MCI Inc.

This article is about LDDS, which later changed its name to WorldCom and purchased MCI Communications. For other uses, see MCI (disambiguation).

MCI logo

MCI, Inc. is an American telecommunications subsidiary of Verizon Communications that is headquartered in Ashburn, Virginia. The corporation was originally formed as a result of the merger of WorldCom and MCI Communications, and used the name MCI WorldCom followed by WorldCom before taking its final name on April 12, 2003 as part of the corporation's emergence from bankruptcy. The company formerly traded on NASDAQ under the symbols "WCOM" (pre-bankruptcy) and "MCIP" (post-bankruptcy). The corporation was purchased by Verizon Communications with the deal closing on January 6, 2006, and is now identified as that company's Verizon Business division with the local residential divisions slowly integrated into local Verizon subsidiaries.

MCI's history, combined with the histories of companies it has acquired, echoes most of the trends that have swept American telecommunications in the past half-century: It was instrumental in pushing legal and regulatory changes that led to the breakup of the AT&T monopoly that dominated American telephony; its purchase by WorldCom and subsequent bankruptcy in the face of accounting scandals was symptomatic of the Internet excesses of the late 1990s. It accepted a proposed purchase by Verizon for US$7.6 billion.

For a time, WorldCom was the United States's second largest long distance phone company (after AT&T). WorldCom grew largely by aggressively acquiring other telecommunications companies, most notably MCI Communications. It also owned the Tier 1 ISP UUNET, a major part of the Internet backbone. It was headquartered in Clinton, Mississippi, before being moved to Virginia.

History

Corporate founding

The company began as Long Distance Discount Services, Inc. (LDDS) in 1983, based in Hattiesburg, Mississippi. In 1985 LDDS selected Bernard Ebbers to be its CEO. The company went public in 1989 through a merger with Advantage Companies Inc. The company name was changed to LDDS WorldCom in 1995, and later just WorldCom.

The company’s growth under WorldCom was fueled primarily through acquisitions during the 1990s and reached its apex with the acquisition of MCI in 1998. Among the companies that were bought or merged with WorldCom were Advanced Communications Corp. (1992), Metromedia Communication Corp.(1993), Resurgens Communications Group(1993), IDB Communications Group, Inc (1994), Williams Technology Group, Inc. (1995), and MFS Communications Company (1996). The acquisition of MFS included UUNET Technologies, Inc., which had been acquired by MFS shortly before the merger with WorldCom. In February 1998, a complex transaction saw WorldCom purchase online pioneer CompuServe from its parent company H&R Block. WorldCom then retained the CompuServe Network Services Division, sold its online service to America Online, and received AOL's network division, ANS. The acquisition of Digex (DIGX) in June 2001 was also complex; Worldcom acquired Digex's corporate parent, Intermedia Communications, and then sold all of Intermedia's non-Digex assets to Allegiance Telecom.

MCI acquisition

MCI WorldCom logo (Used from 1998–2000)

On November 10, 1997, WorldCom and MCI Communications announced their US$37 billion merger to form MCI WorldCom, making it the largest merger in US history. On September 15, 1998 the new company, MCI WorldCom, opened for business.

Proposed Sprint merger

WorldCom logo (Used from 2000–2003)

On 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.

Accounting scandals

CEO Bernard Ebbers became very wealthy from the rising price of his holdings in WorldCom common stock. 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. 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). 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. 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 stock's 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.

The fraud was accomplished primarily in two ways:

1. Booking ‘line costs’ (interconnection expenses with other telecommunication companies) as capital on the balance sheet instead of expenses.
2. Inflating revenues with bogus accounting entries from "corporate unallocated revenue accounts".

In 2002, a small team of internal auditors at WorldCom worked together, often at night and in secret, to investigate and unearth $3.8 billion in fraud. Shortly thereafter, the company’s audit committee and board of directors were notified of the fraud and acted swiftly: Sullivan was fired, Myers resigned, Arthur Andersen withdrew its audit opinion for 2001, and the U.S. Securities and Exchange Commission (SEC) launched an investigation into these matters on June 26, 2002 (see accounting scandals). By the end of 2003, it was estimated that the company's total assets had been inflated by around $11 billion.

Bankruptcy

On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection in the largest such filing in United States history at the time (since overtaken by the collapse of Lehman Brothers and Washington Mutual in September 2008). The WorldCom bankruptcy proceedings were held before U.S. Federal Bankruptcy Judge Arthur J. Gonzalez who simultaneously heard the Enron bankruptcy proceedings which were the second largest bankruptcy case resulting from one of the largest corporate fraud scandals. None of the criminal proceedings against WorldCom and its officers and agents was originated by referral from Gonzalez or the Department of Justice lawyers.

On April 14, 2003, WorldCom changed its name to MCI and moved its corporate headquarters from Clinton, Mississippi, to Dulles, Virginia.

Under the bankruptcy reorganization agreement, the company paid $750 million to the SEC in cash and stock in the new MCI, which was intended to be paid to wronged investors.

