Worlcom: 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 CEO of Compaq Computer) and the newly appointed CFO Robert Blakely faced the daunting task of settling the company’s outstanding debt of around $35 billion and performing a rigorous financial audit of the company. This was a monumental task, at one point utilizing an army of over 500 WorldCom employees, over 200 employees of the company’s outside auditor, KPMG, and a supplemental workforce of almost 600 people from Deloitte & Touch. As Joseph McCafferty notes, “(a)t the peak of the audit, in late 2003, WorldCom had about 1,500 people working on the restatement, under the combined management of Blakely and five controllers…(the t) otal cost to complete it: a mind-blowing $365 million”(McCafferty, 2004).
In addition to revealing sloppy and fraudulent bookkeeping, the post-bankruptcy audit found two important new pieces of information that only served to increase the amount of fraud at WorldCom. First, “WorldCom had overvalued several acquisitions by a total of $5.8 billion”(McCafferty, 2004). In addition, Sullivan and Ebbers, “had claimed a pretax profit for 2000 of $7.6 billion” (McCafferty, 2004). In reality, WorldCom lost “$48.9 billion (including a $47 billion write-down of impaired assets).” Consequently, instead of a $10 billion profit for the years 2000 and 2001, WorldCom had a combined loss for the years 2000 through 2002 (the year it declared bankruptcy) of $73.7 billion. If the $5.8 billion of overvalued assets is added to this figure, the total fraud at WorldCom amounted to a staggering $79.5 billion.
Although the newly audited financial statements exposed the impact of the WorldCom fraud on the company’s shareholders, creditors, and other stakeholders, other information made public since 2002 revealed the effects of the fraud on the company’s competitors and the telecommunications industry as a whole. These show that the fall of WorldCom altered the fortunes of a number of telecommunications industry participants, none more so than AT&T Corporation.
The CNBC news show, “The Big Lie: Inside the Rise and Fraud of WorldCom,” exposed the extent of the WorldCom fraud on several key participants, including the then-chairmen of AT&T and Sprint (Faber, 2003). The so-called “big lie” was promoted through a spreadsheet developed by Tom Stluka, a capacity planner at WorldCom, that modeled in Excel format the amount of traffic WorldCom could expect in a best-case scenario of Internet growth. In essence, “Stluka’s model suggested that in the best of all possible worlds Internet traffic would double every 100 days” (Faber, 2003). In working with the model, Stluka simply assigned variables with various parameters to “whatever we think is appropriate”(Faber, 2003).
This was innocent enough, had it remained an exercise. A problem emerged when the exercise was extended and integrated into corporate strategy, when it was adopted and implemented by WorldCom and then by the telecommunications industry. Within a year, “other companies were touting it” and the model was given credibility it should not have been accorded (Faber, 2003). As Stluka explains, “there were a lot of people who were saying 10X growth, doubling every three to four months, doubling every 100 days, 1,000 percent, that kind of thing” (Faber, 2003). But it wasn’t true. “I don’t recall traffic … in fact growing at that rate … still, WorldCom’s lie had become an immutable law.” Optimistic scenarios with little foundation in reality began to spread and pervade the industry. They became emblematic of the “smoke and mirrors” behavior not only at WorldCom prior to its collapse, but the industry as a whole.
Fictitious numbers drove not just WorldCom, but also other companies as they reacted to WorldCom’s optimistic projections. According to Michael Armstrong, then chairman and CEO of AT&T, “For some period of time, I can recall that we were back-filling that expectation with laying cable, something like 2,200 miles of cable an hour” (Faber, 2003). He adds: “Think of all the companies that went out of business that assumed that that was real.”
The fallout from the WorldCom debacle was significant. Verizon obtained the freshly minted MCI for $7.6 billion, but not the $35 billion of debt MCI had when it declared bankruptcy (Alexander, 2005). Although WorldCom was one of the largest telecommunications companies with nearly $160 billion in assets, shareholder suits obtained $6.1 billion from a variety of sources including investment banks, former board members and auditors of WorldCom (Belson, 2005). If this sum were evenly distributed among the firms 2.968 billion common shares, the payoff would (have been) well under $1 a share for a stock that peaked at $49.91 on Jan. 2000″ (Alexander, 2005, 3).
There are more losers in the aftermath of the WorldCom wreck. The reemerged MCI was left with about 55,000 employees, down from 88,000 at its peak. Since March 2001, however, “about 300,000 telecommunications workers have lost their jobs. The sector’s total employment-1.032 million-is at an eight year low” (Alexander, 2005, 3). The carnage does not stop there. Telecommunications equipment manufacturers such as Lucent Technologies, Nortell Networks, and Corning, while benefiting initially from WorldCom’s groundless predictions, suffered in the end with layoffs and depressed share prices. Perhaps most significant, in December 2005, the venerable AT&T Corporation ceased to exist as an independent company.
