined one-hundred-year history.Columbia Capital and M/C Partners were joined by Battery Ventures, Charlesbank, Morgan Stanley, Oak Investment Group, and Centennial Ventures. My investors, including the portion that was earned by management, earned $8.5 billion on their $1.1 billion investment.
My comeback began with a fiber provider in my home state of Colorado, whose backstory was colorful. In a 2000 article, the New York Observer described the leader of a fast-growing Bandwidth provider in Denver named ICG Communications:
J. Shelby Bryan is tall, smooth and charming—seductive, even. He is an incomparable salesman. A blend of old Texas money and East Coast establishment gloss, the 54-year-old Mr. Bryan offers something for everyone: a few years working for Ralph Nader . . . , a stint as a Morgan Stanley mergers and acquisitions banker . . . and, when such a move was still considered daring, a run as a telecommunications entrepreneur.
Vogue editor Anna Wintour left her husband for him. President Clinton schmoozed Manhattan Democrats in his Upper East Side salon. And on Feb. 29, cable titan and notoriously discerning communications investor John Malone took a $500 million stake in his high-flying . . . ICG.
ICG was born as Teleport Denver, a satellite operator in the mid-1980s that later rebranded to IntelCom Group. In the mid-1990s, with both its cash and prospects low, ICG recruited Bryan to become its CEO.
After receiving an MBA from Harvard University, Bryan launched his career as a Morgan Stanley investment banker. In 1979, he co-founded Millicom International Cellular SA, which had a Market Value of $1 billion when he resigned from his CEO position in 1994.
In his first year as ICG’s CEO, Bryan raised $2 billion, much in the form of junk bonds. When Bryan observed Wall Street’s reaction to AboveNet, MFS, Teleport, and others investing in metro fiber networks, he accelerated ICG’s local fiber build-outs. The market reacted favorably. At the peak of ICG’s share price, Bryan’s stock was worth $88 million.
Bryan enjoyed the stature and perks of being a public company CEO, including raising capital and schmoozing with VIPs. However, he didn’t much care for the aspects of the job that involved running the business. Bryan lived in New York City and spent minimal time in Colorado, the headquarters of ICG.
Bryan left the day-to-day operations to COO John Kane. In the late 1990s, Kane turned his attention to providing dial-up Internet access platforms for low-cost Internet Service Providers. In particular, ICG’s customers were Microsoft, Earthlink, NetZero, which offered its customers free access to the Internet, and the discount retailer K-Mart, now bankrupt, for its BlueLight.com online service.
With ICG’s customers offering free Internet access, traffic into the ICG network ramped up exponentially. The network wasn’t ready for this traffic explosion, which led to an implosion of service quality. In 2000 the Wall Street Journal reported, “Key customers, including Microsoft Corp., NetZero and EarthLink, began screaming that users trying to connect to the Internet through the ICG network were getting blocked by busy signals or had connections cut off.” The Denver Post piled on: “ICG’s network was rife with troubles. It had experienced network outages, equipment failures, and technical difficulties. . . . Customers cut back on their business with ICG and threatened to cancel their contracts altogether.”
During the early signs of duress, Bill Beans, a veteran of MFS and Teleport, replaced Kane as COO.
ICG’s motive to aggressively offer this service was to exploit the access charges that the Baby Bells were required to pay for terminating this dial-up traffic. In 1999, $125 million of ICG’s $479 million revenue was derived from this unsustainable regulatory framework. However, in 2000, the gravy train ended. Led by SBC, the Baby Bells delayed payments and forced a 90 percent reduction in the fees it was obligated to pay for terminating dial-up Internet traffic.
In the spring of 2000, before the customer challenges and rate reduction had fully played out, Bryan convinced John Malone’s Liberty Media to lead a $750 million investment in ICG, which equated to an Enterprise Value at nearly $5 billion. Leveraged-buyout specialist Hicks, Muse, Tate & Furst invested $230 million alongside Malone’s $500 million. The other $20 million came from investment advisor Gleacher & Company.
In August, in the midst of deteriorating service and shrinking revenue, ICG was on the cusp of combining with Alex Mandl’s Teligent, which was also in Liberty Media’s portfolio and was also faltering. The New York’s Waldorf-Astoria Hotel was booked for an August 9 announcement. Mandl pulled out at the last minute as he better understood the magnitude of ICG’s dire situation. Perhaps Mandl also knew that two wrongs don’t make a right.
In September 2000 ICG slashed its estimates for 2001 revenue to half of its earlier forecast of $1.4 billion. The stock plunged to below $1 per share. With debt trading at a gigantic discount to face value, famed hedge fund manager Steve Feinberg bought a significant amount of ICG’s high-yield bonds via his firm, Cerberus Capital Management. The $750 million invested in the Malone-led round just four months earlier was worthless. In Malone’s exceptional career, ICG must have ranked as his worst investment.
Bryan was replaced by Liberty Media’s Carl E. Vogel. A class action lawsuit claiming securities fraud against Bryan and others was settled for $18 million.John Kane was also named in several lawsuits.
With all hell breaking loose, a board meeting was held on September 15. Beans recalled fifteen board members and advisors, including Vogel and billionaire Thomas “Tom” O. Hicks of Hicks, Muse, Tate & Furst, were in the meeting when a blast struck the window of the sixth-floor boardroom at ICG headquarters.
“I was presenting, and I thought a bird flew into the window,” Beans told me in 2024. The security people came in and said [it was] a bullet, not a bird.” The police concluded the bullet was from a sniper, though the subsequent investigation didn’t uncover the source. Vogel and Hicks resigned the next day, leaving Beans as COO, reporting to a thinned-out executive committee of the board.
Two months later, with the stock now worthless, ICG filed for bankruptcy. Randy Curran, who had restructuring but no telecom experience, was hired as the CEO. In October 2002 ICG emerged from bankruptcy as a public company with $205 million in debt and $94 million in cash. “This is a great day for ICG, our customers, and our employers,” said Curran, CEO of ICG. Cerberus and W. R. Huff Asset Management emerged as the largest shareholders.
In 2003 Curran was named Denver’s Telecom Executive of the Year by the Denver Telecom Professionals, who released the following statement: “Over the past year there have been very few telecommunications executives in the world who have been successful in turning their businesses around in this unstable environment, and Randy Curran is one of these executives.”
Not all was as it seemed. By the end of the same year, Curran was no longer CEO. In the fall of 2004, just two years after emerging from Chapter 11, ICG filed a statement with the SEC disclosing it would likely need to file for a second bankruptcy.
While the ICG drama was playing out, I was wrapping up my time at Level 3. One of the hallmarks of Level 3’s culture was convincing ourselves that we were the best operators in the telecommunications industry. Even in our survival years, we could point to Level 3 as being among the few that avoided bankruptcy or a desperate sale.
So when I left Level 3, I thought my phone would ring. It didn’t. It turned out most investors didn’t notice. Or perhaps they didn’t care. Most of the telecom industry saw Level 3 as no different from our bankrupt rivals—like them, we also destroyed enormous amounts of stakeholder value.
