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Disgraced telecoms group Worldcom adopted the new name of MCI in 2003, and was acquired three years later by Verizon. Worldcom had been among the most admired businesses of the 1990s as a result of an astonishing string of acquisitions which turned a small regional phone company into a global giant. The admiration turned to shock when it was revealed that the buying fever had masked what was then the biggest corporate accounting fraud in history, with profits eventually overstated by as much as $11bn. In the ensuing scandal, Worldcom filed for bankruptcy and a new management team took on the task of rebuilding the company's finances and reputation. It remained the #2 long distance carrier in the US (after AT&T) and a leader in international voice, internet and data communications services. In 2005, MCI was the subject of a takeover battle between rival carriers Verizon and Qwest. Verizon eventually won the day, and its purchase of MCI closed at the beginning of 2006.
Unlike many of its competitors in US telecoms, most of whom started as part of the former Bell System telecoms monopoly, Worldcom was built from scratch. In 1983, at around the same time that AT&T was being split up into seven regional "Baby Bell" operators connected by a single long-distance service, a group of Mississippi businessmen formed Long Distance Discount Service (LDDS). The company was set up to be a long-distance reseller, competing with AT&T's long-distance service by leasing a rival long-distance network and selling on call-time, mostly to business customers. In 1985, Bernie Ebbers, one of the company's founding investors, became CEO. A former nightclub bouncer and high school gym teacher, Ebbers had made some money managing motels and invested it in LDDS. After becoming CEO of the company, he expanded the business rapidly, largely through a series of mergers with like-minded businesses. In 1989, the business went public following its takeover of long-distance service provider Advantage.
In the company's first 15 years, Ebbers completed more than 60 separate acquisitions or mergers. During the 1990s, the deals grew ever larger as LDDS devoured reseller Advanced Telecommunications (in 1992 for $850m in stock), long distance providers Metromedia and Resurgens (1993 - $1.25bn in cash and stock), satellite communications group IDB (1994 - $936m in stock), and fibre and radio transmissions network WilTel (1995 - $2.5bn in stock). In 1995, the company renamed itself Worldcom to reflect the scope of its operations. A year later it spent $12bn to buy MFS Communications, a voice and data service provider with operations in the US and Europe. MFS was itself in the process of digesting UUnet, already one of the world's biggest internet service providers. As a result of the MFS deal, Worldcom became the first US company to offer a network which supplied both local and long-distance telecoms service since the dismantling of AT&T over a decade earlier.
But the highpoint came in 1997 as the global fever for corporate deals began to reach its peak. A year earlier UK-based British Telecommunications had announced plans to pay $24bn to acquire US business MCI and create one of the world's biggest phone companies. MCI was a seasoned hand in the US telecoms sector, originally formed in 1963 to supply two-way radio communications for truckers in the mid-West region. The company had expanded into long-distance, buying up smaller rivals until it was one of the Bell System's fiercest competitors. MCI's repeated attempts to gain access to Bell's national network led to a long-running lawsuit, which in turn had been a major factor in regulators' decisions to break up the Bell monopoly. By the mid-1990s MCI had become the second-biggest long-distance operator in the US, and also had interests in a variety of other projects including ASkyB, an ill-fated US satellite broadcasting joint venture with News Corporation.
BT had acquired a 20% stake in MCI in 1994 for $4.3bn, and saw an opportunity to jump onto the global stage with a full-scale merger. However MCI, like Worldcom, was busily snapping up its own deals in its home market. Not all of these were profitable, and as MCI's debt mountain grew, BT attempted to renegotiate the takeover price, offering a lower bid of $19bn. This gave MCI's US competitors, GTE (later part of Verizon) and Worldcom, their chance. Both made higher offers to MCI. After a brief tussle over price, Worldcom took the prize with a staggering $37bn bid. At the time, it was the biggest merger in corporate history (although within a year it had been overtaken by seven even bigger deals by other companies). In a further blow to BT, Worldcom spurned the British company to seal a strategic international alliance with Spanish company Telefonica instead.
The same year, Worldcom also bought network service Brooks Fiber Properties as well as the route networks previously owned by CompuServe and AOL. To appease regulators, it sold the MCI internet backbone to Cable & Wireless (although the two companies later argued over who should keep MCI's internet customers). The deal-making didn't stop there. The group bid $2.3bn to take over Embratel, Brazil's biggest long-distance operator, when it was spun off from state-controlled Telebras. In 1999, Worldcom added wireless operator Wireless One, video subscription service CAI Wireless and wireless messaging service SkyTel. In 2000, the group announced a merger with data services provider Intermedia, which brought the latter's controlling share in web service provider Digex into the Worldcom portfolio. By this time, Ebbers was widely regarded as a man with the Midas touch, a symbol of American opportunism who had built himself up from virtually nothing to the head of one of the country's biggest businesses. At their peak, Ebbers' own shares in Worldcom were worth more than $1bn. His crowning achievement was the negotiation of a massive $130bn merger with US competitor Sprint.
But this was where Worldcom's economic miracle began to get unstuck. The Sprint deal had to be abandoned after regulators demanded that both companies dispose of key operations. With its share price now under some pressure, Worldcom announced it would split into two businesses, both controlled by Worldcom Inc, but with separately quoted tracking stocks. Worldcom became the operating name for the group's more valuable business services, primarily international voice and data communications and internet hosting. The consumer long-distance telecoms and dial-up internet services were rehoused in a sister operation trading as MCI.
