MCI emerges from bankruptcy

/ Source: The Associated Press

WorldCom Inc. emerged from bankruptcy Tuesday as MCI, shedding its scandal-tainted name and more than $35 billion in debt.

It also hopes to distance itself from its past: The $11 billion accounting fraud that led to its bankruptcy filing in July 2002.

“MCI’s turnaround is a tribute to the human spirit and the amazing will of our 50,000 dedicated employees,” MCI president and CEO Michael D. Capellas said in a statement. “We are emerging with a new board and management team, a sound financial position, unmatched global assets, a strong customer base and industry-leading service quality.”

While MCI’s reduced debt load may provide it with a competitive advantage, the company still faces significant challenges, experts say.

WorldCom had unveiled its reorganization plan in April 2003. It included moving its headquarters from Clinton, Miss., to Ashburn, Va., and renaming the company after its long-distance unit, MCI. WorldCom had merged with MCI in a deal announced in 1997.

The bankruptcy process has allowed the company to slash its debt from $41 billion to about $6 billion. That will shave $2.1 billion a year off interest payments for a company producing about $21 billion a year in revenue.

But MCI’s emergence from court protection comes as the telecommunications industry is no less competitive than when WorldCom entered bankruptcy. The company’s biggest challenge will be to navigate pricing pressures, said Muayyad Al-Chalabi, managing director of telecommunications consulting and research firm RHK.

“The question is, ’Can they reduce their costs enough to match the expected revenue decline?”’ Al-Chalabi said Monday.

WorldCom has already warned that it expects revenue to drop 10 percent to 12 percent this year. It has taken steps to reduce costs, especially through job cuts. Last month the company announced plans to lay off 4,000 workers, reducing its work force to about 50,000 employees.

Another challenge is that, like many companies emerging from bankruptcy, MCI’s board will be heavily influenced by bondholders who bought up WorldCom’s debt at fire-sale prices.

The bondholders’ primary interest is often to ensure that they are repaid for their investment as soon as possible, which might not be conducive to fostering a long-term vision at the company.

MCI’s court-appointed monitor, former Securities and Exchange Commission chairman Richard Breeden, has imposed some restrictions on board members to make their process more transparent, including a requirement that directors provide two weeks’ notice before selling MCI stock.

Jerry Reisman, a bankruptcy lawyer in Garden City, N.Y., said he believes the company is well positioned to compete and discounted the notion that customers and clients will shy from the company because of its past.

Indeed, the company said it lost none of its top 100 customers during the bankruptcy process. And in January the U.S. government, which collectively is the company’s biggest customer, lifted a six-month ban that had prohibited WorldCom from bidding for new government contracts.

Many of the people who contributed to WorldCom’s scandal are gone. All the senior executives and board members from the reign of former Chief Executive Officer Bernard Ebbers are gone. Five executives, including former Chief Financial Officer Scott Sullivan, have pleaded guilty to federal charges for their role in the accounting scandal.

Ebbers has pleaded innocent to charges including conspiracy and securities fraud.