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WorldCom Inc.
Case Analysis I
Pradip N Khandwalla
Former Professor
IIM, Ahmedabad
e-mail: pradipkhandwalla@yahoo.co.in
The October-December
2004 (Vol. 29 No. 4) issue
of Vikalpa had published a
management case titled
WorldCom Inc. by Satish C
Pandey and Pramod Verma.
This issue features five
responses on the case by
Pradip N Khandwalla,
Mukund R Dixit, Rishikesha
T Krishnan, Jayanth R
Varma, and Salma Ahmed
and Ashfaque Khan.
herlock Holmes would find the case of who shot WorldCom interesting. Was
it Bernard Ebbers, the larger than life but greedier than Shylock CEO of
WorldCom? Was it Scott Sullivan, the brash young man making some $20
million a year, hungry for more, and clever as a fox in creative accounting? Was
it the Arthur Andersen audit team that was so very accommodative to the ambitions
of Ebbers and Sullivan? Was it the somnolent board of WorldCom that pampered
Ebbers and for a long time buried its eyes and ears in sand? Was it Saloman Smith
Barney, the investment bankers, and their telecom analyst Jack Grubman, who
appeared to specialize in luring swarms of dumb investors to potentially junk stocks?
Was it Cynthia Cooper and her internal audit team that stood tall and talked straight
while others in the company cowered and whispered and thus spoiled the party?
Or, was it the Great American Greed System of making money by manipulating
market valuations that played the Professor Moriarty role in the stalking and shooting
of WorldCom?
I find it fascinating that the American system is so alert after a major corporate
crime has become public knowledge. Then the Securities and Exchange Commission,
committees of the Congress, investor groups, bankers, the media and so forth descend
like vultures on the scene. Until then, the system glorifies high-flying corporate
cowboys! Fortune elevated Ebbers to the top of the list of People to Watch 2001
(in 2003, the irony must have elicited groans from the stakelosers) and Sullivan was
awarded the CFO Excellence Award by the CFO magazine. So long as the wealth
bubble keeps getting bigger, few questions are asked. There is applause for acquisitions and mergers even when some in-depth probing might reveal them to be
reckless or worse; financial acumen is praised as being astute when it is only clever
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propriate human resource management systems, a culture of participative decision-making, staff empowerment, customer care, creativity and innovation, and
ethical conduct; and redefine the mission of WorldCom
as raising the quality of life of the people profitably.
Dozens of corporations around the world have been
turned around by actions like the foregoing. These steps
will build internal and external credibility and could
transform WorldCom from a pariah into an icon of
corporate excellence.
Case Analysis II
Mukund R Dixit
Faculty, Business Policy Area
IIM, Ahmedabad
e-mail: dixit@iimahd.ernet.in
SCHEMA
The maturity of an industry or change in technologies
or regulations open opportunities for new entry. The
new entrants succeed by competing on either price
emergence of discount chains or new product or
service features dot com services or mobile telephony.
They question the existing practices in the industry. As
the incumbent struggles to adapt to the changes, they
innovate and sustain their entry. Not all companies that
enter succeed in sustaining their entry. Failures arise
from their inability to put their internal act together and
deliver what they have promised. The successful sustainer consolidates its position by acquiring the failed
companies or those that want to exit. As it succeeds, it
builds expectations of further success. It expands domestically, internationalizes, and diversifies through
further acquisition. It attracts the attention of venture
capitalists, bankers, equity investors, equipment suppliers, and employment seekers. Customers migrate to it.
Together they form an ecosystem of their own and look
forward to high rewards from their involvement in the
industry.
The promoters and managers of the company become celebrities and win awards from professional
VIKALPA VOLUME 30 NO 2 APRIL - JUNE 2005
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THE SHOCKS
The public pronouncements of Sidgmore on taking charge
indicate that he was either not aware of the accounting
frauds that were happening since 1999 or was trying to
create an illusion. I would like to give the benefit and
say that he was nave and that he was not a part of the
coterie that cooked the accounts. He may have been
involved in the technical and business building aspects
of the company.
The developments between June 20, 2002, when
Cynthia Cooper disclosed her findings of inappropriate
line cost transfer, and July 21, 2002, when WorldCom
filed for protection to allow it to continue operations
shocked all the stakeholders including the regulatory
authorities. The companys own enquiry and investigations by independent agencies indicated an attempt to
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hoodwink the investors and perpetuate a fraud. Underlying the fraud was the fundamental imbalance in the
strategy, resources, and capabilities of the company. The
company had failed to integrate its acquisitions and craft
a sustainable strategy. It had not challenged the assumptions behind the business logic of growth through acquisition in an emerging sector. It had failed to invest
in learning and building management control systems.