Moreover, my rapid rise was fueled by a relentless desire to succeed no matter the cost. I had sharp elbows, low patience, and poor EQ. Colleagues had mixed feelings about me. They saw me as intelligent, driven, and successful—but also as ruthless, callous, and insensitive.
Lastly, the industry environment remained in peril. Too many executives were chasing way too few opportunities. Investors lost billions in telecom. Most were not ready to lose more.
I faced the unpleasant reality that my career had come to an end. I was only forty.
Just when I needed it, I received a big assist from a Level 3 colleague, Donald “Don” Gips. My relationship with Gips began in 1998, when he visited our Level 3 offices in Boulder. Gips arrived early for his scheduled meeting with Crowe, so I was asked to spend time with him. We introduced ourselves to each other, did the small talk thing, and slowly figured out that neither of us knew why we were talking to each other.
Gips was everything I wasn’t—he had an undergraduate degree from Harvard University and an MBA from Yale. He was a management consultant at McKinsey & Company and then became chief domestic policy advisor to Vice President Al Gore. He served as chief of the International Bureau at the FCC, where he was responsible for wireless spectrum policy and auctions. He was sophisticated, well spoken, and worldly.
I was a schmuck from the blue-collar south suburbs of Chicago.
Crowe hired Gips to lead corporate strategy and development, which he did for ten years. In 2008 he resigned to serve in the White House, where he ran the Office of Presidential Personnel for President Obama. He was named as the US ambassador to South Africa.
In 2003 Gips sent this note on my behalf:
From: Gips, Don Sent: Wednesday, February 26, 2003 To: James “Jim” Fleming Cc: Dan Caruso Subject: FW: Follow-up
Jim, I want to introduce you to Dan Caruso. Dan just left Level 3 and is one of the smartest people I have worked with here or anywhere. He is also a very good friend.
Don
Fleming was a senior partner at Columbia Capital (ColCap), a Washington, DC–based Private Equity company focused on telecom. John Siegel was Fleming’s younger partner, and together, they were considering an investment in a distressed public company. Their investment thesis was to replace the CEO, but they didn’t have a new CEO lined up.
M/C Partners, a Boston-based Private Equity firm that also focused on Technology, Media, and Telecommunications (TMT), was teaming with ColCap on the transaction. Peter Claudy was the lead partner on the deal. A fresh-faced MBA named Gillis Cashman was also involved.
A team of my former MFS colleagues were working with ColCap and M/C Partners on the deal. As the story goes, Claudy called up Siegel.
Claudy: Our MFS guys say they have the perfect person to be CEO of MPower.
Siegel: We have a name too. Don Gips from Level 3 is highly recommending him.
Claudy: That’s a coincidence. The person recommended to me is also from Level 3. His name is Caruso.
Siegel: That is the same person Don introduced us to.
That deal didn’t work out, so instead, Siegel and Claudy decided to back me as CEO in a bid to take ICG private. By this time ICG was burning $8 million a month and had $32 million of cash remaining. Do the math. They would be out of cash, according to their calculations, in four months.
They had $100 million in liabilities. The majority was a long-term lease on the corporate headquarters Bryan had built in Denver’s Tech Center. The building was a lavish edifice of black marble, designed by an architect who was a college friend of Bryan’s. When it was dedicated in 1998, Bryan boasted,
The building slants outward and upward, a little bit like our business. We are a relatively small company in a competitive industry, and in order to be successful, we have to be pretty darn aggressive. We wanted a dramatic-looking building that reflected what we were all about.
The building was described to reflect a bow of a ship, facing westward to signal that ICG was taming a new frontier. Instead, the new frontier tamed ICG and the bow-of-a-ship building became a lavish black marble anchor.
In the 2002 bankruptcy restructuring, ICG entered a long-term lease with the building owner. ICG’s obligation was to pay $600,000 a month, which equated to about $60 million of the $100 million of 2004 liabilities.
While we were negotiating to buy ICG, I reached out to the building owner. A bankruptcy filing would have tied up their asset for several years. I offered to return it to them in eighteen months, in exchange for us paying them $240,000 a month. This eliminated over $55 million of liabilities with one stroke of the pen!
On July 18, 2004, with the revised building lease in hand, we entered the agreement to buy ICG for $0.75 per share, which equated to $5 million.Gillis Cashman of M/C Partners recalled a conversation between the investors and me. I shared my analysis that I believed ICG’s equity was worth at least $50 million. Peter Claudy of M/C responded that we could buy it for $5 million, to which I responded, “Holy crap. If so, I am going to make you a shit ton of money.” We agreed to invest an additional $3.7 million into ICG to provide them sufficient cash to get through the closing period, meaning our total investment was $8.7 million.
“When the ICG investment was announced, Jim and I received a call from a fellow investor who offered a sarcastic congratulations: ‘I give you guys credit. At least you are going to die with your boots on,’” recalled Siegel. The phrase originates from the idea of soldiers or cowboys who would die in action, still wearing their boots, rather than surrendering or otherwise giving up. “This made me chuckle because we were confident in the team and their plan, but showed the abject fear in the market in the wake of the fiber meltdown,” Siegel added.
A multi-month shareholder and regulatory approval process was required before we would be able to close the transaction. During this period we significantly cut ICG’s cash burn rate, primarily by shuttering ICG markets that were not core to our Bandwidth strategy.Several ICG markets, such as Boston and Philadelphia, had no fiber. We shut these down.
In parallel, we negotiated the sale of ICG’s California business. Three days after we closed our ICG purchase, we announced that MPower was buying the California business for $38 million, consisting of $13 million in MPower stock and $25 million in assumed liabilities associated with a California fiber lease. The combination of the renegotiated headquarters lease and the California transaction reduced the $100 million of liabilities to $20 million—all within three days of owning ICG.
When MPower was sold in 2006, the value of our MPower stock grew to $20 million.
Like all Private Equity transactions, we needed a business plan to support the investment.John Scarano, who was a colleague at MFS and Level 3, and Marty Snella from Level 3 were two of my initial partners. Rob Schmiedeler, a neighbor, was a third. Later, we were joined by Sandi Lewis (from MFS and Level 3), Dennis Kyle (from Level 3), and Matt Erickson (also from Level 3). I winged a plan and put together numbers to support the thesis. I showed that the resulting businesses would be worth over $100 million, which would leave us with $40–$60 million of value—a return of two to four times the $15–$20 million we expected to invest. The clarity of the plan meant the entire team was in full execution mode from the moment we took control.
Each week we met with ColCap and M/C. We’d review progress against the plan, and in almost every case, we were way ahead of our targets. We sold nonstrategic markets.ICG’s southern markets were sold to Xspedius for $18 million. We reduced the liabilities more and faster than we projected. We found hidden sources of value that we monetized into cash or equity.Part of the land that ICG owned at its headquarters was adjacent to Colorado’s new light rail. We sold it for $2 million. If we held it another year or two, it would have been worth far more.We sold ICG’s voice business, called Voicepipe, for equity. Some of the equity was received from a Golden, Colorado–based company called New Global Telecom. When we sold ICG to Level 3, they didn’t want what remained of our Voicepipe business and gave me the option of retaining Voicepipe, which we did. Later, we merged Voicepipe into Zayo for $3 million of Series A equity. Voicepipe’s value grew by over ten times as Zayo’s value rose, meaning Voicepipe alone became worth more than $30 million. Progress on expense reductions was well ahead of schedule.
