• Advanced Telecommunications Corporation (1992), for $850 million
• Metromedia Communications Corporation and Resurgens Communications Group (1993), for $1.25 billion.
• IDB Communications Group (1994), for $936 million.
• Williams Telecommunications Group network services operations (1995), for $2.5 billion.
• MFS Communications Corporation and UUNet Technologies (1996), for $12 billion.
• MCI Communications Corporation (1998) for $34.7 billion.

Other companies acquired by Worldcom include Brooks Fiber, Compuserve Corporation, Advanced Network Services, and Skytel.
In 1999 Worldcom announced a planned $115 billion acquisition of Sprint Corporation, the largest takeover in corporate history. This merger would have created the largest telecom carrier in the country, however it met with antitrust concerns by the federal government and merger plans were eventually dropped.

Accounting Irregularities

In the weeks proceeding Worldcom’s bankruptcy, most press attention focused on the firm’s extraordinary accounting scandal. Worldcom disclosed that it had improperly accounted for billions of dollars in expenses, artificially inflating the firm’s profits over the last several quarters. It is important to remember that this scandal, on its own, did not cause the downfall of the company. Worldcom was already in serious financial trouble before the accounting irregularities were disclosed. But the disclosure necessitated the restatement of several periods’ financial results and made Worldcom immediately in violation of loan covenants to its debtors. This quickly precipitated a bankruptcy filing as the firm scrambled to protect itself from creditors and gain breathing room to work out a restructuring.

Bankruptcy Filing

When Worldcom filed for bankruptcy protection on July 21, 2002, the company listed $103.8 billion in assets, making it, by far, the largest bankruptcy in U.S. corporate history. But Worldcom’s bankruptcy is not an isolated event in the telecommunications industry. It is simply the largest and most visible example of a massive shakeout that has claimed many other telecom firms as victims. According to research by attorney Thomas K. Crowe, 77 telecommunications companies sought bankruptcy protection in 2001, a substantial increase over the 20 telecom firms that filed for bankruptcy in 2000. This trend has continued in 2002 with 17 firms filing for bankruptcy in the first quarter alone.

Worldcom has chosen to file for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Under Chapter 11, Worldcom will be allowed to continue operations and will receive protection from creditor collection efforts while the company forms a reorganization and restructuring plan. This plan must eventually be approved by the bankruptcy court.

When Worldcom filed for bankruptcy, it had revenues of $35 billion per year and debts of $41 billion. The firm was able to secure interim financing of $750 million to meet immediate cash needs and is expected to receive a full $2 billion in debtor-in-possession financing. This money is intended to keep the company afloat while a restructuring plan is completed and approved.

Implications for Worldcom and Other Enterprise Customers

• Service Interruption - Of primary concern to Worldcom customers is the likelihood of major service interruptions as a result of their bankruptcy filing. Although other telecom firms that have filed for bankruptcy have had sometimes abrupt interruptions in service, there are two reasons that a major Worldcom service interruption is unlikely:
  1. The Federal Communications Commission (FCC) realizes that all major carriers rely on one another for service delivery and has stated that it will do everything possible to avoid Worldcom service outages that would have a domino effect in the industry. Major telecommunications networks are very interconnected because carriers routinely purchase capacity from one another. A major Worldcom outage would have severe implications on the entire telecom industry, not just Worldcom customers.
  2. A major outage would have severe revenue and service implications to Worldcom during a time when it can least afford additional financial problems. As Worldcom works to develop a restructuring plan, the company must maintain its customer base to stay viable. Major service interruptions would provide cause for existing customers to cancel their contracts with Worldcom and switch to another carrier.
• Contracting Issues - Worldcom’s bankruptcy filing, by itself, is not cause for most customers to exit their Worldcom contracts. Unless the contract specifically states that a Chapter 11 filing or other financial crisis is grounds for termination, the contract is mostly likely still in force. Therefore, most of Worldcom’s large enterprise customers may find it difficult to make changes during this restructuring. Unless Worldcom suffers large-scale outages or other problems that invoke contract termination clauses or Service Level Agreement (SLA) violations, many large customers may be forced to continue using Worldcom whether they want to or not.
• Service Quality Degradation - Although major services outages seem unlikely, we feel that several factors will likely result in degradation of service quality for Worldcom customers:
  1. During restructuring, senior management will be preoccupied with maintaining financial viability, not maintaining or improving customer service.
  2. Worldcom has eliminated thousands of jobs that will negatively impact service levels. Fewer people will be available to answer questions, resolve problems, and correct billing and order processing mistakes. Additional layoffs may be necessary before restructuring is complete.
  3. Worldcom is likely to suffer a talent drain as the company restructures. Talented employees who do not feel the company is viable or do not want to wait for a lengthy restructuring will be likely to seek jobs elsewhere. This is particularly true in Worldcom’s sales force, where reps are having an extremely difficult time meeting quotas and earning bonuses as customers are less willing to sign contracts with Worldcom.

  As a result of these factors, customers should expect longer lead intervals for installations and slower response times for problem resolution.

