Worldcom

WorldCom1
By Dennis Moberg (Santa Clara University) and Edward Romar (University of Massachusetts-Boston)
An update for this case is available.
2002 saw an unprecedented number of corporate scandals: Enron, Tyco, Global Crossing. In many ways, WorldCom is just another case of failed corporate governance, accounting abuses, and outright greed. But none of these other companies had seniorexecutives as colorful and likable as Bernie Ebbers. A Canadian by birth, the 6 foot, 3 inch former basketball coach and Sunday School teacher emerged from the collapse of WorldCom not only broke but with a personal net worth as a negative nine-digit number.2 No palace in a gated community, no stable of racehorses or multi-million dollar yacht to show for the telecommunications giant he created. Onlydebts and red ink--results some consider inevitable given his unflagging enthusiasm and entrepreneurial flair. There is no question that he did some pretty bad stuff, but he really wasn't like the corporate villains of his day: Andy Fastow of Enron, Dennis Koslowski of Tyco, or Gary Winnick of Global Crossing.3
Personally, Bernie is a hard guy not to like. In 1998 when Bernie was in the midst ofacquiring the telecommunications firm MCI, Reverend Jesse Jackson, speaking at an all-black college near WorldCom's Mississippi headquarters, asked how Ebbers could afford $35 billion for MCI but hadn't donated funds to local black students. Businessman LeRoy Walker Jr., was in the audience at Jackson's speech, and afterwards set him straight. Ebbers had given over $1 million plus loads ofinformation technology to that black college. "Bernie Ebbers," Walker reportedly told Jackson, "is my mentor."4 Rev. Jackson was won over, but who wouldn't be by this erstwhile milkman and bar bouncer who serves meals to the homeless at Frank's Famous Biscuits in downtown Jackson, Mississippi, and wears jeans, cowboy boots, and a funky turquoise watch to work.
It was 1983 in a coffee shop inHattiesburg, Mississippi that Mr. Ebbers first helped create the business concept that would become WorldCom. "Who could have thought that a small business in itty bitty Mississippi would one day rival AT&T?" asked an editorial in Jackson, Mississippi's Clarion-Ledger newspaper.5 Bernie's fall-and the company's-was abrupt. In June 1999 with WorldCom's shares trading at $64, he was a billionaire,6 andWorldCom was the darling of the New Economy. By early May of 2002, Ebbers resigned his post as CEO, declaring that he was "1,000 percent convinced in my heart that this is a temporary thing."7 Two months later, in spite of Bernie's unflagging optimism, WorldCom declared itself the largest bankruptcy in American history.8
This case describes three major issues in the fall of WorldCom: thecorporate strategy of growth through acquisition, the use of loans to senior executives, and threats to corporate governance created by chumminess and lack of arm's-length dealing. The case concludes with a brief description of the hero of the case-whistle blower Cynthia Cooper.
The Growth Through Acquisition Merry-Go-Round
From its humble beginnings as an obscure long distance telephone companyWorldCom, through the execution of an aggressive acquisition strategy, evolved into the second-largest long distance telephone company in the United States and one of the largest companies handling worldwide Internet data traffic.9 According to the WorldCom Web site, at its high point, the company
* Provided mission-critical communications services for tens of thousands of businesses around the world* Carried more international voice traffic than any other company
* Carried a significant amount of the world's Internet traffic
* Owned and operated a global IP (Internet Protocol) backbone that provided connectivity in more than 2,600 cities and in more than 100 countries
* Owned and operated 75 data centers�on five continents. [Data centers provide hosting and allocation...