WorldCom woes cap a collapsing industry

The company's scramble to restate almost $4 billion in accounting errors is the most dramatic failing in an industry that has been collapsing into financial chaos.

John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
John Borland
4 min read
WorldCom's scramble to restate almost $4 billion in accounting errors is the most dramatic comedown in an industry that over the past year has been collapsing into financial chaos.

Just two years ago, telecommunications was a powerhouse industry. Throughout the late 1990s, venture capitalists and banks poured money into companies old and new, as the Internet boom promised seemingly unlimited demand for bandwidth and communications services.

But the painful reality set in with the crash of the Internet economy. Funding dried up, and customers began going out of business in droves. Demand for the telecom companies' new networks vanished, and the giants that had leveraged their growth by borrowing against future earnings found themselves in deeper and deeper trouble.

Today even optimistic analysts are calling for a continuing shakeout. Many of the companies that were superstars are already gone or are struggling through bankruptcy.

Here's a look at how some of the biggest stars have fallen to earth:

WorldCom: Former Chief Executive Bernie Ebbers built an international giant that once exceeded even AT&T's market capitalization, largely by a series of more than 70 acquisitions. Hubris led him to agree to buy rival Sprint, in a deal that would have created a company much closer to Ma Bell's size. That deal was blocked by federal regulators and helped set off a chain of events leading to WorldCom's present state.

As WorldCom's stock plummeted over the past year, revelations of personal loans made to Ebbers shrouded the company in controversy. Analysts questioned the company's ability to make good on massive bond debt coming due over the next few years.

Finally, Ebbers himself resigned in April, leaving John Sidgmore--a former vice president who had come to the company at the head of Internet backbone UUNet--with the unenviable task of righting the ship. News of the nearly $4 billion accounting problem can only increase the difficulty of Sidgmore's job.

AT&T: The biggest of the telecommunications giants, Ma Bell re-created itself as a cable company at the height of the Internet boom. As the economy began heading south, Wall Street questioned the strategy of Chief Executive Officer C. Michael Armstrong.

Ultimately, the ambitious CEO decided to split up the company he had created, spinning off the mobile phone and cable divisions as separate companies. Comcast agreed to buy AT&T's cable division for $72 billion last December.

AT&T is still struggling to rebuild a solid business in an environment where long-distance phone profit margins are razor-thin and the long-distance network business is stagnating.

Global Crossing: One of the scrappy newcomers of the late 1990s, Global Crossing hoped to capture business from AT&T and the other giants, surfing the wave of venture capital and demand for Internet bandwidth.

When the Net bubble collapsed, so did Global Crossing's prospects. The company filed for Chapter 11 bankruptcy protection in January. But the real clouds came with news that it had engaged in network-swapping agreements with some of its peers, along with accusations that the company had improperly accounted for these swaps as revenue.

The company is now being investigated by federal securities regulators and a congressional committee. Earlier this week, it acknowledged that some employees had shredded documents after news of the U.S. Securities and Exchange Commission inquiry was released.

Qwest Communications International: Under the guidance of former AT&T executive Joseph Nacchio, Qwest's ambitions were second to none. It purchased local phone giant US West, giving itself a guaranteed source of revenue and a solid foothold in the telecommunications establishment that no other upstart could match.

That didn't save it from a high-profile meltdown: It is under SEC investigation for accounting practices and has been forced to put its assets up for sale, and the board of directors forced out Nacchio as chief executive last week. The company's stock, hovering around $4.50, has fallen more than 92 percent since its high of almost $58 in July 2000.

The company was criticized roundly for what some shareholders called Nacchio's "outrageous" compensation--$27 million last year, excluding stock options--even as the stock plummeted. The package was more than six times his $4.22 million pay in 2000.

Level 3 Communications: One of the few long-distance networks to avoid complete collapse has turned to software distribution as a way to stay afloat.

The company spent billions of dollars on a 20,000-mile network through much of North America and parts of Europe, reaping the benefits of runaway investment in fiber optics during a late 1990s telecom boom. When demand for its advanced networks dried up, Level 3 was forced to cut staff and scale back expansion plans. Now, through a series of acquisitions, the company has transformed itself into a software company--at least in terms of revenue.

In March, Level 3 completed the purchase of Norwood, Mass.-based CorpSoft for $89 million in cash plus the assumption of $31 million in debt. It then bought Dallas-based software distributor Software Spectrum for $122 million in cash.