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Exodus to Buy Global Crossing Web Business

September 28, 2000|ELIZABETH DOUGLASS | TIMES STAFF WRITER

Resurrecting a deal that fell apart in July, Global Crossing Ltd. has agreed to sell its GlobalCenter Web-hosting business to rival Exodus Communications Inc. in a stock deal worth an estimated $6.5 billion, according to a person close to the negotiations.

The agreement was approved by both companies' boards of directors late Wednesday and is expected to be announced today.

Word of the revived merger talks hit Wall Street before the close of trading Wednesday, boosting Global Crossing shares $1.88, or more than 6%, to $29.88 on Nasdaq. Shares in Santa Clara, Calif.-based Exodus, also traded on Nasdaq, fell $2.75, or nearly 5%, to close at $53.25.

GlobalCenter and Exodus are competitors in the expanding market for managing other companies' Internet and e-commerce sites through computer centers--a set of complex services known generally as Web hosting.

Demand for such services has been skyrocketing and the profit margins are attractive, but the business demands heavy investments in equipment as well as access to large fiber-optic networks to route Internet traffic worldwide. For that reason, most Web-hosting companies are focused on scaling up and have not yet turned a profit.

In fiscal 1999, Exodus lost $130.3 million on $242 million in revenue, while GlobalCenter posted a loss of $170 million on 1999 sales of $71 million. Global Crossing is based in Bermuda and its executive offices are in Beverly Hills.

Industry analysts generally applauded the matchup, noting that the combination creates a stronger and more global Web-hosting business that may attract more corporate customers. At the same time, the deal provides a steady customer for Global Crossing's global fiber-optic network.

"It certainly seems that scale is important in this business . . . and if the deal is at the rumored valuation, then I think it's a slight positive for the [Global Crossing] stock," said Bette Columbo, who follows telecommunications companies for Bear Stearns.

Over the last several months, the stock prices of Global Crossing, Exodus and many other firms have sunk dramatically, a situation that has helped spark a flurry of merger talks among Web-hosting players.

Global Crossing, which has lost half of its market value since February, was one of several suitors for Digex Inc., a Web-hosting firm that is controlled by Intermedia Communications Inc.

Exodus, its shares trading 40% lower than its 52-week peak of $89.81 in March, also bid for Digex. WorldCom was the ultimate winner, agreeing this month to buyIntermedia (and its Digex interest) for $6 billion in stock.

In opting for the sale to Exodus, Global Crossing will scrap plans to create a so-called tracking stock for the fast-growing GlobalCenter subsidiary. The company had planned to raise up to $1 billion in an initial public offering of shares in the Sunnyvale, Calif.-based business.

The stock sale had been delayed several times over the summer because of negotiations with Exodus as well as worsening prospects on Wall Street for new telecommunications offerings.

Under terms of the proposed deal, Exodus would absorb GlobalCenter, with Global Crossing retaining a 20% ownership in the newly combined Web-hosting company. Exodus would send the majority of its customer traffic over Global Crossing's network--a commitment worth more than $4 billion over 10 years, the source said.

In addition, the two firms would create a Web-hosting joint venture in Asia between the new Exodus and Asia Global Crossing, a communications network partnership that includes Global Crossing, Japan's Softbank Corp. and Microsoft Corp.

Asia Global Crossing, which is on the verge of its own initial public offering, would own two-thirds of the new Asia venture. The merged Exodus company would own one-third, the source said.

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