The Company & Situation
WorldCom was a provider of long distance phone services to businesses and residents. It started as a small company named LDDS and grew into national telecommunication company called WorldCom. It became the second-largest long distance telephone company in the United States and one of the largest companies handling worldwide Internet data traffic with help of Bernie Ebbers - the CEO. WorldCom gain its power through acquisition of small telecom firms. From the period of 1995-2000 it bought over 60 local businesses and in 1997 it bought MCI for $37 billion. At that time WorldCom spent approximately $60 billion and accumulated $41 billion in debt. The stocks of WorldCom were highly desirable at Wall Street and risen from one cent per share to over $60 a share.
In 1999 the growth of revenue dropped and the price of the stocks started to fall down. “According to Ebber, the main goal of the company was to be N 1 stock on Wall Street” (Kaplan, 2007). Revenue growth was very important point to meet expectation of Wall Street traders and stay on top of the stock charts. In an effort to increase revenue, executives reduced reserve accounts (the debts from acquired companies) by $2.8 billion and moved this money into the revenue line of its financial statements. When this strategy outlived itself Ebber implemented the new one. In 2000 WorldCom began to classify operating expenses like long-term capital investments. This allowed company to inflate profit at another $3.85 billion. Later on $500 million in computer expenses were added which never happened.
In July 2002 WorldCom filed for bankruptcy after several disclosures regarding accounting irregularities. Company admitted $9 billion in adjustments to financial statements that were violated GAAP.
Strengths and Weaknesses as well as Alternatives
The goal of WorldCom was to become strong leader in telecommunications industry which was achieved through successful acquisition of more than 60 companies. Some of these acquisitions were significant. “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”. (Moberg, Romar, 2003). From now on WorldCom had ability to offer combined services for long distance, local service and data communications. This was very strong move but it has some challenges. Managers had to combine several big companies into one business. This is very time consuming process which requires careful planning and attention at all level of the organization. With so many acquisitions at one time managers did not have enough time and recourses to complete process. The second challenge is to complete financial integration. All newly accepted assets, debts, god will and etc. should be accounted and integrated into one financial system in compliance with GAAP.
At this point several issuers arose. First of all the CEO of the WorldCom was not the person who paid attention to small details. He was the strategy mind behind operations. He failed to set new corporate policy and set the tone at the top. Secondly, the senior managers failed to develop a cooperative mindset among the various units of WorldCom which lead to various technical mistakes between local services.
Regarding financial reporting, WorldCom has its own interpretation of accounting rules and regularities. In order to stay profitable and show revenue growth company used fraudulent methods of reporting along with unacceptable write offs, cutting annual expenses, manipulating bad debt accounts and so on.
In 2000 the WorldCom acquisition of Sprint failed. “The denial stopped the carousel, put an end to WorldCom's acquisition-without-consolidation strategy and left management a stark choice between focusing on creating value from the previous acquisitions with the possible loss of share value or trying to find other