DOD: Global Crossing Never Had Deal
The Defense Information Systems Agency (DISA), a unit of the U.S. Department of Defense (DOD), now says the DOD did not unfairly strip Global Crossing Holdings Ltd. of the contract after the carrier's January bankruptcy. In fact, the agency is now staunchly defending its decision to take the contract from Global Crossing and give it to WorldCom in April.
And, in an interesting glimpse of the government's attempt at market analysis, a federal review of WorldCom says they're doing just fine. A recent report from the DISA to the General Accounting Office (GAO), obtained by Light Reading on Friday, says this:
"WorldCom continues to satisfactorily perform the firm’s government contracts. WorldCom has $1.6 billion in annual revenues from federal, state and local government contracts, including $363 million dollars a year in revenue from DOD, as reported by WorldCom."
The newest information revolves around the arcane bureaucratic and legal details of the contract bidding process. The government agencies involved now say that, contrary to popular belief and public reports, Global Crossing never officially held the contract. And once the contract was awarded to WorldCom, the government's hands were tied, because the law apparently bars a contract being taken away from a company once it is in bankruptcy proceedings. So, legally, whether or not the contract was awarded to Global Crossing in the first place is important.
The DISA "had not yet awarded the contract to any of the [bidding] vendors when Global Crossing filed for bankruptcy" in late January, according to DISA spokeswoman Betsy Flood.
The contract in question is a 10-year deal worth a maximum of $450 million to work on the DOD's Defense Research and Engineering Network (DREN), a network connecting 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 will be issued during the three-year base period, with a $450 million ceiling over the entire ten-year period.
After the contract was issued to WorldCom, Sprint Corp. (NYSE: FON) and Global Crossing filed protests with the GAO.
DISA officials have suggested that the GAO dismiss Global Crossing's and Sprint's protest. In the August 1 report to the GAO obtained by Light Reading, DISA lawyers say WorldCom's financial restatements won't affect the company's management and won't "materially change the company's financial responsibility."
If the DOD had awarded Global Crossing the DREN contract and then withdrawn the contract when Global Crossing filed for bankruptcy, as some suggested, it would have been going against the "automatic stay" injunction that, in bankruptcy law, protects a bankrupt debtor from collection actions. That's significant, because automatic stay is a major part of the rationale for the DOD's sticking with WorldCom, even during that carrier's mounting financial scandal.
DISA says that WorldCom's Chapter 11 filing placed the DREN contract as an asset under federal bankruptcy laws. "Any legal action (i.e., terminations) must go through the Bankruptcy Court because of the 'automatic stay' that prevents adverse contractual actions against petitioners absent court approval," writes Flood in an email to Light Reading.
Given the size of the DREN deal, it's understandable that the losing carriers in the contract bidding were upset when WorldCom won, especially given that WorldCom would go on to file for the largest bankruptcy in U.S. history after admitting it had falsely accounted for at least $3.8 billion in capital costs (see WorldCom Goes Boom). Despite the DISA's recommendation, a final word from the GAO isn't expected until October.
To follow the whole story, though, one has to go back to August 2001, when Global Crossing was initially notified that the DREN contract it won in July 2001 was being put back up for bid following a slew of carrier protests.
During the rebidding, DISA says it awaited a financial evaluation of Global Crossing from the Defense Contract Management Agency (DCMA). In December 2001, the contracting officer, spurred by negative news reports on Global Crossing finances, asked the DCMA to "conduct a pre-award survey" of Global Crossing's financial stability.
The DCMA survey rated Global Crossing's finances as "satisfactory" and, on January 14, 2002, the DISA told Global Crossing that it would get the contract, according to the DISA's Flood. Later that month -- on January 23 -- Global Crossing asked the DISA to wait before awarding the contract because it had some bad news to announce on the financial front.
After Global Crossing filed for bankruptcy, the DCMA did another survey of the carrier's finances and found that its bankruptcy and poor finances "exposes the Government to significant risks in entering into any contracts," according to a statement provided by DISA.
On April 4, DISA awarded the DREN contract to WorldCom, the next carrier in line for the contract.
But how did DCMA miss seeing WorldCom's financial troubles? "DCMA recommended [WorldCom] based on a satisfactory finding of financial responsibility," writes Flood. "The DCMA pre-award survey was based on the same financial assessment used for Global Crossing's latest financial review."
Has the DOD since changed its mind? Apparently not. The report from DISA to the GAO, as mentioned above, defends WorldCom's finances. But that may be a moot point, given the automatic-stay rule.
"Even if Global Crossing were to succeed in its protest allegations, it would not be eligible for award of the contract," the DISA document states.
— Phil Harvey, Senior Editor, Light Reading