• Diversification and Switching Costs – Customers wishing to mitigate the risk of a Worldcom service outage or quality degradation will need to diversity their telecom services by moving all or a portion to another carrier. In doing so, customers will incur costs that include:
  1. Researching service alternatives
  2. Negotiating new carrier agreements
  3. Implementing new services
  4. Maintaining redundant services
• Price Increases – The entire telecommunication services industry is currently in a state of crisis as a result of extreme price competition and overcapacity. Carriers have been discreetly increasing prices lately and are likely to continue increasing prices if they feel they will not suffer significant erosion of market share. If Worldcom increases prices as part of a restructuring plan in order to maintain profitability, or if other carriers feel stronger in their competitive position because of the Worldcom crisis, telecom consumers can expect to see price increases.

Developing a Contingency Plan
The most important task for the enterprise customer who relies on telecommunications services for vital company operations is to honestly assess the risks of the Worldcom bankruptcy and develop an appropriate contingency plan. The specifics of this plan will vary by customer and will depend on several factors:

1. The type and quantity of services currently purchased from Worldcom and other carriers
2. The criticality of telecom services to your companies’ operations
3. Alternate services available in your area
4. Internal and external resources available to develop and execute a contingency plan

To get started, enterprise customer should take the following steps:

• Review your contract – Any enterprise customer, whether or not a Worldcom customer, should take time to review its carrier contracts. Understand the circumstances under which you can exit the contract for cause. See if the contract has language that addresses the financial viability of the carrier. If necessary, consult an attorney or telecom consultant for help with this assessment. It is important to understand your legal rights and obligations during this time of industry crisis so that you can make intelligent decisions and avoid service interruptions.
• Determine your specific risks – This article provides an overview of the likely risks encountered by enterprise customers, but what are the specific risks your organization is exposed to? Do you have services that are particularly vulnerable? Does your organization rely heavily on a voice or data network for its day-to-day operations? If so, what are the implications of an outage to this network? What would happen if you had a delay in upgrading, expanding, or reconfiguring your network?
• Attach costs to specific risks – To fully appreciate carrier risks, enterprise customers should attach costs to each risk factor identified above. What is the cost of a network outage in your organization at a single site? At more than one site? What is the cost of delayed problem resolution or improper order entry as a result of reduced carrier customer service?
• Develop a diversification strategy – If you were required to switch all or a portion of your services to another carrier because of service problems, how would you do it? Which services are most critical? How much lead time would you need to smoothly convert services to another carrier? Which carriers are most likely to be able to serve your needs?
• Pre-negotiate alternate carrier agreements – Once you have determined the actual risks and requirements for diversification, contact alternate carriers and begin the process of negotiating an alternate agreement. Even if you don’t plan to switch services right away, this is a good opportunity to gauge the competitiveness of your current carrier agreement and lock down pricing before the need is critical. Besides, your negotiating position will be greatly enhanced if you are operating from a position of strength, rather than waiting for a crisis with your current carrier that puts you under undue pressure to move quickly.
• Don’t be surprised to see price increases – All carriers are under huge financial pressure right now. Competition has driven their profits into the ground and they are all looking for ways to raise prices and increase profits. As large carriers falter, don’t be surprised to see the remaining, stronger players use the opportunity to increase prices. They will do so gladly if they feel a price increase will not jeopardize their market share.
• Determine switching costs – Determine the actual costs of switching carriers or implementing a diversification plan. How long will the conversion take? What is the price differential between the old and new carrier? Will you need to operate two networks simultaneously for some period in order to avoid an outage?
• Develop a cost/benefit analysis – By identifying risks, understanding alternatives, and quantifying switching costs, customers can develop an accurate cost/benefit analysis that details the advantages and disadvantages of a carrier switch or diversification.
• Get expert help – Consult an attorney experienced in telecommunications matters if you have questions about your contract. If you don’t have adequate in-house expertise, hire a consultant to help you develop a contingency plan and assess your network risks.

Now is the Time to Act
Although the likelihood of a major service outage as a result of the Worldcom bankruptcy is small, there are still significant risks to Worldcom customers and non-customers. The Worldcom bankruptcy highlights the risks of an increasingly unstable telecommunications services marketplace. No carrier is immune to the problems that are currently befalling the industry. Many weaker competitors have already declared bankruptcy, some with little or no notice of service interruption to customers. And even the traditionally strong competitors are facing significant pressure to increase cash flow to maintain their debt loads amid decreasing prices and modest increases in demand.
If you are responsible for managing your companies’ carrier relationships, now is the time to raise the red flag and get serious about assessing the true risks to your organization of this industry shakeout. You should review your contracts, understand your legal rights and limitations, objectively assess risks and costs, and most importantly, develop a comprehensive contingency plan to mitigate risks and ensure trouble-free service. The time will be well spent in the event of continued industry instability. And in the best case, if there are no additional carrier failures and Worldcom emerges from Chapter 11 as a viable, ongoing concern, your contingency plan will prove to be an inexpensive insurance policy against carrier risks and a solid roadmap during your next contract negotiation.