The running joke was that whatever we achieved the prior week was old news. Quickly, the investor meetings were titled “What have you done for me lately?” as we discovered additional value adders to celebrate. These were fun times for the management team and the investors.
Colorado was ICG’s home turf. It owned one of the best competitive fiber networks in the state. We focused on the Bandwidth product. Revenue was growing while cash flow was being generated. We concluded this geography alone could be worth $130 million. Ohio was the second most important ICG geography. We turned this into a growth business as well and concluded it was worth $45 million.
Some, including me, wanted to keep Colorado and Ohio and use these operations as a consolidation platform. Others wanted to sell. One of our investors needed a big win to bolster their otherwise struggling funds. My management team had little to show for their Level 3 stock options and wanted to put money in their pocket. They were right. It was time to take chips off the table.
With Level 3, Qwest, and tw telecom all headquartered in Colorado, the Colorado network gave us leverage in the sale process. The result was Level 3 acquiring ICG for $173 million.The $173 million purchase price consisted of $10 million in assumed profitability and the rest split between cash and Level 3 stock.
We closed the transaction in mid-2006, two years after we took the company private. The outcome was phenomenal. Our total investment was the initial $8.7 million. Our cash balance never dropped below $10 million, which meant that we used their rapidly depleting cash balance of $30 million to buy and turnaround the company. The total proceeds were greater than $250 million, resulting in a Multiple on Invested Capital (MOIC) of 28.7x and an IRR greater than 400 percent.
ColCap and M/C rescued me from likely being an unnoticed asterisk in the story of the Bandwidth Bust. I helped the two post great returns in funds that were being devastated by the meltdown. ColCap and M/C became my lead investors in my subsequent venture. I will forever be grateful to Siegel, Fleming, Claudy, and Cashman for their contributions and to Gips and my former MFS colleagues for their introductions to ColCap and M/C.Don Gips joined Zayo’s board before our IPO and remained a director until we sold the company.
Claudy was suffering from cancer during our two-year turnaround of ICG. He died soon after our exit. I was thankful that he was able to be there for the exit, as it ranked as one of his greatest accomplishments. Importantly, the exit locked in his portion of the value for him to leave to his family. Rest in peace, my friend.
Broadwing—David Huber#
At the end of the Bust, Cincinnati Bell unloaded Broadwing and went back to being a regional telephone company. Broadwing seemed finished. It wasn’t by a long shot.
Long before the Gold Rush, Dr. David Huber was a lab manager at GI in the early 1990s. Huber was working on commercializing a technology that was developed by British researcher David Payne and Bell Labs. Light would be routed through a prism to divide it into multiple wavelengths, also referred to as colors, so that each wave would carry a separate communications signal. The technology became known as dense wavelength-division multiplexing (DWDM), which became the enabler of fiber being able to carry vast amounts of data through communications networks.
However, GI was stubbornly uninterested in funding Huber’s work. Instead, they agreed to license Huber the DWDM technology, conditioned on Huber securing funding of $3 million within eighteen months. Huber was able to close a $3.3 million investment just before the deadline. The new investors named a new CEO and rebranded the company as Ciena Corporation.HydraLite was the initial name David Huber selected for his company.
Ciena went on a tear, which I suspect caused GI to shed some tears of regret. In February 1997 Ciena went public at a $3.4 billion valuation, the largest IPO valuation ever achieved by a start-up. However, by then, Huber had already moved on, departing the firm in 1995. Huber claimed his departure was because the board rejected his proposal for Ciena to develop an all-optical system.
Huber’s Ciena stock became worth $300 million, which he used to launch another optical tech start-up, naming it Corvis Corporation.Following the Bandwidth Bust, Ciena’s annual revenue decreased from $1.6 billion to $300 million. In February 2001 the company raised $1.5 billion through a combination of stock and debt. Ciena used this cash to survive and acquire distressed rivals. In mid-2024, Ciena’s Market Value was $6.6 billion. This time Huber would remain CEO.
In July 2000, just before the transition from the Boom to the Bust, Corvis went public, raising $1.1 billion. The IPO price was nearly three times higher than the target. The stock price jumped 300 percent on the first day of trading and, after closing at $84, achieved a $28 billion valuation. Within days, the stock price increased another 30 percent, resulting in a valuation of $38 billion. Huber’s 22 million shares were worth $1.9 billion.
This historically successful IPO occurred despite Corvis having only two customers, with Broadwing being the largest. Moreover, Corvis had yet to ship a product. Corvis’s big balance sheet allowed it to provide vendor financing to its customers. Broadwing, for example, used Corvis’s vendor financing to purchase Corvis’s technology.
Soon after Corvis’s IPO, the Bandwidth Bubble burst. Corvis’s 2002 revenue was only $20 million; its losses were a staggering $507 million. And its largest customer, Broadwing, was under extreme duress. Its two other large customers were in bankruptcy. By early 2003 Corvis’s stock price was $0.64.
Yet Huber didn’t panic; instead, he played the only card he had up his sleeve: Corvis had nearly $600 million in cash remaining from its IPO. Perhaps he could leverage this cash while a host of others were reeling from the meltdown. Huber teamed up with the founder of Cable TV company Charter Communications to buy Broadwing from Cincinnati Bell for a price of $129 million, plus operating liabilities of $375 million—a tiny fraction of the $3.2 billion Cincinnati Bell paid for Broadwing just three years prior.
“Times change,” wrote an analyst, “[fiber] companies . . . are selling their assets for pennies on the dollar to get out from under their crushing debt loads.”
Three years later Broadwing’s board brought in a new CEO, Telecom industry veteran Stephen “Steve” Courter. Huber had decided to step aside, and just one month after Courter’s arrival, Broadwing agreed to sell to Level 3 for $1.4 billion, including $744 million in cash and the remainder in Level 3 shares. So much for Broadwing being dead money. And Huber reaped a windfall for his shares. Later in 2006 he bought a $15 million home in the Port Royal section of Naples, Florida.
Some fairytales do have a happy ending.Steve Courter was a former US army captain and Desert Storm veteran who rose to lieutenant colonel. For only being in the CEO’s chair for a month before the execution of the Level 3 transaction, Courter also had a financial windfall. He ran Broadwing for the next year during the closing process and reportedly distributed a big chunk of his proceeds from the Level 3 sale to some of Broadwing’s senior managers. Courter remained in Austin, Texas, after passing the torch to Level 3 and became an award-winning professor for the University of Texas McCombs School of Business, education always having been his passion.
tw telecom—Larissa Herda#
In the late 1980s, Larissa Herda‘s employer ran out of money. Not only was she left without a job, but her last paycheck went unpaid. The unemployed Herda, who lived in Washington, DC, stumbled onto ICC, the fiber upstart that also employed Ron Beaumont and was later acquired by MFS. In 1988 she convinced them to hire her as an account executive. “I knew nothing about telecom,” Herda reflected in 2024. “When I sold a $15,000 per month deal to Marriott, it caught everyone’s attention.”
