WorldCom Fades Into History
Reorganization Complete, Telecom Company Now Becomes MCI Inc.Apr 19, 2004 | Wahington Post WorldCom Inc. is set to end its tumultuous 21-month journey through bankruptcy reorganization tomorrow when it plans to emerge as a new company under a new name, freed of more than $35 billion in debt.
At 6 a.m., WorldCom is to become MCI Inc. The company has been doing business informally under the MCI brand for more than a year.
The Ashburn-based telecommunications giant has been preparing to take on its new identity since July 21, 2002, when it filed for protection from its creditors after revealing the largest accounting fraud in U.S. history.
The new MCI will be much different from the former WorldCom, the nation's second-largest long-distance phone company. It reduced its debt to less than $6 billion from $41 billion. It has trimmed its workforce to about 50,000 people from more than 70,000. It has overhauled it senior management and rid itself of about 100 executives who were implicated directly or indirectly in the $11 billion accounting scandal.
WorldCom chief executive Michael D. Capellas has played a central role in the reorganization, during which creditors and federal authorities praised his ability to steer the company through Chapter 11. But now Capellas must prove he can keep WorldCom competitive in a marketplace where customers expect a variety of offerings, including local, long-distance, wireless and Internet service.
"Nobody is kidding themselves. In the short term it is going to be a tough year," Capellas said.
In the near term, WorldCom plans to focus on its business customers, who account for 80 percent of the company's revenue, offering Internet-based services that allow companies to "put local, long-distance and Internet all on the same network," Capellas said.
For residential customers, Capellas said the company would concentrate on high-density urban areas where WorldCom has established its own networks and does not have to lease lines from other companies.
WorldCom will compete for customers at a time when new rivals, such as cable television companies and Internet phone service providers, are entering the marketplace. Much of the telecommunications industry is engaged in a price war as federal regulators free companies to compete for local, long-distance and other business.
As a result, revenue at WorldCom has plummeted 30 percent even though the company's customer base has remained stable at about 20 million subscribers. In 2002, WorldCom reported revenue of $32 billion. It projects only $21 billion to $22 billion in revenue this year.
"Contracts are being renewed, but every time they get renewed at a lower price," said Patrick J. Comack, an analyst with Guzman & Co. WorldCom is suffering from an industry-wide problem, he said. "AT&T is feeling the same kind of pain."
WorldCom's top sales executive, Wayne E. Huyard, doesn't think prices will go up anytime soon. "I'm not sure when it will stabilize. I really don't see much change in that in the near future," Huyard said.
During the relatively short time WorldCom has been in Chapter 11, the industry has shifted to a new economic model, based on offering customers a package of services that can include local, long-distance, wireless and Internet service.
Capellas is trying to reposition the company to offer such a package. It could be difficult. WorldCom sold its money-losing wireless division more than a year ago. Now one of Capellas's biggest priorities is to find a new partner in the mobile-phone business. "Doing a partnership while you are in bankruptcy is difficult," Capellas said.
The company also continues to market its local phone service known as "The Neighborhood." In the past two years the company has signed up about 3.5 million customers. At the same time, WorldCom hopes to expand its high-speed Internet service, which so far has not been aggressively marketed to residential customers. Both plans depend in part on WorldCom's ability to rent lines from local telephone companies to reach residential customers. Federal regulations once dictated the terms of those leasing arrangements, but a federal court recently threw out the rules and the Federal Communications Commission has not said whether it will appeal the decision.
"We are going to have to determine which way the regulatory wind blows," Capellas said.
With revenue shrinking or remaining flat, Capellas has said that keeping costs in check will continue to be a daily priority. The Chapter 11 reorganization has been expensive. In the past year, lawyers, accountants and consultants have billed the company for $800 million.
The company has no current plan to further reduce its workforce, Capellas said, but he did not rule out future layoffs. As part of its corporate restructuring, Capellas moved WorldCom's headquarters from Clinton, Miss., to the company's campus in Ashburn, where it employs more than 4,000 people. WorldCom has 1,000 more employees around the Washington region.
In the near term, the company's single biggest saving has been its ability to cut its interest payments from $2.5 billion a year to just $400 million.
Some analysts were reluctant to discuss WorldCom's prospects because the company has not yet completed its audited financial statements for 2003. Under the Securities and Exchange Commission's rules, the company may emerge from bankruptcy only if it can file complete audited statements within the next 15 days. A WorldCom spokesman said the company is on track to file its 2003 statement this week.
The company has already filed restated financials for 2000 and 2001 with the SEC. It reported a total loss for the two years of $64.5 billion, compared with its previous claim of $10 billion in pretax earnings.
Today lawyers for the company will hole up in conference rooms of its bankruptcy lawyers, Weil Gotshal & Manges LLP. They will work with executives to complete the final bankruptcy paperwork, a process not unlike a real estate closing.
In addition to settling its accounts, the company is scheduled to wire $500 million to the SEC today, partial payment of its $750 million fraud settlement. The SEC is still owed $250 million worth of the new MCI stock.
The company plans to issue 326 million shares of MCI stock. About 300 million shares are to be issued tomorrow, mostly to bondholders. According to the company's reorganization plan, bondholders were paid an average of 36 cents for each dollar of debt. The remaining shares are to go to unsecured creditors, possibly as early as this week.
Under an earlier plan of reorganization, several of the key bondholders, including David J. Matlin of MatlinPatterson Asset Management LLC, planned to sit on the company's board. But they changed their minds after Richard C. Breeden, a court-appointed corporate monitor, argued that as board members they should be required to disclose stock sales up to two weeks before they occur, meaning they would have to publicly tip their hand if they decided to cash in on their investments.