WorldCom’s Chief to Sell 9% of Holdings to Meet Margin Call
Amid the continuing plunge of once highflying telecommunications stocks, an emblematic victim has been added to the roster of pain: Bernard J. Ebbers, chief executive of WorldCom Inc., the long-distance telephone and Internet giant, last week filed to sell 9% of his company holdings to keep pace with his deepening personal debt.
In a Sept. 28 filing with the Securities and Exchange Commission, Ebbers declared his intent to sell 3 million shares, or about $79 million worth of company stock. A company spokeswoman said he was forced to sell to pay off a loan he had taken to buy the shares four years ago.
The dreaded “margin call” has become increasingly familiar to thousands of traders who have sunk borrowed money into stocks in hopes of making fast profits, only to have creditors demand repayment when the market heads south. But it’s a particularly tough turnabout for Ebbers, an out-sized man who turned a Mississippi start-up into a global behemoth by craftily executing one takeover after another.
“He’s always been a big believer in the company, so it’s not surprising me that he levered up by betting on his own stock,” said Richard Klugman, a telecommunications analyst at Donaldson Lufkin & Jenrette in New York.
“Bernie has a high majority of his net worth in WorldCom. This is not the kind of thing that a typical investment advisor would encourage you to do, to have all or most of your eggs in one basket, but that’s fairly standard behavior for an executive at an entrepreneurial firm.”
For Ebbers, the debt crunch caps a year he would probably rather forget. This summer, regulators on both sides of the Atlantic doomed his most ambitious deal--his proposed $129-billion takeover of Sprint Corp., the nation’s third-largest long-distance company. Antitrust authorities cited concerns that the deal would hurt consumers and concentrate too much Internet traffic in the hands of one corporation.
Since then, WorldCom’s shares have lost about half their value--erasing about $76 billion of the Clinton, Miss.-based company’s stock market value--as stocks throughout the industry have plummeted. Investors have grown spooked that the telecommunications world will require ever greater infusions of capital as it expands networks in an era when every company is retooling for the promises of the Internet.
Ebbers’ holdings included 19.4 million WorldCom shares held outright as of April 11 and options to purchase 7.9 million additional shares. On Friday, the shares fell 75 cents to close at $25.19 on Nasdaq.
Chief executives such as Ebbers sometimes will borrow money to buy additional stock in their own companies, particularly if the shares have declined. Ebbers, though, hasn’t reported any purchases of WorldCom stock since 1997, according to SEC data compiled by Washington Service.
Under Federal Reserve regulations, investors can initially borrow 50% of the purchase price of a stock. If the stock declines and pushes the ratio of the loan beyond 75% of the value of the shares, the brokerage can sell the stock without notification or require the investor to pay down the borrowings.
Other telecommunications officials have also lost stock to margin calls, Vik Grover, an analyst at New York investment bank Kaufman Bros. told Bloomberg News. He cited as an example Christopher Edgecomb, chief executive of Star Telecommunications Inc., a Santa Barbara-based provider of long-distance services, prepaid calling cards, and international toll-free services.
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Bloomberg News contributed to this report.
