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Ray Suarez looks into the rise and fall of WorldCom, once a major player in the telecommunications industry, with Blair Levin, telecommunications analyst at Legg Mason and former chief of staff at the FCC; and Anna-Maria Kovacs, a telecommunications analyst with Commerce Capital Markets.
Now, the fall of a major star in the telecommunications industry, and to Ray Suarez.
The man who put the vision together to build this great company, our CEO. Please welcome Bernie Ebbers. ( Cheers and applause )
Two years ago, Bernard Ebbers was riding high. The WorldCom President and CEO headed one of the world's biggest long distance and Internet carriers at a time when the telecommunications industry was booming.
BERNARD EBBERS, CEO and President, WorldCom: MCI-WorldCom has grown up so fast and expanded so far with the help of forward-looking leaders who know the importance of opening markets. When markets are open, the 83,000 employees of MCI- WorldCom know how to compete, and we compete to win. And when we compete, the tangible benefits of innovation come to our customers.
The onetime basketball coach built WorldCom up from a little-known discount long distance company that he started in Mississippi in 1983. Capitalizing on the breakup of telephone giant AT&T, the company went on a buying binge, using high-priced WorldCom stock to acquire more than 40 companies in five years. In 1997, Ebbers surprised the communications world with his announcement of WorldCom's $30 billion bid to take over phone giant MCI
(November 1997) Entrepreneurs are, by nature, people that look for opportunities. Both MCI's senior management and WorldCom's senior management, if there are opportunities out there that make sense, we certainly won't shy away from it.
At the time, the deal was the largest merger in history. Two years later, Ebbers announced another blockbuster proposal: A $129 billion merger with long distance carrier Sprint.
I am happy to announce today that MCI-WorldCom and Sprint have made a definitive agreement to merge our two companies.
But in July of 2000, federal and European regulators blocked the deal on antitrust grounds. In recent months, WorldCom, once Wall Street's darling, has fallen from its perch.
The company's stock has lost some 80% of its value this year, closing today at just $2.21 a share. In March, the Securities and Exchange Commission launched an investigation into WorldCom's finances. And last month, WorldCom announced it was cutting nearly 4,000 jobs in the United States, more than 4% of its global workforce.
Like many other telecom companies, WorldCom has been hit hard by overbuilding, over investment, and declining revenues from dropping long distance rates. Front page headlines today announced Ebbers' resignation. Coupled with that news were reports that he owes the company more than $365 million for personal loans. John Sidgmore, WorldCom's vice chairman since 1996, has been tapped to replace Ebbers.
We chart the rise and fall of WorldCom and its CEO, Bernard Ebbers, with two watchers of the telecom industry. Blair Levin is a telecommunications analyst at Legg Mason. He was chief of staff at the Federal Communications Commission during the Clinton Administration.
And Anna-Maria Kovacs is a telecommunications analyst with Commerce Capital Markets, an institutional research and investment banking firm. Blair Levin, were you surprised that the Bernie Ebbers' chapter of the WorldCom story ends this way?
No, certainly not in the last few weeks and really the last few months. I mean, WorldCom has had a very tough time. Really, in the last year, the whole telecommunications industry has had a tough time. Generally when a company falls from so high to so low, the CEO is bound to fall right afterwards.
Anna-Maria Kovacs, how does a guy who owned a small chain of motels in Mississippi and a very small discount long- distance operation go to being one of the giants of the telecommunications industry 15 years later?
Well, One of the things that worked in his favor was the ability to use WorldCom stock to do a large number of acquisitions. WorldCom did grow quite a bit just internally from selling its products, but an awful lot of the growth came from acquisitions, and that, in turn, sort of became self-fueling.
So as the stock kept going up, it got easier and easier to get bigger and bigger. And that helped the stock keep going up. What we see now is sort of the inverse of that as the fortunes of the company cycle down. The beginning of that obviously was the inability to buy Sprint after the company had pretty much admitted that they needed to buy Sprint to have the kind of scale they need to continue in the industry.
And then the company was hit pretty hard by the recession, as well as by increased competition from not only the AT&T, Sprint and Qwest, but a number of small players who had come in. So that all of the things that made it possible for WorldCom to grow have worked against it, essentially.And as the stock has gone down and its ability to erase debt has disappeared, it's become harder and harder to keep going.
Well, Anna-Maria talks about how Bernard Ebbers was able to pull off all this buying.
But he certainly had a lot of help. Analysts, the financial industry, banks that were willing to lend him lots and lots of money. He didn't go down that road alone, did he?
No, he didn't go down that road alone. But I think it's important to remember that he did a lot of the buying at a time when there were a lot of… there was a lot of wind in the sail of what he was doing.
The most important thing to me is really the product cycle of data, which he seized on very early. He bought UU-Net and really rode the Internet wave up. He was not alone in this. Indeed, you could see a lot of other CEO's who rode it up similarly. I think he rode it better than others, but no one has been able to ride it down very well. No one has figured out the next move.
This is what, part of the business fiber cables transmitting data rather than people making long-distance phone calls?
Correct. He certainly understood the value of the Internet backbone, and WorldCom has one of the finest Internet backbones in the world. What I don't think he anticipated was the extent to which things like wireless would cannibalize the long-distance business, how increased competition would put more pricing pressure on that, how e-mails themselves, the Internet itself is a disruptive technology to the core business of MCI so in the mid-'90s there was a lot of wind to his back, and now there's a lot of wind going in the other direction.
