The Rise and Fall of Worldcom

In the 90s of the last century, WorldCom shares were in the portfolio of almost every serious investor. And why not! Rapid growth, capitalization of hundreds of billions of dollars, a charismatic founder: what could go wrong? About the sad fate of the telecom giant, its employees and CEO – in our material.

Mergers and acquisitions

The telecommunications giant was created in 1995 after the merger of two corporations: the long-distance and international communications company Long Distance Discount Service (LDDS) and WilTel.

The company formed in this way continued its aggressive commercial activity: from 1991 to 1997 it invested about $60 billion in the purchase of a dozen similar organizations (MFS Communications for $12 billion, UUNet Technologies, CompuServe, and others).

The corporation's most significant acquisition was MCI, which was considered the second largest in the American telecommunications sector and was worth about $40 billion.

The deal was the pinnacle of Worldcom's development. The company's services were used by the largest companies, with 40 million clients bringing the corporation up to $40 billion a year. The company employed 75,000 people worldwide, and the owner Bernard Ebbers' fortune, according to Forbes, was slightly less than $1.5 billion.

After such a financial peak of success, WorldCom entered a crisis. The synergy of the merger with MCI was controversial.

Falsification of financial statements

As a result, the top management of the company, seeing the deterioration of the company's financial condition, falsified its reporting, reducing expenses on paper and increasing the income received: for example, in 2001, losses of 1.2 billion dollars miraculously transformed into a profit of 2.7 billion dollars. In just three years of such “work with documents”, the company received a profit of about 9 billion dollars.

It all came to light in 2002, when internal audit vice president Cynthia Cooper launched an investigation after discovering that WorldCom CFO Scott Sullivan was dipping into the firm's reserves to cover expenses.

Experts, having checked the company's financial documentation from 1999 to 2002, calculated that the total amount of accounting fraud was just under $80 billion.

Investors in the market, having received this data, immediately began to sell off the company's securities: WorldCom shares fell from $64.5 to 6 cents. Capitalization fell by 99% (from $180 billion to $2.7 billion).

The company was trying to avoid bankruptcy, having shortened 17,000 employees, including top managers. This combination was partially successful: after paying the victims $500 million in cash and $250 million in stock, the company changed its name to MCI. In 2006, it acquired Verizon Communications for $6.75 billion.

By the way, the WorldCom executives did not escape responsibility for ruining their own company: they were found guilty of committing a criminal offense. Bernard Ebbers was sentenced to 25 years in prison, Scott Sullivan received five years of imprisonment (the businessman made a deal with the investigation), the financial controller and the chief accountant – one year in prison each.

Ebbers, by the way, was released in 2019 due to health reasons. He died in 2020.

What else is known about Bernard Ebbers?

The founder of Worldcom was born in Canada in 1941. He was a lackluster student at school, but played basketball well and even coached a school basketball team (he couldn't compete himself because he was injured in a street fight).

Ebbers entered the business by buying a sewing factory, a motel and a restaurant with money he had saved or borrowed. All these projects, started by the entrepreneur, were not successful.

Ebbers became the head of the future Worldcom by chance: in 1983, the telecom giant AT&T was forcibly divided into several parts by a court decision. The active entrepreneur immediately attracted his friends, collected the money and bought out one of the companies that emerged as a result of the division, which he called Long Distance Discount Service (LDDS).

Analysts later noted that Ebbers had no experience in the field when he acquired the telecommunications company: early investor and board member Carl J. Aycock in 1997 toldthat “…the experience that Bernie had before running a long distance company was in [собственном] using the phone.”

Why did friends and colleagues, knowing about his unprofessionalism, invest in the project? Ebbers had an important asset that allowed him to become the head of a technology corporation without any work experience, – a person's cloudless reputationwho makes the right bets and sometimes wins well. This was expensive in the turbulent 80s.

An analysis of the situation inside the collapsed WorldCom from the authorities

Securities and Exchange Commission, having checked WorldCom's financial statements, stated that:

• The bookkeeping fraud was primarily carried out by CFO Scott Sullivan and the firm's controller, David Myers, but the resulting scandal was largely the result of how CEO Ebbers ran the corporation (“He was at the heart of the company's culture and exerted much of the pressure that allowed the fraud to continue for so long”);

• The auditing organization missed, in the opinion of the authorities, opportunities that could have led to the discovery of abuses;

• WorldCom employees themselves were also complicit in the violations (they maintained inadequate control over information needed by auditors, and edited documents for themselves). Some in the finance and accounting departments were not bold and decisive enough in upholding the demands of legality: they “believed that to object forcefully to conduct they knew was being directed by Sullivan would cost them their jobs; few were willing to take that risk.”

Why was Ebbers given a 25-year prison sentence if his defense and controllers said his subordinates deceived the boss?

The reason was the founder's own behavior during the trial. The jury found his testimony defensive and evasive: They “concluded that with his personal fortune evaporating and the company he had built sinking, it was inconceivable that Ebbers would not pay attention” to the details of his company's finances.

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