CSR - THE WORLDCOM

FIASCO
Presented by –

Sagar Lahoti
 Company Background
 World com Founded in 1983 in Hattiesberg, Mississippi
 Initially called LDDS-Long distance discount service
 Bernard Ebber as CEO in 1985
Growth=Survival
$650000=$1.5 million

 World com went public in 1989-E.O.S

 1993—metromedia co. & resergens communication
 1994– IDB
 1995—William Technology
 1996-MFS communication
 1998-Biggest acquisition($40 billion revenues)
 Company Background
 1999 sprint merger worth $129 billion crashed

 Stock declined by 2000

 Heavy loans unstabilized his position as he left he said….

 New CEO-John Sidgmore & CFO Scott Sullivan

 Investigation launched by :

- SEC (Security exchange commission)

- Internal auditor
 Purchased by Verizonon communication on 2001

known as verizon business.

 Nemesis Catches Up With
WorldCom
 Attempt to acquire Sprint in Oct 1999 but failed
 Ebbers lacked strategic sense of direction and company
started drifting
 Company suffered severe financial crunch because of decline
in revenue, overcapacity and huge debts
 Fear amongst CEO and the top brass of the company
 Stock price dropped to 0.5 $ in Jan 2002
 In June 2002, Co. announced inflation of profits and improper
accounting of 3.9 Bn $
 In August 2002, another 3 Bn $ was improperly accounted
 Unfolding of the WorldCom
Scandal
 There was great fall in WorldCom shares, huge debts and
mounting pressure from investors
 Ebbers resigned in April 2002 and John Sidgmore became
the CEO
 Fraudulent activities thus came to light

 KPMG appointed as new auditors

 The revelations made were shocking
 Truth Behind the Scandal
 Unrealistic financial targets and inability to meet them
 Recording of a/c entries without any evidences
 Company was capitalizing its line costs. Line costs were
operating expenses but classified as capital expenditure
 False figures – 3.055 Bn $ in 2001 & 797 Mn $ in 2002
 In 2000 and 2001, WC claimed pre tax revenue of 7.6 and
2.4 Bn $ respectively. Later discovered as loss of 49.9 and
14.5 Bn $ for the respective years
 Reserve accounts were manipulated to increase figures
 Two versions of accounts – the actual version and the “Final”
version for investors
 Reasons for the Fiasco
1) CORPORATE CULTURE: -

 Variety of people, culture, a/c practices and business

strategies due to several acquisitions
 Various departments of the office located in different cities
 No outlet for employees to express their concerns
 Employees became yes-men and were very afraid

 Employees smelt something fishy

 Sharing, interacting and involvement with each other was
restrained for the employees
 Reasons for the Fiasco
2) INORGANIC GROWTH: -

 Ebbers became media darling because of WC growth

 The M&A series was financed by high valued WC stock in
1990s during stock market boom
 But recession had a terrific impact on stock price i.e. from
64$ to mere 2$
 Ebbers also in a tight spot. Thus, he took personal loan of
400 Mn $ in Oct 2000
 Reasons for the Fiasco
3) FAILING LEADERSHIP: -

 Ebbers was neither qualified nor experienced to lead

 A former basketball coach who made it big only through
M&As
 Lacked the desired level of corporate culture

 Self biased
 Failed to handle WC during tough days
 Claimed innocence, but it couldn’t have been possible
without him
 Reasons for the Fiasco
4) RECESSION IN THE ECONOMY: -

 WC was booming in late 90s along with the economy and the
telephone industry
 But the scenario changed with the close of 90s
 Price wars intensified and rise in demand of mobile phones
affected the income statements
 WC was badly hampered
 Reasons for the Fiasco
5) VAST OVERSUPPLY OF CAPACITY: -

 The US Telecommunications Act 1996 comes into force

 With the projection of internet growth, many companies
sprang upon to meet the demand of telecom
 Heavy borrowings by the companies

 But the dot com boom ended and companies were burdened
with excess capacity. Thus, the revenues were falling
 WC reluctant to show it
 Reasons for the Fiasco
6) UNHELATHY FOCUS ON PROFITS: -

 WC management focused only on revenues and profit

margins rather than building long term relationships
 Primary aim was to beat the forecasts of incomes & ratios
 With recession and price wars, E/R ratio was hit and
company failed to meet targets
 This further pushed the fiasco
 Reasons for the Fiasco
7) UNCONCERNED AND MALFUNCTIONED BOARD: -

 Richard Breeden – SEC appointed “Corporate Monitor”

 He termed Ebbers as a “Roman Emperor”
 Board failed to control the CEO
 Directors indulged in heavy spending & lavish salaries
 Unreasonably long tenures for several board members
 Audit and compensation committees were least committed
 They had little understanding of internal financial workings
 Ebbers was sanctioned 400 Mn $ loans
 Severance package for Ebbers & his wife – 50 Mn $ and
interest subsidies worth 40 Mn $
 The Financial Mess
 SEC’s probe found out that WC had debt of 5.75 Bn $

 WC signed credit agreements with 26 banks for 2.65 Bn $

 WC also had 30 Bn $ in bond debt
 WC listed 104 Bn $ assets which had real value much lesser
 M Cap felt from 120 Bn $ in 1991 to 408 Mn $

 In 2002, WC defaulted to pay dividend of 0.6 $ on MCI group

stock. Justified that it could save 284 Mn $ a year
 How the stakeholders
were affected
 Share value declined by 95 %, leaving investors penniless
 WC cut down its workforce by 17,000 & 3,500 within a week
of filing bankruptcy. Current employees 40,000 from 101,000
 Service to 20 Mn customers was jeopardized. Customers
couldn’t shift because of heavy penalties
 WC’s UNNET services also in precarious situation
 25 banks have sued WC for loan defaulting. Shareholders
have sued investment banks for recommending WC stock
 Big blow to Indian co. VSNL. WC owes around Rs. 400
crores to VSNL.
 WC and Arthur Anderson
 Arthur Anderson was external auditor of WC since 1989

 They denied any involvement in the fiasco

 AA missed opportunities where they could have disclosed the
fraud. They’ve been criticized for their way of handling WC
accounts books and policies
 Observers commented that AA could have paid more
attention towards aggressive practices when it was aware of
such practices before
 AA had series of audit failures including Enron & WC
 Postscript
 March 2002 – SEC launched investigation of accounts of WC
 June 2002 – SEC filed fraud charges against WC
 WC filed for Chapter 11 of US Bankruptcy Code
 WC had uncovered 11 Bn $ in accounting fraud and
understated expenses of 74.5 Bn $
 Ebbers sent to prison for 25 years and Sullivan for 5 years
 Others found guilty – David Myers, Buford Yates, Betty
Vinson and Troy Normand
 Richard Breeden – appointed as “Corporate Monitor” by SEC
 Breeden was given responsibilty to carry out governance
review and recommending future changes
 78 recommendations on corporate governance at WC
 The End &….The Beginning
 The company had to implement the 78 recommendations

 Several changes in company and board of directors

 Michael Capellas selected as new CEO
 All employees asked to sign a pledge of ethics
 WC sold of its peripheral business but holds MCI and
UNNET
 Fresh start - Renamed as MCI Inc.
Thank
You !!