WorldCom Case Study by BVIMIT PGDBM Batch

8/4/2019 WorldCom Case Study by BVIMIT PGDBM Batch

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Business Ethics and

Corporate Governance


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Presented By:

1. Guruprasad Shejwal 33

2. Chandan Mishra 17

3. Kanchan Mourya 184. Siraj Shaikh 30

5. Aishwarya Kadam 10

6. Amruta borgave 03

BVIMIT PGDBM batch

Group Members


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World com was small firm in Mississippi which was incorporated in1983 to resell long distance telecom services

Due to break up of the telecom giant AT& T in 1983 there wereopportunities emerging in telecom market

4 investors including Bernerd decided to take advantage of this new

market opportunity They brought LDDS ( long distance discount services ) with an

objective of reselling AT&T long distance services to small and midsize business

Over a period of time LDDS was renamed as world Com as they

grew through acquisitions and became 2nd largest telecom firm inUS

Due to sudden crash in stock market in 2000 , telecom industry inusa faced major problems like

1. Massive capital investment

2. Excess capacity

WorldCom Brief analysis of case


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World com was severely affected by above problems

World resorted to wrong accounting ( booking expenses as capitalexpenditure ) to show that they were making progress

In 2002 due to losses Ebbers was eased out by Board of Directors and

New CEO jhon Sidgmore was appointed In 2002 co. When co. identified its losses , it recalled debts from creditors

and negotiated compromised deal with its lenders which failed andcompany had to face legal action bankruptcy


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Ignored market conditions or miscalculation of demand it created excesscapacity was created

Adverse Industry conditions

Poor Execution of merger integration

Two Billing programmes were being run simultaneously creating huge

pendency of receivables Bad accounting practices

Relaxed Regulatory Environment WorldCom auditors never challengedthe illegal accounting taking place since 1999

Poor Top Management

What went wrong with WorldCom


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Advantages of an Aggressive Merger Policy

WorldCom achieved its position as a significant player in thetelecommunications industry through the successful completion of 65acquisitions.

Two of these acquisitions were particularly significant. The MFS

Communications acquisition enabled WorldCom to obtain UNet, a majorsupplier of Internet services to business, and MCI Communications gaveWorldCom one of the largest providers of business and consumertelephone service

By 1997, WorldCom's stock had risen from pennies per share to over $60 a

share.Through what appeared to be a prescient and successful businessstrategy at the height of the Internet boom.

As the stock value went up, it was easier for WorldCom to use stock as thevehicle to continue to purchase additional companies. The acquisition of

MFS Communications and MCI Communications were, perhaps, the mostsignificant in the long list of WorldCom acquisitions.

Q1.)What are the advantages and disadvantages of an AggressiveMerger Policy like that at WorldCom


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Senior management made little effort to develop a cooperative mindsetamong the various units of WorldCom.

Inter-unit struggles were allowed to undermine the development of aunified service delivery network.

WorldCom closed three important MCI technical service centers thatcontributed to network maintenance only to open twelve different centersthat, in the words of one engineer, were duplicate and inefficient.

Competitive local exchange carriers (Clercs) were another managerialnightmare. WorldCom purchased a large number of these to provide localservice

Disadvantages


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Poor Top Management:WorldCom's efforts to integrate MCI illustrateseveral areas senior management did not address well. In the first place,Ebbers appeared to be an indifferent executive who "paid scant attention tothe details of operations.

Relaxed Regulatory Environment : was followed as Wall Street Analystdid not manage to detect an dishonesty among WorldCom management.

Unscrupulous Accounting Practices:

To prove to Wall Street that WorldCom was indeed growing because of hisacquisitions, Ebber decided to adjust the accounting, which in turn madethe stock prices more attractive.

Q2) Major Reasons for the quick collapse of WorldCom


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There are times when companies decide to change the numbers of theirprofits on their books in order to make it appear as if they are earning morethan they really are. This is done for a variety of reasons.

There are times when companies decide to change the numbers of their

profits on their books in order to make it appear as if they are earning morethan they really are. This is done for a variety of reasons.

In order to keep his personal financial image looking good, he continuedthe process of accounting fraud both on a professional and a personallevel.