Retrieved May 15, 2007 from Dennis Moberg (Santa Clara University) and Edward Romar (University of Massachusetts-Boston) www.scu.edu/ethics/dialogue/candc/cases/worldcom.html
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 CEO of Compaq Computer) and the newly appointed CFO Robert Blakely faced the daunting task of settling the company’s outstanding debt of around $35 billion and performing a rigorous financial audit of the company. This was a monumental task, at one point utilizing an army of over 500 WorldCom employees, over 200 employees of the company’s outside auditor, KPMG, and a supplemental workforce of almost 600 people from Deloitte & Touch. As Joseph McCafferty notes, “(a)t the peak of the audit, in late 2003, WorldCom had about 1,500 people working on the restatement, under the combined management of Blakely and five controllers…(the t) otal cost to complete it: a mind-blowing $365 million”(McCafferty, 2004).
In addition to revealing sloppy and fraudulent bookkeeping, the post-bankruptcy audit found two important new pieces of information that only served to increase the amount of fraud at WorldCom. First, “WorldCom had overvalued several acquisitions by a total of $5.8 billion”(McCafferty, 2004). In addition, Sullivan and Ebbers, “had claimed a pretax profit for 2000 of $7.6 billion” (McCafferty, 2004). In reality, WorldCom lost “$48.9 billion (including a $47 billion write-down of impaired assets).” Consequently, instead of a $10 billion profit for the years 2000 and 2001, WorldCom had a combined loss for the years 2000 through 2002 (the year it declared bankruptcy) of $73.7 billion. If the $5.8 billion of overvalued assets is added to this figure, the total fraud at WorldCom amounted to a staggering $79.5 billion.
Although the newly audited financial statements exposed the impact of the WorldCom fraud on the company’s shareholders, creditors, and other stakeholders, other information made public since 2002 revealed the effects of the fraud on the company’s competitors and the telecommunications industry as a whole. These show that the fall of WorldCom altered the fortunes of a number of telecommunications industry participants, none more so than AT&T Corporation.
The CNBC news show, “The Big Lie: Inside the Rise and Fraud of WorldCom,” exposed the extent of the WorldCom fraud on several key participants, including the then-chairmen of AT&T and Sprint (Faber, 2003). The so-called “big lie” was promoted through a spreadsheet developed by Tom Stluka, a capacity planner at WorldCom, that modeled in Excel format the amount of traffic WorldCom could expect in a best-case scenario of Internet growth. In essence, “Stluka’s model suggested that in the best of all possible worlds Internet traffic would double every 100 days” (Faber, 2003). In working with the model, Stluka simply assigned variables with various parameters to “whatever we think is appropriate”(Faber, 2003).
This was innocent enough, had it remained an exercise. A problem emerged when the exercise was extended and integrated into corporate strategy, when it was adopted and implemented by WorldCom and then by the telecommunications industry. Within a year, “other companies were touting it” and the model was given credibility it should not have been accorded (Faber, 2003). As Stluka explains, “there were a lot of people who were saying 10X growth, doubling every three to four months, doubling every 100 days, 1,000 percent, that kind of thing” (Faber, 2003). But it wasn’t true. “I don’t recall traffic … in fact growing at that rate … still, WorldCom’s lie had become an immutable law.” Optimistic scenarios with little foundation in reality began to spread and pervade the industry. They became emblematic of the “smoke and mirrors” behavior not only at WorldCom prior to its collapse, but the industry as a whole.
Fictitious numbers drove not just WorldCom, but also other companies as they reacted to WorldCom’s optimistic projections. According to Michael Armstrong, then chairman and CEO of AT&T, “For some period of time, I can recall that we were back-filling that expectation with laying cable, something like 2,200 miles of cable an hour” (Faber, 2003). He adds: “Think of all the companies that went out of business that assumed that that was real.”
The fallout from the WorldCom debacle was significant. Verizon obtained the freshly minted MCI for $7.6 billion, but not the $35 billion of debt MCI had when it declared bankruptcy (Alexander, 2005). Although WorldCom was one of the largest telecommunications companies with nearly $160 billion in assets, shareholder suits obtained $6.1 billion from a variety of sources including investment banks, former board members and auditors of WorldCom (Belson, 2005). If this sum were evenly distributed among the firms 2.968 billion common shares, the payoff would (have been) well under $1 a share for a stock that peaked at $49.91 on Jan. 2000″ (Alexander, 2005, 3).
There are more losers in the aftermath of the WorldCom wreck. The reemerged MCI was left with about 55,000 employees, down from 88,000 at its peak. Since March 2001, however, “about 300,000 telecommunications workers have lost their jobs. The sector’s total employment-1.032 million-is at an eight year low” (Alexander, 2005, 3). The carnage does not stop there. Telecommunications equipment manufacturers such as Lucent Technologies, Nortell Networks, and Corning, while benefiting initially from WorldCom’s groundless predictions, suffered in the end with layoffs and depressed share prices. Perhaps most significant, in December 2005, the venerable AT&T Corporation ceased to exist as an independent company.
Retrieved May 15, 2007 from Dennis Moberg (Santa Clara University) and Edward Romar (University of Massachusetts-Boston) www.scu.edu/ethics/dialogue/candc/cases/worldcom.html
