Editor’s note: Russ McGuire is the online director of Business Reform Magazine. Each issue of Business Reform features practical advice on operating successfully in business while glorifying God.
Last week, WorldCom announced their reorganization plan to exit from bankruptcy, as well as their plans to officially move their headquarters and change their name to MCI. While plenty has been written about the company’s massive accounting fraud and the elimination of $36B in debt, there’s been virtually no discussion of WorldCom’s wiped-out equity and the impact that elimination might have on the industry.
Prior to exposure of the company’s fraudulent bookkeeping, WorldCom had clearly reached the pinnacle of the industry. Voted “most likely to succeed” among its long distance peers – AT&T and Sprint – and an oft-rumored acquirer of a Baby Bell, it’s critical that we remember how they got there.
In 1996, WorldCom spent $14 billion to acquire MFS and its world-leading Internet division, UUNET. How did they pay that huge sum? By printing new WorldCom stock worth $14B and giving it to MFS shareholders. It wasn’t the first time the company had used its (over-valued) stock to buy valuable assets and customers, there had been over a dozen earlier transactions, and it certainly wasn’t the last, but it was the first really big deal and it clearly launched WorldCom into the big leagues.
However, 1997 was the breakout year for WorldCom. They acquired Compuserve from H&R Block for $1.2B in stock. They then acquired Brooks Fiber for $2.4B in stock. But WorldCom’s defining moment was the successful acquisition of MCI for $37B – mostly in stock.
That wasn’t the end of the deal making. Major acquisitions include SkyTel for $1.8B in 1999 and Intermedia for $6B in 2000.
Bottom line – WorldCom built the world’s most impressive network and accumulated a gold-plated customer base largely on the backs of shareholders duped into taking misrepresented WorldCom stock in exchange for valuable assets. The value of these assets is clear in the Disclosure Statement filed by WorldCom on April 14: “The Company is one of the world’s preeminent global communications companies, providing a broad range of communications services in 125 countries across six continents. The company operates one of the most expansive, wholly owned communications networks comprising approximately 98,000 route miles of network connections… Each day, it provides mission critical services for thousands of businesses globally and has more than 20 million customers worldwide.”
Coming out of bankruptcy, WorldCom, oops, I mean MCI, gets to keep the bulk of those networks and customers. The shareholders are left with nothing.
According to the company’s disclosure statement, MCI is projecting $25B in revenues in 2003, with a net income of $497M. Throughout the process of financial restructuring, WorldCom has been able to dramatically reduce the “book value” of their assets. At the end of 2001, WorldCom listed a book value of nearly $39B in property plant and equipment (PP&E), which is primarily composed of their network. Coming out of bankruptcy, MCI plans on having $11B in PP&E. The company also listed over $50B in “goodwill and other intangible assets” at the end of 2001. Coming out of bankruptcy, MCI will have less than $1B in intangible assets.
The combined reduction in PP&E and goodwill represents $77B – of which $36B can be attributed to the company’s eliminated debt, and it’s logical to correlate the remaining $41B with asset value that was created by shareholders’ accepting WorldCom equity.
The most interesting analysis of the impact of all of this on the industry is to compare MCI’s resulting PP&E and revenues with similar metrics for the companies with whom they will continue to compete. MCI’s ratio of revenues to PP&E is projected to be roughly 2.3 – in other words, for every dollar of value in their network (bought with debt and stock), they will be able to produce $2.30 in revenue.
For comparison’s sake, let’s look at the similar ratios for AT&T, Verizon, and Level 3. Each of these represents a different segment of the industry. I will use 2002 actuals that each company has reported to the SEC.
At the end of 2002, AT&T had $25.6B in PP&E on their books. With these network assets, they were able to generate $37.8B in revenue. At the end of 2002, Verizon had $178B in PP&E and for the year, they generated $67B in revenue. In the communications portion of their business, Level 3 had $4.5B in PP&E and generated $1.1B in revenue.
So – the Revenue to PP&E ratio for each of these companies is:
- MCI: 2.3
- AT&T: 1.5
- Verizon: 0.4
- Level 3: 0.2
Interestingly, according to WorldCom’s 2001 annual report, that year, WorldCom generated $35B in revenues using $39B in PP&E for a ratio of 0.9 – much more in line with their peers.
Bottom line – by writing down the value of their assets, and by eliminating the need to provide a return to the sources of funding for those assets (debt holders and stockholders), MCI will be incredibly more productive than their competitors in terms of generating revenue and cash flow with their network.
Whether MCI can translate this tremendous competitive advantage into a winning marketplace strategy remains to be seen.
Russ McGuire is Online Director for Business Reform. Prior to joining Business
Reform, Mr. McGuire spent over twenty years in technology industries, performing various roles from writing mission critical software for the nuclear power and defense industries to developing core business strategies in the telecom industry. Mr. McGuire is currently focused on helping businesspeople apply God’s eternal truths to their real-world business challenges through Business Reform’s online services. He can be reached at [email protected].