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WorldCom, once the dominant company in the telecommunicationsindustry, was in serious economic trouble.

WorldComs roots stem from a Mississippi telecom company called LDDSwhere Ebbers was CEO. Growing to over 80,000 employees throughmultiple acquisitions of other telecom businesses, WorldCom became the

overwhelming industry leader. He grew annual revenues from $1 million in 1984 to over $17 billion in

1998. However, Ebbers had little regard for long-term plans and avoidedmaking larger strategic decisions as his company accumulated increasingdebt.

Q.3 If you were Bernard Ebbers, what proactive steps you would havetaken to prevent the spectacular downfall of WORLDCOM?


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As WorldCom acquired new companies, its accounting procedures,computer systems, and customer service issues became increasingly morecomplex, and industry experts note that WorldCom struggled to keep upwith the growth.

Company employees who tried to bring initial problems to Ebberss

attention were discouraged, and Ebbers made it clear he only wanted tohear good news.

This avoidance of problems created a company culture that demandedsuccess at all costs. That ultimately included falsifying financial reports.

In an effort to increase revenue, WorldCom reduced the amount of moneyit held in reserve (to cover liabilities for the companies it had acquired) by$2.8 billion and moved this money into the revenue line of its financialstatements.


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That wasn't enough to boost the earnings that Ebbers wanted. In 2000,WorldCom began classifying operating expenses as long-term capitalinvestments. Hiding these expenses in this way gave them another $3.85billion. These newly classified assets were expenses that WorldCom paidto lease phone network lines from other companies to access theirnetworks. They also added a journal entry for $500 million in computerexpenses, but supporting documents for the expenses were never found.

These changes turned WorldCom's losses into profits to the tune of $1.38billion in 2001.

Ebberss refusal to honestly face the harsh economic truth for WorldComwas ultimately highlighted to be a source of WorldComs financial

problems.


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Increase customer base Increase tarrif charges to increase revenue

Decrease the cost which was incurring by finding what are the reasonsbehind falling the revenue


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Mergers and acquisitions refers to the aspect ofcorporate strategy, corporate financeand management dealing with the buying, selling,dividing and combining of different companies and

similar entities that can aid, finance, or help anenterprise grow rapidly in its sector or location oforigin or a new field or new location without creatinga subsidiary, other child entity or using a joint venture.

Following are the issues to be considered before goingahead with merger or acquisition:

A New Entity

Everyone is required to understand that a merger will

Q.4 What are the major issues to be considered before going ahead withacquisition or merger?


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A New Vision

A new entity needs a new vision, or a statement of what the neworganization intends to become.

It is a broad, forward-thinking image that the company must have before itsets out to reach its goals.

It is a concept of what it intends to deliver over time to customers,shareholders and employees.

Within this new vision, each department will not only have its own role,but also must determine how it fits into this new vision and how it will

work with other departments to fulfill this vision.. Determine that Vision

The vision of the new entity might be to become the best newspaper in theUnited States, the fastest package delivery service or the most reliableelectricity provider.

This seem like vague statements, but they are a good way to start. Nowthe company must establish a culture that can deliver that vision.

Discovering the optimal culture can be accomplished by having employeesfrom the acquired company complete a questionnaire or survey


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Surveys can bring to light the organizations strong points, as well as itsdevelopmental needs.

These strong points promote a constructive culture, while thedevelopmental needs hinder a constructive culture by promoting either apassive/defensive or aggressive/defensive culture


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WorldCom was much interested in acquisition To project better performance of company in eyes of shareholders.

Q5. What Motivation could explain the fraudulent accounting atWorldCom


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Unethical things happening in WorldCom were :-

Wrong accounting Procedure was adopted by co. Co. Auditors did not point out accounting lapses

Co. executive were asked to look after properties of acquired co.s ratherthan intergrating

Losses were shown as capital Expenditure

They were running two billing programmes simultaneously because of thistheir receivables increased

Their focus was more on Acquisition then integration

If they had adopted Clear business strategy they might have not faced thissituation of winding up co. instead they might have been leading market co.

in telecom industry .

CONCLUSION


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Documents

WorldCom Case Study by BVIMIT PGDBM Batch