MCI WorldCom

MCI, Inc. was an American telecommunications company that was headquartered in Ashburn, Virginia. The corporation was the result of the merger of WorldCom (formerly known as LDDS) and MCI Communications, and used the name MCI WorldCom followed by WorldCom before taking its final name on April 14, 2003 as part of the corporation's emergence from bankruptcy. The company formerly traded on NASDAQ under the symbols "WCOM" (pre-bankruptcy) and "MCIP" (post-bankruptcy). The corporation was purchased by Verizon Communications with the deal closing on January 6, 2006, and is now identified as that company's Verizon Business division.

MCI's history, combined with the histories of companies it has acquired, echoes most of the trends that have swept American telecommunications in the past half-century: It was instrumental in pushing legal and regulatory changes that led to the breakup of the AT&T monopoly that dominated American telephony; its purchase by WorldCom and subsequent bankruptcy in the face of accounting scandals was symptomatic of the Internet excesses of the late 1990s. It accepted a proposed purchase by Verizon for US$7.6 billion.

For a time, WorldCom (WCOM) was the United States' second largest long distance phone company (AT&T was the largest). WorldCom grew largely by 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 based in Clinton, Mississippi before moving to its present corporate headquarters.

History

Corporate founding

Long Distance Discount Services, Inc. (LDDS) began in Jackson, Mississippi in 1983. In 1985 LDDS selected Bernard Ebbers to be its CEO. The company went public in August 1989 when it merged 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 (see below). Among the companies that were bought or merged with WorldCom were Advanced Communications Corp. (1992), Metromedia Communication Corp.(1993), Reurgens 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.

MCI acquisition

On 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.

Sprint merger

On October 5, 1999 Sprint Corporation and MCI WorldCom announced a $129 billion dollar merger agreement between the two companies. The deal would have been the largest corporate merger in history up to that time. The new company was to have been WorldCom and would have been the largest communications company in the United States. The merger would have put AT&T in the number two spot of the largest communications companies in the US for the first time in history. However the deal did not go through because of pressure from the US Department of Justice and the EU on concerns of it creating a monopoly. On July 13, 2000, the Board of Directors of both companies acted to terminate the merger. Later, in 2000, MCI WorldCom renamed itself WorldCom without Sprint being part of the company.

Accounting scandals

Bernard Ebbers became very wealthy from the rising price of his holdings in WorldCom’s stock. However, shortly after the MCI acquisition 1998, the telecommunications industry entered a downturn and WorldCom’s growth strategy suffered a serious blow when it was forced to abandon its proposed merger with Sprint in late 2000. By that time, WorldCom’s stock was declining and Ebbers came under increasing pressure from banks to cover margin calls on his WorldCom stock that was used to finance his other businesses (timber and yachting, among others). During 2001, Ebbers persuaded WorldCom’s board of directors to provide him corporate loans and guarantees in excess of $400 million to cover his margin calls, but this strategy ultimately failed and Ebbers was ousted as CEO in April 2002 and replaced by John Sidgmore, former executive of UUNet Technologies, Inc.

Beginning in 1999 and continuing through May 2002, the company (under the direction of Scott Sullivan (CFO), David Myers (Controller) and Buford “Buddy” Yates (Director of General Accounting)) used fraudulent accounting methods to mask its declining financial condition by painting a false picture of financial growth and profitability to prop up the price of WorldCom’s stock. The fraud was accomplished primarily in two ways: 1) underreporting ‘line costs’ (interconnection expenses with other telecommunication companies) by capitalizing these costs on the balance sheet rather than properly expensing them and 2) inflating revenues with bogus accounting entries from ‘corporate unallocated revenue accounts’. WorldCom’s internal audit department uncovered approximately $3.8 billion of the fraud in June 2002 during a routine examination of capital expenditures and alerted the company’s new auditors, KPMG (who had replaced Arthur Andersen, WorldCom’s external auditors during the fraud). Shortly thereafter, the company’s audit committee and board of directors were notified of the fraud and acted swiftly: Sullivan was fired, Myers resigned, Arthur Andersen withdrew its audit opinion for 2001, and the U.S. Securities and Exchange Commission (SEC) launched an investigation into these matters on June 26, 2002 (see accounting scandals). By the end of 2003, it was estimated that the company's total assets had been inflated by around $11 billion.

