Financial Haute Couture

Fashion is getting more expensive all the time. And no, I'm not talking about statements like $600 Manolo Blahnik backless shoes, $3,000 Gucci embroidered jeans or $5,000 John Galliano silk chiffon dresses. I'm talking about stocks created to satisfy the modern fashion needs of Wall Street. To be specific, the trendy "tracking stocks" that Global Crossing Ltd. plans to issue as part of its proposed $47 billion purchase of U S West, the Denver-based Baby Bell local phone company. It will cost Global Crossing a cool $1 billion of foregone tax breaks to issue those shares. At least, that's the number buried in the documents Global Crossing and U S West handed out last week when they announced their deal, which is scheduled to be completed sometime next year. Assuming that this transaction, which has more moving parts than a $19,800 Van Cleef & Arpels diamond watch, doesn't fall apart before then.

The Global Crossing-U S West transaction is a classic piece of dealmaking by classic dealsters like Global Crossing's founder, Gary Winnick, a former Drexel Burnham junk-bond guy. Global Crossing, created two years ago to lay an undersea fiber-optic cable linking the United States with Europe, is already one of Wall Street's mythic creations. Early investors have made 300 times their initial investment. Global Crossing's most lucrative asset is its stock, currently valued in the market at about $23 billion. So Global Crossing is using its stock as currency to buy real companies with real businesses that generate real money, such as U S West and Frontier Corp., a Rochester, N.Y., telecom company (whose shareholders include me).

The U S West deal is hideously complicated for a reason. To wit: in order for minnow-size Global Crossing, with 1998 revenues of $424 million, to swallow a $12.4 billion whale like U S West, it needs to be able to offer securities that Wall Street will value at very high prices. So it's splitting Global into two tracking stocks. One, Global Crossing L, for local, would carry a fat $1.50 cash dividend and track the results of boring but profitable businesses like local phone service. The second, Global Crossing G, for global, would include its undersea cables and all sorts of sexy fiber-optic stuff that doesn't need to show profits to fetch a high share price. The idea is that Wall Street investors would price these two pieces at a higher combined price than they would price Global Crossing if it simply bought U S West in a simple deal. (Aside: if you want to wallow in labyrinthine deal delights, check out or mail me a stamped, self-addressed envelope.)

Back to the main event. Fashion is expensive in this deal, because Global Crossing, based in the tax haven of Bermuda, has to move to the United States. Credit--or blame, depending on your point of view--U.S. tax and accounting rules. Here's why. The companies want to offer U S West holders a stock paying a cash dividend, as U S West does. But shipping money from the U.S. to Bermuda to the U.S. to pay dividends would result in a 30 percent tax. We're talking $1.8 billion of dividends a year, so that's major moolah.

Second, for complicated accounting reasons, U S West has to technically be the acquiring company, even though Global Crossing is actually taking control. To give you the short version, this maneuver sticks $30 billion of accounting costs onto the G stock, whose go-go investors are seeking growth rather than reported profits. This avoids having the charges pollute the L stock, whose conservative investors care about earnings very much. For U S West to be the acquirer, its shareholders have to get more than 50 percent of the combined companies' stock. But if holders of a U.S. company get the majority of the stock in a deal with a non-U.S. company, the deal is taxable. Having Global Crossing move to the United States makes this deal tax-free.