WorldCom to File for Chapter 11 Protection

Mantour writes: "To everyone's big suprise ;), Worldcom is going for Chapter 11. 'The Chapter 11 filing by WorldCom would follow once high-flying companies like energy trader Enron Corp. and Global Crossing Ltd., which crumbled into bankruptcy amid a crush of accounting investigations by federal regulators.' You can get more info in this Yahoo story" Update: 07/22 12:21 GMT by T : mnordstr points out a CNN report calling this "the largest bankruptcy ever."

Comments

So, Here's the Question

[Fished]

I am a Worldcom employee, and here's my question, that I cannot seem to find an answer to anywhere. What does this mean to employees? I find lots about investors, bankers, and bond-holders, but very little about employees.

Re:So, Here's the Question

[stripes]

What about customers as well?

Assuming they are selling a service at a cost that at least covers current costs (ignoring build out a deployment cost!) then either they will keep running it in chap 11 (they can choose to break contracts without peanilty...so they may decide to stop offering a service if they are not making money on it! they can also decide to renogiate any long term contacts they wish, even if they are profitable)....er where was I? Ah, either they will run it in chap 11 and keep running when/if they re-emerge from bankruptcy, or they will sell it off with the infastructure to some company that wants to keep running it.

If the service is not profitable they may try to raise the price, or sell it off, or discontinue it. This is pretty much the golden opertunity for that sort of thing, so if you are getting a "great deal" on something from them, that might not last.

Re:So, Here's the Question

[stripes]

If somebody had done their calculations right though, deployment costs would not have been a problem in the first place.

Sort of, yes. One problem though is a OC-192 from DC to NY costs the same amount of money whether you have one buy paying you or 85,000 of them. You have to make an assumption about how many people will buy your service so you can estimate how much each on of them has to contribute to the cost of the shared resources. If you guess too low then your prices are too high, and you can't sell enough of the product. If you guess too high you price the product too low and lose money on "each one sold" (but at least you lose less money as more sell!).

With the products WCOM sells, or at least the UUNET part almost all the cost is the backbone (shared!) and emploies (shared!). So the whole price more or less comes down to "how many will we sell". Also when spending in the area takes a downturn it drives you costs up. Which sucks.

Those are all the good reasons not to be able to accurately estimate costs. The bad reasons are they hadn't really had to in the last decade, and never really got in the habit of doing it. So low (or negative) profit products were rescued by high profit ones. In some cases without anyone knowing really. In other cases with people knowing, but it isn't really to your advantage to announce the product you are working on is losing money, now is it? (connect the dots on that on yourself)

Basically you are saying this will shoot their profit level up to where it would have been after all debts had been paid off (or a little higher then where it should have been now if things had been operated properly. . . .)

No, well above that because any capital equipment that wasn't payed for is now free. Any contracts that were the best-possible-price 3 years ago can be re-negotiated now for the new lower prices that fibers "enjoy". Only some of this is just plain being able to adjust prices back to where they should have been! A lot is stuff that really couldn't be done otherwise.

Personally, I am against proceeding on so many fronts that I forget what in the world I have still to pay over from my past battles! WorldCom got into this situation, heck, even giving them the benefit of the doubt that each one of their acquisitions was going to be profitable some day in the future (doubtful. . . .), they ate up so much so fast that now they are about to explode.

Look, this is generic bankruptcy law. It applies to the 2nd largest telcom. It apples to the little bakery down the street form you. It applies to toothpaste makers, and car makers. This isn't a talk about what is being done special because the failure was so huge, it is just what happens to a company that can't pay it's bills, but doesn't want to give up.

I'm not real fond of it myself. I don't know enough economics to tell you if it is on the whole a good thing (it does better preserve the bundled value of things then just giving WCOM's assets to it's creditors) or a bad thing. I know the bankruptcy of dot-bomb companies makes things harder on WCOM and other ISPs because they are stuck with debt form their coutmers, so maybe without such laws not as many telcos would be dragged under now. Or maybe they would. (WCOM being a special case as it looks more like book cooking got them here, not ISP debt...but it is kind of hard to tell from what I read in papers, and even when I worked there I never moved in those circles!)

*sighs* Of course I don't see why companies really bother going public, stupid from what I can see. If you don't have the revenue stream coming in already, then you don't need additional funding, you just need a better plan!

