CEO of WorldCom Resigns
If there is a symbol of all things wrong in the increasingly toxic meltdown of the telecommunications industry, it is Bernard Ebbers’ WorldCom Inc.--once the symbol of all things right.
On Tuesday, the company announced that Ebbers, a 60-year-old former college basketball coach and hotel manager, resigned as chief executive and president of the company that became his life’s work.
Starting with a cut-rate long-distance service nearly two decades ago, Ebbers built WorldCom into the nation’s second-largest long-distance carrier, making its stock as much a must-have investment as steel, autos and utilities were to past generations. He did it with an aggressive strategy that was all teeth: acquire, acquire, acquire.
But that game plan finally caught up with him.
Ebbers’ departure, which came amid growing pressure from company board members, makes him the highest-profile casualty thus far in a telecommunications bust so relentless that it has vaporized $2 trillion in shareholders’ money over the last two years.
And WorldCom has become symbolic of high-tech disaster, neatly encapsulating all the woes of the industry: overwhelming debt, declining revenue and questionable accounting practices.
“The big mistake was to have only one growth strategy, and that was to [buy up] other companies,” said Scott Cleland of Precursor Group, a Washington-based research firm. “When that was over, there was no growth strategy to replace it.”
The company said it is healthy enough to survive the downturn. It has more than $2.5 billion in cash, steady income from its long-distance business and a worldwide fiber-optic network that carries more data traffic than any of its rivals.
“This is a real company, with real profits, with tens of thousands of customers and a huge asset base that spans the world,” said WorldCom Vice Chairman John Sidgmore, who took over Tuesday as the company’s CEO and president. “So we just don’t see this company in the same position as some of the other companies that have been liquidated over the last several years.”
The CEO change, he added, represents “a new chance, a new day and a new start for the company.”
Analysts and investors seemed unconvinced Tuesday. The company’s stock closed up 13 cents at $2.48 on Nasdaq, but some analysts said that in part represented buying by “short sellers” who were closing out bets that the price would collapse, as it has. Also, the value of actively traded WorldCom bonds continued to sink below 50 cents on the dollar.
“I don’t think the change of CEO will help things,” said Ajay Mehra, a portfolio manager at Columbia Management Group.
Mergers Gave Rise to Telecom Giant
Within the telecommunications industry, the story of WorldCom’s rise from an idea in a Mississippi coffee shop is as storied as the rise of Hewlett-Packard Co. from a garage in Palo Alto.
Rather than engineering genius, however, Ebbers had a knack for acquisitions.
He orchestrated more than 70 mergers, cobbling them together to make WorldCom a giant in telecommunications despite its location in tiny Clinton, Miss.
His biggest catch came in 1998 when WorldCom bought MCI Communications, the nation’s second-largest long-distance carrier and a household name to millions of consumers.
Emboldened by his lengthy acquisition streak, Ebbers announced plans in 1999 to buy rival Sprint Corp. in a deal valued at $129 billion. Sprint would have provided WorldCom with stronger cash flow and a much-needed position in wireless telecommunications.
Despite strong resistance from government officials, Ebbers refused to back down. Ultimately, he lost the gamble and was forced to call off the deal. Many believe that the failed Sprint acquisition was the beginning of WorldCom’s long slide into financial trouble.
“If it wasn’t arrogance, it was certainly a miscalculation” by Ebbers, Mehra said. “I think it was a crucial blow, almost a lethal blow for WorldCom.”
Today, WorldCom faces a mound of debt--nearly $30 billion in all--at a time when the telecom industry’s prospects are shaky and a turnaround seems a distant hope.
The long-distance business, the cash-generating engine that has fueled much of WorldCom’s spending, is in sharp decline, and analysts worry that it may not be able to shoulder the company’s debt in 2003 and 2004.
WorldCom’s problems were compounded by news of massive loans the company made to Ebbers to prevent him from selling big chunks of company stock as part of a margin call. Under original terms of the $366 million in loans to Ebbers, it was unclear when the money would be paid back.
Ebbers has assets to back up the loans, among them a 163,000-acre ranch in Canada, a soybean farm in Louisiana and investments in a yacht-building firm, timber and a refrigerated trucking company, according to news reports. He recently sold his yacht, Aquasition, at an undisclosed price.
On Tuesday, company officials said the loans have been converted to a note that Ebbers will pay back over five years. Sidgmore would not elaborate on the terms or reveal what severance pay, if any, the company awarded to Ebbers.
WorldCom also faces an investigation by the Securities and Exchange Commission, which is looking into the Ebbers loans, as well as the way the company accounted for some of its acquisitions. Those factors have sent WorldCom stockholders and bondholders into a panic, worrying that the company might file for bankruptcy protection--a scenario Sidgmore rejects.
“We don’t see any way, under any scenario, that WorldCom is going to run out of cash in the foreseeable future,” he said Tuesday.
“The accounting questions and the SEC investigation and all those things relative to our financial condition, we really view like red herrings,” Sidgmore said. “They are the result of the fact that we have lost credibility.”
Bankruptcy Worry Not Universal on Wall St.
Sidgmore’s comments have been echoed by some Wall Street analysts who refuse to buy the bankruptcy scare.
“What’s going on with WorldCom is what’s going on with the markets overall, though WorldCom brought much of this on itself,” said Peter DiCaprio, an analyst at investment bank Thomas Weisel Partners in Boston. “You have very fragile markets that are very skittish and that respond overwhelmingly to the first hint of bad news. That creates severe swings in prices that you hadn’t seen much of before but now see regularly.”
With $30 billion in debt, the loans to Ebbers and plummeting stock and bond prices, “WorldCom hits all the buttons,” DiCaprio said. “But you could make the same case two years ago that stocks were going up exorbitantly high on absolutely nothing. Now they’re being annihilated on nothing at all.”
WorldCom’s woes show that “the meltdown has worked its way to the highest level of the market,” said analyst Vik Grover at Kaufman Bros. in New York. “It started with the smallest companies and worked its way through the food chain. Nothing was isolated.”
In addition, Grover noted, Wall Street has changed its attitude, especially with state and federal regulators investigating whether brokerages have tried to win investment banking business from companies by offering favorable ratings on their stocks, whether deserved or not.
“Last year, when the industry was refinancing hundreds of millions of dollars of debts, you didn’t see a lot of analysts complaining,” he said. “Now you’re seeing something that we’ve never seen before: five or six ‘sell’ ratings at once on what was one of the Street’s favorite stocks. WorldCom hasn’t changed much; it’s the economy and Wall Street that are changing.”
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