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MCI Set to Emerge From Bankruptcy

Apr 20, 2004 | AP

WorldCom Inc. hopes to leave more than just $35 billion in debt behind when it emerges from bankruptcy.

It also hopes to shed its past, dropping its scandal-tainted WorldCom name for the new moniker of MCI and walking away from the $11 billion accounting fraud that led to its bankruptcy filing in July 2002.

While the company's reduced debt load may provide it with a competitive advantage, MCI still faces significant challenges, experts say.

The bankruptcy process has allowed the company to slash its debt from $41 billion to about $6 billion. That will shave $2.1 billion a year off interest payments for a company producing about $21 billion a year in revenue.

But MCI will be emerging on Tuesday into a telecommunications industry that is no less competitive than when WorldCom entered bankruptcy in July 2002. The company's biggest challenge will be to navigate the hypercompetitive pricing pressures in the industry, said Muayyad Al-Chalabi, managing director of telecommunications consulting and research firm RHK.

"The question is, can they reduce their costs enough to match the expected revenue decline?" Al-Chalabi said.

WorldCom has already warned that it expects revenue to drop 10 percent to 12 percent this year, to about $21 billion. It has taken steps to reduce costs, especially through job cuts. Last month the company announced plans to lay off 4,000 workers, reducing its work force to about 50,000 employees.

Another challenge is that, like many companies emerging from bankruptcy, WorldCom's board will be heavily influenced by bondholders who bought up WorldCom's debt at fire-sale prices.

The bondholders' primary interest is often to ensure that they are repaid for their investment as soon as possible, which might not be conducive to fostering a long-term vision at the company.

Al-Chalabi said it is not uncommon for bondholders on the board to "go after cosmetic things. Their focus is more on the short term."

WorldCom's court-appointed monitor, former Securities and Exchange Commission chairman Richard Breeden, has imposed some restrictions on board members to make their process more transparent, including a requirement that directors provide two weeks' notice before selling MCI stock. Two bondholders who would have been on MCI's new board opted against joining because of those restrictions.

Many of the people who contributed to WorldCom's scandal are gone. All the senior executives and board members from the reign of former chief executive Bernard Ebbers are gone. Five executives, including former chief financial officer Scott Sullivan, have pleaded guilty to federal charges for their role in the accounting scandal.

Ebbers has pleaded innocent to charges including conspiracy and securities fraud.

Not only are the executives gone, but the company headquarters have moved from Ebbers' home in Mississippi to Ashburn, Va., in the suburbs of Washington, D.C., where MCI had been based before it was acquired by WorldCom in 1998.

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