Not true. It is just the "I have a great idea, and all I need is $100,000 to make it happen, so I'll get a second morgatage on my house and do it!" writ large. I was at UUNET before it took on cash from the VCs and things were tight. After we took on the money we spent like nobodies business, and were losing money hand over fist (because we had a more expensive backbone that we had customers to pay for for a few years...but there was no real step between 10Mbit-that-blew-dead-goats-if-you-used-more-then- 6Mbits and 45Mbits!). Not long after it went public it was turning a real profit. I doubt it stopped until long after it was bought by WCOM. So the VC-IPO route worked. The merger part didn't so well because very large companies have dis-economies of scale (I do have enough econ to know that!).

Bush really dropped the ball

[evilviper]

So, Bush wanted to American people to think he was doing something about the rashes of corporate corruption. So what does he do? He creates a task force, and doubles the (very small) penalties for this sort of thing.

You know what he should have done... If he had said that this sort of activity will fall under the mob laws, this would stop, and we'd know the president was not corrupt. If that happened, that would mean anyone involved in illegial activity would have full liability. You wouldn't just get 10 years in jail, then get out with all your ill-gotten money in-hand. The feds would be able to take away all your assets to pay off debts. Houses, cars, bank accounts, all taken away.

But then half of congress would end up in jail, and probably Bush himself.

Corperate welfare is BAD

[HanzoSan]

Why should we pay tax dollars to keep a monopoly up and running? I hope the government doesnt step in, the government should never step in to save any company unless its an absolutely vital company such as a food company, or water or electric company where peoples lives are on the line.

Worldcom is a communications company and I hate this corperate welfare shit, we cant get welfare, so why should they?

(Slightly OT) Bush's role in today's economy

[kadehje]

The last paragraph parent post makes what I interpret to be an indirect shot at the current president's economic policies. While this may or may not be the intent of the post, the mindset that I have mentioned is common enough in media reports and ordinary conversation that I feel the need to rant about how I believe President Bush is getting the shaft for a problem he is not primarily responsible for creating.

I can't stand how many people claim that the political blame behind the Enron, WorldCom, and other fradulent companies' downfalls is solely that of President George W. Bush. I find that charge to be along the lines of claiming that Bush's foreign policy failures were the chief reason for last September's terrorist attacks.

As with the terror attacks, there were many causes for the ongoing meltdown of the United States capital market. The factors leading to the sudden bankruptcies of these large companies existed long before the current president moved into the White House, and some existed even before his father lived there. Most important among the causes: the executives themselves that lied about the state of their companies. In at least the Adelphia and WorldCom scenarios, it is pretty clear that blatantly criminal acts took place: they falsely claimed profitability to obtained credit from banks that would not have loaned them money if the banks knew that these companies were in fact losing money hand over fist. These executives should be jailed for AT LEAST 10 years (if they knew that these acts were ruining the company for their own personal benefit, then I would like to see them jailed for life) in addition to making as complete a restitution as possible for bondholders and stockholders.

In addition, the incentives behind this lying about companies' financial statemets has been around since the 1980's, when the "Greed is Good" mantra began to sweep Wall Street. Both in the 1980's (until October 1987) and in the 1990's the booming stock market encouraged companies to do whatever was necessary to boost their stock price. Also, especially in the 90s, the ridiculous growth of executive pay, primarily in the form of stock and stock options, gave executives a personal incentive to boost their share prices as soon as possible. Boards of directors, who also largely paid themselves in stock, turned their backs on their obstensible duties to protect shareholders' long-term interests to bolster their own short-term interests.

There were many economists who railed against these conflicts of interest and urged the SEC and Congress to pass new regulations regarding the nature of executive pay and how publicly traded companies were to be governed. But, with the economy appearing to continue to grow robustly, the federal government saw no need to rock the boat. Hell, stock prices grew substantially for 16 of the 18 years between 1982 and 1999 (IIRC, 87 and 90 were the only two down years for the Dow Jones average in that time), so The Market couldn't be wrong, right?

