Long Distance Discount Services was founded in 1983 and later became WorldCom. Under CEO Bernard Ebbers, WorldCom grew rapidly through acquisitions in the 1990s, including MCI in 1998. However, declining revenues and industry downturn led Ebbers and CFO Scott Sullivan to fraudulently misstate over $3.8 billion in expenses to maintain the stock price. This was uncovered in 2002, causing WorldCom to file for bankruptcy and Ebbers to be imprisoned.
Long Distance Discount Services was founded in 1983 and later became WorldCom. Under CEO Bernard Ebbers, WorldCom grew rapidly through acquisitions in the 1990s, including MCI in 1998. However, declining revenues and industry downturn led Ebbers and CFO Scott Sullivan to fraudulently misstate over $3.8 billion in expenses to maintain the stock price. This was uncovered in 2002, causing WorldCom to file for bankruptcy and Ebbers to be imprisoned.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online from Scribd
Long Distance Discount Services was founded in 1983 and later became WorldCom. Under CEO Bernard Ebbers, WorldCom grew rapidly through acquisitions in the 1990s, including MCI in 1998. However, declining revenues and industry downturn led Ebbers and CFO Scott Sullivan to fraudulently misstate over $3.8 billion in expenses to maintain the stock price. This was uncovered in 2002, causing WorldCom to file for bankruptcy and Ebbers to be imprisoned.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online from Scribd
Long Distance Discount Services, Inc. (LDDS) began in
Hattiesburg, Mississippi in 1983.
In 1985 LDDS selected Bernard Ebbers to be its CEO.
The company name was changed to LDDS WorldCom in
1995, and later just WorldCom.
The company’s growth under WorldCom was fueled primarily
through acquisitions during the 1990s and reached its apex with the acquisition of MCI in 1998. Telecom industry faced low margins; Ebbers decided growth=survival Ebbers purchased over 60 firms in 2nd half of the 90’s.
WorldCom moved into Internet and data traffic
Handles 50% of US Internet traffic
Handles 50% of e-mails worldwide
1999 revenue growth halted; stock dropped
Major Companies acquired Advanced Communications Corp. (1992)
Metromedia Communication Corp.(1993)
Resurgens Communications Group(1993)
IDB Communications Group, Inc (1994)
CompuServe from its parent company H&R
Block
Digex (DIGX) in June 2001 On November 10,
1997 On November 10, 1997, WorldCom and MCI Communications announced their US$37 billion merger to form MCI WorldCom, making it the largest merger in US history. On September 15, 1998 the new company, MCI WorldCom, opened for business.
On October 5, 1999 Sprint Corporation and MCI
WorldCom announced a $129 billion merger agreement between the two companies. Had the deal been completed, it would have been the largest corporate merger in history, ultimately putting WorldCom ahead of AT&T as the largest communications company in the United States.
However the deal did not go through because of
Condition of American Corporate firms in 90’s In the early 1990s, the US economy went through a phase of consolidation, in which many major companies acquired or merged with weaker companies to strengthen their own position in the market (as seen earlier, WorldCom happened to be one of the key acquirers in this phase).
The share prices of companies play a vital role
during mergers and acquisitions. Therefore companies try to 'maintain' the prices of their shares (that is, keep them sufficiently high). If they fail to do so, they can easily become targets for takeover/acquisition. Moreover, if a company wishes to raise capital from the market, its performance on the stock exchange is considered to be very important. The companies are generally valued on the basis of cash flows they could generate in future. As the financial performance of a company is one of the most important (and direct) factors affecting its share price, companies were under constant pressure to show positive revenue streams... Down turn of “TELECOM INDUSTRY”. Brains behind the fraud of $11bn
CEO Bernard Ebbers
CFO Scott Sullivan Former controller David Myers Former accounting director Buford Yates Former accounting managers Betty Vinson and Troy Normand Arthur Anderson auditing firm Ebbers Angle (borrowed more than $ 1 billion for personal purposes from various banks. He pledged his WorldCom stock as collateral. ) Bernard Ebbers became very wealthy from the rising price of his holdings in WorldCom’s stock. However, shortly after the MCI acquisition in 1998, the telecommunications industry entered a downturn and WorldCom’s growth strategy suffered a serious blow when it was forced to abandon its proposed merger with Sprint in late 2000. By that time, WorldCom’s stock was declining and Ebbers came under increasing pressure from banks to cover margin calls on his WorldCom stock that was used to finance his other businesses (timber and yachting, among others).
