...------------------------------------------------- ------------------------------------------------- Individual Final Project ------------------------------------------------- Case 2: “WorldCom, Inc.: Corporate Bond Issuance” Case Highlights This case is about the $37-billion bid for MCI Corp., by WorldCom – the United States’ second largest long distance phone company (after AT&T at the time). The purchase should come through by using its own stock to buy the public shares of MCI that did not belong to British Telecommunications (BT), and paying with cash the 20% stake BT held in MCI. In order to finance BT’s stake, WorldCom planned to issue the highest bond offering up to date in the markets of $6 billion. Also to be taken into account in this case, is the timing of the bond issuance, with some turmoil conditions in the bond and equity markets at the time due to the Asian crisis, the large volume of debt issues scheduled for issuance on the same week, and the pricing of the “jumbo” bond. For the remainder of this paper, I will analyze in detail each of these issues. WorldCom’s Background The company was born after the breakup of AT&T, in 1983, with the rise of long-distance telephone business. Bernie Ebbers, CEO, conducted a series of acquisitions which led LDDS (company’s name at the time – Long Distance Discount Services) to become the fourth-largest long-distance carrier in the USA. LDDS changed its name to WorldCom...
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...WorldCom an American telecommunications subsidiary of Verizon Communications that is headquartered in Ashburn, Virginia. The corporation was originally formed as a result of the merger of WorldCom and MCI Communications. For a time, WorldCom was the United States's second largest long distance phone company (after AT&T). WorldCom grew largely by aggressively acquiring other telecommunications companies, most notably MCI Communications. It also owned the Tier 1 ISP UUNET, a major part of the Internet backbone. It was headquartered in Clinton, Mississippi, before being moved to Virginia. Corporate founding The company began as Long Distance Discount Services, Inc. (LDDS) in 1983, based in Hattiesburg, Mississippi. In 1985 LDDS selected Bernard Ebbers to be its CEO. The company went public in 1989 through a merger with Advantage Companies Inc. 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. Among the companies that were bought or merged with WorldCom were Advanced Communications Corp. (1992), Metromedia Communication Corp. (1993), Resurgens Communications Group(1993), IDB Communications Group, Inc (1994), Williams Technology Group, Inc. (1995), and MFS Communications Company (1996). The acquisition of MFS included UUNET Technologies, Inc., which had been acquired by MFS shortly before the merger...
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...MCI Communications Corp. BACKGROUND MCI Communications Corp., a long distance telecommunications company, had been a sluggish performer in a buoyant market, and the management sensed a growing restlessness on the part of shareholders. To enhance the shareholders’ value, the company planned to repurchase some of its outstanding common stock. To guide the management in its decision, the company sought the advice of Lynch Investments in establishing a program to repurchase some of its outstanding common stocks. This leads to Katzu Mizuno, an associate of Lynch Investments, to investigate what source of fund is appropriate for the repurchase program and the possible effect of such action in the company. CASE ANALYSIS This case analysis aims to answer the following problem: How should the company finance its plan to repurchase its outstanding common stock in order to enhance its shareholder value? The company will be less flexible if it would have a debt-equity ratio of 72%. But since the said D/E ratio would “still be moderate with respect to the industry”, MCI’s bond rating won’t go below a medium grade of BBB. MCI needs to unlevered and then re-lever the target company’s equity beta. Unlevering the target’s equity beta yields an estimated beta comparable to the other major competitors which have different debt structure (see Exhibit B). Thus, re-levering this equity beta to reflect MCI’s target capital structure yields the appropriate risk for MCI to use in estimating a cost...
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...years after this case was written, the telecommunications industry consolidated further. Verizon Communications acquired MCI/WorldCom and SBC Communications acquired AT&T Corporation, which had been in business since the 19th Century. The acquisition of MCI/WorldCom was the direct result of the behavior of WorldCom's senior managers as documented above. While it can be argued that the demise of AT&T Corp. was not wholly attributable to WorldCom's behavior, AT&T Corp.'s decimation certainly was facilitated by the events surrounding WorldCom, since WorldCom was the benchmark long distance telephone and Internet communications service provider. Indeed, the ripple effect of WorldCom's demise goes far beyond one company and several senior managers. It had a profound effect on an entire industry. This postscript will update the WorldCom story by focusing on what happened to the company after it declared bankruptcy and before it was acquired by Verizon. The postscript also will relate subsequent important events in the telecommunications industry, the effect of WorldCom's problems on its competitors and labor market, and the impact WorldCom had on the lives of the key players associated with the fraud and its exposure. From Benchmark to Bankrupt Between July 2002 when WorldCom declared bankruptcy and April 2004 when it emerged from bankruptcy as MCI, company officials worked feverishly to restate the financials and reorganize the company. The new CEO Michael Capellas (formerly...
