CSR - THE WORLDCOM FIASCO

Presented by –

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 1993—metromedia co. & resergens communication 1994– IDB 1995—William Technology 1996-MFS communication 1998-Biggest acquisition($40 billion revenues)

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.

Company Background

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 “Final”

version for investors

Reasons for the Fiasco1) 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 Fiasco2) 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 Fiasco3) 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 Fiasco4) 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 Fiasco5) 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 Fiasco6) 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 Fiasco7) UNCONCERNED AND MALFUNCTIONED BOARD: -

Richard Breeden – SEC appointed “Corporate Monitor” He termed Ebbers as a “Roman 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 “Corporate 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 !!