In 1999 Herda and her newlywed husband moved to Chicago. She used her ICC experience to land a similar position at MFS, becoming the first employee of the National Account Sales Group. She sold a $50,000 per month contract to a financial services company named Quotron, the largest deal for the company to date. This deal helped solidify Kiewit’s conviction of their new investment in MFS.
Herda recalled another sale she closed, this one to a communications company. “I was in labor with my first child and closed Allnet from the hospital bed,” she said, explaining that a female colleague of hers had returned from maternity leave and was told her job had been eliminated; Herda wanted to avoid a similar fate. Deservedly so, the sale earned her top salesperson of the quarter. During MFS’s IPO road show, Royce Holland used the story of her closing the deal while in labor to illustrate the dedication of MFS’s employees.
Herda and her husband didn’t enjoy living in Chicago, so she asked to be transferred to Atlanta. Her boss, not wanting to lose his top performer, tried to block it. Herda went over his head and convinced Beaumont, now a president of MFS, for support. She was named general manager of Atlanta and turned it into one of MFS’s fastest growing markets. Herda was promoted to regional vice president.
Immediately after WorldCom acquired MFS, Herda was recruited to join tw telecom, a unit of Time Warner, to be the senior VP of sales.At the time Herda joined, the company was named Time Warner Telecom. The name was shortened to tw telecom in 2008 when Time Warner Cable was no longer a shareholder in the company. Just prior to Herda’s arrival, the company adopted the Time Warner Telecom moniker. Previously it was branded Time Warner Communications. The entity that directly owned Time Warner Communications was Time Warner Cable, which was a division of Time Warner.Herda was recruited to tw telecom by MFS veteran Steve McPhie. Herda met McPhie when she trained him for being her regional sales SVP counterpart in the Midwest region. The tw telecom business unit was created in 1993 with the backing of Glenn Allen Britt and the support of his boss, Gerald “Jerry” M. Levin. Levin was named CEO of Time Warner Inc. in 1993, and Britt became CEO of Time Warner Cable in 2001.Perhaps the biggest blunder in business history was media giant Time Warner agreeing in 2000 to a “merger of equals” with dial up Internet provider America Online (AOL). The $350 billion combination was the largest in history. Soon after, it became abundantly clear that AOL’s business model would be engulfed by the transition to dedicated, not dial-up, connections used by consumers to access the Internet. Eager consumers flocked to the more powerful, faster dedicated connections offered by the Baby Bells, Cable TV providers, and hundreds of upstarts. AOL rapidly lost market share, becoming increasingly irrelevant as it practically drowned in this transition’s wake. The impact on Time Warner shareholders would be devastating.
Levin, who led the merger for Time Warner, was named number sixteen on CNBC’s top twenty list of worst American CEOs of all time. Though not much of a consolation prize, AT&T’s Bob Allen, WorldCom’s Bernie Ebbers, and Enron’s Kenneth “Ken” Lay topped him with rankings of twelve, five, and three, respectively.
AOL’s shareholders, especially Internet pioneer Stephen M. “Steve” Case, made out like bandits. “I wanted to concentrate on my family,” Case told the Washington Post. I’m sure his wife and five children wanted to spend more time with him and help him spend the many billions he pocketed from the merger.
By the time Herda arrived in 1997, tw telecom was operational in seventeen markets. Despite the market reach, 1996 revenue was only $24 million, and the company was bleeding $84 million a year in losses. Herda got to work. In her first six months, sixty MFS employees followed her to tw telecom. By the end of 1997, revenue had increased to $55 million, a 130 percent improvement over 1996.
Despite the momentum, Time Warner had lost interest in their tw telecom business unit. They tried hard to sell it but were unsuccessful. On her fortieth birthday, Herda received a call from a Time Warner executive offering her the tw telecom CEO position. She initially declined, recounting the conversation while on an entrepreneurship panel years later: “I told him he must be out of his mind because I had absolutely no idea what a CEO did, knew nothing about the capital markets, and I really wasn’t the right person for the job.”
His response, as recalled by Herda, was, “I’ve watched you for the past year. You’re basically running the company already, and if you don’t take the job, we’re shutting the company down because Time Warner isn’t going to fund the cash burn anymore.” Herda accepted, feeling obligated to the loyal MFS colleagues that followed her to tw telecom. She immediately went on a road show, raising $400 million in three weeks to save tw telecom from being shuttered.
The reprieve didn’t last long. On Super Bowl Sunday in 1999, Britt called Herda and revealed a tentative deal was in place to sell tw telecom as part of a bigger transaction with AT&T. Herda was irate. She convinced Britt and Levin to refrain from announcing tw telecom as part of the transaction. Soon thereafter, Herda forced their hand to allow her to take the business unit public under the threat that she and her executive team would otherwise resign.
tw telecom began trading on the NASDAQ on May 12, 1999, selling $250 million of Time Warner’s shares to the public at $14 per share. By early 2000, tw telecom’s stock soared to $89 a share, a sixfold increase from the IPO price.
In September 2001, in the market crash that followed the terrorist attack, tw telecom’s stock dropped to below $10 per share. tw telecom’s stock, again following the market, bounced back to reach $20 per share later 2001. The recovery was fleeting, with the stock dipping below $1 per share, and the debt traded at thirty cents on the dollar, in 2002.
When the bubble burst, tw telecom was feeling the chilling bite of telecom’s nuclear winter. Eighty percent of Herda’s revenue came from carriers, and most were filing for bankruptcy. WorldCom, in particular, was 14 percent of tw telecom’s revenue.
Herda laid off a third of her workforce. She broke down in tears when she announced the layoffs to her employees. She recalled feeling not up to the CEO task because she let her emotions show. But showing that bit of humanity led to employees sending letters to her expressing their appreciation for her leadership and care.
Herda used her strong balance sheet to aggressively shift her enterprise customer revenue mix from 20 percent to 80 percent, significantly reducing her reliance on the rapidly shrinking carrier segment.
Prior to 9/11 and before the gravity of the Bandwidth Bust became clear, Herda acquired a struggling fiber property named GST Telecom.
John Warta, the founder of Electric Lightwave, launched GST Telecom in 1994. GST built fiber networks in multiple California markets: Tucson, Arizona; Albuquerque, New Mexico; and Houston, Texas. In 1997 he pursued a transaction to become the seventh telecom concession in Mexico for $30 million. His envisioned structure would allow him to build 2,200 kilometers of fiber along Mexico railroads, with an MCI deal in hand to fund much of the build in exchange for four fibers. In pursuing this transaction, Warta set up entities that were part owned by GST and part owned by entities associated with himself.
Herda seized on the opportunity, spending $690 million to acquire the assets of GST out of bankruptcy, which doubled the number of tw telecom markets to forty-four.
Five years passed before Herda did her next fiber acquisition. tw telecom purchased Enron’s Portland, Oregon, fiber assets for $750,000 as part of a competitive auction in early 2004.
tw telecom’s next acquisition was Xspedius Communications in 2006, which has a fascinating backstory of its own—one that also crossed paths with the heritage of MFS.
