Finance Summary of the case WorldCom

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Summary of the case
WorldCom, a telecommunication company based in US initially operating in the southern states
of the country with less presence of the then well established telecommunication companies such
as MCI, begun its operation around the year 1984 after breakup of another telephony company
by the name AT&T. With the availability of long distance phones lines due to the breakup,
WorldCom, then operating as LDDS (Long Distance Discount Service), sized the opportunity to
begin the telecommunication business. The young company was however forced to lease
network and phone lines form other entities among them defunct AT&T in order to be able to
provide telecommunication services to its customers. The huge expenditure in leases meant that
the young company struggled to make profits and it soon accumulated $1.5 million in debt. The
company turned into one of its original nine investors, Mr. Bernie Ebbers to run the company
and steer it back to profitability. Mr. Ebbers had been previously employed as Truck driver,
Milkman, basketball teacher and bar bouncer among other jobs that he held. (Kaplan and Kiron,
2007)
Mr. Ebbers steered the young company into profitability through internal growth and acquisition
other small long-distances companies and consolidating the markets they were already serving.
The logic behind growth in acquisition was that the volume of bandwidth determined the cost of
operation. If a company could acquire more bandwidth, then its cost operation will come down
thereby increasing the profit margin an indicator which defines the success of a company. LDDS
continued to make other major acquisitions in the market as a expansion strategy and this paid
off with the company expanding to all other parts of America as well as gaining access to
international markets. In the year 1995, LDDS, merged with Advantage companies, a public
listed company and officially adopted the name WorldCom after shareholder vote. (Kaplan and
Kiron, 2007)

During 1990’s, telecommunication industry went through rapid transformations with
technological advancements and revelation of other markets such as data market beyond its fixed
lines phones. Mr. Ebbers continued with his initial expansion strategy through acquisitions but
faced challenges when WorldCom attempted to acquire Sprint, a transaction denied by US
Justice department. The CEO appeared to have lacked sense of direction after this last merger
attempt was denied. Having invested in long term contracts to acquire phone lines in anticipation
of market expansion in future, WorldCom stated facing problems marinating its good financial
track record it had been enjoying for more than two decades. One of its performance indicators
was Expense – Income ratio (E/R), which was supposed to be kept as low as possible preferably
well below 50% to indicate company’s good performance. But with competition from other
emerging and established companies through price cuts, WorldCom struggled to match its
expense with revenues realized to get a good E/R ratio. The management resorted to two ways to
manipulate the company’s financial records and hide the financial struggle the company was
going through. (Maintaining financial records, 2011) The techniques devised by its Chief financial
Officer to cheat the system were accrual releases and expense capitalization. These two
techniques went on uninterrupted for long time being perpetrated by senior company official lead
by the CEO, MR. Ebbers, up until the discovery was made by the company head of internal audit
MS. Sharon Cooper. Its is clear from the case study that there were systematic attempts to
circumvent the system by the company’s senior management in order to retain good ratings in
the market and business circles while its peers struggled to remain afloat in business. The
company’s board of directors was also inadequately constituted in terms of necessary expertise
to oversee the company’s operations especially on financial reporting and representation. (Kaplan
and Kiron, 2007)