Tuesday, January 18, 2005
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January 18, 2005WorldCom's Audacious Failure and Its Toll on an IndustryBy KEN BELSON Few executives have helped create and then watched the destruction of as much wealth as Bernard J. Ebbers, the former chief executive of WorldCom. With resolve and salesmanship, but little training in finance or engineering, Mr. Ebbers built one of the world's largest telecommunications companies - at its peak worth $160 billion. Now, with WorldCom in tatters, he stands accused of masterminding a record $11 billion accounting fraud that toppled the company he created and left investors, former employees and others to pick up the pieces.It was the largest bankruptcy ever, measured by WorldCom's $107 billion in assets at the time of its filing for bankruptcy protection in July 2002. And the fallout from WorldCom's implosion includes many other telecommunications companies that staggered or collapsed, in part from trying to keep up with the phantom growth pace set by WorldCom.Once heralded as an outsider who bucked the system and won, Mr. Ebbers has become an outsider in the truest sense: He is millions of dollars in debt, has been widely assailed for his excesses and is treated as an outcast even by some in Mississippi, where WorldCom had its headquarters and where he was once held in esteem for his pluck and foresight. As far as he has fallen, Mr. Ebbers could lose still more if he is convicted of conspiracy, securities fraud and filing false financial reports in a criminal case scheduled to begin today in United States District Court in Manhattan with preliminary motions and the beginning of jury selection. The trial is expected to last about two months. If convicted on all counts, Mr. Ebbers, 63, faces a prison sentence as long as 85 years.Regardless of the case's outcome, Mr. Ebbers's business demise continues to reverberate well beyond the courtroom. WorldCom - doing business again as MCI, the company's original name - is half its former size and struggling to survive. And whether or not one believes that he masterminded an accounting fraud, there is little doubt that the telecommunications industry, whose 1990's boom Mr. Ebbers help fuel with his deal making, is in a shambles - riddled with heavy debt, sagging stock prices and network overcapacity.Phone carriers, emerging from the financial ruins, are relying less on the long-distance and data services that Mr. Ebbers championed, and more on bundles of products like wireless and video that can attract customers with deeper pockets.More broadly, corporate America is coming to terms with life after WorldCom. The company's downfall led Congress to answer critics' calls for action by reviving stalled legislation that became the Sarbanes-Oxley Act of 2002, a sweeping piece of corporate reform legislation. Companies of all sorts are spending millions of dollars to comply with the law, which has increased accountability but, critics say, also stifles innovation."Every publicly traded company can thank Bernie Ebbers for Sarbanes-Oxley and the handcuffs they operate under today," said Scott C. Cleland, a telecommunications analyst at the Precursor Group. "It's everyone else's punishment for his misdeeds."Perhaps those hardest hit, though, are not in boardrooms, but the thousands of former WorldCom employees like Bill Walters, who lost both their jobs and their insurance and pensions. Many of their savings were wiped out by the collapse in the price of the company's stock, and some are still struggling to find work.Mr. Walters, 51, who was a network engineer at WorldCom for 18 years, is relatively lucky. He lost his $300,000 pension, but found work as a technician six months after he was laid off. Happy for the income, he commuted to Houston, returning home to Dallas on weekends to see his wife and two children.But his wife lost her job at Southwest Airlines, and the stress of living apart became too much. He moved home a few weeks ago and now works as a carpenter installing cabinets. Every Friday, he and a dozen or so former WorldCom colleagues meet for lunch at a local restaurant to commiserate, network and wonder what went wrong."At WorldCom, all they talked about was loyalty," Mr. Walters said. "But there's no security, and I doubt there ever will be. We're like an old pencil: You throw it out when it gets too short."Of course, WorldCom did not cause such hardship alone. Global Crossing and 360networks were among many other telecommunications companies that built wildly in the 1990's, and Wall Street investment bankers eagerly financed their fantastic projects. The bankers in turn promoted the sale of shares and bonds to investors eager to believe the promises of unending gains.But Mr. Ebbers was at the center of so much during the telecommunications bubble that he has drawn much blame for its collapse, and not only because of the scale and audacity of the accounting fraud that five of Mr. Ebbers's