WorldCom goes boom.

July 21, 2002 7:47 PM

WorldCom goes boom. (NY Times link.) Another big firm with accounting, ahem, "issues" declares bankruptcy. If you're comparing these disasters by size, this one completely blows Enron and Global Crossing out of the water.
posted by mrbula (14 comments total)

From the WorldCom website:

"Chapter 11 enables us to create the greatest possible value for our creditors, preserve jobs for our employees, continue to deliver top-quality service to our customers and maintain our role in America's national security," said John Sidgmore, president and chief executive officer of WorldCom.

Oh, great.
posted by mrbula at 7:51 PM on July 21, 2002

If I attempt to file bankruptcy and my assets are four times my debts, the bankruptcy judge is going to throw my case out and toss my ass(ets) out in the street.

How is WorldCom any different, and when did bankruptcy cease to mean debts > assets + cash flow? The article indicates they've already lined up $2B in bank loans (name a bank that would lend a dime to a person about to declare bankruptcy), and also seems to indicate they're not hurting for cash flow ("stream of customer payments"). So, can someone more versed in bankruptcy law than I please explain?
posted by mr_crash_davis at 8:00 PM on July 21, 2002

The Denver Post had a comentary about this this morning. Basically, going bankrupt is the new business strategy, and companies that don't go bankrupt are at a disadvantage, business-wise.
posted by jazon at 8:33 PM on July 21, 2002

Hey! Let's all party like it's 1998!

AGAIN!
posted by WolfDaddy at 9:33 PM on July 21, 2002

The Denver Post article was an interesting read. You know, I'm not planning on needing a mortgage or anything for awhile. And to be honest, without these student loans to pay off I could do a lot more to help prop up the economy. I'm starting to get some good ideas, here.....maybe going bankrupt should be *my* business strategy. These days it's "Brand You" and whatnot, afterall. I'd merely be a failed brand. And what's so bad about that??

*sigh*
posted by Salmonberry at 11:03 PM on July 21, 2002

On the worldcom site you can find this short intro to Chapter 11 terminology here

What Chapter 11 basically seems to mean is that they're not bankrupt :) . They're (read Board of Directors, CEO, whoever is in control) saying " listen I'm in deep shit, I will not be able to pay my debts so that's the plan: I'll give such and such info about my ass(et) structure, cash flow structure etc etc to a Bankrupcy Judge that will listen to you creditors and act as a trusted third party.

Then I'll keep control of my company and try to pay you at least a part of what I owe you. My business plan will be under control of you creditors and of the judge.

Accept that or ask the judge to throw what the company owns on ebay for sale, then satisfy your debts on the money resulting from the auctions. If there isn't enough money, your problem"

Now I'd need some info regarding who's going to be accountable if the mony from the liquidation isn't enough. Shouldn't the CEO / Board of Directors be responsible ? Shouldn't someone go to jail, given that accounting was flawed and that is not a naturally occuring chapter 11, but one that started from an accounting fraud ?
posted by elpapacito at 2:57 AM on July 22, 2002

The only sad part of this is that the multimillion dollar annual payoffs that are going to the self-same bastards who ran the company into the ground are not considered restructurable debt, and therefore, like their multimillion dollar playgrounds conveniently built in the Homestead Exemption state of Florida, they're exempt from being touched. Appalling.
posted by Dreama at 3:03 AM on July 22, 2002

Dreama: interesting details , but couldn't one press charges againts the infamous bastards ? After all what good is some hundred million dollar if you can spend them only in some fiscal paradise because you can't show your face in any "civilized" country ? Of couse the old fashioned rope and soap seems more effective then a years long chase-the-criminal but who knows....
posted by elpapacito at 3:16 AM on July 22, 2002

Well, without proof of intentional financial malfeasance, there's little to charge them with. What they did may well be within the bounds of the law. Not by any means within the bounds of decency and morality, but within the bounds of statute.
posted by Dreama at 5:46 AM on July 22, 2002

Another excellent example of the market "correcting itself." The prick who associated this to national security should be flogged. I haven't seen such poetic license since the description of the coffees at Starbucks.
posted by adampsyche at 5:51 AM on July 22, 2002

Dreama -I'm not sure that's really the case. Worldcom will need to ask the BK court for permission to make payments - i.e., pay critical vandors, employees etc. It's quite possible that payments to former management will end up as a bankruptcy claim.

The thing to remember about Worldcom is that assets are carried at book (what they bought them for or paid to have them built) less depreciation (probably 5-10% per year). The fact is that (1) Worldcom overpaid significantly for acquiring companies and (2) Telecom assets are no llonger worth anything near what it cost to build them. So there is absolutely no relation here between the value of Worldcom's assets as they report them and the real value of those assets if you were to try to sell the company or its networks or whatever.

Finally, the Chapter 11 process is actually - despite the fact that everyone seems to be bitching about it lately - one of the glories of the US legal system. Investors tend to be terrfied at the prospect of foreign bankruptcies because of their tendency to liquidate immediately, return diminimus amounts to investors and destroy the businesses. Worldcom will be able to operate, employ thousands and thousands of people, not cause mass confusion by shutting down service (a la KPN) and potentially allow creditors to recoup as much value as possible. Worldcom's management is, to my mind, doing the responsible thing here both for their creditors and employees.
posted by fluffy1984 at 7:13 AM on July 22, 2002

fluffy84: wasn't each single asset value supposed to be re-written each year either at market price or liquidation price, depending on which is lower ? That's supposed to be the most cautious approach at "real value" of assets, 5%-10% depreciation is unrealistically low when it comes to hardware. A.f.a.i.k. that is a general accepted accounting practice.
posted by elpapacito at 11:00 AM on July 22, 2002

Naah, there's actually a fair bit of leeway for asset depreciation schedules. Usually it's something like evenly over five years (or ten years, or whatever). This almost certainly wouldn't reflect the current state of the used telecom equipment market (values have fallen by at least half in the past year).

If you look at Worldcom's latest balance sheet, you'll see that ignoring goodwill they have about $51B in assets compared to $44B in debt. And $4B of those assets are known to be bogus (that was the scandal, after all), so net tangible assets are around $4B. I suspect that the most recent revelation put WorldCom in violation of asset-to-debt ratio limits on some of their loans, forcing them into default and thence Chapter 11.

So the creditors get ownership of the company, all the current stockholders get nothing, and the ex-CFO and maybe a couple of other people go to jail. It's gotta be a better way than shutting the company down, firing everyone, and liquidating the assets.
posted by jaek at 11:28 AM on July 22, 2002

Depreciation schedules vary based on what is assumed to be the useful life of assets. Computers and switches and whatnot will have very short depreciable life (3 years maybe) fiber networks will have longer ones. Companies do take charges to write down the value of their assets - but they can get away with not doing it for a long time. The writedown is not normally to liquidation value even then, but is often based on management's own projections of what can be earned by those assets in the future. It's generally almost never safe with companies today (not including financial companies for whome everything is differenct) to judge their value by the net tangible value of their assets (assets minus liabilities minus goodwill). The fact of the matter is, Worldcom's debt trades in the low teens and has been since the scandal broke because people - including the distressed guys who tend to be quite sharp - do not believe that the net tangible asset value of the company reflects the real value of its business and assets, and in fact believe the net value of its assets to be significantly below the value of its debt.
posted by fluffy1984 at 11:43 AM on July 22, 2002