Sprint Corporation and McI Worldcom
n October 5, 1999 Sprint Corporation and MCI WorldCom announced a $129 billion merger agreement between the two companies. Had the deal been completed, it would have been the largest corporate merger in history, ultimately putting MCI WorldCom ahead of AT&T as the largest communications company in the United States. However, the deal did not go through because of pressure from the US Department of Justice and the European Union on concerns of it creating a monopoly. On July 13, 2000, the boards of directors of both companies terminated the merger. Later that year, MCI WorldCom renamed itself to simply “WorldCom” without Sprint being part of the company.
[edit]Accounting scandals
CEO Bernard Ebbers became very wealthy from the rising price of his holdings in WorldCom common stock.[5] However, in the year 2000, the telecommunications industry entered a downturn and WorldCom’s aggressive growth strategy suffered a serious setback when it was forced by the US Justice Department to abandon its proposed merger with Sprint in mid 2000.[5] By that time, WorldCom’s stock price was declining and Ebbers came under increasing pressure from banks to cover margin calls on his WorldCom stock that was used to finance his other businesses (timber and yachting, among others).[5] During 2001, Ebbers persuaded WorldCom’s board of directors to provide him corporate loans and guarantees in excess of $400 million to cover his margin calls.[5] The board hoped that the loans would avert the need for Ebbers to sell substantial amounts of his WorldCom stock, as his doing so would put further downward pressure in the stocks price. However, this strategy ultimately failed and Ebbers was ousted as CEO in April 2002 and replaced by John Sidgmore, former CEO of UUNET Technologies, Inc.
Beginning modestly in mid-year 1999 and continuing at an accelerated pace through May 2002, the company (under the direction of Ebbers, Scott Sullivan (CFO), David Myers (Comptroller) and Buford “Buddy” Yates (Director of General Accounting)) used fraudulent accounting methods to mask its declining earnings by painting a false picture of financial growth and profitability to prop up the price of WorldCom’s stock.[5]
The fraud was accomplished primarily in two ways:
Booking ‘line costs’ (interconnection expenses with other telecommunication companies) as capital on the balance sheet instead of expenses.
Inflating revenues with