Level 3 Communications, Inc. Business Information, Profile, and History

Company Perspectives:

Level 3 is widely recognized for its culture of technology innovation and leadership. The company has played a key role in helping to lead the global communications industry through a true revolution--the shift away from the legacy circuit-based technologies in place for the past century to new Internet Protocol (IP) technologies.

History of Level 3 Communications, Inc.

Level 3 Communications, Inc. operates one of the largest communications and Internet networks in the world. The company's network, which utilizes advanced optical and Internet Protocol technologies, encompasses approximately 23,000 miles of fiber in North America and Europe. In North America, Level 3's network covers nearly 19,000 miles, connecting 72 markets. In Europe, the company's network connects 20 markets, covering roughly 3,600 miles. Level 3 ranks as one of the largest providers of wholesale dial-up service to Internet service providers (ISPs) and as a primary provider of Internet connectivity for millions of broadband subscribers. Of the six largest ISPs in the United States, five use Level 3's network. Additionally, nine of the ten largest telecommunications companies in the world use Level 3's network. Level 3 also operates as a reseller of software to corporate clientele through its information services business segment, which manages sales offices in 30 countries that serve more than 8,000 customers.

Origins

Level 3 sprang from the bounty produced by another company, the immensely successful and prolific Peter Kiewit Sons' Inc. Level 3's former parent began as a masonry business founded in 1884 in Omaha, Nebraska, by Peter Kiewit, the son of Dutch immigrants. Shortly after 1900, the masonry company had evolved into a general contracting firm, with Peter Kiewit and two of his six sons taking on small construction projects for Omaha residences and businesses. This foray into construction marked the beginning of one of the most active construction companies in the United States. During the 1930s, Peter Kiewit Sons' began focusing on large-scale construction projects, entering the segment of the construction industry that would make the company a towering force. As the decades passed, Peter Kiewit Sons' completed massive construction projects such as the Fort McHenry Tunnel beneath Baltimore Harbor, the Flaming Gorge Dam in Utah, and nearly all of the Interstate Highway System in the western United States, among numerous other high-profile projects.

Success in the large-scale construction industry turned Peter Kiewit Sons' into a multi-billion-in-sales company. The company was generating so much cash on an annual basis that it literally had more money than it knew what to do with, thus leading to its diversification into non-construction businesses. Peter Kiewit Sons' delved into a range of businesses, developing interests in coal mining, toll roads, newspaper publishing, and cable television, among others. This foray into diverse businesses engendered the assets that gave birth to Level 3, whose origins were rooted in the 1980s, when Walter Scott was beginning his tenure as chief executive officer of Peter Kiewit Sons'.

Walter Scott was appointed chief executive officer in 1979, succeeding the five-decade reign of command of Peter Kiewit, the youngest of the founder's six sons. Scott's character and influence were significantly important to the promotion of Level 3, giving the company legitimacy and credibility within the financial community, a standing the company would need because of the costly nature of its work. Scott, who joined Peter Kiewit shortly after World War II, was held in extremely high regard in Omaha--home to five Fortune 500 companies--enjoying as much popularity among the city's residents as the "Oracle of Omaha," famed investor Warren Buffett. Many residents of Omaha would invest heavily in Level 3, as would those outside Nebraska, primarily because of their faith in Scott. Investors also were encouraged by the presence of Level 3's other architect, Jim Crowe, who arguably ranked as the single most important individual in Level 3's conception and development.

Scott and Crowe were both construction-minded executives. Scott was an industry veteran who presided over one of the most accomplished building concerns in the world. Crowe joined Peter Kiewit Son's after leaving Morrison Knudsen, a giant construction firm. Despite their backgrounds, both executives staked their futures on the telecommunications industry, the realm in which Level 3 sought to thrive. The change in their professional lives drew its impetus from Crowe, who spearheaded Peter Kiewit Sons' diversification into telecommunications during the 1980s. At Crowe's urging, Scott agreed to buy Metropolitan Fiber Systems, a company that built circuit-switch and fiber-optic networks for telephone companies. By 1987, after the acquisition was renamed MFS, Crowe had begun building his own networks and quickly made MFS one of the nation's largest competitive local-exchange carriers, or CLECs.