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...WorldCom took the telecom industry by storm when it began a frenzy of acquisitions in the 1990s. The low margins that the industry was accustomed to weren't enough for Bernie Ebbers, CEO of WorldCom. From 1995 until 2000, WorldCom purchased over sixty other telecom firms. In 1997 it bought MCI for $37 billion. WorldCom moved into Internet and data communications, handling 50 percent of all United States Internet traffic and 50 percent of all e-mails worldwide. By 2001, WorldCom owned one-third of all data cables in the United States. In addition, they were the second-largest long distance carrier in 1998 and 2002. How the Fraud Happened So what happened? In 1999, revenue growth slowed and the stock price began falling. WorldCom's expenses as a percentage of its total revenue increased because the growth rate of its earnings dropped. This also meant WorldCom's earnings might not meet Wall Street analysts' expectations. In an effort to increase revenue, WorldCom reduced the amount of money it held in reserve (to cover liabilities for the companies it had acquired) by $2.8 billion and moved this money into the revenue line of its financial statements. That wasn't enough to boost the earnings that Ebbers wanted. In 2000, WorldCom began classifying operating expenses as long-term capital investments. Hiding these expenses in this way gave them another $3.85 billion. These newly classified assets were expenses that WorldCom paid to lease phone network lines from other companies to...
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...MCI Communications Corporation FOUNDED: 1968 Contact Information: HEADQUARTERS: 1801 Pennsylvania Ave. Washington, DC 20006 PHONE: (202)872-1600 FAX: (202)887-3140 URL: http://www.mci.com OVERVIEW MCI is the second-largest long-distance provider in the United States after AT&T. It is a leader and innovator in the telecommunications industry. MCI was instrumental in forging an opening in that industry for companies to compete with AT&T. It continued in the late 1990s to lead all others except for AT&T, which had held an industrywide monopoly until the 1980s. The company, located just a few blocks from the White House, has offices in 300 locations around the world, and competes in a wide variety of communication service markets. In 1997, the global long-distance company World-Com Inc. made a $30-billion bid to buy MCI. GTE made a $28 billion offer. After some negotiation, MCI agreed to a $37-billion purchase by WorldCom. The merger was announced November 10, 1997 and the new company will be named MCI WorldCom. COMPANY FINANCES Upon announcing the merger of MCI and World-Com Inc., the combined firms projected over $30 billion in revenues for 1998. In 1997 MCI had net income of $209 million on revenue of $19.65 billion, as compared to 1996 when net income was __BODY__.20 billion on revenue of $18.49 billion. This was a considerable increase over 1995 income of $548 million on $15.26 billion in revenues. Earnings per share of stock rose from $.80 in 1995...
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... 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. Among the companies that were bought or merged with WorldCom were Advanced Communications Corp. (1992), Metromedia Communication Corp.(1993), Resurgens Communications Group(1993), IDB Communications Group, Inc (1994), Williams Technology Group, Inc. (1995), and MFS Communications Company (1996). The acquisition of MFS included UUNET Technologies, Inc., which had been acquired by MFS shortly before the merger with WorldCom. In February 1998, a complex transaction saw WorldCom purchase online pioneer CompuServe from its parent company H&R Block. WorldCom then retained the CompuServe Network Services Division, sold its online service to America Online, and received AOL's network division, ANS. The acquisition of Digex (DIGX) in June 2001 was also complex; Worldcom acquired Digex's corporate parent, Intermedia Communications, and then sold all of Intermedia's non-Digex assets to Allegiance Telecom. 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, after MCI divested itself of its successful "internetMCI" business to gain approval from US Department of Justice. June 1999 with WorldCom’s shares trading at $64, Bernie Ebbers was...