former subordinates have admitted, or the size of WorldCom's bankruptcy. He engendered deep and lingering resentment in the industry for the brash way he took over companies and the aggressive tactics he used to win contracts and meet profit targets. WorldCom was also among the most vocal cheerleaders for the Internet and the billions of dollars it was supposed to spawn for businesses.Because WorldCom owned UUNet Technologies, the largest carrier of Internet traffic at the time, Mr. Ebbers would seem to have been in a better position than most to gauge the pace of Internet growth. The company's mantra, evoked to justify its investments and growth projections, was that Internet traffic was doubling every 100 days. For a while, that was true. But it was no longer so by the late 90's, though WorldCom executives continued to cite such figures, and this served as the conventional wisdom fueling the demand for Internet and telecommunication stocks."WorldCom's main transgression was to pour gasoline on the Internet fire," said Andrew Odlyzko, a professor at the University of Minnesota who wrote research papers as early as 1998 debunking contentions that Internet growth was so fast. "The technological revolution was pretty powerful as it was," he said. "But WorldCom made it much worse than it would have been."By doing so, Mr. Odlyzko argues, WorldCom contributed to the financial losses suffered by investors in telecommunications stocks well beyond its own shares, and he says WorldCom bears some responsibility for the hundreds of thousands of layoffs that accompanied the downturn. At its peak, WorldCom employed 80,000 people; MCI currently has half as many. Since March 2001, about 300,000 telecommunications workers have lost their jobs. The sector's total employment - 1.032 million - is at an eight-year low.No company became more ensnared in WorldCom's web than its larger rival, AT&T. In the late 90's, AT&T laid off tens of thousands as it tried futilely to match WorldCom's phantom profits. In the name of growth, AT&T also made ill-timed investments, like the $11.3 billion deal to buy the cable operator TCI that in time sped the company's decline. "We were like a greyhound chasing a rabbit," said Dick Martin, an AT&T spokesman then and author of a recent book, "Tough Calls: AT&T and the Hard Lessons Learned from the Telecom Wars." "We spent a lot of time trying to figure how WorldCom could be so much more efficient than we were," he said, "so we went around slashing costs right and left."While AT&T executives scratched their heads, Mr. Ebbers attacked an AT&T stronghold: services for big corporate clients. According to Susan Kalla, an industry analyst at Friedman, Billings, Ramsey, Mr. Ebbers broke ranks with industry custom and started cutting prices by more than 20 percent to win new business, even if it meant losing money on the accounts. But the long-distance telephone industry began to deteriorate so fast - assisted in part by the introduction of cheaper Internet phone service - that AT&T and other long-distance carriers are retreating from the retail service market.Long-distance carriers were not the only ones caught up in a sort of mania. Equipment vendors like Lucent Technologies, Nortel Networks and Corning reaped benefits from WorldCom's wild predictions. From 1998 to 2000, the telecommunications industry issued $323 billion in debt, with about half that money spent on equipment, Ms. Kalla said.But when the market collapsed, equipment vendors reduced their work forces, too. Some, like Nortel, resorted to doctoring their books to meet profit forecasts, inflate their stock prices and stave off bankruptcy.These days, Mr. Ebbers is struggling with his own finances. His fortune once exceeded $1 billion, and, using his WorldCom stock as collateral, he borrowed hundreds of millions of dollars to pay for ranches, timberland, homes and part of a hockey team.Many of those assets have been sold to pay back the loans. But MCI says Mr. Ebbers owes the company more than $400 million, even after it sold his 500,000-acre Canadian ranch and yacht-building business. And while he still holds stakes in several small businesses, Mr. Ebbers must pay for his own legal defense, which may end up costing him millions of dollars.He is also paying personally. Once a star in his hometown near Jackson, Miss., he is now shunned by residents who idolized him when times were good, according to a former WorldCom executive."In Jackson, a lot of people think he's guilty, and think he should go to jail, and feel betrayed and lost a lot of money," the executive said, adding that Mr. Ebbers is rarely seen in the restaurants and clubs where he was once a regular. "It's a pretty strong opinion in town."This group, the executive said, includes former WorldCom employees in Clinton, Miss., where the company had its headquarters, but also people who bought WorldCom stock on the basis of a business story that turned out to be too good to be true
