The Rittenhouse Review

A Philadelphia Journal of Politics, Finance, Ethics, and Culture

Tuesday, April 30, 2002  

How the Mighty are Falling

The Wall Street Journal this morning reports that Bernard J. (“Bernie”) Ebbers, the embattled chief executive officer of WorldCom Corp., resigned yesterday and that a public announcement of his departure expected today. [Ed.: Link requires subscription.]

Ebbers’s decision came, at least in part, as a result of pressure from WorldCom’s outside directors, who were frustrated with the company’s stock price and unsettled by the controversy surrounding Ebbers’s $366 million personal loan from WorldCom’s coffers and the ongoing investigation by the Securities and Exchange Commission.

WorldCom’s common stock, which traded as high as $64.50 in June 1999, closed at $2.35 yesterday, a decline at 96 percent.

Ebbers built his career and reputation as an acquirer of dozens of small telecommunications companies, a strategy that propelled his tiny LDDS Communications Corp., of Jackson, Miss., to the upper echelons of the phone business. WorldCom, as the company was then known, entered the big leagues in 1997 by acquiring MCI Communications Corp. Then in 1999, WorldCom attempted to acquire competitor Sprint Corp., a deal squashed by federal regulators.

Ironically, the acquisitions that created WorldCom as we now know it are the primary subject of the SEC’s inquiry, as is the loan WorldCom made to Ebbers to cover margin calls on other loans that were backed with company stock. (The $366 million loan was extended to Ebbers to cover debts he had accumulated from personal business investments, obligations that likely would have forced the CEO to sell his WorldCom shares, an outcome that would have put considerable pressure on the stock price.)

Ebbers will be succeeded by John Sidgmore, WorldCom’s vice chairman, according to the Journal, the man who for years ran WorldCom’s Internet business, UUNet.

The question now is whether Sidgmore will sell WorldCom or invest the time, energy, and money needed to rebuild the firm. In his interview with the Journal, Sidgmore dismissed talk of bankruptcy and emphasized that the company has plenty of cash.

WorldCom’s latest attempt to restructure the firm, separating the company’s consumer and small-business operations, conducted through MCI, into a tracking stock, was a dismal failure.

Already, Wall Street’s research analysts are being taken to task for failing to grasp the implications of WorldCom’s growth-by-acquisitions strategy and for their inability to understand the company’s financial statements, all the while praising Ebbers and Co. for their brilliance.

As the Journal puts it, “During the company’s heyday, few analysts complained that the frenetic pace of acquisitions made it difficult to accurately gauge the company’s health, a task also complicated by WorldCom’s reliance on confusing pro-forma figures in its financial reports.”

Of course, “Now they are singing a different tune. ‘You always had this question about whether WorldCom was a house of cards,’ says Michael Bowen, an analyst at Soundview Technology Group in Old Greenwich, Conn.” Hmm….Wonder if Bowen ever wrote that in one of his reports about the company.

“‘Everything was pro forma. It drove us nuts,’” Bowen told the Journal. Maybe, but we’ll bet Bowen parroted those figures in his notes to clients.

“He said analysts had trouble getting ‘a clear shot at what the growth really was,’” according to the Journal. No doubt, but that requires analysts to ask the right questions and management to provide correct and thorough answers. We would have no difficulty believing that was not the case here.

More important, the fall of Ebbers means another “legend,” another “genius,” another “visionary,” has gone by the wayside. Ebbers joins the 1990s Hall of Shame, already populated with the likes of Ken Lay, Andy Fastow, Jeff Skilling, and Jeff McMahon of Enron Corp.; David Duncan of Arthur Andersen & Co.; Todd Krizelman and Stephan Paternot of Inc.; Alfred Taubman and Diana Brooks of Sotheby’s Holdings Inc.; Gary DiCamillo of Polaroid Corp.; Gary Winnick and Tom Casey of Global Crossing Ltd.; Ellen Hancock of Exodous Communications Inc.; Jerome York and Paul Allaire of Xerox Corp.; Bill Schrader of PSINet Inc.; Jon Ledecky of U.S. Office Products Co.; David Wetherell of CMGi Inc.; Henry Blodget of Merrill Lynch & Co.; and Mary Meeker of Morgan Stanley.

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