Bankruptcy

On July 21 2002, WorldCom filed for Chapter 11 bankruptcy protection in the largest such filing in United States history. WorldCom changed its name to MCI, and moved the corporate headquarters from Mississippi to Virginia, on April 14, 2003.

Under the bankruptcy reorganization agreement, the company paid $750 million to the SEC in cash and stock in the new MCI, which was intended to be paid to wronged investors.

In May, 2003, the company was given a no-bid contract by the United States Department of Defense to build a cellular telephone network in Iraq. The deal has been criticized by competitors and others who cite the company's lack of experience in the area. Bankruptcy was tough on morale within the company.^*

Post-bankruptcy

The company emerged from Chapter 11 bankruptcy in 2004 with about $5.7 billion in debt and $6 billion in cash. About half of the cash was intended to pay various claims and settlements. Previous bondholders ended up being paid 35.7 cents on the dollar, in bonds and stock in the new MCI company. The previous stockholders' stock was valueless.

It has yet to pay many of its creditors, who have waited for two years for a portion of the money owed. Many of the small creditors include former employees, primarily those who were laid off in June 2002 and whose severance and benefits were withheld when WCOM filed for bankruptcy. A group of some of these employees have formed the exWorldCom5100 group.

On February 14, 2005, Verizon Communications agreed to acquire MCI for $7.6 billion.

On March 15, 2005 Bernard Ebbers was found guilty of all charges and convicted on fraud, conspiracy and filing false documents with regulators — all related to the $11 billion accounting scandal at the telecommunications company he founded. He was sentenced to 25 years in prison. Other former WorldCom officials charged with criminal penalties in relation to the company's financial misstatements include former CFO Scott Sullivan (entered a guilty plea on March 2, 2004 to one count each of securities fraud, conspiracy to commit securities fraud, and filing false statements former controller David Myers (pleaded guilty to securities fraud, conspiracy to commit securities fraud, and filing false statements on September 27, 2002 director Buford Yates (pleaded guilty to conspiracy and fraud charges on October 7, 2002 ^*)," target="_blank" >and former accounting managers Betty Vinson and Troy Normand (both pleading guilty to conspiracy and securities fraud on October 10, 2002 [http://www.cbsnews.com/stories/2002/11/05/national/main528148.shtml).

On July 13, 2005 Bernard Ebbers received a sentence that would keep him in prison (potentially Yazoo City in Mississippi) for 25 years. At the time of the sentence Ebbers was 63 years old. He may potentially be let out of prison at the age of 83 on terms of good behavior. In March of 2005, 16 of WorldCom's 17 former underwriters reached settlements with the investors (Citigroup settled for $2.65 billion on May 10, 2004 ([http://www.citigroup.com/citigroup/press/2004/040510a.htm).

Verizon-MCI merger

On February 14, 2005, Verizon agreed to acquire MCI, formerly WorldCom, after SBC Communications agreed to acquire AT&T just a few weeks earlier. The MCI/Verizon merger was put on hold until March 17, 2005 for them to evaluate a rival offer from Qwest, which made an offer that was potentially worth more. MCI accepted Verizon's initial bid, although it had a lower cash value, because of their perceived financial stability in comparison to Qwest’s, but holders of 26% of MCI stock requested that they evaluate the merits of both offers before making a final decision. Qwest later lost the battle for the acquisition of MCI. On October 6, 2005, the Special Meeting of MCI Stockholders on the subject of Verizon's acquisition resulted in 64 percent of outstanding shares voting in favor of Verizon's offer. The European Union regulator approved the merger on October 7, stating that a combined company would still face strong competition in Europe. U.S. regulatory requirements were satisfied by December 29, 2005. MCI has been incorporated into Verizon with the name Verizon Business.

The merger closed on January 6, 2006.^*

References

First Interim Report of Dick Thornburgh, Bankruptcy Court Examiner, United States Bankruptcy Court for the Southern District of New York, In re WorldCom, Inc., Case No. 02-15533 (AJG) (November 4, 2002)

External links

Credit risk

Moody's KMV Default Case Studies

Third party

MCI Worldcom | WorldCom | MCI

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