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WorldCom Keeps $450M Defense DealWorldCom Keeps $450M Defense Deal

US General Accounting Office dismisses protests about WorldCom's defense contract

October 11, 2002

3 Min Read
WorldCom Keeps $450M Defense Deal

The General Accounting Office (GAO) this week dismissed protests by Global Crossing Holdings Ltd. and Sprint Corp. (NYSE: FON) regarding a big defense contract given to WorldCom Inc. (OTC: WCOEQ) before the carrier filed for bankruptcy. At issue was whether WorldCom's contract would be stripped when the government discovered it was given false data when it checked the carrier's financial stability.

The answer? Apparently not.

The disputed contract is a 10-year, $450 million deal to work on the Department of Defense's (DOD) Defense Research and Engineering Network (DREN). The DREN connects more than 6,000 DOD scientists and engineers across the U.S.

The deal's minimum guarantee was $6 million. In April, WorldCom announced that an estimated $70 million in orders would come during a three-year base period, with a $450 million maximum possible during the contract's life.

Global Crossing and Sprint wanted the GAO to take back the contract award, alleging the contract was awarded based on bogus financial information (see DOD: Global Crossing Never Had Deal). Interestingly, the GAO and the Department of Defense (DOD) had two different responses to the losing carriers' gripes.

Arguing that the telecom industry is in turmoil, the contract-awarding DOD unit responded that "the restatement of WorldCom's financial statements does not compare unfavorably with other telecommunications firms," according to the GAO's October 8 decision. Not a surprising response, consider the DOD has defended WorldCom in the past, even while the carrier's financial scandal was unfolding (see US Government: Defending WorldCom? ).

The GAO, however, conceded that the DOD "relied on grossly inaccurate financial information in making a determination that WorldCom was a responsible contractor." But even though WorldCom's financial statements were inaccurate, the government didn't know about the fudged numbers until after it gave WorldCom the contract. So, because the government acted in good faith, the GAO dismissed the Global Crossing and Sprint protests.

[Ed. note: This is good gummint logic. As our Commander in Chief recently put it, "Fool me once, shame on... shame on you. Fool me... uh... You can't get fooled again!"]

Of course, this is only the latest development in the DREN contract, a deal that's been passed around more than a whiskey flask at a Methodist wedding.

Some background: In August 2001, Global Crossing was notified that the DREN contract it won in July 2001 was being put back up for bid following a slew of carrier protests (see Global Crossing Goes to War).

During the rebidding, the government conducted a pre-award survey of Global Crossing's finances and found them to be "satisfactory." On January 14, 2002, the government told Global Crossing that it would get the contract. Later that month, however, Global Crossing asked the government to wait before awarding the contract because it was about to uncork some disastrous financial news (see Global Crossing DOD Contract Hits Snag).

After Global Crossing filed for bankruptcy, the government agency involved did another survey of the carrier's finances and, on April 4, the contract was given to WorldCom, the next carrier in line (see WorldCom Wins DoD Deal). Since then, Global Crossing and Sprint have been protesting the government's choice to use WorldCom for the DREN contract. These protests were the ones dismissed this week by the GAO.

In its written decision, the GAO used lawyerly terms to basically state that since the government showed good faith and since WorldCom's finances were being investigated by other government agencies, it has decided not to "get ahead" of the process.

Global Crossing, naturally, is not thrilled with the news. "We are disappointed by the GAO's failure to recommend termination of the [DREN contract] awarded to WorldCom," says a spokesperson for the firm.

"The contract was originally awarded to Global Crossing on the merits of our technologically superior, cost-effective solution. We continue to maintain that our financial stability is superior to that of the awardee.

"We are reviewing the decision and evaluating the possibility for further action on our part."

— Phil Harvey, Senior Editor, Light Reading

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