CSR - THE WORLDCOM FIASCO

Presented by ²

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 1993²metromedia co. & resergens communication 1994± IDB 1995²William 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 ³Final´ 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 ³Corporate Monitor´ He termed Ebbers as a ³Roman 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 ³Corporate 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 !!

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