Looking back at WorldCom’s rapid transformation from one of the world’s most powerful telecoms outfits into an insolvent agglomeration of acquisitions whose stock price has declined to virtually nothing, spare a thought for the company’s investor relations officers. They were the ones who had to pick up the pieces after the desertion of the company’s founder, CEO and chief debtor, Bernie Ebbers, of Scott Sullivan, the group’s ex-CFO and ultimately its executioner, and of Sullivan’s partner in crime, David Myers, the financial controller. They were the ones who fielded the thousands upon thousands of questions from irate fund managers and retail investors who held WorldCom stock, and of the bondholders who had every reason to be just as worried. And after the company’s descent into the no-man’s-land of Chapter 11 bankruptcy, the IR team had the arduous task of convincing customers that WorldCom could continue to function during its restructuring.
‘It has been a very difficult and trying time for all of us here,’ says Scott Hamilton, vice president of investor relations. ‘I have a great group of people in the IR department and we have all had to deal with the shock, the shame and ultimately the anger of what has happened.’
Ebb of Ebbers
WorldCom’s problems began in earnest earlier this year when shareholders started to question large loans to Ebbers while he was still CEO. The falling stock price meant he either had to borrow money or sell his own stock at a heavy loss to cover the cost of the shares he had bought on margin. Although the company’s level of debt had already raised worries on Wall Street, the board approved the loans, the last of which was for $340 mn and was registered by the SEC in March 2002. Spokesman Brad Burns only succeeded in angering shareholders in mid-March when, following news of a SEC investigation into the company’s largesse towards its chief executive, he explained to journalists, ‘The very essence of why Mr Ebbers was granted a loan was to protect shareholder value.’
True, the sale of a large number of shares by the CEO would have depressed the price even further. Nonetheless the company was flooded with calls asking if this was really the best use of the shareholders’ money. Asked if – in retrospect – he regrets his colleague’s comment, Hamilton replies, ‘No, it was just an attempt to explain why the loans were given. But the loans in themselves were absolutely regrettable.’
Towards the end of his tenure as CEO, Ebbers was increasingly sullen and uncommunicative, no doubt brooding over his impending demise. When he did engage, it was to launch vehement attacks on his critics. On February 7, following the announcement of a large decline in profits, he claimed that ‘bankruptcy or a credit default is not a concern,’ maintaining that the company had $10 bn in available cash and bank credit facilities. Nobody was quite able to decipher the statement that followed: ‘The veracity of the rumors circulating about WorldCom over the last week has been truly unbelievable.’ Ebbers’ situation became untenable. Shareholders and bondholders no longer trusted him, and their securities were in free fall. At the end of April, WorldCom’s founder and CEO resigned. But worse was to come.
As recently as mid-June, even though Standard & Poor’s had just lowered WorldCom’s debt rating to B+ and placed it on watch for further downgrades, the outlook was still far from dismal. The company was on the verge of negotiating a $5 bn credit facility, and there wasn’t even any great time pressure. On June 17, treasurer Susan Mayer proclaimed that ‘with plenty of cash on hand and no debt maturing over the next six months, it does not matter whether the new facility is in place today or any date later this summer.’
The subsequent discovery of a $3.9 bn fraud, whereby operating expense was effectively booked as capital expense, put paid to all that.
‘The most difficult moment for all of us in what has been a protracted crisis was the earnings restatement for the last five quarters once an internal audit had discovered the accounting irregularity,’ Hamilton recounts. He goes on: ‘Right up to the restatement we believed we could avoid a liquidity crisis. But when the restatement occurred, its sheer magnitude understandably caused the banks to close their doors.
In order to protect themselves, our suppliers began demanding up-front payments, and our cash burn exploded.’
The revelation of the accounting fraud seemed to seal WorldCom’s fate. Having seen both Enron and Global Crossing collapse under the weight of their own accounting scandals, investors saw WorldCom’s bankruptcy as inevitable. Chapter 11 was only a matter of time.
Damage control
According to Lou Thompson, CEO of the National Investor Relations Institute, the crisis has been handled particularly well by John Sidgmore, who took on the poisoned chalice of the CEO role after Ebbers’ defection. If Ebbers was aloof towards the end, the same cannot be said of Sidgmore, who has not stopped talking to investors, customers and employees since he stepped into the breach. He has done his best to present a clear financial picture to stakeholders.
‘At management’s direction, our audit committee hired [William McLucas] the former head of enforcement for the Securities and Exchange Commission to fully investigate the situation,’ he told a press conference in early July. And at every step, measures have been taken to try to ensure the company’s financial survival. In May for example, the decision to eliminate the MCI tracking stock, which could have saved the company up to $284 mn per year, was greeted by a pronounced but short-lived rally in WorldCom’s share price.
Thompson adds that Sidgmore’s communications staff, including the IR team, have been equally impressive: ‘Amid a persistent flow of highly negative news, they have taken the initiative to assure customers that the company will continue to provide effective and uninterrupted service.’
Nonetheless, it is widely believed that many customers will leave WorldCom when their contracts expire. Some customers have reportedly started to jump ship while competitors are queuing up to take a bite out of WorldCom’s impressive and valuable customer base, which includes various departments and agencies of the US government, including the $11 bn contract known as FTS 2001 which the company shares with Sprint.
Scott Hamilton echos a sentiment that is widespread, though little talked about, in the telecommunications industry: ‘It is important to remember that from customers’ perspective a healthy WorldCom is in their best interests.’
Agreement comes from Andy Green, CEO of BT Ignite, the data services arm of BT. As he told the Financial Times in late July, ‘I am not trying to dance on WorldCom’s grave.’ Not all competitors have been as charitable. David Dorman of AT&T, who is widely tipped to succeed Michael Armstrong as CEO, talked of a ‘flight to quality’ only two days after WorldCom’s bankruptcy filing.
In the face of harsh competition and investor disquiet, Sidgmore has been doing his best. ‘We have to first assure our customers and employees that our future is secure,’ he announced in a statement at the end of June. ‘Then we have to make it clear to the world that we are an honest, ethical organization that is deeply committed to providing innovative products and excellent services.’
Hamilton insists that the company is still capable of providing excellent service levels and of continuing to innovate. ‘Even last week [days before the Chapter 11 petition] we came out with WorldConnect, an IP-based voice and data local and long-distance service,’ he observes. ‘We cannot allow the world to think negatively about WorldCom as a whole because of the actions of a few.’
Looking ahead
Hamilton finds it hard to hide his disappointment at what has happened. He has, after all, spent most of his working life within the WorldCom family. During 1991-95 he was at MCI. He went on to develop the investor relations office at SkyTel, which was bought by WorldCom in 1999, and he has been in WorldCom’s investor relations office ever since. ‘For me personally,’ he says, ‘it’s very hard to believe that such things [bad accounting practices] have been going on in the years that I have been with WorldCom. It’s hard to think that this could happen to the investors with whom we had worked so hard to create a relationship based on credibility and trust.’
In spite of the devastating period that he and his colleagues have lived through, Hamilton is not ready to give up the fight to save WorldCom. ‘I hope the company can regain credibility and emerge from bankruptcy,’ he says. ‘I hope we can rebuild the morale of our employees. I hope we can continue to provide our customers with great services. And I hope we can eventually restore some value for our bondholders.’
