Thursday, March 17, 2005

WorldCom’s cowboy bites the dust

on Economist

Mr Ebbers built WorldCom from modest beginnings into a firm worth over $175 billion at the height of the stockmarket boom by relentlessly acquiring telecoms assets and eventually masterminding a $37 billion merger with MCI, one of America’s leading long-distance phone companies. At the height of the boom his firm’s internet-backbone business carried 40% of America’s web traffic.

Revelations that he had borrowed hundreds of millions of dollars from WorldCom to cover losses from his purchase of company shares hastened his exit. By now, WorldCom’s market capitalisation had shrunk to $7 billion. Shortly afterwards, the firm admitted an accounting fraud and sought Chapter 11 bankruptcy protection.

At WorldCom, costs were simply reclassified as capital expenses to boost cashflow and profits. The firm’s bankers and shareholders were fooled by this—or chose not to care—while the good times persisted. As the boom ended, WorldCom’s financial chicanery was thrown into the spotlight.

Ironically, the manner of WorldCom’s demise has allowed creditors and shareholders to recoup a little of their investments through the courts. Investors in other once-high-flying companies have been left to rue “lost” paper fortunes that evaporated with the tech bubble’s bursting. WorldCom was a little different. It had real assets, revenues and profits. Perhaps it was this as much as Mr Ebbers’s hubris that encouraged the firm to employ accounting tricks to keep an illusory promise alive.

This rebirth has caused alarm among competing telecoms firms. They complain that the bankruptcy proceedings left WorldCom in an unfairly strong position. But MCI has failed to capitalise. In 2004 revenues fell by 15% and the company suffered an operating loss of $3.2 billion after writing down the value of its telephone network by $3.5 billion. MCI may soon fall prey to a competitor: it is currently mulling an offer of $6.8 billion from Verizon Communications, one of America’s largest local phone companies, and a rival $8 billion offer from Qwest, a smaller local phone firm.

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