MCI Settlement: Too Little?
Late Monday, the court OK'd the SEC's proposal, made last week, to add $250 million worth of new company shares to the $500 million the carrier has agreed to pay investors as part of the resolution of the agency's fraud case against WorldCom (see MCI to Pay Record Settlement and MCI Settlement: What's Next?).
The change would bring the carrier's total penalty to $2.25 billion from $1.51 billion, though the amount MCI's agreed to pay ($500 million) remains the same.
According to MCI's press release, Judge Jed S. Rakoff praised MCI in his ruling, saying: "The Court is aware of no large company accused of fraud that has so completely divorced itself from the misdeeds of the immediate past and undertaken such extraordinary steps to prevent such misdeeds in the future."
Rakoff's approval took place as part of the civil action taken against MCI by the SEC; the revised compensation plan must still be approved by the bankruptcy court overseeing WorldCom's restructuring. No information on a hearing date was available at press time.
The compensation will be paid by an agent of the court when MCI emerges from bankruptcy, which MCI has said will happen this fall. The carrier's re-emergence plan calls for a cancellation of up to 80 percent of its debt via a package deal in which creditors get a fixed amount for what they're owed. WorldCom says the plan has the nod from an overwhelming majority of the bondholders (see WorldCom Plans Re-Emergence). The plan is set to be reviewed by the bankruptcy court from August 25 through 29.
MCI seems proud of the ruling. "We have committed to being a role model of corporate governance and the significant changes we have already implemented are a testament to that commitment," said CEO Michael D. Capellas in the press release.
Others aren't so positive. "We're happy to have anything, of course... This solution is great for bondholders and management, but it's a virtual disaster for everyone else in the world," says Neal Nelson, head of WorldCom/MCI Stockholders, a grassroots group opposed to the present terms of MCI's bankruptcy proceedings. "WorldCom's stock value [prior to Chapter 11] was $100 billion. If that were $100, the settlement would equate to about twenty-five cents."
Like others who've objected to the MCI reorg plan, Nelson says the biggest risk is to have MCI "running around with $3 billion in debt," when competitors such as AT&T Corp. (NYSE: T) and Sprint Corp. (NYSE: FON) remain hampered by debt in the double-digit billions. The situation could hatch price wars and other unpleasant repercussions, he says.
Nelson's group has launched an online campaign for user pledges to boycott the carrier after its emergence from bankrupcty, in support of the group's view that equity representation is missing from the current plan (see W'com Shareholders Protest New MCI and MCI Holders Ask Sprinters to Boycott). So far, the group claims to have gotten over 18,000 responses to its request.
An MCI spokeswoman says a boycott would only serve to punish the hardworking employees who weren't guilty of any wrongdoing and have suffered enough for the deeds of a few.
Another source says MCI's terms of compensation, old and revised, won't please all, but MCI's re-emergence is inevitable. "MCI has a choice," writes Jeff Kagan, an independent analyst, in an email today. "They can either use their new, lower cost, debt free position to be more profitable, or they can use it to compete on price."
Kagan, for one, thinks MCI will act cooperatively. As the world moves from a per-minute, single-service world to a world of integrated, bundled services, he sees MCI sending signals that it wants to advance that model, rather than isolate itself.
— Mary Jander, Senior Editor, Light Reading