Now, Anna-Maria Kovacs, a lot of attention into personal issues, like the fact that the company lent him some $366 million. Is that normal business practice?
I can't think of any other company that has done that. It is by no means normal business practice. And you have to wonder what he, and, more importantly, what the board was thinking when that happened.
When that kind of thing goes South– and I understand that part of the problem with that arose as he was trying to cover the rapidly tumbling price of stock– does that really create a situation where you're sort of, in order to save the company, tossing somebody overboard? Lightening the load?
You mean in terms of his resignation this week?
Yeah. Do they become a liability at that point?
I think Mr. Ebbers' resignation certainly can be viewed as sort of throwing him to the wolves or whatever in the hope that the company… that that takes care of the issues.
But obviously the company also is going to have to deal with its share in terms of why he was given those loans. And beyond that, the Securities and Exchange Commission's look into WorldCom's accounting is going to continue, whether Bernie Ebbers is there or not. So, no, I would say his departure does not particularly take care of those questions.
Now, in the last several months, Blair Levin, we've been reading the business pages of CEO's and other chief corporate officers who have cashed in their chips early and walked away from the table with hundreds of millions of dollars.
In the case of Bernard Ebbers, here's a guy who is borrowing money to buy more WorldCom stock when it was tumbling in price.
That's exactly right. I think in many ways he was a true believer. I don't think he was selling out his shareholders. I don't think he was trying to cash out while the going was good. I think he really believed in the company. And that may have blinded his vision.
I think that one of the things that the company is doing– and the board clearly sent a message to him that it was time to go– is they understand they have got a pretty short window here to turn things around. They need to restructure that company. Indeed, the whole telecom industry is going to go through a very significant restructuring over the next year as it deals with what essentially was over investment capacity and a number of other things over the last couple of years. But WorldCom is kind of the first at the plate to see how they do it. But in order to do that I think they realize they needed new leadership.
Do you think they can make it?
Well, I think they have a very short window in which to come up with a new plan for trying to figure out what assets really make sense. There's a very significant tension between trying to be a growth company, which requires a lot of investment, and trying to cut back and improve on their return on capital. So I think it's a very tricky path.
But again, they are not alone in this. Indeed, the entire industry is down significantly. The Bell companies, who everyone sees as kind of the most stable within that sector, they're really all trading at 52-week lows as well. What we're dealing with is a very significant issue where not only do you have growth slowing significantly in the sector, but you also have a competitive dynamic with wireless and data now competing with the traditional voice network, and that's what Ebbers has to deal with. But it's really what the whole sector has to deal with.
Well, Anna-Maria, you just heard a fairly bleak picture painted. Are there other ways of looking at it, some assets that MCI-WorldCom can count on?
Well, I think what you need to keep in mind is that this is very much a growth industry, and that, yes, we are in a recession and that creates problems. We see a whole sort of re-scrambling of the industry structure as traffic that used to be carried on traditional long distance moves to wireless and vice versa. But essentially the underlying fundamentals are very strong and will be strong.
So I think as Blair said, this is, to some extent, just a matter of making it through however long this recession lasts into better times and dealing with the debt load that WorldCom has. But beyond that, I think a very likely outcome for WorldCom is that it will need to be bought out, and I think one of the things that might have to happen is for the rules of the game in terms of mergers and acquisitions being changed to recognize that the industry has fundamentally changed and restructured in the last few years, and the kind of metrics that were used to turn down the WorldCom-Sprint deal cannot be applied anymore.
If you're going to have a strong industry in a sector which is enormously capital intensive, you are going to have to allow for some consolidation. WorldCom clearly is a company with a customer base and assets that people would want to go after. Whether they'll want to take on all of the debt or not is not… you know, I think is a separate question. But I think WorldCom in some form, whether as an independent or as an acquisition, will go on.
What about those companies that aren't groaning under the weight of tens of billions of dollars of debt, as WorldCom is? Are there too many players in the pool trying to make a living out of long distance, trying to make a living out of fiber optic networks and data transmission right now?
Certainly from the investment community's perspective, that's absolutely right. I think it should be noted that from the consumer perspective and from the economy's perspective, the last ten years has been terrific in terms of telecommunications. Pretty much every product, the price has dropped dramatically. That may not be true of local phone, but if you look at wireless, if you look at international calls, if you look at the ability to do all kinds of things we couldn't do before like e-mail, it's really been a terrific ride. But there's a price to be paid.
And in many ways, the consumer has gotten the benefit of an enormous investment in the infrastructure. And I think this economy will benefit from that, but pretty much every player in the segment, whether it be the new guys on the block like a Global Crossing, or the more traditional blue chip challengers like WorldCom or AT&T and Sprint or the traditional Bell companies, the local phone companies, they all have very significant debt loads.
That's really Qwest's biggest problem. Qwest has a great local phone system, but they themselves are struggling under very significant debt. So that's really the task of the industry– getting out from under that debt. It's going to be painful over the next couple years. Though I agree with Anna-Maria, in the long run the information economy is here, it's real, we're going to keep doing more and more of our business and spending more and more of our time over these networks.
Guests, thank you both.
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