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January 18, 2005WorldCom's Audacious Failure and Its Toll on an IndustryBy KEN BELSON Few executives have helped create and then watched the destruction of as much wealth as Bernard J. Ebbers, the former chief executive of WorldCom. With resolve and salesmanship, but little training in finance or engineering, Mr. Ebbers built one of the world's largest telecommunications companies - at its peak worth $160 billion. Now, with WorldCom in tatters, he stands accused of masterminding a record $11 billion accounting fraud that toppled the company he created and left investors, former employees and others to pick up the pieces.It was the largest bankruptcy ever, measured by WorldCom's $107 billion in assets at the time of its filing for bankruptcy protection in July 2002. And the fallout from WorldCom's implosion includes many other telecommunications companies that staggered or collapsed, in part from trying to keep up with the phantom growth pace set by WorldCom.Once heralded as an outsider who bucked the system and won, Mr. Ebbers has become an outsider in the truest sense: He is millions of dollars in debt, has been widely assailed for his excesses and is treated as an outcast even by some in Mississippi, where WorldCom had its headquarters and where he was once held in esteem for his pluck and foresight. As far as he has fallen, Mr. Ebbers could lose still more if he is convicted of conspiracy, securities fraud and filing false financial reports in a criminal case scheduled to begin today in United States District Court in Manhattan with preliminary motions and the beginning of jury selection. The trial is expected to last about two months. If convicted on all counts, Mr. Ebbers, 63, faces a prison sentence as long as 85 years.Regardless of the case's outcome, Mr. Ebbers's business demise continues to reverberate well beyond the courtroom. WorldCom - doing business again as MCI, the company's original name - is half its former size and struggling to survive. And whether or not one believes that he masterminded an accounting fraud, there is little doubt that the telecommunications industry, whose 1990's boom Mr. Ebbers help fuel with his deal making, is in a shambles - riddled with heavy debt, sagging stock prices and network overcapacity.Phone carriers, emerging from the financial ruins, are relying less on the long-distance and data services that Mr. Ebbers championed, and more on bundles of products like wireless and video that can attract customers with deeper pockets.More broadly, corporate America is coming to terms with life after WorldCom. The company's downfall led Congress to answer critics' calls for action by reviving stalled legislation that became the Sarbanes-Oxley Act of 2002, a sweeping piece of corporate reform legislation. Companies of all sorts are spending millions of dollars to comply with the law, which has increased accountability but, critics say, also stifles innovation."Every publicly traded company can thank Bernie Ebbers for Sarbanes-Oxley and the handcuffs they operate under today," said Scott C. Cleland, a telecommunications analyst at the Precursor Group. "It's everyone else's punishment for his misdeeds."Perhaps those hardest hit, though, are not in boardrooms, but the thousands of former WorldCom employees like Bill Walters, who lost both their jobs and their insurance and pensions. Many of their savings were wiped out by the collapse in the price of the company's stock, and some are still struggling to find work.Mr. Walters, 51, who was a network engineer at WorldCom for 18 years, is relatively lucky. He lost his $300,000 pension, but found work as a technician six months after he was laid off. Happy for the income, he commuted to Houston, returning home to Dallas on weekends to see his wife and two children.But his wife lost her job at Southwest Airlines, and the stress of living apart became too much. He moved home a few weeks ago and now works as a carpenter installing cabinets. Every Friday, he and a dozen or so former WorldCom colleagues meet for lunch at a local restaurant to commiserate, network and wonder what went wrong."At WorldCom, all they talked about was loyalty," Mr. Walters said. "But there's no security, and I doubt there ever will be. We're like an old pencil: You throw it out when it gets too short."Of course, WorldCom did not cause such hardship alone. Global Crossing and 360networks were among many other telecommunications companies that built wildly in the 1990's, and Wall Street investment bankers eagerly financed their fantastic projects. The bankers in turn promoted the sale of shares and bonds to investors eager to believe the promises of unending gains.But Mr. Ebbers was at the center of so much during the telecommunications bubble that he has drawn much blame for its collapse, and not only because of the scale and audacity of the accounting fraud that five of Mr. Ebbers's former subordinates have admitted, or the