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Ailing WorldCom Puts Sidgmore To The Test

Sep 3, 2002 | The Washington Post

Internal accountants question numbers, an investigation ensues and the chief financial officer resigns. John W. Sidgmore, as head of the company, has to deal with concerns about how revenue was booked.

It's not WorldCom Inc., and it's not now. It's another company -- CSC Intelicom -- back in the early 1990s.

Sidgmore weathered the troubles there and went on to high-profile posts at other technology companies, eventually reaching his current position of chief executive of embattled telecommunications giant WorldCom.

But debate inside WorldCom is beginning to focus on whether Sidgmore is the man to lead the company through bankruptcy. His long technology career in the Washington area shows successes at leading companies -- and challenges that proved too much for him to surmount.

"I've been lucky, and I've been challenged, and I've persevered," Sidgmore said during a recent series of interviews.

WorldCom, which is based in Clinton, Miss., but has thousands of employees in the Washington area, filed for bankruptcy protection from its creditors in July and has acknowledged improperly accounting for $7.65 billion in expenditures. Recently, sources familiar with the company said two WorldCom board members have urged other directors and creditors to pressure the company to fire Sidgmore. According to the sources, the two board members said Sidgmore's vision for saving WorldCom is flawed and that the company should instead focus on finding potential buyers.

Sidgmore, 51, took over at WorldCom after the board pushed out longtime chief executive Bernard J. Ebbers. Since the accounting scandal broke, Sidgmore has been the public face of the company as it finds itself the subject of congressional hearings and criminal investigations.

Before his ascension, Sidgmore served as vice chairman at the company, where by his own account he withdrew from most day-to-day involvement after having a falling-out with Ebbers about WorldCom's aborted deal to buy wireless carrier Nextel Communications Inc. in 1999.

Sidgmore arrived at WorldCom after it purchased the parent company of Internet provider UUNet Technologies Inc. After helping build UUNet into an Internet powerhouse, Sidgmore was considered by many to be one of the most successful technology entrepreneurs in the country, a visionary and a brilliant dealmaker. His supporters regarded him as a business white knight, a manager who could turn around the most troubled company.

Sidgmore started his management career at General Electric Co.'s information services unit, GE Information Services Inc. He worked at GE for 14 years, rising through the ranks from salesman to general manager in charge of North American sales and services.

"He was a highly touted guy at GE," said Peter Barris, who worked with Sidgmore there and is now managing partner of New Enterprises Associates, one of the largest venture capital firms in the country. "He was a standout player who always delivered results and exceeded his targets. He was promoted up the ranks."

From GE, Sidgmore went to a private telecommunications software company in Bethesda first called Telic Corp. and then Intelicom Solutions Corp.

Intelicom Solutions sold software to telephone companies including MCI, AT&T Corp. and Bell Atlantic (now Verizon Communications Inc.) for printing bills and dispatching workers, among other services. In 1991, Sidgmore helped negotiate the sale of the company to Computer Sciences Corp. of El Segundo, Calif.

Computer Sciences -- a multibillion-dollar public company that sells consulting and information technology services to the government and industry -- bought Intelicom Solutions to expand into the telecommunications software market. But it wasn't long before officials there began worrying about the business prospects for the newly renamed CSC Intelicom.

"The business wasn't going the way CSC thought it should be," said one former high-level Intelicom executive. "It was headed south."

Auditors at the head office began to question numbers reported to them by the company's chief financial officer, Don Clarke, according to three sources who were part of the company's management at the time. Clarke, promoted to CFO by Sidgmore after acting as the company's controller, reported directly to Sidgmore and worked closely with him.

The sources said revenue was recognized at the unit -- and entered on the balance sheets -- before the money had come into the company. They said that in some instances, revenue from deals based on letters of intent was booked before the clients had signed contracts. Revenue for maintenance and service contracts was being recognized upfront rather than over the length of the contract, the sources said.

Expenses also were spread out over longer periods or allocated to various contracts, making the company look more profitable than it was, the sources said.

The accounting practices added tens of millions of dollars to Intelicom's bottom line over a period of about 2 1/2 years, according to a high-level source at the company who had access to company balance sheets.

"There's no doubt that they were very, very aggressively massaging the numbers," said another former company executive. One executive called CSC's confidential hotline to report possible accounting irregularities.

In summer 1994, Clarke was pushed out because of the alleged accounting problems, according to the sources who worked in management.

