Newborn MCI Firm Still Facing Debt, Lawsuit Problems
Apr. 21–An ugly duckling once called WorldCom that descended into bankruptcy nearly two years ago emerged Tuesday as a reformed and renamed MCI.
But a beautiful swan it is not.
Still, Michael Capellas, the executive widely given kudos for transforming scandal-plagued WorldCom, made his best effort to put a fairytale spin on things.
“When I took this job 16 months ago, I told our 50,000 employees that we’d do all the right things and would make history,” Capellas said during a media briefing. “We don’t view this as the finish line, but the time to start a new race.”
The new MCI, which left WorldCom’s Mississippi headquarters for suburban Virginia, has shed some $35 billion in debt during bankruptcy.
Now MCI carries about $6 billion in debt.
Worldcom filed for Chapter 11 protection in July 2002, shortly after the company disclosed a massive accounting fraud that eventually reached $11 billion in inflated profits.
Five executives, including former chief financial officer Scott Sullivan, have pleaded guilty to federal charges for their role in the accounting scandal. Former CEO Bernard Ebbers has pleaded innocent to charges including conspiracy and securities fraud.
WorldCom shareholders, employees and retirees lost billions due to the fraud and competitors from AT&T Corp. to SBC and Verizon have complained that the firm now emerges with an unfair financial advantage.
Even so, MCI faces several obstacles.
The company’s position as the No. 2 long-distance carrier is not so enviable now that phone companies like SBC and BellSouth offer long distance on top of local offerings. Prices have fallen significantly during MCI’s bankruptcy and continue to do so.
“In the consumer market, bundling products is attracting customers,” said Raul Katz, a vice president with consultant Booz Allen Hamilton. “Carriers find that selling wireless and broadband to customers along with local and long distance is a winning strategy.”
MCI does not have a wireless unit and is at a disadvantage, he said.
Also, a number of civil lawsuits stemming from the fraud continue to dog MCI.
“I’d estimate it will take at least two years for MCI to settle the bulk of the civil suits that it faces,” said Jim Speta, a telecom specialist on the faculty of Northwestern University’s law school.
With its lightened debt load, MCI could make an attractive takeover target for carriers like SBC and Verizon but Speta said the lingering legal problems will probably discourage an acquisition right now.
Capellas, who came to MCI from Hewlett-Packard, intends to focus the company on providing information technology services along with network connectivity.
While that is a smart strategy, it’s also the one pursued by AT&T, Verizon and several other firms, said Speta.
MCI managed to hang onto most of its large commercial and governmental customers. It also has a base of some 3.5 million households that take MCI’s unlimited calling for a flat rate service.
MCI executives have acknowledged their problems, warning the company could see its revenue drop by 10 percent or more this year. Last month it announced plans to lay off 4,000 employees to bring its work force total to about 50,000.
Even if Capellas can cut costs faster than MCI loses revenue, some doubt that his firm faces a long future as an independent operation.
“This is an industry where more consolidation is required,” said Katz of Booz Allen Hamilton. “In two years, once most of the lawsuits are cleared up, MCI will be a prudent takeover target.”
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