size of WorldCom's bankruptcy. He engendered deep and lingering resentment in the industry for the brash way he took over companies and the aggressive tactics he used to win contracts and meet profit targets. WorldCom was also among the most vocal cheerleaders for the Internet and the billions of dollars it was supposed to spawn for businesses.Because WorldCom owned UUNet Technologies, the largest carrier of Internet traffic at the time, Mr. Ebbers would seem to have been in a better position than most to gauge the pace of Internet growth. The company's mantra, evoked to justify its investments and growth projections, was that Internet traffic was doubling every 100 days. For a while, that was true. But it was no longer so by the late 90's, though WorldCom executives continued to cite such figures, and this served as the conventional wisdom fueling the demand for Internet and telecommunication stocks."WorldCom's main transgression was to pour gasoline on the Internet fire," said Andrew Odlyzko, a professor at the University of Minnesota who wrote research papers as early as 1998 debunking contentions that Internet growth was so fast. "The technological revolution was pretty powerful as it was," he said. "But WorldCom made it much worse than it would have been."By doing so, Mr. Odlyzko argues, WorldCom contributed to the financial losses suffered by investors in telecommunications stocks well beyond its own shares, and he says WorldCom bears some responsibility for the hundreds of thousands of layoffs that accompanied the downturn. At its peak, WorldCom employed 80,000 people; MCI currently has half as many. Since March 2001, about 300,000 telecommunications workers have lost their jobs. The sector's total employment - 1.032 million - is at an eight-year low.No company became more ensnared in WorldCom's web than its larger rival, AT&T. In the late 90's, AT&T laid off tens of thousands as it tried futilely to match WorldCom's phantom profits. In the name of growth, AT&T also made ill-timed investments, like the $11.3 billion deal to buy the cable operator TCI that in time sped the company's decline. "We were like a greyhound chasing a rabbit," said Dick Martin, an AT&T spokesman then and author of a recent book, "Tough Calls: AT&T and the Hard Lessons Learned from the Telecom Wars." "We spent a lot of time trying to figure how WorldCom could be so much more efficient than we were," he said, "so we went around slashing costs right and left."While AT&T executives scratched their heads, Mr. Ebbers attacked an AT&T stronghold: services for big corporate clients. According to Susan Kalla, an industry analyst at Friedman, Billings, Ramsey, Mr. Ebbers broke ranks with industry custom and started cutting prices by more than 20 percent to win new business, even if it meant losing money on the accounts. But the long-distance telephone industry began to deteriorate so fast - assisted in part by the introduction of cheaper Internet phone service - that AT&T and other long-distance carriers are retreating from the retail service market.Long-distance carriers were not the only ones caught up in a sort of mania. Equipment vendors like Lucent Technologies, Nortel Networks and Corning reaped benefits from WorldCom's wild predictions. From 1998 to 2000, the telecommunications industry issued $323 billion in debt, with about half that money spent on equipment, Ms. Kalla said.But when the market collapsed, equipment vendors reduced their work forces, too. Some, like Nortel, resorted to doctoring their books to meet profit forecasts, inflate their stock prices and stave off bankruptcy.These days, Mr. Ebbers is struggling with his own finances. His fortune once exceeded $1 billion, and, using his WorldCom stock as collateral, he borrowed hundreds of millions of dollars to pay for ranches, timberland, homes and part of a hockey team.Many of those assets have been sold to pay back the loans. But MCI says Mr. Ebbers owes the company more than $400 million, even after it sold his 500,000-acre Canadian ranch and yacht-building business. And while he still holds stakes in several small businesses, Mr. Ebbers must pay for his own legal defense, which may end up costing him millions of dollars.He is also paying personally. Once a star in his hometown near Jackson, Miss., he is now shunned by residents who idolized him when times were good, according to a former WorldCom executive."In Jackson, a lot of people think he's guilty, and think he should go to jail, and feel betrayed and lost a lot of money," the executive said, adding that Mr. Ebbers is rarely seen in the restaurants and clubs where he was once a regular. "It's a pretty strong opinion in town."This group, the executive said, includes former WorldCom employees in Clinton, Miss., where the company had its headquarters, but also people who bought WorldCom stock on the basis of a business story that turned out to be too good to be true
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