Mid-1990s: The Stage Is Set for Level 3

The rapid rise of MFS prompted Peter Kiewit Sons' to give its subsidiary its own freedom to grow. In 1993, MFS was spun off as a separate company and taken public, with Crowe appointed as its leader. The future of the company was changed significantly a short time later, after Scott attended an exclusive, biennial gathering hosted by Warren Buffett. Bill Gates, the cofounder of Microsoft Corporation, gave a speech in front of the 50 guests, stressing the revolutionary nature of the Internet and how his company was responding to the advent of the Internet age. Gates also remarked that the new technological advance could render the business of traditional telephone companies obsolete, a comment that pricked Scott's ears. "Yes, Bill's talk is probably what got us thinking about the Internet," he reflected in a July 22, 2002 interview with Telephony.

After the gathering of Buffett intimates, Scott and Crowe decided they wanted to find a business that was involved in the infrastructure of the Internet and join that company with MFS. In April 1996, the pair found such a company, UUNet, an "Internet backbone" company they acquired for $2 billion, the highest amount paid for an Internet-related company at the time. If there were any skeptics who raised an eyebrow at the price paid by MFS, their jaws would have dropped several months later when WorldCom entered the picture. Bernie Ebbers, the CEO of WorldCom, perceived MFS's acquisition of UUNet as a threat to his company, a threat he dispatched in August 1996 by offering to acquire MFS. The transaction was concluded in December 1996, when WorldCom acquired MFS in an all-stock acquisition valued at $14.3 billion.

The stakes were high in telecommunications in the 1990s, with interest and investment invigorated by the development of technology possessing enormous potential. Bernie Ebbers could not let MFS usurp his own efforts at building the nation's premier network, nor could Scott and Crowe turn their backs on the possibilities available in the industry they had adopted as their proving ground. Crowe wanted to build a new company patterned after MFS, but unlike MFS, which was involved in conventional circuit-switch networks, Crowe's new company would focus on constructing a fiber-optic-only network based on Internet protocol--the language by which the signal was sent.

With Scott's blessing, Crowe's new venture was organized within Kiewit Diversified Group (KDG), which comprised all of Peter Kiewit Sons' businesses and investments in non-construction areas. Crowe began building his start-up company in mid-1997, enlisting the help of 18 former MFS executives whom he recruited from WorldCom. His first objective, under the guidance of Scott, was to sell KDG's non-telecommunications assets to provide the start-up capital for building an expensive and vast fiber-optic network. Crowe's company was a start-up, but one with enormous financial resources behind it from the start, putting it in an entirely different league from other venture-backed, start-up enterprises. By the beginning of 1998, the sale of KDG's non-telecommunications business provided Crowe with roughly $2 billion in seed money. He also had another $1 billion in non-telecommunications assets to be sold at a later date, businesses that in the meantime would provide the start-up venture with a source of cash flow.

Level 3 Becoming a Separate Company: 1998

As with MFS, Scott and Crowe believed it would be best to separate KDG from the construction company. The name Level 3 Communications, Inc. was chosen, a reference to the seven-layer Open Systems Interconnect network model--a framework for international standards in computer network architecture. Crowe and his executive team were focused on the lowest three layers, or levels; the bottom layer being the physical fiber itself, followed by the optical layer, or signal, and the network layer, the language by which the signal was sent. On April 1, 1998, Level 3 began trading on the NASDAQ National Market.

Crowe faced a daunting challenge as he set out, charged with completing a project whose scale rivaled that of Peter Kiewit Sons' largest construction projects. His goal was to build a worldwide network, an objective to be reached in stages, with the first stage of the global plan calling for the creation of a network in North America. Level 3's network, as it was constructed, featured built-in flexibility, with fiber run through buried conduit that allowed for easy upgrades, enabling the company to incorporate advances in fiber technology. "Our design goal is not to try to guess where design technology will take us five years from now," Crowe explained in a February 2, 1998 interview with Telephony. "Our goal is to build a network that can accommodate unprecedented technological change," he added.

Crowe threw himself into the mammoth task at hand. He secured rights of way from railroad companies and ordered legions of employees to dig trenches and lay cable, efforts that quickly exhausted billions of dollars in capital. As the herculean task of constructing the first section of the global network was underway, Level 3 moved its headquarters from Omaha to Broomfield, Colorado, where a greater supply of qualified engineers could be found. After 30 months of working furiously to establish a network, Level 3 completed its first section, a 16,000-mile network that spread across North America.