In May 2003, the company was given a no-bid contract by the United States Department of Defense to build a cellular telephone network in Iraq. The deal has been criticized by competitors and others who cite the company's lack of experience in the area.

The SEC and Worldcom reached a deal in which Worldcom agreed to pay a civil penalty of $2.25 million. The deal was approved by federal judge Jed Rakoff in July 2003. In a sweeping consent decree, the SEC and Rakoff essentially took control of Worldcom. Rakoff appointed former former SEC chairman Richard C. Breeden to oversee Worldcom's compliance with the SEC agreement. Breeden actively involved himself in the management of the company, and prepared a report for akoff, titled Restoring Trust, in which he proposed extensive corporate governance reforms, as part of an effort to "cast the new MCI into what he hoped would become a model of how shareholders should be protected and how companies should be run."

Post-bankruptcy

Bernard Ebbers

The company emerged from Chapter 11 bankruptcy in 2004 with about $5.7 billion in debt and $6 billion in cash. About half of the cash was intended to pay various claims and settlements. Previous bondholders ended up being paid 35.7 cents on the dollar, in bonds and stock in the new MCI company. The previous stockholders' stock was cancelled, making it totally worthless.

It had yet to pay many of its creditors, who had waited for two years for a portion of the money owed. Many of the small creditors included former employees, primarily those who were laid off in June 2002 and whose severance and benefits were withheld when WorldCom filed for bankruptcy.

On August 7, 2002, the exWorldCom 5100 group was launched. It was composed of former WorldCom employees with a common goal of seeking full payment of severance pay and benefits based on the WorldCom Severance Plan. The "5100" stands for the number of WorldCom employees laid off on June 28, 2002 before WorldCom filed for bankruptcy.

On February 14, 2005, Verizon Communications agreed to acquire MCI for $7.6 billion.

On March 15, 2005 Bernard Ebbers was found guilty of all charges and convicted of fraud, conspiracy and filing false documents with regulators—all related to the $11 billion accounting scandal at the telecommunications company he founded. He was sentenced to 25 years in prison. Other former WorldCom officials charged with criminal penalties in relation to the company's financial misstatements include former CFO Scott Sullivan (entered a guilty plea on March 2, 2004 to one count each of securities fraud, conspiracy to commit securities fraud, and filing false statements), former comptroller David Myers (pleaded guilty to securities fraud, conspiracy to commit securities fraud, and filing false statements on September 27, 2002), former accounting director Buford Yates (pleaded guilty to conspiracy and fraud charges on October 7, 2002), and former accounting managers Betty Vinson and Troy Normand (both pleading guilty to conspiracy and securities fraud on October 10, 2002).

On July 13, 2005 Bernard Ebbers received a sentence that would keep him imprisoned for 25 years. At time of sentencing, Ebbers was 63 years old. On September 26, 2006, Ebbers turned himself in to the Federal Bureau of Prisons prison at Oakdale, Louisiana, the Oakdale Federal Corrections Institution to begin serving his sentence.

In March 2005, 16 of WorldCom's 17 former underwriters reached settlements with the investors. Citigroup settled for $2.65 billion on May 10, 2004.

In December 2005, the Microsoft corporation announced that MCI will join it by providing Windows Live Messenger customers "Voice Over Internet Protocol" (VOIP) service to make telephone calls. This was MCI's last new product—called "MCI Web Calling". After the merger, this product was renamed "Verizon Web Calling".

In the media

• Fun with Dick and Jane, starring Jim Carrey: The closing credits begin with a Special Thanks To list, naming executives at Enron, WorldCom, Tyco, Adelphia, ImClone Systems, Arthur Andersen, Cendant and HealthSouth. The character Jack McCallister (played by Alec Baldwin) was based on real-life WorldCom CEO, "Bernie" Ebbers (see above).
• The Other Guys: Will Ferrel's character says to a SEC employee, "From everything I've heard, you guys are the best at these types of investigations... Outside of Enron... and AIG; and Bernie Madoff; WorldCom, Bear Stearns, Lehman Brothers..."

See also

• Corporate governance
• Corporate scandal
• Dot-com Bubble
• Bernard "Bernie" Ebbers—Founder, CEO of WorldCom. Became a convicted criminal for accounting fraud and the resulting US$11 billion loss to investors.
• Vivien v. Worldcom

References

• Lynne W. Jeter (2003). Disconnected: Deceit and Betrayal at WorldCom. Wiley. ISBN 0-471-42997-X.
• Om Malik (2003). Broadbandits. Wiley. ISBN 0-471-43405-1.
• First Interim Report of Dick Thornburgh, Bankruptcy Court Examiner, United States Bankruptcy Court for the Southern District of New York, In re WorldCom, Inc., Case No. 02-15533 (AJG) (November 4, 2002) Retrieved 2008-05-02
• "LDDS-Metro Communications, Inc. - Company Profile, Information, Business Description, History, Background Information on LDDS-Metro Communications, Inc". Advameg, Inc. 2007. Retrieved 2008-05-02.

External links

• Official MCI website
• WorldCom (Archive)
• Verizon Business corporate website