But Clarke said in a recent interview that he resigned and that the company's auditors had approved CSC Intelicom's books.

Sidgmore said Clarke "wanted out because he was under fire from the company because they didn't like the way he managed the cash situation."

"But there was absolutely nothing wrong with it," Sidgmore said. "The way we booked revenue was the way most software companies did it at the time. It just wasn't the way they did it."

Sidgmore said revenue was occasionally booked on letters of intent but insisted those letters were legally binding. "Several audits were done by the head office, and we walked away clean," Sidgmore said.

Edward Soule, a professor of corporate ethics at Georgetown University, said letters of intent are not legally binding in any business. "There's no justification for treating a letter of intent as a sale," Soule said. "If all you have is a letter of intent, you don't have a sale."

CSC declined to comment on Clarke's or Sidgmore's tenure at the company or on the performance of CSC Intelicom. CSC ended up selling most of the unit within just a few years of purchasing it, laying off hundreds of people in the process.

Kevin Haggerty, who replaced Clarke as chief financial officer, said the division was shut down because "the software just wasn't selling. Those products were failing in the marketplace."

Sidgmore said he thought CSC just "didn't want to be in the software business."

Sidgmore left CSC soon after Clarke's departure in 1994, taking over at UUNet, one of the nation's first commercial Internet providers. At the time, the company had $6 million in revenue. Under Sidgmore, annual revenue there would grow to about $4 billion a year. UUNet staged a successful initial public offering on the Nasdaq Stock Market in May 1995, when the opening share price soared from $14 to $22.75.

During his UUNet days, Sidgmore showed his dealmaking savvy, persuading MFS Communications Co. to buy UUNet for $2 billion and then having a hand in WorldCom's $14 billion purchase of MFS.

He also helped engineer a deal that gave Microsoft Corp. a 15 percent stake in UUNet, attracting a critical $12 million investment from the software giant and $100 million a year to pay for UUNet's networking gear. "He was a total success at UUNet," said Barris, who recruited Sidgmore to UUNet after having worked with him at GE.

"He walked into a situation that was a great opportunity, where there was a great market emerging. But there are countless other examples of people who had those same opportunities and fouled them up terribly," Barris said. "John deserves a lot of credit for the success of UUNet. He did a masterful job."

Sidgmore may have won kudos for his business maneuvers, but his pronouncement in June 2000 that WorldCom was not profitable shocked investors. "It had the perception of being a spectacular success," said Scott Cleland, chief executive of the Precursor Group, an independent research company. "Operationally, it did carry the most traffic of any carrier. But it was not a success financially."

Sidgmore, described as fiercely loyal to his friends, has often lent a hand to friends' and colleagues' business ventures, raising money, refining business plans and acting as an adviser and mentor.

He advised venture capital firm New Enterprise Associates on communications services and hardware companies to invest in. He helped his former secretary Paula Jagemann launch eCommerce Industries Inc. while he was at WorldCom. He's still the chairman of Vienna-based eCommerce Industries, a large provider of software to the office products industry.

"The company was his brainchild," Jagemann said. "Everyone wants John on their board, to participate as an adviser, even just as a sounding board."

In September 2000, MicroStrategy Inc. chief executive Michael Saylor asked Sidgmore, who already served on MicroStrategy's board of directors, to help turn around a troubled division called Strategy.com. It proved to be an insurmountable challenge.

Investors at the time were shunning Strategy.com, a service that delivered news and information to individuals' computers and handheld devices. The dot-com boom had turned into a bust, and MicroStrategy was still wrestling with its own accounting troubles.

Only a few months earlier, the company was forced to restate inflated financial results for 1997, 1998 and 1999. It settled civil charges by the Securities and Exchange Commission for $11 million and class-action lawsuits filed by shareholders for about $55 million.

"It was really a coup to get someone like Sidgmore to sign on to Strategy.com," said Mark Bisnow, a former MicroStrategy executive. "We thought we could bathe in his reflected glory."

Nick Weir, president and CEO of Strategy.com, said Sidgmore did try to save the company.

"He was very instrumental in the company obtaining financing of $52 million from outside investors," Weir said. "He was very generous of his time, considering all the other commitments he had. But we were fighting a very, very tough current. It was the time that the entire Internet bubble burst."

A few days after the Sept. 11 terrorist attacks, Strategy.com was quietly shut down.

"My recommendation was to kill the business rather than waste any more money," Sidgmore said. "The money I raised wasn't nearly enough."


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