Disaster at the Turn of the Century

Investors, particularly those in Omaha who had made a fortune from investing in MFS, flocked to Level 3. By March 2000, the company's stock was trading for $130 per share. Its market capitalization stood at a monstrous $44 billion--$4 billion more than the market capitalization of General Motors. In the blossoming new sector of Internet-related business, Level 3 ranked as one of the most powerful forces in the world, embodying what the business press hailed as the advent of the "new" economy. Unfortunately for Level 3, the promise of a new era in business quickly faded, as the dot-com sector suffered a spectacular collapse, leading to the ruin of scores of companies and staggering losses in the financial community.

Level 3 began to experience the first tremors of the coming catastrophe in the spring of 2000. The company's biggest customers, ISPs and CLECs, began to falter, causing Level 3's sales to wilt. Further, large, established telecommunications companies such as AT&T and Sprint were expanding their broadband capacity. These industry veterans were joined by new companies such as Global Crossing, Williams, and Broadwing, who were building their own new networks. The result was a glut of capacity that greatly diminished the value of Crowe's impressive new network, as wholesale prices for using Level 3's expensive, fiber-optic lines plunged. No one doubted the technological quality of Crowe's network, "but it's like a great racetrack," an analyst explained in a July 22, 2002 interview with Fortune. "You still need the fans. You still need the customers. And companies like AT&T and Qwest started with customers."

Level 3's stock value decreased dramatically as the dot-com bubble burst. The company's share price plummeted from $130 to $13, eventually dropping to $3 by 2002. Investors, particularly those in Omaha, lost enormous amounts of money because of Level 3's downward slide, losses that represented billions, not millions, of dollars--"There are hundreds, probably thousands of investors in Omaha who have suffered combined losses in Level 3 stock equal to tens of billions of dollars," wrote reporter Andy Serwer in a July 22, 2002 Fortune article.

The severity of the losses was stunning, but there was hope that Level 3 ultimately could realize the full financial potential of its impressive fiber-optic network. While numerous other Internet-oriented businesses collapsed during the meltdown at the turn of the century, Level 3 survived--a feat industry optimists applauded. The company was incurring substantial losses, posting a deficit of more than $1 billion in 2002, and awash in debt, hobbled by interest payments from roughly $7 billion of debt, but it was alive and in business. Crowe, despite the precarious financial state of the company, pressed forward, acquiring Software Spectrum, Inc. and CorpSoft, Inc. in 2002. Theses acquisitions helped form the company's information services business segment, which sold software to the company's corporate clientele and became a producer of a significant amount of revenue for Level 3. Crowe also capitalized on the misfortune of others, acquiring valuable assets from failing telecommunications companies for pennies on the dollar. One such deal was completed in February 2003, when Level 3 acquired Genuity, Inc., a bankrupt former Verizon subsidiary that operated a network used by Verizon and America Online.

As Level 3 prepared for the future, the success of the company hung in the balance. Much remained to be determined about the true worth of the company's sophisticated network spanning North America and Europe. In the years ahead, the investors who held on to their stock during Level 3's downward spiral would discover the wisdom of their choice, as Scott and Crowe sought to return the luster to their professional reputations.

Principal Subsidiaries: Software Spectrum, Inc.; CorpSoft, Inc.; (i)Structure, LLC.

Principal Competitors: Global Crossing Ltd.; Qwest Communications International Inc.; WiTel Communications Group, Inc.; MCI, Inc.; Sprint Corporation; France Telecom SA; Deutsche Telekom AG; AT&T Corp.

Chronology

• Key Dates:
• 1980s:Construction giant Peter Kiewit Sons' diversifies into telecommunications, creating the business foundation for Level 3.
• 1993: MFS, constituting Peter Kiewit Sons' telecommunications interests, is spun off as a public company.
• 1996: MFS acquires UUNet, a deal that attracts the attention of WorldCom, which purchases MFS for $14 billion before the end of the year.
• 1997: The basis of Level 3 is formed through a Peter Kiewit Sons' subsidiary, Kiewit Diversified Group.
• 1998: Level 3 begins trading on the NASDAQ National Market.
• 2000: Level 3 begins to experience profound difficulties.
• 2002: Level 3 acquires Software Spectrum, Inc. and CorpSoft, Inc.
• 2003: Level 3 acquires Genuity, Inc.