James “Jay” Monroe III was among the best examples of a clever entrepreneur buying distressed fiber assets in the wake of the Bandwidth Bust. Thermo Group, his family office, teamed with Brown Brothers Harriman and Colorado-based Meritage Funds to bankroll Xspedius. Jim Allen, the co-founder of Brooks Fiber and a former WorldCom board member, partnered with Mark R. Senda, a veteran of MFS, AT&T Canada (a.k.a. Allstream), and Brooks Fiber to form Xspedius.
Xspedius purchased the assets of e.spire Communications out of bankruptcy in June 2002 for $18 million in cash and $50 million in debt. At its Boom era peak, e.spire was worth over $1 billion and had 3,500 miles of fiber with networks in twenty states, including Georgia, Florida, Texas, South Carolina, Arkansas, and Alabama. In 1997 an analyst pumped up e.spire: “By almost any measure—revenues, network, etc.—[e.spire] is the fastest growing CLEC in our universe.”
e.spire, which was originally named American Communications Services Inc. (ACSI), was started by MFS veterans Anthony “Tony” Pompliano and Richard Kozak. Pompliano was the original CEO of Chicago Fiber Optics, which became MFS. Kozak was the original leader of MFS Development who passed my resume along with the recommendation to ignore it to his successor, Kevin O’Hara. When e.spire declared bankruptcy in 2001, neither Pompliano nor Kozak were running the company.
“This is a very healthy business,” said Senda. “Through the bankruptcy process, we were able to eliminate the debt [and receive] a business that is near net income positive.”
In 2005 Senda and I struck a deal. Xspedius purchased five hundred miles of fiber assets from ICG in Birmingham, Alabama, Charlotte, North Carolina, Louisville, Kentucky, and Nashville, Tennessee. The purchase price was $18 million. “We think the fiber gods have smiled on us,” Senda said. He was right. The value was far higher than the purchase price. Oh well—you win some, you lose some.
In 2006 Monroe sold Xspedius to tw telecom for $532 million, consisting of $213 million in cash and $319 million in stock. In total, the investors invested $200 million, half coming from Thermo. At the time of the transaction, the Xspedius investors more than doubled their value.Monroe wasn’t done. He rolled his $100 million of stock into tw telecom at $17 per share. When tw telecom sold to Level 3 in 2014, these shares were worth $41, meaning Monroe’s $100 million Xspedius investment was now worth $350 million, including the cash Monroe received in 2006.
There’s more. When Monroe sold Xspedius, he retained Xspedius Fiber Group, which owned fiber and conduit assets in California, Florida, Georgia, Maryland, Texas, Virginia, and the District of Columbia. He rebranded this entity FiberLight and focused the business on providing Dark Fiber solutions to carriers and large enterprises. Over the next seventeen years, they expanded to 18,000 miles of fiber. In 2023, Monroe sold it to a consortium of infrastructure investors for $1 billion. Assuming Thermo pocketed $300 million from this sale, the original $100 million Xspedius investment turned into a total of $650 million.
Herda continued the steady high-single-digit revenue growth with strong profitability. By 2013 tw telecom posted $1.6 billion in revenue with profitability of $600 million. Herda, under the pressure of activists, was ready to listen when Level 3 approached tw telecom in 2014. Level 3 enticed tw telecom with a $7.3 billion purchase price, including the $1.6 billion of debt assumed by Level 3.
“Business was strong and growing, and it was actually fun,” Herda explained to me in 2024. “In the end, as reluctant as we were to sell, we had a fiduciary responsibility to our shareholders.” The $43 per share was three times the $14 IPO price in 1999. Given the fact that the division of Time Warner was basically worthless when she assumed the tw telecom CEO role, her value creation performance was phenomenal.
Herda was one of the most successful CEOs of the Bandwidth adventure. Without a doubt, she was the most accomplished woman. Kudos to Larissa and the entire tw telecom team.
XO—Carl Icahn; Verizon—Lowell McAdam#
When we last left XO, famed buyout investor Teddy Forstmann, with the backing of XO CEO Akerson, was orchestrating a prepackaged bankruptcy. Corporate raider Carl Icahn had a different plan in mind.
Forstmann’s proposed pre-pack would allow the company to complete a January 2002 deal that included Teléfonos de México (Telmex), Mexico’s dominant telecommunications company, which was led by one of the world’s richest, Carlos Slim. Forstmann and Slim would each invest $400 million in return for an 80 percent ownership stake.
The pre-pack was opposed by bondholders who believed that giving an 80 percent stake to Forstmann and Telmex left too little for the bondholders. During the bankruptcy, Icahn, the world’s most infamous bottom feeder, accumulated a multimillion-dollar position in the unsecured bonds. In March 2002 Icahn made a competing offer to buy 50 percent of the equity for $500 million.
XO’s management preferred the pre-pack over Icahn’s offer, but when they attempted to move forward with Forstmann and Telmex, the two investors got cold feet, and in October 2002 each agreed to pay $12.5 million to get out of their offer. Forstmann, which owned about 24 percent of XO before XO’s bankruptcy, also agreed to forfeit its ownership in XO.
The $1.5 billion Forstmann had invested in XO was worthless. Forstmann had many great successes during its thirty-five-year history, including Gulfstream Aerospace, Topps Playing Cards, Dr Pepper, and GI. XO was not one of them.Forstmann Little was also a major investor in McleodUSA. Learn how this turned out in appendix 3, “More Bandwidth Stories.”
Sensing weakness, Icahn rescinded his restructuring proposal, blaming an inability to reach an agreement with XO’s other creditors. In the meantime Icahn did what Icahn does best: he gained control of 85 percent of XO’s senior secured debt. On January 17, 2003, XO emerged from bankruptcy with Icahn as the new owner.
Icahn told the Washington Post, “I’m hoping to see the company built up from here. I think it’s got a great deal of potential.” Icahn suggested this might be the beginning of an Icahn rollup of distressed Bandwidth companies.
XO reemerged as a public company with Icahn owning 83 percent of the equity. The $5.3 billion of prebankruptcy debt was reduced to $500 million. XO emerged with $554 million cash on its balance sheet. The equity holders lost everything.
XO’s interim CEO, Nate Davis, who replaced Dan Akerson, commented to the Washington Post: “I feel like the rain and the dark cloud that have been following us around has been lifted. We’ve been telling people that while our balance sheet was sick, operationally we were strong, and this proves us right.”Dan Akerson succeeded Ed Whitacre, the former AT&T CEO, as CEO of General Motors, following Whitacre’s successful turnaround of the auto giant.
Later in 2003 Icahn hired telecom veteran and former Global Crossing COO Carl Grivner as XO’s CEO. “With its strong balance sheet and the combination of its wide-reaching broadband network assets and unique service offerings, XO is positioned to become a significant competitive force in the business telecommunications market,” touted Grivner.
In 2004 XO was relisted on Nasdaq. XO also conducted a rights offering that was required by the bankruptcy reorganization plan. Other unsecured creditors exercised their rights under this offering, but Icahn took a pass—likely in error as I explain later—as this caused Icahn’s ownership stake to drop to 61 percent. The rights offering raised $200 million and was used to pay down debt.
