WorldCom Files for Bankruptcy
WorldCom Inc. (Nasdaq: WCOME) set another new low for the telecom industry on Sunday evening as it announced that it has filed for Chapter 11 bankruptcy protection (see WorldCom Goes Bankrupt). WorldCom's bankruptcy – the largest in U.S. history – comes nearly a month after the company disclosed it had falsely accounted for nearly $4 billion in expenses.
On a conference call Monday morning, CEO John Sidgmore insisted WorldCom's insolvency will likely have little, if any, impact on the company's customers, since the company will continue to operate as normal.
The sheer size of WorldCom's filing, however, makes other recent bankruptcies seem puny by comparison. Though expected, it's not clear what effect the move will have on the U.S. financial markets, which have lately been rocked by scandals at Xerox Corp. and Merck & Co.
Enron's bankruptcy in late 2001 was the largest in U.S. history at the time it was filed, with some $62.8 billion in reported assets as of September 30, 2001. Now WorldCom takes the title, with a filing that lists $107 billion in assets and more than $65 billion in liabilities.
WorldCom says its non-U.S. subsidiaries are not included in the filing and will continue to operate normally.
WorldCom also announced that it is working to arrange up to $2 billion in financing so it can fund its employee obligations and ongoing operating needs. The company says it has a commitment for $750 million of the $2 billion from Citibank, J.P. Morgan Chase Bank & Co., and General Electric Capital Corp. The facility is subject to approval by the bankruptcy courts. Sidgmore said Monday that WorldCom will probably not need further financing to get through the process, since the filing greatly reduces the company's cash requirements.
WorldCom has been in trouble for several months, but its problems climaxed on June 25 when it announced it had falsely accounted for nearly $4 billion in expenses (see WorldCom Goes Boom). At the beginning of this month, WorldCom began laying off 17,000 workers, about 20 percent of its workforce. On Monday's conference call, Sidgmore said the company has no immediate plans for further layoffs.
As if fudging its financial statements weren't enough, WorldCom has recently been accused by a former employee and Internet traffic experts of also inflating its figures for Internet traffic (see Did WorldCom Puff Up the Internet Too?).
Sidgmore said that it is still unclear how quickly WorldCom will reemerge from the bankruptcy filing, but he expects it will be in the next nine to twelve months. The speed of the process, he said, depends on how quickly the company's new external auditor, KPMG, manages to wade through the company's accounting for the period under investigation. That, he said, should happen by the end of 2002.
Sidgmore remains optimistic about the company's prospects. On Monday's call, he said that Chapter 11 will enable the company to create the greatest possible value for creditors, preserve jobs for its employees, and continue to deliver top-quality service to its customers.
"My hope is that we go through the Chapter 11 process as quickly as possible," he said, "and that we reemerge a stronger company." He also said that he expects the company's spirit of competition to reemerge from the process intact. "I don't think it would be smart for our competitors to relax during this period."
But such optimism doesn't help WorldCom investors, who have lost billions of dollars worth of equity. If the pattern of bankruptcies at companies such as Enron and Global Crossing Holdings Ltd. holds, WorldCom common stockholders are likely to have any remaining stake in the company wiped out. Despite this, some WorldCom investors (or speculators) clung to the last pennies of hope on Monday, with WorldCom Inc. (Nasdaq: WCOME) shares trading up 0.06 (66.67%) at $0.15.
Despite the fact that WorldCom's bankruptcy filing is the largest on record, Sidgmore said it is not unreasonable to expect the company to get through the process quickly. This, he said, is because he expects WorldCom's core business to be kept intact and not liquidated.
WorldCom also announced Sunday it has elected Nicholas Katzenbach and Dennis R. Beresford to its board of directors. Katzenbach was Attorney General of the United States from 1965 to 1966. He was Under Secretary of State for the U.S. from 1966 to 1969.
Beresford is Professor of Accounting at the Terry College of Business, University of Georgia. He served as Chairman of the Financial Accounting Standards Board from 1987 to 1997. Both Beresford and Katzenbach were appointed to a Special Investigative Committee of the WorldCom board to conduct an independent review of the company's accounting practices and the preparation of its financial statements. Sidgmore said Monday that neither have formerly been involved in WorldCom.
J.P. Morgan Trust Company, Mellon Bank, Citibank, and J.P. Morgan Chase are listed as WorldCom's four largest creditors.
— Phil Harvey, Senior Editor, and Eugénie Larson, Reporter, Light Reading