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` Long Distance Discount Services (LDDS) began in 1983.

` In 1985 LDDS selected Bernie Ebbers to be its CEO.

` Company name was changed to WorldCom in 1995.

` Telecom industry faced low margins, Ebbers decided growth.

` During the 1990s, the firm made a series of acquisitions.

` Purchased 65 firms

` 2nd largest long-distance operator in 1998 and 2002.


` WorldCom·s share price rose from $20 in 1995 to over $60 per
share.

` On June 25, 2002, WorldCom announced that it had overstated


earnings in 2001.

` WorldCom filed for bankruptcy protection on July 21st.

` On August 8, 2002, the company announced that it had also


manipulated its reserve account.

` The WorldCom bankruptcy is the largest in U.S. history.


Stock Price and Key Acquisitions
w  
Ú Acquired MFS (including internet backbone)

Ú Acquired MCI (more than twice it·s size)³Changed its name to MCI
WorldCom

Ú Ñ Failed merger with Sprint (would have been the largest merger in
history)

Ú Ñ Dotcom Bubble Burst (rapid decline in telecom stock values)

Ú Ñ  ÑWorldCom loans $400M to CEO (Ebbers)

Ú Ñ ÑAccounting Fraud uncovered

Ú Ñ ÑFiled for Bankruptcy Protection

Ú Ñ Emerged from Bankruptcy as MCI

Ú Ñ erizon agrees to acquire the company for $6.75B


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Ú Operating Expenses to Assets
Ú The company had classified over $3.8 billion in payments for line
costs as capital expenditures rather than current expenses.

` From 1998-2000, WorldCom reduced reserve accounts held to


cover liabilities of acquired companies.
Ú WorldCom added $2.8 billion to the revenue line from the
reserves.
]ow the Fraud was discovered
` March 7, 2002 - the SEC requests information from
WorldCom
Ú ]ow could WorldCom make so much when AT&T is
losing money?

` Internal auditor at WorldCom exposed some of the


accounting irregularities apparently intended to deceive
investors.
Bernard Ebbers, CEO

` Borrowed more than $1 billion


from various banks.

` Facing dismissal, he resigned from


WorldCom on April 30, 2002.

` Bernie Ebbers resignation statement:


· 
      
 
 

  

   

Scott Sullivan, CFO
` Served as CFO, treasurer and
secretary.

` Directed staff to make false


accounting entries.

` Personally made false and


misleading public statements
regarding finances.
]    
` Problems with the Company·s Internal Controls

Ú WorldCom was dominated by Ebbers (CEO) and Sullivan


(CFO).

Ú Lack of courage of employees to communicate the fraudulent


activates.

Ú Financial system

Ú BOD did not appear to have had an adequate understanding of


the company.

Ú Inadequate audits

   
` Ebbers was sentenced 25 years imprisonment.

` WorldCom was removed from S&P 500 index.

` The share price fell by over 80%.

` 17000 employees lost their jobs.

` Investors were put into severe loss.

` WorldCom was renamed MCI in 2004 when it emerged from


bankruptcy.

` Michael D. Capellas was appointed as the new Chairman and


CEO of WorldCom.
*   

` prmia.org/pdf/Case_Studies/WorldCom_Case_Study_April_2009.p
df
` http://www.icmrindia.org/casestudies/catalogue/Finance/FINC022.ht
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