Also in 2004 XO outbid Qwest and others in a $320 million acquisition of Allegiance Telecom.Allegiance Telecom was a competitive telecom carrier founded by former MFS COO Royce Holland at the same time Jim Crowe launched Level 3. The purchase price was $631 million, of which $311 million was paid in cash and the rest in the form of 45.4 XO shares. At XO’s $6.80 share price, the company’s shares were valued at $320 million.
Icahn was present throughout the overnight bankruptcy process auction. Each time Qwest outbid XO, Icahn would immediately top the Qwest bid. Qwest’s team was not empowered to increase their bid without the approval of their CEO. So after each Icahn bid, Qwest would request a recess. . . This process continued throughout the night until Icahn wore Qwest into submission.
Genuity, which was acquired by Level 3 in 2003, was Allegiance’s biggest customer. Level 3 sought to terminate Genuity’s $25 million per quarter revenue commitment to Allegiance, as Level 3 could use its own network for this traffic. Level 3, citing service deficiencies, withheld payments. Level 3’s John Ryan recounted what happened next. Holland escalated to Crowe, which led to Crowe asking Level 3’s Corporate Development team what was likely to happen with Allegiance. They told him that bankruptcy was imminent. Crowe responded, “If the body is going to be found dead on the floor, do we really want to be standing beside it with a gun in our hands?” Level 3 released the payments. Forbes quoted an unnamed source in a February 2004 article: “By owning the two largest [competitive phone providers] in the nation, it gives Icahn an unchallenged position to play a role in the inevitable restructuring of the whole industry. This deal guarantees him a place at the table.” No, it didn’t.
Icahn’s lieutenants on XO were New Yorkers Vince J. Intrieri and Keith Meister. Like Icahn, they knew little about operating a Bandwidth business. Their strategy was to just sustain the asset while Icahn sorted through how to get access to the net operating losses (NOLs).Net operating losses (NOL) are the accumulation of net income losses that occurred in prior years. The NOLs are tracked on the balance sheet. If the company becomes profitable in the future, the NOLs may be used to shield the income from income taxes. Therefore, a dollar of NOL is worth 35 to 42 cents of avoided taxes, depending on the relevant state income tax rate. If a company with NOLs is acquired, the acquiring company can, depending on the circumstances, realize the tax savings. XO had $4.0 billion of NOLs, which had a value to XO of over $800 million. The US federal corporate tax rate was 35 percent in 2008, and the New York State corporate tax rate was 7.1 percent, bringing the combined tax rate to 42.1 percent. The $4.0 billion NOL would offset $4.0 billion of taxable income, which would reduce tax liability by as much as 42 percent. $800 million is 20 percent of $4 billion, reflecting a time value discount as the NOLs would take several years to consume. XO meandered along, posting mediocre results.
In early 2006 I visited New York. I jumped at the opportunity when our banker offered to get me together with Intrieri and Meister. “Perhaps XO would like to buy ICG’s Colorado and Ohio properties,” my banker teased. I naively saw an opportunity for a reverse merger with me being CEO.
I met Intrieri and Meister at 767 Fifth Avenue, the lavish headquarters of Icahn Enterprises. The banker and I sat in a conference room for forty-five minutes after the scheduled start time when Intrieri and Meister finally showed up. The icy duo skipped past any pleasantries and acted like they weren’t sure why they were meeting with me. Intrieri and Meister barely reacted as I explained the ICG turnaround, my past involvement with the XO-Level 3 fiber transaction, and the logic of combining ICG’s remaining assets with XO. The meeting ended as abruptly as it started.
Later that afternoon my banker called me. Intrieri and Meister wanted to know if I was available to meet Icahn the next day.Icahn was not available the next day. So I stayed over the weekend to meet early the following week. “For certain,” I beamed, if for no other reason than to meet the leverage buyout legend.
When I arrived, Icahn’s assistant showed me into a large conference room. I scoped the large painting of a lion on a cliff with blood dripping from its mouth from the wildebeest carcass at its feet. I paused to look at the chess-like model of armies in full battle with Napoleon facing off against the Duke of Wellington. The large conference room had a large replica of a TWA airplane, a memento from Icahn’s hostile takeover in 1985.
After twenty minutes of sitting alone, I was called into Icahn’s private office. Icahn, Intrieri, Meister, and I sat at a small circular antique table.
“Why are you here?” Icahn blurted to initiate the conversation, as if I invited myself.
“ICG turnaround blah-blah, XO/Level 3 Joint Build Deal blah-blah, XO blah-blah,” I rambled as he couldn’t have looked more disinterested.
“So let me get this straight. You think you could run XO better than my CEO, Carl Grivner,” he barked.
I cited my investment thesis about focusing on bandwidth and not managed services.
Icahn interrupted, “See that phone over there?” as he pointed to a Polycom on the coffee table about three feet from his outstretched arm. “How about I grab that phone and I will listen while you explain to Grivner how you could run his business better than him?” he dared me.
I tried again to explain.
“I’m serious,” he abruptly cut me off and began to scoot his antique chair toward the phone. “I am going to call him, and we will all be entertained by Grivner’s reaction to your bullshit,” he continued as he leaned in his chair and stretched for the phone.
“Sure, get him on the phone,” I said, not sure I meant it. I watched as the tip of Icahn’s fingers were inches from touching the speed dial button.
Then BAM! The chair leg broke, tossing Icahn flat on his back underneath the small table. Intrieri and Meister sat in their chairs, uncertain what to do, as it became clear Icahn had fallen and couldn’t get up.
“Is this part of the intimidation play?” I thought.
We helped him up. Without missing a beat, Icahn grabbed the phone. The CEO was traveling, so Don MacNeil, the COO, took the call.
Icahn started to explain. “I got this guy here in my office. He’s telling me all kinds of things about how he could run XO better than you guys.”
MacNeil responded, “Who’s the guy?”
Icahn pointed at me. “Hey, hey, what did you say your name was?”
We had a five-minute chat. MacNeil was kind, as he told Icahn that I was a credible guy in the industry. The call ended, and nothing came of it.
After the meeting I visited FAO Schwarz, the toy store made famous when Tom Hanks’s character played the song “Chopsticks” by dancing on an oversize piano. I bought a big stuffed bear, which stands proudly in my Beaver Creek mountain house. I pet it every time I walk by.
The following week I sent a thank-you to Icahn with a bottle of glue. “I thought the Elmer’s might be handy to fix the leg of your chair.”
I received a written letter from him, which I still have.
Dear Dan:
Thanks for your kind note and the bottle of Elmers!
I enjoyed meeting with you and the opportunity to hear your thoughts on the telecom industry. And, I look forward to continuing our discussions in the future.
Please let me know when you will be in New York again as I would like to visit with you further.
Best Regards, Carl
Icahn and I crossed paths a couple of years later—when I took a hostile run at XO.
XO NOLs would have a value of $800 million if Icahn could use them to shield taxable income. US tax law permits a corporate entity (parent) that owns greater than 80 percent of another entity (subsidiary) to use the NOLs of the subsidiary.
