WorldCom was at one time the second-largest long-distance telecommunications corporation in the United States, and its roots were in Mississippi. The corporation imploded in scandal, resulting in prison time for its cofounder.
Why should WorldCom rock the markets? This is the latest in a series of scandals from corporate America. It all started with Enron, which filed for bankruptcy last December. That led to the disintegration of Andersen, one of the world's five biggest accountancy firms.
Since then conglomerate Tyco, telecommunications firm Global Crossing and others have also been hit by questions of financial probity. As one investor put it: "We've got to have something to base our bets on, and if we can't use the accounts all bets are off. Is there a wider problem then? List of Partners vendors. WorldCom was not just the biggest accounting scandal in the history of the United States—it was also one of the biggest bankruptcies of all time. The revelation that telecommunications giant WorldCom had cooked its books came on the heels of the Enron and Tyco frauds, which had rocked the financial markets.
However, the scale of the WorldCom fraud put even them in the shade. WorldCom has become a byword for accounting fraud and a warning to investors that when things seem too good to be true, they just might be.
When the tech boom turned to bust, and companies slashed spending on telecom services and equipment, WorldCom resorted to accounting tricks to maintain the appearance of ever-growing profitability. As a result, Ebbers lost his fortune. In he was convicted of securities fraud and sentenced to 25 years in prison.
This was not a sophisticated fraud. To hide its falling profitability, WorldCom inflated net income and cash flow by recording expenses as investments. WorldCom filed for bankruptcy on July 21, , only a month after its auditor, Arthur Andersen, was convicted of obstruction of justice for shredding documents related to its audit of Enron. This spate of corporate crime led to the Sarbanes-Oxley Act in July , which strengthened disclosure requirements and the penalties for fraudulent accounting.
In the aftermath, WorldCom left a stain on the reputation of accounting firms, investment banks, and credit rating agencies that had never quite been removed. Bernard Ebbers was convicted on nine counts of securities fraud and sentenced to 25 years in prison in On Dec.
Thanks to debtor-in-possession financing from Citigroup, J. Morgan, and G. Capital, the company would survive as a going concern when it emerged from bankruptcy in as MCI—a telecom company WorldCom had acquired in However, tens of thousands of workers lost their jobs.
By MCI was in financial trouble. Just months away from opening its nationwide microwave network, the company defaulted on its line of bank credit and was on the verge of collapse. Also in Microwave Communications, Inc. McGowan understood the FCC's commitment to the survival of competition. To ensure MCI's preservation he worked quickly to enter the more profitable markets, capitalizing on the FCC's support.
Such lines connect a single customer in one city to another city, in which any number can be reached. Even though MCI had succeeded in enlarging its markets by winning approval to provide FX services, the company had yet to make a profit. If the company was successful it could become a wealthy corporation, but if it failed, MCI faced the possibility of bankruptcy.
In V. Orville Wright joined MCI. Wright soon became president. The breakthrough Execunet victory saved MCI from possible financial collapse. As a full-scale competitor in the lucrative long distance market, MCI saw its revenues increase sharply.
The Execunet victory also opened the long distance market to other small firms. Few, however, could afford to expend the enormous sums needed to build and maintain their own network facilities. MCI's successful crusade for deregulation and divestiture, however, placed the company under financial strain in the immediate aftermath of the Bell System's breakup in MCI's profit margins collapsed as it was compelled to reduce rates.
Higher access charges also squeezed the company. Once the local Bell operating companies were divested, MCI's artificial cost advantage disappeared. Also in , in need of capital to expand MCI's national network and to finance an aggressive marketing campaign to win new long distance customers, McGowan struck a deal with IBM, which bought 18 percent of MCI for cash with the option to expand its holdings later up to 30 percent.
The following year, MCI called for the removal of all remaining regulatory restraints. The odd alliance was created by the companies' shared perception that deregulation would enable both to improve their financial outlook by increasing rates. MCI was involved early on in what would later be dubbed the Internet. Five years later the National Science Foundation Network NSFNet was launched; constructed by MCI, this ultra-high-speed digital network linked a number of academic computer centers and became the "backbone" of the Internet.
Meantime, in V. Orville Wright retired as president of MCI, but continued to serve as vice-chairman until He was replaced as president by Bert C. Roberts Jr. The company's communications services included domestic and international long distance telephone service, international record communications services between the United States and more than countries, and a domestic and international time-sensitive electronic mail service.
Long distance telephone service accounted for 90 percent of MCI's total revenues in The company had bolstered its position in domestic and international markets through a series of investments, including acquisition of Satellite Business Systems, RCA Global Communications, Inc.
With the acquisitions, MCI had approximately a 16 percent share of the domestic long distance market. In March the company announced that it had acquired Overseas Telecommunications, Inc. Consequently, in the second half of MCI market share dropped to 13 percent. In December , the same month that MCI completed the conversion of its entire nationwide network from analog to digital transmission, president and COO Roberts was named to the additional post of CEO, with McGowan remaining chairman.
McGowan, a heart transplant recipient in , died of a heart attack the following June, at the age of Roberts was named to succeed him as chairman, retaining the CEO post as well.
While the company focused almost exclusively on the long distance market when McGowan was in charge, MCI under Roberts's leadership began diversifying in anticipation of both the further deregulation of the U. In September MCI entered into an alliance with Canadian long distance firm Stentor to create the first fully integrated digital network linking the United States and Canada.
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