WorldCom: Showing Signs of Life

By Daniel Eisenberg

When WorldCom first owned up to its massive accounting fraud last summer, most observers of the once soaring telecom upstart figured its calls were numbered. Rivals like AT&T and Sprint were happy to close the book on a company they blame as the principal culprit in the telecom bubble--one that had posted curiously high profits that they could never quite seem to match. But six months after its dirty little secret of success was exposed and the company was left for dead, WorldCom is confounding both its critics and its competition--not only refusing to die but showing some real, small signs of life.

WorldCom has undergone what court-appointed monitor and former SEC chairman Richard Breeden calls "a steam cleaning from top to bottom," getting rid of virtually every member "of the gang that couldn't shoot straight," including practically the entire finance department. So far, at least, the nation's second largest long-distance company has been able to hold on to the bulk of its big, valuable corporate and government accounts, though many such customers are exploring other options. It has also grabbed some local residential customers from the Baby Bells, reached a partial settlement with the SEC and built up a healthy cash reserve of close to $2 billion. Most important, it has lured former Compaq head and Hewlett-Packard president Michael Capellas to take on the reclamation project.

Capellas spent much of his first few weeks at the helm doing his best to convince WorldCom's anxious customers and employees that the company, whose revenue has fallen an estimated 15% to 20% in the past year, won't be disconnected anytime soon. Now, with the prospect of a possible fine of up to $9 billion on the horizon, he has to craft a viable reorganization plan for the largest corporate bankruptcy in U.S. history, involving $107 billion in assets. To generate real profit, he'll have to consider unloading its shrinking paging business and handing out even more pink slips. He also wants to turn the company into (don't laugh) a paragon of corporate governance--and is actually required to do so as part of his new contract, worth about $6 million annually in cash and stock. That should be a little easier now that the seven board members left over from Bernie Ebbers' free-spending days have just quit, leaving Capellas to handpick the majority of a new, more independent board.

Not surprisingly, WorldCom's rivals, concerned that the company could emerge from bankruptcy with a clean, debt-free balance sheet and start another destructive price war, aren't so quick to forget the past. In recent months, they have been lobbying to have the company liquidated so the whole firm, not just a few top executives, ends up paying for its gross misconduct; it doesn't help matters that Ebbers, who may have to declare personal bankruptcy, still hasn't been charged with anything.

Regardless of whether Capellas can get WorldCom back on its feet, many think it doesn't have a long-term future as a stand-alone company in an industry plagued by overcapacity and falling prices, and that it will ultimately be carved up. The Bells, for one, are just starting a major assault on the corporate market, and would certainly be interested in WorldCom's numerous clients. Considering the amount of carnage WorldCom has already caused, stealing its business, rather than paying a dime for it, might be the best revenge of all. --By Daniel Eisenberg