When the internet boom went bust and the global demand for telecom services declined, the cracks in the
strategy surfaced. The board believed what was told to
it. When the fraud surfaced, it provided a knee-jerk
response by asking the senior officials to relinquish their
responsibilities. The board did not question the revealed
imbalances in strategy, structure, and processes. Nor did
it question the veracity of the golden handshake for
Ebbers. In a way, the board said, I am not responsible
for this. Catch the accountants and fire them. This was
an attempt to get the first scapegoat and absolve oneself
of the blame.
THE TASKS
Against the shocks and the bankruptcy petition, Sidgmore faces the tasks of determining the true performance of the company, discovering the fundamentals of
the company, facing negative publicity, realigning helpful forces to provide support in divestment, focusing,
and building trust. The strategy of growth through
acquisition is not possible now. As a CEO succeeding
Ebbers, he is in the worst situation. He is required to
keep a bold face and spend his time in answering
questions of commissions of enquiries, analysts, employees, and customers. Where would he have the time
and inclination to review the strategy and its execution?
The only operations that appear to be anchors for
building forward are the MCI operations and the international communications services. The hope, however,
is limited. He is unlikely to find significant support for
any of his moves to clean up and build. The negative
publicity and the image of being with a company that
cooked accounts are likely to drive away the value
conscious customers, investors, and employees. There
are viable options for them in the converging telecom
sector. In view of this, the preferred option for Sidgmore
is to sell free assets, if there are, find buyers for the viable
operations, pay off the debts, and close WorldCom.
Sidgmore can find a job elsewhere.
WORLDCOM INC.
THE LESSONS
The experience of WorldCom makes us recount some
time-honoured lessons in management. When you are
successful, check the sources of success and the assumptions of your business logic. Distinguish between nurtured and conferred sources of advantage. The conferred
sources belong to others and if they are determining the
path of your growth, your path is unsustainable. Do
build at the earliest your own sources of advantage.
Similarly, when there is a discontinuity in your strategy
or the stage of your growth, examine the need to learn
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nies. Even governments that are traditionally pro-business and anti-regulation such as the US government
have felt compelled to tighten control through measures such as the Sarbanes-Oxley Act. The quality of
investigation and high rate of conviction in the US may
ensure a fair degree of compliance with enhanced standards of corporate governance. High profile convictions
and jail terms served by white-collar violators such as
Martha Stewart will also have an impact. Such efforts
to use the legal framework to improve corporate governance will not work in India unless they are backed
up by similar steps to make the detection, investigation,
and conviction of white-collar crimes more effective.
Case Analysis IV
Jayanth R Varma
Faculty, Finance and Accounting
IIM, Ahmedabad
e-mail: jrvarma@iimahd.ernet.in
he case by Pandey and Verma provides a description of the WorldCom debacle focusing on the
organizational and governance aspects of the
situation. In my view, however, these aspects are largely
irrelevant to the challenges that Sidgmore faces in mid2002. What Sidgmore needs to do is to identify the value
in the WorldCom business and take quick steps to extract
that value.
There are four reasons why I make this claim:
Unlike in some of the other high profile corporate
failures of the same time, it is clear that in WorldCom, the problem was confined to the CFO, Scott
Sullivan, the Controller, David Myers, and a few key
subordinates apart from the CEO, Bernard Ebbers.
The reason is that the principal fraud at WorldCom
was a very simple capitalization of line costs masterminded by Sullivan himself. This required just
one accounting entry every quarter at the Head
Office. Therefore, we do not see the kind of allpervasive fraud that is in evidence at Enron, for
example.
The key actors of this fraud Ebbers, Sullivan, and
Myers have all either resigned or been terminated. There is a new CEO and a court appointed
monitor. This has more or less set the governance
right.
The prime responsibility for any further investiga-
tion and governance reforms would fall not on Sidgmore but on the court appointed monitor, Richard
Breeden. For example, some of the board members
may have to go too for their failure to check the
misdeeds of Ebbers and Sullivan but, it is not really
Sidgmores job to fire the board to whom he reports.
The unpleasant task of engineering that would fall
on Breeden.
The company has filed for bankruptcy and emerging out of this bankruptcy is, therefore, a matter of
extreme urgency.
Sidgmores task, therefore, is to identify the businesses of the company that have value and try to salvage
whatever value is possible under the existing difficult
circumstances. The body of the case provides too little
information on the value of the WorldCom businesses
but, it is possible to make some estimates from the
information in the exhibits.
The key step in this is to go back to the merger with
MCI back in 1998. From the Fortune rankings for 1997
(Exhibit 2, Table 3E), we find that MCI was nearly three
times as large as WorldCom in terms of revenues and
employees before the merger. However, MCI was not
very profitable then and the MCI part of the merged
business has not been very profitable since the merger
either as may be seen from the segment results in Exhibit
2 (Table 1). It is clear from the body of the case that the
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Case Analysis V
Salma Ahmed
Faculty,
Faculty of Management Studies and Research
AMU, Aligarh
e-mail: salmaahmed6@rediffmail.com
Ashfaque Khan
Executive, Red Hat India
New Delhi
e-mail: akhan@redhat.com
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WORLDCOM INC.