WorldCom files for bankruptcy protection

Petition for Chapter 11 largest case in U.S. history

`We will emerge ... stronger'

MCI parent had disguised $3.8 billion in expenses

July 22, 2002|By NEW YORK TIMES NEWS SERVICE

WorldCom, suffering from the rapid erosion of its profits and an accounting scandal that created billions in illusory earnings, submitted the largest bankruptcy filing in U.S. history last night.

The bankruptcy is expected to rattle a shaky telecommunications industry, but it is unlikely to immediately affect its customers, including the 20 million users of its MCI long-distance service.

The WorldCom filing listed more than $107 billion in assets, far surpassing those of Enron, which filed in December. It had been expected since WorldCom disclosed late last month that it had disguised more than $3.8 billion in expenses.

Few experts expect WorldCom's service to deteriorate noticeably, at least in the near future. But industry consultants said they could not imagine how the additional layoffs and belt-tightening expected in bankruptcy would improve service that is in some respects sloppy.

The collapse of WorldCom is sure to reverberate throughout the jittery financial markets and the wider economy, with banks, suppliers and other telephone companies devising strategies to contain their exposure.

WorldCom, built through rapid acquisitions, accumulated $41 billion in debts. Founded in 1983 as LDDS Communications, it became the United States' second-largest long-distance company and the largest handler of Internet data.

Company executives said they intended to remain in business and have received new financing from banks to do so. "We are going to aggressively go forward and restructure our operations," John W. Sidgmore, WorldCom's chief executive, said in an interview last night. "I think ultimately we will emerge as a stronger company."

Although WorldCom has cut its work force significantly, Sidgmore said last night that he did not expect further layoffs for the time being. He said he would remain WorldCom's chief but would be joined by a chief restructuring officer brought in by creditors.

Some creditors, however, have questioned whether Sidgmore, who has served on WorldCom's board for several years, should remain in charge. Sidgmore took over as chief executive in late April after WorldCom's board ousted Bernard J. Ebbers, one of the company's founders.

Shareholders - who owned what was once one of the world's most valuable companies, worth more than $100 billion at its peak - are likely to be virtually wiped out. With the bankruptcy filing, control passes instead to the banks and bondholders who financed WorldCom's growth.

Besides its own overambitious strategies and flawed accounting, WorldCom also fell victim to a broad glut of telecommunications capacity. Cheap and plentiful financing allowed companies to rapidly build transcontinental and transoceanic fiber-optic networks in the 1990s. The glut resulted in lower prices for WorldCom's services, which include basic telephone service and the transmission of Internet data for large companies.

Sidgmore said last night that he was against breaking up WorldCom and selling its pieces, aside from efforts under way to sell peripheral units like businesses in Latin America and some other operations. This approach would rule out selling MCI or UUNet, a large Internet backbone operation.

But once the company reorganizes and investors gain a better understanding of its twisted finances, it could be an attractive acquisition target, analysts say.

WorldCom's crisis deepened last month when its board disclosed that Scott D. Sullivan, the former chief financial officer, had devised a strategy that improperly accounted for more than $3.8 billion of expenses.

Sullivan was fired by the board, and David F. Myers, the financial controller, resigned. The Securities and Exchange Commission has charged WorldCom with fraud. The Department of Justice is also investigating WorldCom's business practices, and WorldCom is conducting an internal investigation.

WorldCom filed for bankruptcy shortly before 9 p.m. yesterday at the U.S. District Court for the Southern District of New York. Its international operations, which include companies in Brazil and Mexico, were not included.

The filing will relieve WorldCom of about $2 billion of interest payments in the coming year. Lower debt costs could allow WorldCom to compete on a stronger footing with its rivals, a price-cutting possibility that has analysts concerned about the wider strength of the telecommunications industry.

"WorldCom probably won't get any new big contracts from its current customers, but it probably won't lose any either because of the difficulty and complexity involved in switching carriers," said Glen Macdonald, a vice president with Adventis, a consulting firm in Boston.

WorldCom, which is based in Clinton, Miss., scrambled in recent days to secure new financing from its banks after its cash dwindled from more than $2 billion in May to less than $300 million.

As part of the bankruptcy filing, WorldCom announced that it had received up to $2 billion from a handful of banks. Such new loans to companies in bankruptcy receive top priority in repayment.

WorldCom must now deal with holders of $28 billion in bonds, as well as 27 banks that lent the company $2.65 billion in May.

But compared with other companies that have recently filed for bankruptcy, including Enron, WorldCom has far more tangible assets, generating real money, lawyers said. This improves the odds that the company can emerge from bankruptcy.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.