Post bankruptcy, Icahn, through a myriad of corporate entities that had taxable income, owned 83 percent of XO. Icahn entered a tax allocation agreement that resulted in him using $450 million of the tax shields in 2003 and 2004. Since he controlled both parties of the agreement, the favorable terms allowed Icahn to realize these tax shield benefits without properly compensating XO’s other shareholders.
The 2004 rights offering dropped Icahn’s ownership from 83 percent to 61 percent. The no-participation was likely due to a miscalculation by Icahn—perhaps he assumed other investors would not participate in the rights offering. Now below the 80 percent threshold, Icahn stood to lose the remaining $800 million of NOL value. He spent the next several years trying to rectify this.
Texas hedge fund R2 Investments owned eleven million shares of XO’s common stock, which it received alongside Icahn via the conversion of distressed debt R2 purchased during XO’s bankruptcy. When XO’s stock price rose to $7 per share, R2 was happy it rode Icahn’s XO coattails.
R2 was a lot less happy when XO’s stock dropped to $0.3 per share in 2008, and 95 percent of their peak value was lost. R2, which attributed the bottoming out to Icahn’s mishandling of his fiduciary responsibilities as controlling shareholder, wasn’t afraid to take on Icahn.
In 2005 Icahn signed an equity purchase agreement with XO that would have resulted in the sale of most of XO’s assets and the NOLs for $700 million. R2 filed a lawsuit challenging this self-dealing agreement, and after a preliminary hearing in March 2006, Icahn backed down.
In 2006 Icahn tried to sneak language into the proxy for the 2006 annual meeting that would provide him permission to consummate the 2005 transaction without shareholder approval. Icahn backed down again when R2 commenced injunctive legal proceedings.
Icahn then decided to run the company into dire straits, which would provide him the opportunity to invest to rescue the company under terms that would result in his equity exceeding 80 percent. With debt maturities coming due in 2008, he ramped up cash burn to $10 million a month, which was draining XO of its remaining cash.
Several entities made unsolicited expressions of interest to purchase XO. In March 2008 a telecommunications company offered $1 billion to buy the whole company, a 50 percent premium over Icahn’s offer.The $1 billion translated to $2.25 per share, which was a 50 percent premium to the $0.79 to $1.27 price that XO was trading at in April 2008. Another inbound offer to buy XO arrived later that month.
Later in Bandwidth, Zayo’s story will be told. Here, I will jump ahead to Zayo’s second year when, in June 2008, I served a big fat softball to Icahn. My unsolicited offer was to buy XO’s fiber business for $900 million to $1 billion while leaving behind the valuable NOLs in an entity that would continue to own the also valuable wireless spectrum.When Akerson became CEO of Nextlink, he envisioned a platform that combined wireless with fiber as solutions for its customers. To advance this vision, he paid $695 million to a company named WNP Communications, of which $153 million was used to fund the acquisition of wireless licenses from the FCC. He also paid $137.7 million to Nextel to acquire the 50 percent interest in a McCaw company Nextband. The other 50 percent was already owned by Nextlink. This gave Nextlink ownership of forty wireless licenses. Our offer included high-confidence letters from our financial advisors that Zayo could obtain financing. We indicated we could achieve a final purchase agreement within six weeks.
We signed a nondisclosure agreement and, on June 21, informed XO’s banker that we were nearly complete with our due diligence. Two days later we firmed up our offer at $940 million and removed the financing contingency.
The next day XO’s advisors summarized Zayo’s offer to XO’s board. The value of our offer was $1.52 per share, which was three times the $0.50 per share public stock price. Moreover, our offer allowed for XO to retain the value of the NOLs and wireless spectrum.
When XO didn’t engage, I sent a letter on June 27 that documented the value of retaining the tax benefits as being an incremental $8.24 per share, bringing the total value to almost $10 per share, plus the value of the wireless spectrum. This represented an enormous premium over the $0.50 public stock price of XO.
On June 30 I sent another letter questioning why the board was acting counter to its purpose of maximizing shareholder value by not responding to our offer.
On July 8 we expressed that we were prepared to increase our offer but only after having a face-to-face meeting. The response from XO’s advisor was that we would need to raise our price to $1.3 billion and agree to a $25 million reverse breakup fee. On July 10, with XO’s stock price now down to $0.35 per share, we offered to propose a purchase price materially higher than $940 million and stated that we did not object to a reverse breakup fee. However, to proceed, we reiterated our requirement for a face-to-face meeting with the actual decision-maker.
In Icahn’s 2006 Elmer’s Glue letter to me, he said he’d like to “visit with me further.” Instead, XO cut off communications with us.
R2 continued to put pressure on Icahn. In a June 12 letter, they wrote, “We believe you, as chairman of the board and the majority shareholder of XO, in clear violation of your fiduciary duties to minority shareholders, have been acting and will continue to act to advantage improperly your XO Debt to the detriment of XO’s minority shareholders.” Under threat of a lawsuit, R2 requested (1) Icahn and those associated with Icahn resign from XO’s board, (2) Icahn’s stock be placed in a blind trust, and (3) Icahn refrain from exercising any managerial control or participation in shareholder, board, or management meetings.
Icahn ignored such warnings.
On July 24, 2008, XO executed a rights offering that resulted in Icahn achieving his goal of owning more than 80 percent of XO. The New York Times published an article titled “The Kettle? The Pot Says He’s Black.” The article focused on the hypocrisy of Icahn’s reputation as a shareholder activist versus his behavior at XO, characterizing the transaction as follows: “Icahn paid $329 million and agreed to retire $450 million of the debt in return for a huge swatch of preferred stock. How huge a swatch? Enough to largely dilute all the other shareholders while pushing Icahn’s stake above the magic 80 percent mark. Imagine that.”
This transaction was not put up for a shareholder vote.
The New York Times went on to quote Powell of Telecom Ramblings: “Carl is very smart and acts very aggressively in his own self-interest. And if you get in the way of his self-interest, he will trample you.”
A revised NOL agreement (tax allocation agreement) was also put in place under terms favorable to Icahn. The rights offering valued XO at $636 million, well less than half of the value of the Zayo alternative. The fairness opinion provided by XO’s advisors included an extraordinarily unusual disclaimer.
We express no view as to any other aspect or implication of the Transaction or any other agreement, arrangement or understanding entered into in connection with the Transaction or otherwise. Furthermore, we express no view on certain that Tax Allocation Agreement by and among [Icahn] and the Company nor are we expressing any opinion or making any judgment, evaluation or determination with respect to the value, characteristic, ability of any party to utilize or other attributes of the Company’s tax position or of any net operating losses. In addition, you have not asked us to address, and our Opinion does not address, the fairness to the holders of any class of securities, creditors or other constituents of the Company.
In August R2 sent a letter to Grivner, demanding the rights to books and records, citing their intent to “investigate possible mismanagement, improper influence or conduct, improper conflicts of interest and lack of due care on the part of XO’s Board of Directors.”
The next Icahn maneuver was to increase his ownership to 90 percent, which would thereby give him the power to execute a short-form merger to acquire the remainder of XO. In October Icahn disclosed that he increased his ownership in a private transaction by 3,995,000 common shares and 500,000 Series A preferred shares. This put him at 89.36 percent.
