As it turns and burns

BY: SHWETANSHU GUPTA

MBA-49-2013
 William
Murray Fields
Waldron

Bernard
Ebbers
Company’s profile
1998- WorldCom and MCI announced its merger

1993- 4th largest with $1.5 billion revenue

1988-1994- Acquired more than half-dozen communication

companies

1995: Changed its name to LDDS WorldCom

1994- LDDS acquired IDB WorldCom

Started as a small long distance service provider called

LDDS in Mississippi in 1983.
Cont’d
From 1988-2002- 70 mergers and acquisitions
purchased 30 companies
Second largest telecommunication provider in the US
after AT&T in 1998 and 2002.

2000- Both companies terminated the merger process.

MCI WorldCom renamed itself simply "WorldCom".

1999, Sprint and MCI WorldCom announced a

merger agreement, but remained unsuccessful.

Number two telecom company in 1998 after MCI

merger ($34.5 billion).
Year: 2002
 According to a Wall Street
Journal article on Feb. 29, 1996,
WorldCom provided investors with returns of 57.3 percent a year
over the previous 10 years. The article states: "A $100 investment
in WorldCom in 1989, for instance, would be worth $1,580 by
January; that, according to the company, is about 10 times the
best return generated by WorldCom's primary competitors, the
Big Three of long distance: AT&T Corp., MCI Communications
Corp. and Sprint Corp.―
CEO: BERNIE CFO: SCOTT
EBBERS SULLIVAN
How started?
• As WorldCom was enjoying name and fame there was huge
pressures both externally and internally to be no.1.
• Competition

• Merger or acquisition

• Expenses of line costs

• Sprint demerger

• Pressure to meet expectation of Wall street

Line costs?

Local network
in Chicago

WorldCom’s British
network network

WorldCom
customer in Chicago WorldCom
customer in London
Cont’d
WorldCom and other telecommunications firms have faced reduced
demand as the dot–com boom ended and the economy entered
recession.

Revenues fall short of expectations, while debt remains.

With failure of sprint merger it faced a severe setback.

Shareholder’s expectation

Profits

Market value of the company’s common stock plunged from about $150
billion in January 2000 to less than $150 million as of July 1, 2002.
Dot-com boom- bust?

The dot-com bubble -1997–2000.

Marked by the founding of a group of new Internet

based companies commonly referred to as dot-coms.

Companies could cause their stock prices to increase by

simply adding an "e-" prefix to their name or a ".com"
to the end, which one author called "prefix investing".
 Fraud

First, WorldCom's
Second, The company
accounting department
inflated revenue by $ 1
underreported 'line
billion.
costs’
EXPENSE VS CAPITAL EXPENDITURE

• A company spends $500 to perform annual maintenance on a

cutting machine. This expenditure is an operating expenditure
and, as such, it should be treated as business expense .Current
net income would decrease as a result.

• However, if the company spends $500 to replace the motor in

the machine, this expenditure would be posted to the asset
account ―Property, Plant, and Equipment‖. Such an
expenditure is a capital expenditure because the life of the
equipment has been extended and/or its operating efficiency
increased.
What WorldCom did?
Reduced the amount of money held in
reserve by $2.8 billion and moved this
money into the revenue line of its
financial statements.

In 2000, classified operating

expenses as long-term capital
investments ( $3.85 billion).

These changes turned WorldCom's losses

into profits to the tune of $1.38 billion in
2001. It also made WorldCom's assets
appear more valuable.
They also added a journal entry for
$500 million in computer
expenses, but supporting documents
for the expenses were never found.

Ebber also takes out a separate $43

million loan to finance the purchase
of a 500,000-acre ranch- backed by
Ebbers' WorldCom stock.

Scott Sullivan misallocated capital

expenditure as normal expenses, thus
turning profits into losses ( $9 billion) -
not discovered by internal auditor Cynthia
Cooper until June 2002.
How discovered?

Firstly by WorldCom's own internal audit

department- uncovered $3.8 b. of the
fraud.

Then Securities and Exchange Commission

(SEC) launched an investigation.
What revealed?
When irregularities were spotted in MCI's books, the SEC requested
that WorldCom provide more information.

The SEC was suspicious as WorldCom was making so much

profit, AT&T was losing money.

An internal audit found that WorldCom had announced as capital

expenditures as well as the $500 million in undocumented computer
expenses. There was also another $2 billion in questionable entries.

WorldCom's audit committee was asked for documents.

Admitted to inflate its profits by $3.8 billion and not following

GAAP, over the previous five quarters. A little over a month
WorldCom filed for Chapter 11 bankruptcy.
 Chapter 11 bankruptcy
Chapter 11 is a chapter of the United States Bankruptcy
Code, which permits reorganization under
the bankruptcy laws of the United States.

Chapter 11 bankruptcy is available to

every business, whether organized as a corporation or sole
proprietorship, and to individuals.

When a business is unable to service its debt or pay

its creditors, the business or its creditors can file with a
federal bankruptcy court for protection under either
Chapter 11.
 Present condition
The company emerged from Chapter 11 bankruptcy during 2004 with about $5.7
billion in debt and $6 billion in cash.

On August 7, 2002, the exWorldCo 5100 group was begun. It

On February 14, 2005, Verizon Communications agreed to acquire MCI for $7.6
billion.

December 2005, the Microsoft announced that MCI will join it by providing Windows
Live Messenger customers "Voice Over Internet Protocol" (VoIP) service.

This was MCI's last new product—- called "MCI Web Calling".

After the merger, this product was renamed "Verizon Web Calling".
Consequence
• Stock
• Mid 1999 -$64.50 a share
• After announcement - below $1 a share
• Today -$.06 a share
• Employees
57,000 employees lost jobs.
• Shareholders
$180 Billion of shareholder value lost.
• Company
$750 Million settlement paid to SEC
Legal trials
Big expectations-bigger frauds