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Beacon Equity Research

Market Commentary

Jeff Bishop
Editor, Beacon Equity Research

Is Globetel Full of Hot Air?

Anyone who follows the OTC market has undoubtedly been watching the recent ascent of tiny Globetel Communications (AMEX: GTE) during the past few months. Whether you are long, or short, or just sitting on the sidelines (like me) watching what will happen next, it has been an exciting stock lately. It has gone from an obscure, lightly traded stock to consistently being one the most heavily-traded issues on the OTC and AMEX exchanges.

So what gives? Why are investors suddenly in love with this stock?

Investors need only to look at the flood of press releases touting the "Stratellite" technology of its now wholly-owned subsidiary, Sanswire Networks. Sanswire (a pink sheet company) agreed to merge into Globetel in April of last year bringing with it a very interesting product called the Stratellite, which is a low-orbiting, quasi-satellite that can transmit high-speed data over a very large area. The company claims it can cover an area the size of Texas from its platform which is perched about 13 miles above the Earth. The Stratellite is basically a big Kevlar balloon which can be equipped with communication gear for HDTV, 3G networks, high-speed internet, cellular, or just about any form of broadband communication a person could want. All of this without any need for wires, cables, or towers to transmit. The claim is that a person can have virtually unlimited 2-way broadband communication anywhere within the 400 mile diameter area the Stratellite covers.

Sound too good to be true? I think it probably is too, but who really knows.

For one thing, I have seen too many companies come off the pink sheets with some kind of revolutionary technology and merge into a slightly larger one. Most of these scenarios end poorly for the shareholders, or "bagholders" as I like to call them. Some of these deals do indeed seem to succeed, at least from the shareholder's view. Most recently, I remember a little company called US Home & Garden that somehow stumbled onto a miraculous piece of technology (a Taser-like laser or bomb, which also sounded too good to be true) owned by a small, unknown company.

Did the miracle product get bought by Taser (Nasdaq: TASR) who would seem an obvious suitor with plenty of cash and knowledge of the technology? No. The company was merged with into an obscure fertilizer and garden company, US Home & Garden. The stock later changed its name to Ionatron (OTCBB: IOTN), announced some deal with the Pentagon, and now trades about 1000% higher than when the merger was announced in April last year. The company has yet to produce a working product or generate any meaningful revenue, but as long as the stock trades up it is a success, right?

So, is the Globetel / Sanswire deal going to be the winner everyone supposedly thinks it will be? I just get suspicious when a pink sheet company comes up with a low-tech product, like a "telecom balloon," and claims to have thought of something that Cisco (Nasdaq: Cisco), Lucent (NYSE: LU), or any other big network company didn't think of first. My guess is that the big guys already thought of this idea and found it wasn't feasible. Do you really think SBC, Verizon, or Comcast would spend billions of dollars building out infrastructure every year if they could just float some balloons over the United States instead? Probably not.

If this were such a great idea, why didn't the big guys spend a few million bucks and buy Sanswire themselves? That is pocket change to them, especially for a product that could potentially revolutionize telecommunication. Oh, I know, Globetel was probably just too cunning and out-maneuvered the lumbering Cisco for the Sanswire prize.

Sorry if I sound too pessimistic about this deal - I have just watched it end miserably for shareholders too many times in the past. But maybe this time it will be different. Maybe this will be the next Ionatron? Or even better yet, maybe this one will actually make a product! It may be fun to trade this stock around; but real investors should get answers to some important questions before they make a serious bet here.

As for me, I think I'll just watch this one from the sidelines, again.