When the telecoms bubble suddenly burst during 2001, Worldcom began to come under increasingly relentless scrutiny from financial analysts. The pressure increased when the collapse of energy trader Enron led to a complete overhaul of US accounting standards. Worldcom's acquisition drive had generated a host of accounting adjustments, and the group was forced to divulge that it had made a number of unorthodox arrangements with its directors, not least a loan of $360m to Bernie Ebbers to allow him to buy shares in the business. The company's share price plunged like a stone in the face of this public scrutiny, its stock market valuation withering from $180bn in 1999 to just $8bn by early 2002. Ebbers was obliged by outside directors to resign in April 2002, and financial commentators predicted that the group faced a distinct possibility of sliding into bankruptcy within two years.
In fact it was only two months later when the group's audit committee uncovered false accounting of $3.8bn of expenses, recorded as capital expenditure in order to avoid denting the group's profit and loss account. This apparent fraud had served to boost the group's net income for 2001 and the first quarter of 2002. Without it, Worldcom would have reported substantial losses. The company immediately fired its CFO and financial controller. By shocking coincidence the group's auditors for that period were none other than Arthur Andersen, the accounting firm disgraced in the Enron collapse. In July 2002 the group was forced to file for Chapter 11 bankruptcy protection.
Following further investigation, the amount by which the group overstated its profits was revised upwards several times. The Worldcom rescue operation began at the end of 2002 with the appointment of a new management team led by former Compaq boss Michael Capellas. The company laid off around 20% of its international workforce, and began selling parts of its global network. In a bid to distance itself from the past accounting scandals, the company's new management team dropped the Worldcom name in April 2003, rebranding as MCI. Shortly afterwards it agreed to pay a record $500m fine laid down by the SEC in respect of the Worldcom fraud. Most of the proceeds were paid out to shareholders who lost their investments. MCI sold its controlling interest in Embratel, the leading voice and data telecommunications provider in Brazil, in 2004. Australian ISP OzEmail was sold in 2005.
In March 2004, the group finally issued restated accounts for 2000, 2001 and 2002, the culmination of what it described as "the largest and most complex financial restatement ever undertaken". The group estimated the final value of the accounting fraud at $11bn, but wrote off a total of more than $74bn against its previously stated profits for 2000 and 2001, reporting restated losses of $48.9bn in 2000 and $15.6bn in 2001. Also that month, after a two-year investigation, US prosecutors charged Bernie Ebbers with knowingly conducting a conspiracy to mislead investors and inflate WorldCom's apparent profitability. Worldcom's former CFO Scott Sullivan was also charged and agreed to plead guilty and testify against his former boss.
In July 2004, Ebbers and 18 other former WorldCom executives agreed to pay about $51m to settle a lawsuit by employees who lost billions of dollars from their company pension plans as a result of the collapse of Worldcom's share price, but that deal later collapsed as a result of legal wrangles. Meanwhile MCI itself sued Ebbers to recover more than $400m in loans and interest. Bernie Ebbers' trial finally got underway in January 2005. He claimed to have been unaware of any fraud, but the jury was not convinced and two months later Ebbers was found guilty on all nine charges of securities fraud. The court heard that he had orchestrated the conspiracy to falsify the group's accounts so that it would continue to meet the financial targets expected by investors. One important factor was that he personally had debts of around $400m which were secured by Worldcom shares. A fall in the company's share price would have triggered a default of those loans. The 63-year-old Ebbers was sentenced in July 2005 to 25 years in prison.
In early 2005, as the process of consolidation among US phone companies gathered pace, MCI announced that it was in negotiations to be acquired by rival carrier Qwest. This prompted a rival approach from Verizon, causing MCI to abandon talks with Qwest and broker a deal with Verizon instead, with a sale price of $6.8bn in cash and stock. Not surprisingly, Qwest reacted angrily to this development, not least because its own $8bn offer had been considerably higher than Verizon's. MCI's board defended its decision, saying that it considered Verizon's bid to more secure in the light of Qwest's slightly precarious financial position. However the price difference sparked off protests from MCI shareholders that they were being short-changed.
There ensued a see-saw of ever higher bids. Qwest issued an improved offer worth almost $8.5bn. Verizon raised its own to $7.6bn, and subsequently attempted to break the deadlock by negotiating a side-deal to acquire a large stake in MCI held by Mexican billionaire Carlos Slim. Qwest raised the stakes again with a new offer of $9.75bn, but Verizon's response of $8.45bn appeared to seal the deal once and for all. Qwest withdrew from the fray shortly afterwards. The takeover battle was an impressive victory for MCI CEO Michael Capellas, who had led the group through emergence from bankruptcy to hotly contested takeover target in just eight months. He was richly rewarded for his effort, with a payout of almost $40m.
Verizon's takeover of MCI was approved by shareholders in October 2005, and by regulators at the end of the year. The deal closed in January 2006. MCI's consumer communications divisions were merged into their equivalent units at Verizon. MCI business communications became the core of a new division, Verizon Business.
Last full revision 8th November 2017
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