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...years after this case was written, the telecommunications industry consolidated further. Verizon Communications acquired MCI/WorldCom and SBC Communications acquired AT&T Corporation, which had been in business since the 19th Century. The acquisition of MCI/WorldCom was the direct result of the behavior of WorldCom's senior managers as documented above. While it can be argued that the demise of AT&T Corp. was not wholly attributable to WorldCom's behavior, AT&T Corp.'s decimation certainly was facilitated by the events surrounding WorldCom, since WorldCom was the benchmark long distance telephone and Internet communications service provider. Indeed, the ripple effect of WorldCom's demise goes far beyond one company and several senior managers. It had a profound effect on an entire industry. This postscript will update the WorldCom story by focusing on what happened to the company after it declared bankruptcy and before it was acquired by Verizon. The postscript also will relate subsequent important events in the telecommunications industry, the effect of WorldCom's problems on its competitors and labor market, and the impact WorldCom had on the lives of the key players associated with the fraud and its exposure. From Benchmark to Bankrupt Between July 2002 when WorldCom declared bankruptcy and April 2004 when it emerged from bankruptcy as MCI, company officials worked feverishly to restate the financials and reorganize the company. The new CEO Michael Capellas (formerly...
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...he or she is responsible for. When he resigned from the company, it raised questions because Ebbers had about $366 million dollars in personal loans from the company. Upon the revealing of his resignation to the employees, they were alarmed that something important was happening within the company, but had not yet been exposed. Bernie Ebbers started out in the telecommunications industry in 1983 providing long distance services in Jackson, Mississippi at a company formally known as LDDS. Over the years, the company grew through a series of business deals. In 1995, the name of the company was changed from LDDS to WorldCom. At the time, MCI was the second long distance provider and AT&T was number one. Ebber purchased MCI in 1998, for the amount of $37 billion dollars. With the Examining Business Failure 3 purchase of the MCI, WorldCom became the telecommunications giant. This changed seemed to be the success story of the 1990s, because of how well the company was doing financially and with the job...
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...Insight on WorldCom Scandal Table of Contents ABSTRACT 2 The importance of accounting conceptual framework 3 Historical Background 5 The Scandal – what happened 6 PENALTIES 7 How the scandal relates to accounting theory 8 RELATION TO POSITIVE ACCOUNTING THEORY 9 Conservatism Principle 9 Lack of Reliability 10 Lack of Relevance 11 Financial Misstatement 11 Conclusion 12 Bibliography 14 Insight on WorldCom Scandal ABSTRACT The scope of this paper deals with the WorldCom accounting scandal of the early 2000’s as it relates to elements of accounting theory. The discussion will cover the key reasons that contributed to the collapse of WorldCom. Specifically, this paper will look at: Executive compensation, Earnings Management, and Information Asymmetry. The authors will present arguments that clearly show how each of these three sub-topics played a pivotal role in the scandal. The reader will also see how these reasons are often inter-related, and often overlap each other, the enormity of which caused the company to fall like a stack of dominoes. In particular, information asymmetry was allowed to flourish as the WorldCom executives lavished themselves with huge compensation, all the while keeping the board of directors and investors out of the loop. A poor corporate government structure existed as the board was filled with inept and ineffective individuals who were powerless to stop the pilfering of profits. The end result of these actions...
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...ETHICS IN ACCOUNTING: THE WORLDCOM INC. SCANDAL Conf.univ.dr. Lucian Cernuşca “Aurel Vlaicu” University, Arad, str. Piaţa Sporturilor, nr. 10, bl. 25, apt. 7, 310167 Arad, Phone: 0730468534, luciancernusca@gmail.com What is ethics? What does ethics have to do with accounting? How does a scandal affect the business environment and the society? This article will explain just those questions by analyzing a “famous” fraud scandal: WorldCom Inc. The article discusses the chronology of events that lead to the WorldCom Inc. collapse and explains how the figures were manipulated for the owners’ interest and what the accounting scam was. The article ends with the consequences of the scandal and what the effects were on the society and business environment in general. JEL Classification: M4 Accounting and Auditing Key words: ethics, accounting, bankruptcy, WorldCom Inc., expenses. What is ethics? Why ethics in accounting? Ethical values are the foundations on which a civilized society is based on. Without them, the civilization collapses. In business, the purpose of ethics is to direct business men and women to abide by a code of conduct that facilitates public confidence in their product and services. In the accounting field, professional accounting organizations recognize the accounting profession’s responsibility to provide ethical guidelines to its members. Ethics must and should be taught. People are not born with the desire to be ethical or be concerned with...
