Telecom industry shaken
• WorldCom's rise and fall (graphic chart)
By Kevin Maney
USA Today
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| WorldCom Inc., which bought MCI Communications and its tower in Denver for $44 billion in 1998, may shed real estate it owns or leases in a bid to survive.
Bloomberg News Service |
"You know, when I first took this job, my wife said I was a moron," says Sidgmore, who became chief executive officer in April when company patriarch Bernie Ebbers was forced out. "I didn't have to work. The only bad things that could happen to me would be I'd either go to jail or have a heart attack, and she was sure both were possible in this job."
Sidgmore has spent the past week trying to soothe bankers, customers and employees, and explaining the disclosure that the telecommunications company improperly accounted for $3.9 billion in costs. The crisis could drive WorldCom, the No. 2 long-distance carrier, into Chapter 11 bankruptcy protection.
Sidgmore has barely slept, and his cell phone is glued to his ear as he dishes out answers. But he can't explain why this happened or why, he says, fired chief financial officer Scott Sullivan fudged the books to make WorldCom's finances look better than they were.
"There is no evidence there was pressure on Scott to do this. It's just odd," Sidgmore says.
But WorldCom's disintegration and Sullivan's alleged actions have a lot to do with the relationship among Sidgmore, Ebbers and Sullivan.
The three once considered themselves the ultimate dealmaking triumvirate as they assembled WorldCom out of more than 60 acquisitions.
As the triumvirate blew apart, so did WorldCom. It turned into a dysfunctional family, full of crossed loyalties and backbiting.
"It's like the culture of the Balkans, where there were lots of nations living close to each other, breathing each others' exhaust, but hating each other," says industry analyst David Isenberg. "It was good on paper, but in practice they never got there."
Sullivan was key to building WorldCom, so as his baby faltered financially, investigators suspect he might have turned to accounting tricks to keep it together. Sullivan could not be reached for interviews.
He was well-respected on Wall Street as a straight-shooting, quick-thinking CFO. He apparently believed he stayed within accepted accounting practices.
"He said that he thought he was right," Sidgmore says.
WorldCom says it improperly "capitalized" expenses, which allowed it to spread costs over many years rather than taking them at once. Doing that made WorldCom appear to be profitable in 2001 and the first quarter of 2002 when it actually lost money.
Oddly, though, the trick WorldCom used was so amateur, it's not likely many others would be tempted to use it, says Carr Conway, a forensic accountant at Dickerson Financial Investigation Group. "If I was a CEO and wanted to finagle the numbers, I'd do something much more sophisticated," he says.
But WorldCom isn't the first telecom to be accused of propping its results by deferring costs. Morgan Stanley on June 21, 2001, criticized Qwest's accounting, including how it capitalized software costs after its merger with US West. Qwest disputed the charges.
Sullivan blamed no one else. "John (Sidgmore) asked Scott if anyone else was involved, and Scott said, 'No,' " says spokeswoman Paula Jagemann, who has been by Sidgmore's side throughout the crisis.
'It was a shell game'
As WorldCom grew from startup to major player, the financial survival mentality that might have driven Sullivan percolated through the company.
Jeffrey Vandeventer went to work for WorldCom in 1998 as a billing and research analyst, investigating complaints from large corporate customers who said they had been overbilled.
Sometimes, he says, customers would complain for a year or two and were owed as much as $300,000 by the time their case reached his desk. WorldCom booked revenue when it came in, Vandeventer says, but when the decision was made to refund the money, he would get calls from management telling him to drag his feet on the paperwork so that it would not show up on the books until the next quarter.
"I was saying, 'How could this place stay in business?' " says Vandeventer, who resigned. "It was a shell game." WorldCom says it will look into the claims.
Meanwhile, WorldCom lost its internal compass. It was never built around telecommunications. WorldCom's core purpose — the one thing it did best — was cut deals. The culture centered on dealmaking, then cutting costs at the acquired companies. Around late 1999, diving stock prices put an end to WorldCom's dealmaking. The next year, regulators squashed its attempted takeover of Sprint.
As the company lost its central reason for being, employees and the various pieces of WorldCom lost their way. The spiral at WorldCom was intertwined with the breakup of the triumvirate.
Sullivan joined Ebbers in 1992 when Ebbers' then-tiny company bought even tinier Advanced Telecommunications, where Sullivan worked as CFO. In 1996, a mushrooming WorldCom bought Internet company UUNet, run by Sidgmore, who had previously been trained as a manager at General Electric.
"We all got along famously at the beginning," Sidgmore says. The three wowed Wall Street and cut ever bigger deals, and in 1998 pulled off a purchase of long-distance company MCI. The group had regular deal sessions, where they looked at anything that fit what they called their "strike zone."
That started to come apart in 1999. Sidgmore wanted to buy wireless phone company Nextel, and had negotiated the deal. One hour before it was to close, Sullivan told Ebbers he didn't like the deal, and Ebbers pulled the plug on it.
"The Nextel deal killed John," Jagemann says. When Ebbers bought Digex without consulting Sidgmore, the relationship turned bitter.
"I think that was the beginning of the end of the company," Sidgmore says. WorldCom broke into fiefdoms.
Then there was the MCI culture. Ezra Cohen says he loved his job as a manager at MCI, but after MCI was acquired by WorldCom, it became "one of the worst companies I ever worked for." WorldCom executives "controlled everything from the top," Cohen says.
He says he once had to submit a $20 pizza receipt to a vice president for approval and had to save receipts for every charge over $5. The company took away office coffee pots to cut costs. (They were later returned.) "You felt that you were an unnecessary expense as an employee," he says.
'Company at risk'
Ebbers' WorldCom loyalists are the dealmakers and cost-cutters, and they're centered in Ebbers' hometown of Clinton, Miss. They wear the same casual clothes and drive the same SUVs.
Sidgmore stepped away from WorldCom's operations for more than two years. Sullivan stayed. When Ebbers was pushed out in April, Sidgmore became CEO. Sidgmore says that when Sullivan admitted last weekend what he'd done, Sidgmore at first was shocked. Jagemann says: "But as it became clearer what happened, it quickly got to the point of, 'Holy crap, he's put the company at risk.' "
