WorldCom Cuts Jobs, Gets Lower Ratings
By closing Wednesday, the company’s stock had fallen nearly 4 percent, to $6.51 a share.
“It’s not as if this is new news,” says Davenport & Company LLC analyst F. Drake Johnstone, pointing out that WorldCom’s share price had already taken a huge hit when the rumors around possible layoffs started circulating. “Most of the telecom companies are experiencing slowing revenues. [WorldCom’s] main concern is free cash flow. They have to keep their costs in line.”
The announcement followed a storm of news reports Wednesday morning (April 3) claiming that the telecom giant might be planning to cut as many as 7,500 jobs, or 10 percent of its staff.
”The [Wall Street] Journal article thought the cuts were larger, as did we,” says Lehman Brothers analyst Blake Bath, who published a note yesterday downgrading WorldCom’s stock. “[The lower number of cuts] shows that maybe the company doesn’t think the market is as bad as we do.”
Lehman downgraded WorldCom from Strong Buy to Market Perform, with a price target of $8 a share.
Rumors of a major round of layoffs at the company, which is the second largest long-distance provider in the U.S., have been circulating since early last week. The company stated yesterday that -- due to a large increase in its cash and cash equivalents, which rose from $1.4 billion on December 31 to $2.2 billion on March 31 -- it would redeem $700 million worth of MCI notes. MCI is a wholly owned subsidiary of WorldCom.
WorldCom has been struggling with high debt levels -- $30 billion at the end of March -- and a 24-point investigation by the Securities and Exchange Commission (SEC). The SEC is looking into, among other things, the company's accounting practices, as well loans it made to CEO Bernie Ebbers (see WorldCom Accounting: What's Up?}. The company said the headcount reduction was a necessary part of its efforts to cut costs and improve its revenue growth.
Says J.B. Hilliard W.L. Lyons Inc. analyst David B. Burks, “Given the weakness of their business, [the fact that] demand for telecom services remains weak... it is not unexpected that they are looking for ways to cut costs.”
WorldCom has also made several other moves to cut costs, Reuters reported yesterday, from halting salary increases and stock option grants for some workers to eliminating free coffee at its offices.
The Clinton, Mississippi-based company said that cuts would be made across the organization, and that employees who lose their jobs will receive severance packages commensurate with their duration of service with WorldCom. It also insists that the MCI group will not be affected by the headcount reduction.
”Ultimately, [WorldCom] will be a smaller company,” Lehman's Bath says. “[But] in my view it will be a survivor of the telecom carnage.”
— Eugénie Larson, Reporter, Light Reading