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...and first quarter 2002. Read more: http://www.ukessays.com/essays/accounting/nature-of-the-fraud-accounting-essay.php#ixzz3qjKkXfsR WORLDCOM'S COLLAPSE: THE OVERVIEW; WORLDCOM FILES FOR BANKRUPTCY; LARGEST U.S. CASE By SIMON ROMERO and RIVA D. ATLAS Published: July 22, 2002 • Facebook • Twitter • Google+ • Email • Share • Print • Reprints • WorldCom, plagued by the rapid erosion of its profits and an accounting scandal that created billions in illusory earnings, last night submitted the largest bankruptcy filing in United States history. The bankruptcy is expected to shake an already wobbling telecommunications industry, but is unlikely to have an immediate impact on customers, including the 20 million users of its MCI long-distance service. The WorldCom filing listed more than $107 billion in assets, far surpassing those of Enron, which filed for bankruptcy last December. The WorldCom filing had been anticipated since the company disclosed in late June...
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...Daniels Fund Ethics Initiative University of New Mexico http://danielsethics.mgt.unm.edu WorldCom’s Bankruptcy Crisis INTRODUCTION The story of WorldCom began in 1983 when businessmen Murray Waldron and William Rector sketched out a plan to create a long-distance telephone service provider on a napkin in a coffee shop in Hattiesburg, Miss. Their new company, Long Distance Discount Service (LDDS), began operating as a long distance reseller in 1984. Early investor Bernard Ebbers was named CEO the following year. Through acquisitions and mergers, LDDS grew quickly over the next 15 years. The company changed its name to WorldCom, achieved a worldwide presence, acquired telecommunications giant MCI, and eventually expanded beyond long distance service to offer the whole range of telecommunications services. WorldCom became the second-largest long-distance telephone company in America, and the firm seemed poised to become one of the largest telecommunications corporations in the world. Instead, it became the largest bankruptcy filing in U.S. history at the time and another name on a long list of those disgraced by the accounting scandals of the early 21st century. ACCOUNTING FRAUD AND ITS CONSEQUENCES Unfortunately for thousands of employees and shareholders, WorldCom used questionable accounting practices and improperly recorded $3.8 billion in capital expenditures, which boosted cash flows and profit over all four quarters in 2001 as well as the first quarter of 2002. This disguised...
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...provide Long Distance Discount Services (LDDS) (Internet Services, 2011). Through the acquisition of other businesses Worldcom became the world’s second largest telecommunication company. LDDS began by leasing a wide-area telecommunications service (WATS) line and resold time to other businesses (Internet Services, 2011). WATS is a form of fixed-rate long distance telecommunication service in which certain area codes, such 800, 888, or 877, are reserved for businesses and when customers call these numbers they are not charged for long-distance but rather the business is charged as a subscriber of the WATS service (Rouse, 2006). Beginning in 1988, LDDS began growing through the acquisition of other companies such as Telephone Management Corp., National Telecommunications, IDB WorldCom, and WilTel Network Services (Internet Services, 2011). In 1989, LDDS went public through the acquisition of Advantage Companies Inc....
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...a business begins a downward spiral it is very hard to break free from it. WorldCom Inc. was one of those companies in which rose to fortune and fame but came crashing down once these elements were blurred or forgotten. Although the company did try to stay afloat, it was too late to reverse the damage. History WorldCom Inc. was developed by Murray Waldron and William Rector in 1983 by planning to create a discount long-distance provider named LDDS (Pandey & Verma, 2004). Then in 1985 Bernard Ebbers became CEO of LDDS, in which by 1989 it merged with Advantage Companies, Inc, and then in 1992 it merged with Advanced Telecommunications Corp. With these two mergers WorldCom Inc. grew into a large company with in the US and globally as well (Pandey & Verma, 2004). It was not until WorldCom Inc merged with MCI Communication Corp. that it began to have business with over 280 countries and locations worldwide (Pandey & Verma, 2004). WorldCom was listed as one of the Fortune 500 Company in Fortune magazine for the telecom sector. Even though WorldCom Inc. was listed in this list it did not hide the fact that the company was not doing very well. Structure The partial organizational chart of WorldCom Inc. financial side of the company consisted of Bernard Ebbers as Chief Executive Officer, Scott Sullivan as Chief Financial Officer, and Ronald Beaumont as Chief Operations Officer for WorldCom...
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