On July 9, 2009, Icahn offered to purchase the remaining 10 percent of shares held by others at $0.55 per share.
On August 4, 2009, R2 sent a letter to XO’s independent directors.
Under Mr. Icahn’s tutelage, we believe that this board is on the cusp of stripping almost all value from the minority shareholders. It has taken this board almost four years to find a way to give Mr. Icahn this company, but after a long, arduous process, the board has almost completed its apparent goal—finding a way to give Mr. Icahn all the assets and NOLs for as little consideration as possible.
. . . We were truly aghast when we learned through discovery as part of our attached lawsuit that approximately one year ago one of the potential bidders valued its combined bid for the assets and the net operating losses at approximately $10 per share. The fact that the board rejected this offer in favor of the massively dilutive proposal from Mr. Icahn only causes us to question further the true independence of the “independent directors.”
As you well know, the attached complaint that we recently filed in the Supreme Court of the State of New York shows that this board dismissed proposals from FIVE different bidders that would have each likely garnered more value for the minority shareholders than anything Mr. Icahn is going to offer.
Rest assured, we are going to do everything in our power to ensure that justice is served.
The R2lawsuit didn’t frighten Icahn away from taking XO private. In July 2011 XO notified its shareholders that Icahn, as holder of more than 90 percent of XO’s shares, had exercised his right to buy the remainder of the company and take it private at a price of $1.40 per share.The R[^2] lawsuit was settled out of court at a cost that was not material to Icahn. Two months later Icahn was the proud owner of 100 percent of XO.
In February 2016 Icahn sold XO’s fiber business to Verizon for $1.8 billion. The deal included an option for Verizon to purchase the wireless spectrum by the end of 2018. Between 2008 and 2018, Icahn was able to extract full value from the NOLs.
Given the $1.8 billion that Verizon paid, Zayo’s offer of $940 million for the wireline business would have resulted in a good return for our investors. As I said previously, you win some, and you lose some.
Verizon, the proud new owner of XO’s fiber business, was the Baby Bell powerhouse branded in 2000 after Bell Atlantic acquired GTE, and the Bell Atlantic-NYNEX-GTE triumvirate adopted Verizon as its new name.
During the Bandwidth Bust, Verizon was hit hard by the meltdown because of its financial ties to Genuity and AboveNet, as their bankruptcies resulted in Verizon losing billions of Market Value. Still, Verizon’s strong wireless and traditional phone businesses helped insulate the telecom giant from the intense heat of the industry meltdown.
In 2005 Verizon bought the revived WorldCom for $6.6 billion, giving Verizon the fiber networks of MCI, WilTel, Brooks Fiber, MFS, and the UUNET Internet Backbone. Complementing all these assets were the significant ownership rights to fiber purchased as part of Verizon’s Boom-era partnership with AboveNet. In 2016, Verizon added XO to its impressive inventory.
At the time of the WorldCom acquisition, Lowell McAdam was president of Verizon’s wireless business. Six years later, in 2011, McAdam was named Verizon’s CEO, and he spearheaded the acquisition of XO.
McAdam was excited with his XO purchase and concluded he wanted more. Zayo and I were in his crosshairs.
I haven’t yet told the Zayo story, so I will be jumping ahead here to complete the Verizon story. By now, Zayo, in 2016, had been public for two years and had risen to be the biggest pure-play operator in the Bandwidth industry.
In late 2016 I received an unexpected reach out from someone I had never met—none other than Verizon CEO Lowell McAdam. “Hey, Dan, I will be flying over Colorado on my way to California next week. I’d like to meet you for lunch.”
McAdam and I had lunch at the Ritz-Carlton in Bachelor Gulch. He told me how much he admired the company I founded. He then got right to the point. “I’d like to buy Zayo.”
As McAdam looked forward, he saw the opportunity to leverage deep, dense fiber to simultaneously accomplish two important goals. First, the newest wireless architecture called 5G would need to leverage metro fiber to handle the massive increase in call and data load. Second, Verizon Business, which served enterprises, would be stronger if it leveraged its own fiber. McAdam knew he had great fiber assets while also being increasingly frustrated that Verizon struggled to leverage this fiber. Verizon’s data records documenting the fiber assets were a hair-ball mess made worse by outdated systems and processes used to design and provision services. McAdam saw Zayo as a solution.
When I reported back to my board, the first question they asked was, “Could Verizon get the regulatory nod to do this acquisition?” I shrugged. “This didn’t seem to be a hurdle to McAdam when I talked to him,” I answered. This struck us all as peculiar. I followed up with McAdam, suggesting our regulatory attorneys chat on Verizon’s perspective on regulatory approval risks.
The idea of Verizon acquiring Zayo was immediately shut down by Verizon’s regulatory department. Convincing regulators to approve a Zayo acquisition immediately on the heels of XO was too much for them. Acquisition dead!
McAdam asked me to come back with other ideas. I presented a plan that would take Verizon’s Brooks Fiber, MFS, and XO metro assets and combine them with Zayo’s assets. We would carve out a layer of these assets for Verizon’s exclusive use. We would leverage this layer both for Verizon’s 5G deployments and to expand its fiber reach to enterprise buildings.
Verizon would become a 20 percent owner of Zayo—the maximum threshold for which it didn’t require regulatory approval. Later, when the dust settled on the XO transaction, it could pursue an acquisition of Zayo.
McAdam liked the plan.
The next step was for me to present it to his team. We briefed his COO, John G. Stratton, and he assigned a team to lead the evaluation, using Georgia and Colorado as test cases.
We had a follow-up video call with McAdam, Stratton, and others. I could tell immediately from McAdam’s body language that something was amiss. McAdam said great things about the work we had done and how excited he was to proceed forward. Then he turned to Stratton, who was connected via a video bridge, and said, “John, we’ve worked together for a long time. Whenever I see you scratch your chin like that, I know you have something on your mind.”
As Stratton complimented McAdam for his highly perceptive observation, he began to express concerns that something didn’t feel right to him about the analysis. I knew immediately, and said so in real time to my colleagues, that the idea was dead. The Verizon network organization would never let Zayo take over the fiber layer of its network.
Unfortunately, I unleashed a can of worms by going through this exercise by basically revealing the Zayo playbook to Verizon. This led Verizon to develop its own initiative branded as One Fiber. The Verizon executive team concluded they would take the Zayo proposal and do it themselves. Monopolistic thieves!
As I reflected later, I don’t think I could have ignored the opportunity to form this strategic relationship with Verizon, our largest customer. However, it would have been better if I had, as I doubt Stratton would have been able to convince the Verizon board to accelerate funding of the One Fiber plan without us showing them the playbook. As the Verizon team executed One Fiber, Zayo’s book of business with them steadily declined.
I waited a long time for my consolation prize. In the fourth quarter of 2023, Verizon booked a $5.8 billion impairment charge associated with its Verizon Business segment. This write-off suggested to me that Verizon’s commercial performance in its fiber business has been a disaster, which is why I suggested Zayo could do it better. I got the last laugh.