Presidents Reagan and Clinton essentially got a free pass for the way they allegedly handled the economy. All they really did was continue the charade of passing off a modestly growing economy as a tremendously growing economy and let their successors worry about it when it comes to reconcile Wall Street's figures with Main Street's. In addition to coming in at the end of a business cycle, both Bushes suffered tremendous external shocks that hurt the U.S. economy: the Iraqi invasion of Kuwait in 1990 that caused oil prices to double plagued the first Bush's economy; the hijackings gave the current economy a significant body blow. Neither President can be accurately blamed for these problems.

Am I claiming that the current president or his father is infallible? Absolutely not. But using him as a scapegoat for problems that have infected the entire public and private sectors does a disservice to the president and leads to the political squabbling that will slow down the necessary reforms to the economy. The older Bush was in office for four years; Reagan and Clinton lived in the White House for eight years. GWB has barely been in office for 18 months. Which presidents do you think have had the biggest opportunity to influence economic policy since 1981? And another thing to keep in mind: before he can act, the president often needs the consent of another government body -- Congress.

Before pointing the finger at anyone or anything for a problem like today's business fiascos, one must realize that it's not that simple. If there were one cause, then it would have already been dealt with and confidence would already be on its way back into our stock markets. Our entire financial system needs to be tweaked; if one person or group ends up taking the blame for an entire economy's faults, it will end up being an injustice to everyone in the United States.

Re:It was the fraud, not the clueless business pla

[Zeinfeld]

So after Bush gets into the Whitehouse by promising to run the country like a business we suddenly discover how many of the businesses are being run. So how is this a negative, the corporations didn't start cooking the books on election day.

You asked 'how is this a negative' when really what you are trying to ask is 'how is this his fault'.

The worldcom affair is not Bush's fault, however it is a negative because:

1. Make Bush CEO of USA Inc was his principal campaign theme

2. Bush is implicated in corrupt share deallings the full details of the SEC enquiry have yet to be released, but it is already apparent that Bush had signed a lockup agreement promising not to sell the shares at the time he sold. If Bush knew that the share sale that had caused the lockup had had to be cancelled because of the state of the company he was trading on insider information.

3. Chenney and White The VP and the secretary of state for the army are implicated in major corruption scandals.

4. Bush's hypocrisy a day after failling to accept responsibility for his own actions the president takes it upon himself to call on CEOs to do just that.

5. Fuzzy math was used to justify the Tax cut. The books at Enron and Worldcom were not cooked to half the extent that Bush and Co cooked the budget to get the Tax Cut for his rich friends through.

6. The corrupt corporations were run by Republicans with strong links to senior republicans Kenneth Lay was famously a friend of GWB and lent his corporate jet for his campaign. Worldcom was run by Bernie Ebbers who was one of Trent Lott's principal campaign contributors.

So yes, while Worldcom is not the fault of the President it makes people a lot more aware of his shortcommings and is therefore quite justifiably a negative for him.

Re:Too much debt..

[King Babar]

In other words chap 11 basically lets you strip off all the debt (or a huge percentage of it). It also lets you out of any long term contracts (to buy or sell!) that you didn't like, makes it easier to fire people. Oh, and they can "un lease" a building by taking all their stuff out of it and saying "no, were are not paying" to the landlord.

So "too much debt" is no longer WCOMs problem. It is the problem of banks that loaned money, and supplyers that sent goods on purchase orders.

Companies operating under chapter 11 do enjoy many interesting abilities, but the key aspect of the filing is the re-organization plan, which has to be agreed to by the creditors. This is not always an easy thing to arrange, and at some point creditors (as a group or individually) are allowed to fill their own plans for the reorganization, or request outright liquidation of the firm (chapter 7). Furthermore, Worldcom is or will soon be operating under debtor-in-possession (DIP) financing, which might also place severe restrictions on what they will be allowed to do. This is *not* going to be pleasant for anybody, especially Worldcom. The story at this point is that the company thinks they can use debt service savings to repay the banks (who are first in line) and get the bondholders to take equity, but if I'm a bondholder in this deal, I think I would have to insist that they cancel the existing common stock at the very least, which I curiously have *not* seen mentioned yet. And it's not clear that the bondholders could not do better in an outright liquidation scenario. Plus, there is the amusing prospect of serious litigation and criminal proceedings throughtout... I really don't see how this could go as quickly as the current leadership at Worldcom thinks it will, but maybe they really do have all their ducks lined up this time. We shall see.