WorldCom: Fallen Giant
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JIM LEHRER: More on the WorldCom bankruptcy now from Susan Kalla, a telecommunications analyst with Friedman, Billings and Ramsey, a brokerage firm; Bob Atkinson, director of policy research at Columbia University’s Institute for Tele- information; and Lynn Lopucki, a professor of bankruptcy law at UCLA. Mr. Atkinson, did WorldCom pretty much have to file bankruptcy?
BOB ATKINSON: Once they were effectively unable to pay their current obligations, yes. It’s just a fact of economic life; bankruptcy becomes inevitable.
JIM LEHRER: So there was no other option for them?
BOB ATKINSON: I don’t think so once the accounting problem became known, confidence was lost, banks weren’t willing to continue funding it; it became inevitable.
JIM LEHRER: Ms. Kalla, do you agree it was inevitable?
SUSAN KALLA: Oh, yeah. They ran out of cash. You can’t operate a business that uses cash without any cash and the banks were no longer willing to lend them money at the current agreement. So the banks actually forced them into bankruptcy, which is a good thing, in my view.
JIM LEHRER: But they said they had, what, $100 billion in – a little more than $100 billion in assets $40 some billion in debt and $2 billion or $3 billion in cash. Why could they not survive on that basis?
SUSAN KALLA: Well, they have $107 billion in assets but $50 billion of those assets are what is called goodwill, which are intangible assets or no assets at all. So you can’t really count that. They have $41 billion in debt. Without filing bankruptcy, they had to pay back that $41 billion in debt. And to get access to the rest, they would have to sell assets, which in this market is difficult.
JIM LEHRER: Sure. Mr. Lopucki, what actually did WorldCom solve or protect itself from by filing bankruptcy today?
LYNN LOPUCKI: Well, the major banks had filed a lawsuit against WorldCom seeking to freeze its assets. We don’t know the details of how that was settled but undoubtedly it was settled in a way that made bankruptcy inevitable.
JIM LEHRER: By filing bankruptcy, what is it that does not happen that would have happened had they not filed bankruptcy?
LYNN LOPUCKI: Their assets might have been frozen by the court and they would have been unable to operate. The purpose of the bankruptcy proceeding is to protect them while they attempt to reorganize, and the protection is protection from their creditors.
JIM LEHRER: And the creditors can do nothing. They have to wait until this thing is resolved before they can get any money that is owed them, is that correct?
LYNN LOPUCKI: That’s right. They’re going to have to wait out this proceeding.
JIM LEHRER: Mr. Atkinson, going back to what it is now that will happen, what does reorganize this company, WorldCom under Chapter 11? What do they have to do if they really are going to emerge from bankruptcy as still a company called WorldCom?
BOB ATKINSON: Their first priority, I think is to maintain confidence in two aspects. First customer confidence. Their principal real asset is their customer base. That’s almost the scarce resource in the telecommunications business: Customers, paying customers. And of course the second part of confidence would be investor confidence or financial confidence.
They will need additional capital put into the business just to keep on running, to pay the day-to-day bills, to continue to expand the network or to serve their customers. But that has to be the first priority, just keep the money coming in either from customers or from financial institutions and then they can reorganize their balance sheet and hopefully at the end of that process, come out with a company that in fact has a good, solid cash flow and even profit flow.
JIM LEHRER: Ms. Kalla, what are the chances of it being able, this company, in bankruptcy, being able to continue to service its customers in such a way that they will hang tough with them?
SUSAN KALLA: The prospects are excellent. They’ll just continue to operate for their customers and they can go to the courts and to the creditors to try to get more money to make a proposal to get more money to continue to operate or to do some expansion with their customers as they need it. But the company has an immense amount of inventory in its network and has very highly qualified people working for it and has a very strong annuity stream of business.
The customers that it has have been with it as long as 20 years. So it’s not — and it’s very difficult for the customers to change vendors. So they’re a highly value added service that the company offers. They’re considered the top of the food chain in offering data services so it is likely they’re going to continue to offer very good services to their customers; although there may be some quality issues, those are probably going to be very slight.
JIM LEHRER: Give us a feel, Ms. Kalla, for what kind of customers WorldCom has. What kind of people or companies are these?
SUSAN KALLA: Well, the most notable customers they have are the Fortune 25. Their customers just go – they go down list of the Fortune 25, almost every single one of them is one of WorldCom’s customers. Most of the companies have multiple networks and they use multiple vendors just to have some price control. Those customers, we’ve called 25 of them last week and it looks like they’re all staying with them. They might not give them new business, but their old networks will stay with them.
JIM LEHRER: We’re talking about telephone networks, data transferring? What other kinds of businesses was WorldCom in?
SUSAN KALLA: They have very high end networks that are used for mission critical applications. For example, Merrill Lynch would use their communications network for all their back-end processing, for all their financial data. And companies like DuPont would use networks for R & D and they’d networks for processing their different organizations. There’s networks for every single application within a company.
JIM LEHRER: All right, Professor Lopucki, give us a feel for how the bankruptcy court, what role is it going to play as WorldCom now tries to redo itself and emerge, as Mr. Sidgmore said, hopefully within a year, out of bankruptcy?
LYNN LOPUCKI: Well, the bankruptcy court is going to try to give WorldCom the opportunity to reorganize if they can possibly do it. That is, the bankruptcy courts generally tend to favor reorganization, to afford every opportunity to hold back anybody else from the outside who is attempting to interfere with WorldCom’s business. It will be a respite of maybe nine months to as much as two years. And at the end of that time, WorldCom will get a forgiveness of …much of its debt will be converted into equity and then we’ll see whether WorldCom can survive in its new configuration.
