The primary subject matter of this case concerns management of mergers and acquisitions in a turbulent environment. Secondary issues examined include strategic, organizational, and competitive issues that push the companies to the brink of destruction, and that may induce them to breach the boundaries of ethics and accountability for remaining afloat. The case has a difficulty level appropriate for first year graduate level. The case is designed to be taught in 1.5 class hours and is expected to require 2 hours of outside preparation by students.
Accounting fraud issues have taken the center stage whenever there is a discussion about the bankruptcy of WorldCom. However, the fraud issues were just an outcome of a deep-rooted deterioration in the performance fundamentals of WorldCom. In this case, we discuss some of the strategic, organizational and environmental issues that led to the survival challenges, and hence precipitated ethical irregularities and downfall of the company.
This case focuses on the growth and decline of WorldCom. The case traces the growth of WorldCom, till it filed for bankruptcy in 2002. Although accounting fraud issues have taken center stage when discussing the bankruptcy of WorldCom, the roots of WorldCom's decline lie in its turbulent industry, and strategic and management errors made. WorldCom shows meteoric rise and an equally meteoric fall. The case traces the developments in the telecommunications industry from the breakup of AT&T till 2002. Deregulation and technology have had major roles in shaping the industry. While deregulation increased competition in the long distance business, the local exchange business was not so transformed. Long distance business became increasingly commoditized and competition was price based. Technological advances allowed for massive increases in the transmission capability of networks, resulting in the expectation that there will be a convergence in data, voice and video. Many firms wanted to be the provider who would provide all these services to the consumer and greatly increased their network capacity by laying new lines. Unfortunately the demand boom expected did not happen and all that resulted was a gross mismatch between supply and demand.
WorldCom started as a small long distance reseller and by a series of acquisitions managed to become a national player, with a strong presence in the rapidly growing data business. WorldCom was the leader in the internet backbone business and was strong in the business segment of long distance telephony. WorldCom went on to buy MCI, a company much larger than itself. Various problems may be seen with the merger. The price paid was too high and the company took on a lot of debt. MCI was in a slow growing highly competitive segment--the long distance segment. By buying MCI, WorldCom was increasing its exposure to this segment. Whatever synergies and cost savings that this merger might have obtained were quashed with the poor implementation of the integration. Culture clashes and unreasonable cost cutting resulted in MCI executives leaving the company. Another problem with WorldCom was its lack of presence in the wireless business. WorldCom's attempt to correct that--by its bid to acquire Sprint--was defeated when the Justice department turned down the merger. This left WorldCom with strategic weaknesses, financial burdens, and with a large exposure to the slow growing long distance business. The situation came to a head with disclosures of accounting fraud that involved top management--right from the CEO. Failure to make payments resulted in WorldCom filing for bankruptcy protection.
1. What are the major driving forces in the telecommunications industry? How have they affected the long distance business?
The major driving forces are: regulation/deregulation and technology. …