It's been another gruesome week for the folk at WorldCom Inc., with further accusations of misdeeds being flung at the bankrupt carrier.
So, following on from our opening roundup of the trials and tribulations surrounding our favorite multi-named carrier (see The Week at WorldCom), here are the latest developments at WorldCom/MCI/Whatever-it's-called-this-week:
On Monday, the carrier predicted the shortfall in net income it will suffer as a result of its current ban from winning any further U.S. government contracts. (It currently has contracts worth $1 billion a year that are unaffected by the ban). In a filing with the Securities and Exchange Commission (SEC), WorldCom estimated that it would suffer a net income shortfall of $36 million between now and the end of 2005 if the ban is lifted by November 1 this year.
The ban will be lifted if WorldCom demonstrates that it's dealt with the concerns the government has about its internal controls and business ethics.
However, if the ban lasts until July 1, 2004, the impact would be a whole lot greater: an $8 million hit in 2003, $105 million in 2004, and $137 million in 2005, which comes to a whopping net income shortfall of $250 million. The ban could last for anything up to three years.
Verizon claims the call data was somehow stripped of information to make it seem local, and the Wall Street Journal reported that Verizon had supplied investigators with emails sent between WorldCom and DataVon that implicate the two companies. Naturally, all the parties named are denying any involvement in wrongdoings.
The FBI appealed for witnesses as they continued to investigate claims that WorldCom improperly routed calls via Canada, again in an effort to reduce interconnection charges. It seems the Feds haven't got enough people to interview. Either that, or they haven't found anyone yet that can explain least-cost routing in a way they can understand.
Next it was the turn of SBC Communications Inc. (NYSE: SBC) to fling some dirt. It claims it is not being paid the right amount for terminating long-distance calls coming from WorldCom's network, and claims that WorldCom is currently disguising long-distance calls as local.
As if to give itself a breather, WorldCom generated some news of its own by announcing a new president and chief operating officer (see ADC CEO Jumps Ship to MCI). Former AT&T Corp. (NYSE: T)
exec Rick Roscitt, known for his fat wage checks, is checking out from vendor ADC Telecommunications Inc. (Nasdaq: ADCT) to join the carrier from September 1.
It seems we'll have to wait until Roscitt actually checks into his WorldCom desk before any details of golden handshakes/parachutes/showers are revealed. The operator's press release quotes WorldCom CEO Michael Capella as follows: "He [Roscitt] knows our customers and our business and will immediately fit with MCI's new culture -- one focused on customer service, innovation and integrity."
Unhappy bondholders were the next group to have a dig at WorldCom. The dissenting group, which opposes WorldCom's reorganization plans, allege the operator routed $19 billion of revenue through a subsidiary called MCI WorldCom Brands LLC, in an effort to avoid paying state tax. The scheme, apparently devised by management consultancy KPMG, involved the subsidiary, which is licensed in Delaware and pays no state tax, charging other parts of WorldCom millions of dollars to use the company's brands. The result, allegedly, was that billions of dollars of revenue was booked as returns on intellectual property rather than phone service revenues.
After so many accusations, it was nice to see Yankee Group issuing a research note reminding WorldCom's enterprise users that the operator may have been accused of a great deal, but nothing has yet been proven (see Yankee Defends MCI).
Yankee's analysts say the countless allegations against WorldCom could be "little more than a determined effort by MCI's competitors to disrupt its bankruptcy reorganization," and that "at the core of the fraud allegations is the legal practice of least cost routing, which is commonly used by all carriers in the industry including AT&T." How very reasonable!
To close a turbulent week, WorldCom today filed its monthly operating report for June (see MCI Improves Numbers in June). Its revenue crept up slightly month-on-month to $2.075 billion, while its net income was $84 million, compared with $46 million in May. The operator ended June with $4.6 billion in cash, up $400 million from the end of May. "Our customer loyalty remains strong and we are on track to emerge from Chapter 11," stated Bob Blakely, MCI chief financial officer, in the company's press release.
So, how have the week's developments influenced the Big Question of whether MCI/WorldCom/Whatever should be liquidated or resuscitated?
Since last week, the number of people that have taken Light Reading's Research Poll on the topic has risen to 391, from 243. Sentiment appears to be swinging in favor of liquidation. 63 percent of respondents now say this would be the best outcome for the telecom industry as a whole, compared to 58 percent last week.
To take the poll and see the latest results, please click on this link.
— Ray Le Maistre, International Editor, Boardwatch