JIM LEHRER: Converted into equity in simple terms means that somebody who is owed money today will not get any money but will get stock in the new WorldCom or bonds or something like that?
LYNN LOPUCKI: Exactly. The bonds are canceled and the bondholders receive shares of stock. The old stock is canceled as well.
JIM LEHRER: Now is there a general test that bankruptcy courts use for viability, I mean to establish, okay, these people made it and we’re going to let them back into the real world? How do they do that?
LYNN LOPUCKI: The bankruptcy courts can help a company with its debt. If debt is the problem, the bankruptcy process can reduce that debt all the way to zero. But once the debt is down to zero, the company still has to earn a profit. At that point, their revenues have to exceed their expenses. Most of these companies do get out of bankruptcy; that is, their plan is confirmed by the bankruptcy court. But many of them fail in the few years after bankruptcy.
JIM LEHRER: Why?
LYNN LOPUCKI: Because the reorganizations in most cases haven’t cut deeply enough. The business hasn’t been fixed. The debt hasn’t been cut sufficiently. There is a tendency when companies go into bankruptcy to not want to face up to the hard questions, the hard problems. You can see in this case WorldCom is claiming assets of $107 billion.
Some analysts think they’re worth as little as $15 billion and the market seems to be valuing them at less than the amount of the debt, $41 billion. So WorldCom may be going in here with some very unrealistic expectations.
JIM LEHRER: Do you agree with that, Mr. Atkinson?
BOB ATKINSON: It will be a difficult process and the telecommunications industry is generally in a state of flux. So as WorldCom begins to go through its plan, they may, frankly, have to face additional competition from the Baby Bells getting into the long distance business, AT&T trying to expand its market share, perhaps other companies in the long distance business, some of the smaller companies having their own financial problems, bankruptcies.
And so there will certainly be a lot of pressure on the company – on the price side, on the revenue side of the equation. So I think yes, they are really going to have to get their costs way down because today’s cost structure probably won’t be sustainable two years from now, for example.
JIM LEHRER: Ms. Kalla, do you agree with what Professor Lopucki said in his figures about how people view exactly what WorldCom’s assets really are at this point?
SUSAN KALLA: Yes, some analysts think it is worth about $15 billion. We have a number that’s a little bit lower than that. In terms of going forward, they have an immediate short-term opportunity that is very strong. Their customers are likely to stay with them.
But on the horizon, there are many new technologies and there’s many new aggressive players that are also coming out of bankruptcy. We like to term them as the zombies and the zombies are likely to completely de-stable pricing because they’re coming out of bankruptcy also without any debt on the balance sheet. And they can offer lower prices.
They have a low cost structure because they don’t have to pay interest payments. So we’re seeing that in long distance, prices could continue to be destabilized over the next three years. And at that point, some new technologies may be coming on the market that give competitors a 10-1 advantage over the existing players. So anything could happen.
JIM LEHRER: Professor Lopucki, in the meantime, what happens to the shareholders? What happened to the people who had invested in WorldCom during this bankruptcy process?
LYNN LOPUCKI: Well, they’re still in the case right now. But as a practical matter, they have lost their money. They’re almost undoubtedly going to have their shares canceled. And what they get will be either nothing or some nominal amount.
JIM LEHRER: What about this issue today, the Justice Department asked the bankruptcy court and in fact – a short while ago, earlier this evening, the bankruptcy court granted the request of the Justice Department to have an independent examiner look at possible fraud and manipulation and other things by the management of WorldCom. What is that all about? Is that a normal procedure?
LYNN LOPUCKI: It’s today a common procedure. It doesn’t happen in every case. But in a case like this where there has apparently been fraud, it is not uncommon at all to get an examiner. And the significance of the court’s order is the fees of the examiner are going to be paid by the estate. WorldCom, the bankruptcy estate, pays most of the expenses that are incurred in the reorganization process: Their own and also other parties to the case.
JIM LEHRER: But running parallel then to the civil, what is basically a civil proceeding, the bankruptcy proceeding, is also then a criminal proceeding that is flowing out of the bankruptcy thing itself; is that correct? Am I saying that right?
LYNN LOPUCKI: Well, the bankruptcy court is not involved in any criminal proceedings. The bankruptcy court investigates. In the course of a bankruptcy, usually a lot of information is unearthed and becomes public. And the examiner is one of the processes for doing that, but once the examiner makes a report it is going to be up to someone else, a prosecutor, to take the matter further.
JIM LEHRER: Mr. Atkinson, finally this is a long process? WorldCom is going to be can with us in this state for a long time to come no matter what finally happens as the end result of bankruptcy?
BOB ATKINSON: No. Either WorldCom will emerge from this bankruptcy and become a successful company for the relatively foreseeable future or it may just not make it out of bankruptcy and its pieces would be presumably acquired by other companies or even if it comes out of bankruptcy, other companies, through the competitive process, may take a lot of its customer base, et cetera.
So it is not clear – it would be impossible to predict that any specific company in the telecommunications is a long-term survivor. It is a competitive marketplace and competition means restructuring. It means sometimes failures. But consumers will continue to get, I think, a pretty good price for their telecommunications services and the telephones will continue to ring across America for the foreseeable future.
This is not a crisis of the telecommunications industry at large. It’s a crisis for one company and potentially problems for a number of other companies but the phones will keep ringing. We shouldn’t be too worried about the fundamental infrastructure of the telecommunications industry.
JIM LEHRER: Okay. Thank you all three very much.