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WorldCom's Cost Cuts Will Affect Others

Feb 4, 2003 | USA Today

WorldCom's plan to save $2.5 billion could hurt more than the 5,000 employees who will lose their jobs as the company trims costs in a bid to emerge from bankruptcy protection.

Some of the big cuts outlined Monday by CEO Michael Capellas will force suppliers, landlords and telecom partners to renegotiate contracts with WorldCom at much lower rates. WorldCom says it can reduce its office space by 8.7 million square feet, or 26%, and renegotiate more than 2,600 contracts.

Under bankruptcy laws, WorldCom can reject many contracts with little risk. The supplier would have a hard time collecting damages for breach of contract because of its status as an unsecured creditor, bankruptcy experts say. WorldCom can get better terms, because ''it could hurt the supplier if he loses that customer,'' says Chester Salomon, a partner at bankruptcy law firm Salomon Green & Ostrow.

All told, WorldCom says it can slash its line costs, which primarily include what it spends to use other carriers' networks, by 12.5%, or $1.5 billion. That's triple the cuts Capellas forecast last month. It says its sales, general and administrative costs will drop 13%.

WorldCom's deep cuts underscore just how much damage one company's woes can inflict on others. What's worse, they come as a slow economy already has real estate firms dealing with office vacancies and telecom carriers choking on excess capacity.

But WorldCom has little choice. It is on pace for annual revenue of about $28 billion, which would be down 20% from $35.2 billion in 2001.

While WorldCom has lost business as customers crimp spending, it also has been hurt by its disclosure of $9 billion in improper accounting. Several former employees have pleaded guilty for their roles in the scam. WorldCom has partially settled fraud charges filed by the Securities and Exchange Commission.

Last month, Capellas outlined a 100-day plan to retool the USA's No. 2 long-distance phone company. He plans to file a reorganization plan by mid-April and emerge from Chapter 11 this year. The 100-day plan also entails cost cuts, which were reported Monday by USA TODAY. Cuts include:

* Jobs. The 5,000 job cuts, 8% of its workforce, were a ''difficult decision,'' Capellas says. Key sales, operations and tech employees won't be affected. Customer service won't be harmed, he says. WorldCom cut more than 20,000 jobs last year, but telecom analyst Jeff Kagan says ''this could be the last wave of job cuts unless the marketplace gets worse.''

* Integration. The dozens of acquisitions that created WorldCom also left it with redundant networks and offices. To reduce costs, WorldCom will better integrate various networks and office locations.

* Contracts. WorldCom can get out of or renegotiate contracts with other telecom companies that help carry its long-distance calls. As it stands, WorldCom's line costs are about 50% of its revenue. That's ''a lot higher than what's prevalent now in the industry,'' says Davenport & Co. analyst Drake Johnstone.

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