Sunday, June 30, 2002


This article is worth reading before continuing.

What inspires this is Glenn Reynolds' post of an email suggesting that WorldCom was a "stupid company", in part by growing by acquiring "lousy companies".

IMO the only "lousy company" they acquired was MCI. Among other things, MCI's billing problems were incredible, and my sources have told me that there have been times when MCI had buildings full of people calculating bills using Excel. Even without such nonsense, billing costs money, and penny-ante customers are losers for the long-distance companies. (Notice the pricing plans - the phone companies are pushing for largely fixed bills guaranteeing them a minimum amount, and most of us can avoid usage-sensitive charges.) What MCI had that WorldCom wanted was lots of Internet backbone.

Former CEO Bernie Ebbers was able to acquire all those companies primarily with stock. So it was imperative that he keep the stock price high by any means necessary. I heard stories of salary cuts without warning so Bernie could make his numbers. And as long as he did make them, the stock stayed high enough to keep the acquisitions coming.

Of course you don't keep stock prices high by losing money, as WorldCom's books would have shown had their costs been accounted for properly. There must have been tremendous pressure on the CFO to do something to keep the price up. We see what he came up with, and there's no possibility of "mistake". Whether Bernie knew what was going on or not remains to be determined.

The CFO for sure violated the law and investors' trust. But isn't it amazing that something that happened in the back room (not operations) would cause such a change in the stock price so far removed from the time of the offense?

WorldCom has substantial hard assets that would be valuable to healthier competitors, and it might be a ripe target for a foreign telecom firm to take over. I haven't looked at annual reports, but it's hard to believe that WorldCom doesn't have more than enough assets to cover recent quarter per share prices.

It will be interesting to watch the current CEO, John Sidgmore, as he deals with his situation. Laying off 17,000 will surely lower costs, and it's a backdoor way of running off unprofitable customers via poor customer service.

They won't be funding any acquisitions with stock for a while, and the bad PR may sink them. But if they can keep their business customers, the ones they wanted all along, we might yet see them recover.

If they don't recover, well, keep an eye on AT&T for the next couple of years...

If you're considering changing your telecom provider, take a look at One Star Communications of Evansville, IN. They are a small privately held firm that offers a number of telecom services, including local service in limited areas (primarily New England). They also offer a referral program - if you refer people to them as noted on their website, they offer a bonus on your next bill based on the billings of the new account.

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