During 2001, Ebbers persuaded WorldCom’s board of
directors to provide him corporate loans and guarantees in excess of $400 million to cover his margin calls. The board hoped that the loans would avert the need for Ebbers to sell substantial amounts of his WorldCom stock, as his doing so would put further downward pressure in the stock's price. However, this strategy ultimately failed and Ebbers was ousted as CEO in April 2002 and replaced by John Sidgmore, Beginning in 1999 and continuing through May 2002, the company (under the direction of Scott Sullivan (CFO), David Myers (Controller) and Buford “Buddy” Yates (Director of General Accounting) used fraudulent accounting methods to mask its declining earnings by painting a false picture of financial growth and profitability to prop up the price of WorldCom’s stock. Method used The fraud was accomplished primarily in two ways:
Underreporting ‘line costs’ (interconnection
expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them.
Inflating revenues with bogus accounting entries
from ‘corporate unallocated revenue accounts’.
From 1998-2000, WorldCom reduced reserve
accounts held to cover liabilities of acquired companies WorldCom added $2.8 billion to the revenue line from these reserves How the Fraud took place? Operating Expenses to Assets?
-Mr. Sullivan’s directions affected the income
statement: Revenues xxx (no change) COGS xxx (no change) rom Operating Expenses: e dF mov me Fees paid to lease other Re Inco ent companies phone networks: xxx (Huge Decrease) t e m Sta F rom d o ve e Computer expenses: xxx (Huge Decrease) m m Re Inco ent t e m NET INCOME xxx (Huge Increase) Sta How the Fraud took place? Operating Expenses to Assets?
-Mr. Sullivan’s directions affected the balance sheet:
Assets: t o Computer assets xxx (Huge Increase) d Adde SheetLeasing assets xxx (Huge Increase) ce n Bala
Liabilities xxx (no change)
Stockholders Equity: e d to Retained Earnings xxx (Huge Increase) Add Sheet a la nce B =HAPPY INVESTORS Final Countdown As media, legal and investor unrest intensified against WorldCom, there was little hope left for the company. The company was required to pay $ 172 million in interest and debt in 2002, which was to increase further to $ 1.7 billion and $ 2.6 billion as a part of the repayment schedule in 2003 and 2004. Negative cash flow of $ 871 million in 2001 Generated only $ 564 million in free cash flow in 2002 and $ 1 billion in 2003. The company admitted that it had resorted to fraudulent accounting practices for five quarters (four quarters of 2001 and the first quarter of 2002) Bankruptcy On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection in the largest such filing in United States history at the time (since overtaken by the collapse of Lehman Brothers in September 2008). The WorldCom bankruptcy proceedings were held before U.S. Federal Bankruptcy Judge Arthur J. Gonzalez who simultaneously heard the Enron bankruptcy proceedings which were the second largest bankruptcy case resulting from one of the largest corporate fraud scandals. None of the criminal proceedings against WorldCom and its officers and agents were originated by referral from Gonzalez or Department of Justice lawyers. Impact of WorldCom fall down Ebber was sentenced 25yrs imprisonment Standard & Poor's reduced WorldCom's credit rating to junk status and WorldCom was removed from the prestigious S&P 500 Index The share price fell by over 80% On June 26, the SEC filed a suit alleging "securities fraud" against WorldCom in a district court in New York. 17000 employees lost there jobs Ordinary investors were put into severe loss WorldCom changed its name to MCI, and moved the corporate headquarters from Clinton, Mississippi to Dulles, Virginia, on April 14, 2003. Under the bankruptcy reorganization agreement, the company paid $750 million to the SEC in cash and stock in the new MCI, which was intended to be paid to wronged investors. AT&T is seen as a potential gainer in the aftermath of WorldCom's inevitable collapse.