World Com Fiasco

In 1983 in a small coffee shop in Hattiesburg, Mississippi, Mr. Ebbers first helped create the business concept that would become WorldCom and a Rival of AT&T. From its humble beginnings as an obscure long distance telephone company WorldCom, through the execution of an aggressive acquisition strategy, evolved into the second-largest long distance telephone company in the United States and one of the largest companies handling worldwide Internet data traffic. According to the WorldCom Web site, at its high point, the company giant achieved its position as a significant player in the telecommunications industry through the successful completion of 65 acquisitions. Between 1991 and 1997, WorldCom spent almost $60 billion in the acquisition of many of these companies and accumulated $41 billion in debt. Two of these acquisitions were particularly significant. [Colvin, G. (2002)]

The MFS Communications acquisition enabled WorldCom to obtain UUNet, a major supplier of Internet services to business, and MCI Communications gave WorldCom one of the largest providers of business and consumer telephone service. By 1997, WorldCom's stock had risen from pennies per share to over $60 a share. Through what appeared to be a prescient and successful business strategy at the height of the Internet boom, WorldCom became a darling of Wall Street. In the heady days of the technology bubble Wall Street took notice of WorldCom and its then visionary CEO, Bernie Ebbers. This was a company "on the move," and Wall Street investment banks, analysts and brokers began to discover WorldCom's value and make "strong buy recommendations" to investors. (Browning, E. S. 1997)

When this process began to unfold, the analysts' recommendations, coupled with the continued rise of the stock market, made WorldCom stock desirable, and the market's view of the stock was that it could only go up. As the stock value went up, it was easier for WorldCom to use stock as the vehicle to continue to purchase additional companies. The acquisition of MFS Communications and MCI Communications were, perhaps, the most significant in the long list of WorldCom acquisitions.

With the acquisition of MFS Communications and its UUNet unit, "WorldCom suddenly had an investment story to offer about the value of combining long distance, local service and data communications." In late 1997, British Telecommunications Corporation made a $19 billion bid for MCI. Very quickly, Ebbers made a counter offer of $30 billion in WorldCom stock. In addition, Ebbers agreed to assume $5 billion in MCI debt, making the deal $35 billion or 1.8 times the value of the British Telecom offer. MCI took WorldCom's offer making WorldCom a truly significant global telecommunications company. (Wall Street Journal (October 8), p. C-24)

All this would be just another story of a successful growth strategy if it weren't for one significant business reality--mergers and acquisitions, especially large ones; present significant managerial challenges in at least two areas First, management must deal with the challenge of integrating new and old organizations into a single smoothly functioning business. This is a time-consuming process that involves thoughtful planning and considerable senior managerial attention if the acquisition process is to increase the value of the firm to both shareholders and stakeholders. With 65 acquisitions in six years and several of them large ones, WorldCom management had a great deal on their plate. The second challenge is the requirement to account for the financial aspects of the acquisition. WorldCom's efforts to integrate MCI illustrate several areas senior management did not address well. In the first place, Ebbers appeared to be an indifferent executive who "paid little attention to the details of operations. For example, customer service deteriorated. One business customer's service was discontinued incorrectly, and when the customer contacted customer service, he was told he was not a customer. Ultimately, the WorldCom representative told him that if he was a customer, he had called the wrong office because the office he called only handled MCI accounts. (Ibid. p. A-2)

This poor customer stumbled across a problem stemming from WorldCom's acquisition bender. For all its talent in buying competitors, the company was not up to the task of merging them. Dozens of conflicting computer systems remained, local systems were repetitive and failed to work together properly, and billing systems were not coordinated. Regarding financial reporting, WorldCom used a liberal interpretation of accounting rules when preparing financial statements. In an effort to make it appear that profits were increasing, WorldCom would write down in one quarter millions of dollars in assets it acquired while, at the same time, it "included in this charge against earnings