Is there any hope for WorldCom? The erstwhile telecommunications darling of Wall Street money managers seems to have lost its footing.
Charismatic founder Bernard J. Ebbers, who grew the company from a small Southern long-distance discounter into a global powerhouse, resigned on April 30. The company's stock price hovers around $2, and its bonds aren't inspiring much confidence.
Ebbers himself owes the company some $366 million--a loan that is raising many eyebrows in financial circles. Mired in $30 billion of debt and struggling to make money in a shrinking market, WorldCom appears to be on the verge of bankruptcy. New CEO John Sidgmore is faced with the daunting task of deciding which parts of the company to sell and what, if anything, to salvage.
On the face of it, WorldCom looks like just another post-dot-com telecom implosion. Hardly anyone bats an eyelid these days as the sharp pin of reality pops bubble after bubble of hyperinflated expectations. Apart from the obvious economic generalizations, however, WorldCom's woes have specific causes.
Under Ebbers, a consummate deal maker, WorldCom raced to make more than 70 acquisitions in two decades. Among the biggest were MFS Communications (which had previously acquired UUNET, an Internet backbone company) and MCI, the second-largest telecommunications company in the United States after AT&T. While WorldCom's acquisitions of smaller companies helped drive consolidation in the telecommunications industry, they also created a challenging situation for the company.
To make the acquisitions pay off, WorldCom needed to integrate their operations to drive value growth through scale. But experts at Wharton and elsewhere explain that WorldCom failed to meld its acquisitions into a coherent, value-producing whole. When it did force through such integration, it botched the job. For example, the company integrated UUNet into its main business division, but did so in a way that "destroyed UUNET's brand and its staff morale," noted London's The Economist.
This absence of strategic focus in managing acquisitions and their integration, coupled with a sharp decline in demand for Internet and data services following the bursting of the dot-com bubble, lie at the heart of WorldCom's problems. Although the company still has access to significant lines of credit, its $30 billion in debt looms large. Little wonder that the company's stock price has been falling, and WorldCom is now worth just a fraction of what it was at its peak.
Gerald Faulhaber, professor of public policy and management at Wharton, points out that after WorldCom's acquisition of MCI it could have grown into a powerful force in the telecommunications industry, but it missed this opportunity.
"The best WorldCom could do was to foray into the local exchange business, but that failed."
--Gerald Faulhaber, professor, Wharton
"When WorldCom bought MCI, I thought to myself, this could either be good news for the phone business or bad news for Ebbers," Faulhaber said. "Here you have a go-go M&A specialist who built WorldCom out of a little retail company. And MCI was a real live phone company--not some resale shell game. It was a fairly mature long-distance company. So the question was, could Ebbers turn this around to do something exciting in the telephony space? Certainly WorldCom's attempts to do local distribution came to naught. MCI basically remained a long distance telephone company."
Faulhaber added that few of WorldCom's acquisitions made sense. "More strategic moves would have been good--but they never happened. The best WorldCom could do was to foray into the local exchange business, but that failed."
J.B. Haller, a 1992 Wharton graduate and executive vice president of Current Analysis, an analysis firm headquartered in Virginia, also questioned WorldCom's acquisition strategy, although he admitted that initially the company had good reasons for its deals. "WorldCom purchased MFS and practically became a CLEC (competitive local exchange carrier). That was great. Another merger, Digex, was a high-end hosting play--and that also made sense. It botched the deal to acquire Sprint, however, and the MCI acquisition was a mistake. Ebbers was the king of all deal makers. He liked doing the deal and liked the chase. But the acquisitions didn't integrate well into operations."
Haller added that the MCI acquisition was particularly questionable. "WorldCom had a pretty clear value proposition--selling into the enterprise market, with the UUNET subsidiary being a jewel in the crown."
"WorldCom was associated with the enterprise market, and MCI threw a wrench into the works," Haller said. "Why dilute your message with the long-distance consumer business? Ebbers started out as a guy who focused on low-margin long distance, and then focused on enterprise, and then came back to more familiar space--but the market had changed dramatically around him. There had been major price cuts--practically to the point of commodity pricing--and he was faced with a very different regulatory landscape."
Part of the challenge WorldCom faced in integrating its acquisitions followed from the technical difficulties of making networks work together, Haller said. The company bit off more networks than it could chew, and it couldn't deal with the technical details of making them fit together.
"WorldCom was never able to negotiate all the pieces into one coherent whole," he said. "It took a hit a couple of years ago, for instance, when its frame relay network failed. The company tried to blame it on Lucent, saying it was due to some hardware in the core of the network. That just made WorldCom look worse. The fact of life is, you can't technically integrate so many networks easily."
It didn't do well on the brand management side either, Haller said. "Even after the acquisition, UUNET continued as an entity relatively separate from the WorldCom mother ship. So if you were a large business customer and wanted a particular service from WorldCom, chances are you had to deal with a WorldCom rep, a UUNET rep, and possibly another rep from yet another company." Such a decentralized system, Haller said, didn't make for the best service.
Haller also faults the company's board of directors for not paying attention to how the company was being run.
"Ebbers was the king of all deal makers. He liked doing the deal and liked the chase."
--J.B. Haller, executive vice president, Current Analysis
"WorldCom built an incredibly successful company. It takes a lot of time and resources to build a brand and company image, but it doesn't take a lot of time to knock it down. I'm surprised that the board of WorldCom didn't see this coming sooner. There's this incredibly devalued asset next to all this debt--it should have rung a lot of bells," he said.
Drake Johnstone, a telecommunications analyst at Davenport, believes that WorldCom, like many other companies, also overestimated demand. "There's significant overcapacity in the long-haul network, and there have been sharp price declines in the Internet and data segments. It's difficult for carriers to have positive revenue growth," he said.
Haller doesn't believe WorldCom is doomed, though. "The company still has a lot to offer--frame relay and IP services, for instance--so I think investors have gone from 'irrational exuberance' to irrational pessimism. WorldCom is still recognized in the enterprise space."
Sidgmore, Haller said, should sell off parts of the company. "The company's equity structure can't support that kind of debt. So they have to sell assets. UUNET and Digex probably will go on the market. And they don't need so many networks. I think MCI will be spun off. I don't know whether someone will purchase it--but it has an incredible brand."
Other industry experts believe that Sidgmore--who built UUNET before its acquisition by MFS Communications and WorldCom--may choose to sell WorldCom.
Johnstone, however, thinks that the industry would be better off with some large-scale consolidation and would like to see some telecom companies go under completely. "Despite the well-publicized bankruptcy filings of several firms, they just continue to operate, restructuring their debt under Chapter 11. We need some rationalization in the marketplace," he said.
Johnstone sees regional bell operating companies (RBOCs) as an emerging threat, once demand starts to rise. "In the recent quarter, a lot of corporations scaled back on their commitments to IT services, including telecom services. RBOCs have yet to target the long-haul business market. When they do, that will have a large impact on WorldCom."
Faulhaber agreed that RBOCs will play a larger role. "The margins in this business are getting smaller and smaller. I don't think stand-alone long distance is a viable business anymore. You just can't make money off it. I'm waiting for the regional bell companies to buy out players like MCI, Sprint's long-distance operations, etc. It will probably happen within the next few years."
What will happen next? Sidgmore recently told BusinessWeek that unlike his predecessor, he is indeed willing to sell pieces of WorldCom to avoid bankruptcy proceedings. Whether he will succeed remains to be seen. Time is certainly not on his side.
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