WorldCom the Rise and Fall WorldCom began in 1983 during the breakup of AT&T, which enabled competitors to start selling long distance telephone service to individuals and business customers. A group of investors from Hattiesburg, Mississippi decided to start a communications company called Long Distance Discount Services (LDDS). The company lead by Bill Fields leased a local Bell System Wide-Area Telecommunications Service (WATS) line and resold time on the line to businesses. The sophisticated long distance technology was designed to handle a high volume of calls. The lines were leased at a fixed rate so the idea was that the more customers a company could obtain the lower cost for the company. Fields was able to sign 200 customers, however during this time the telecommunications industry was very competitive and when Bell starting raising the fixed lease rate on the lines LDDS was in trouble. By the end of the first quarter 1985 the company was losing approximately $25,000 a month. When Fields attempt to sell off the company was unsuccessful, one of the initial investors by the name of Bernard Ebbers agreed to become president and chief executive officer for LDDS, who at this time was 1.5 million dollars in debt. Ebbers, a Canadian, was a successful business owner in the hotel business. He came to the United States on a basketball scholarship to Mississippi College. Upon graduation Ebbers saw an opportunity in the motel industry and was able to borrow enough money to invest in a 40 room motel in Columbia, Mississippi. By the early 1980’s Ebbers owned 12 hotels garnering him healthy operating and asset gains. Ebbers knew that in order to bring LDDS out of debt, he would need to work on controlling costs and bringing in new clients. He was able to control costs by keeping overhead low and maintaining unpretentious offices, which means modest and simple functionality not out to impress anyone. The new streamlined LDDS was able to bring in new clients through many different methods. First, was a claim of a personalized customer service center that the larger long distance companies could not offer. Instead of telemarketing, use of a direct sales force made the first initial face to face solicitation, and then monthly and sometimes weekly office calls were made to ensure the customer was satisfied with service. Secondly, LDDS took advantage of the small business market instead of going after big ticket clients like other long distance carriers. The company was able to tailor service to each customers calling pattern, which allowed maximized routing efficiency and cut cost. The final stage of growth for LDDS was through acquisitions, by 1986 revenue rose to $8.6 million and a year later sales had grown to $18 million. The company was now in a position to leverage its order to buy many other smaller long distance companies which included the following: Telesphere Network, Inc. (1987); Com-Link 21, Inc. of Tennessee (1988); Telephone Management Corporation (1988); Inter-Comm Telephone, Inc. (1989); ClayDesta Communications of Texas (1989); Microtel, Inc. (1989); and Galesi Telecommunications of Florida (1989). By the end of 1989 the company’s annual earnings had risen to $4.5 million and from 1983 to 1991 LDDS had purchased about 24 smaller companies allowing the network to reach 27 states. The company continued to make acquisitions throughout the 1990’s with one of the biggest coming in 1995 when they completed the acquisition of WilTel Network Services for $2.5 billion in cash from The Williams Companies. Williams had created an 11,000 mile fiber optic network that was one of only four national networks in the United States. LDDS was now a major competitor having one of the most sophisticated U.S. networks and looking to become a global leader in the telecommunications industry. They changed the company name to WorldCom INC., and WorldCom continued to take the telecom industry by storm following the 1996 Telecommunications act of 1996, which permitted local and long distance companies to enter each others markets. WorldCom capitalized on this by acquiring MFC for around $14 billion in stock. MFC was a leading provider of alternative local network access facilities, bypassing the Bell networks through digital fiber optic cable networks; it had built in and around more than 50 U.S. cities and several in Europe. Along with this deal came UUNET Technologies, Inc., the world's largest Internet and first service provider. The company’s revenues had now reached $4.49 billion by 1996 with a recorded net loss of $2.21 billion reflecting a $2.14 billion charge related to the acquisition of MFS. WorldCom could now offer customers the value of combining long distance, local service and data communications. Investors on Wall Street are now taking an interest in the company driving up the price of stock, which in turn provided the currency for further acquisitions, which made investors happier over and over. During this time however, WorldCom was subtracting millions and sometimes billions from profits in what was described as a write-down of the value of assets acquired. The idea that huge charges against profits could be taken and ignored by investors that thrived on profit seemed irrational, but analyst said with companies pursuing rapid acquisitions, this is exactly what happened. The company was also said to be taking large charges for assets like research and development, which through accounting methods could be converted to a secret fund that the company could tap whenever it needed a boost in its earnings. ''The boost from post-acquisition accounting was like a drug,'' one former WorldCom executive said. Then came the biggest deal of all in 1997 Mr. Ebbers offered MCI Communications Corporation $30 billion in WorldCom stock and $5 billion in debt. MCI took the offer, and Mr. Roberts became the chairman of the newly merged company. This was the beginning of the end for WorldCom. Even people inside were amazed at the inflated price, however WorldCom again seized the opportunity to raise earnings through an array of accounting maneuvers. WorldCom was able to reduce the book value of hard assets of MCI by $3.4 billion by simultaneously increasing so-called good will by the same amount. Since good will is amortized over far more time than hard assets the company spread those huge expenses out over decades rather than just a few years. WorldCom began to derail when the $145 billion bid for Sprint was scuttled by the Justice Department in 2000, citing the merger threatened competition for long distance. WorldCom was now faced with growing a company and making profits without acquisitions, which lead to an internal battle for control among executives from different corporate backgrounds. Pressure was mounting due to the company’s revenue of wholesale and consumer markets dropping, coupled with lack of business planning ultimately left the company with excessive expenses and debt rising. WorldCom executives once again used shady accounting methods. This was accomplished in two ways: first, line costs (interconnection expenses with other telecommunication companies) were reported under capital expenditures rather than operating expenses. Second, the company falsely inflated revenue using bogus accounting entries from corporate unallocated revenue accounts. The fraud was first discovered by WorldCom’s own internal audit team, who uncovered approximately 3.8 billion of the fraud in June 2002. The company acted swiftly with Ebbers (CEO) resigning, Sullivan (CFO) was fired, and Myers (controller) resigning the Securities Exchange Commission launched a full investigation. By the end of 2003 it was estimated that the company’s total assets had been inflated by around $11 billion. A company whose stock was once selling for $64 a share was reduced to filing for Bankruptcy protection. Bernard Ebbers was found guilty of fraud, conspiracy, and filing false documents, as a result he was sentenced to 25 years in prison. Other WorldCom officials were also charged with criminal penalties including former CFO Scott Sullivan, former controller David Myers, former accounting director Buford Yates, and former accounting managers Betty Vinson and Troy Normand.

References:

Associated Content “WorldCom Scandal: A Look Back at One of the Biggest Corporate Scandals in U.S. History”, March 08, 2007 http://www.associatedcontent.com/article/162656/worldcom_scandal_a_look_back_at_one.html?cat=3

The New York Times “For WorldCom, Acquisitions Were Behind Its Rise and Fall”, By KURT EICHENWALD, August 8, 2002 http://www.nytimes.com/2002/08/08/business/for-worldcom-acquisitions-were-behind-its-rise-and-fall.html?pagewanted=1 Funding Universe
http://www.fundinguniverse.com/company-histories/MCI-WorldCom-Inc-Company-History.html