WorldCom Inc.: Survival at Stake
Gollakota, Kamala, Gupta, Vipin, Journal of the International Academy for Case Studies
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.
Considerable attention has been focused on WorldCom in recent months. WorldCom has the dubious distinction of being the company responsible for the biggest accounting fraud and bankruptcy in the US till date. It may be tempting to view WorldCom mostly as an example of how unethical behavior leads to bankruptcy. However, to do that would miss out on a major lesson in management. An analysis of the company's performance shows that the company was having severe problems even before the accounting fraud issue surfaced. Had the company stayed on that trajectory, it might be speculated that it would have moved into bankruptcy sooner or later. WorldCom suffered from strategic and organizational dilemmas and was in an industry facing tremendous turbulence. The aim of this case is to identify the strategic, organizational and environmental issues that led to the decline of WorldCom.
CHANGE AND THE TELECOMMUNICATIONS INDUSTRY
The foremost characteristic of the telecommunications industry is one of change. The twin drivers of change have been technology and regulation/deregulation. Traditionally telecommunications meant communicating by telephone and historically one company provided the service: AT&T. AT&T was considered a natural monopoly and controlled all aspects of telephony: local, interstate and international long distance. However, in 1963, MCI filed with the FCC to be allowed to provide communication services. In 1969, MCI was granted permission to do so, and started voice transmission over microwave links between St. Louis and Chicago. Other companies followed suit but competition was hampered because of AT&T's control over the local exchanges. In 1984, AT&T was ordered to breakup. The long distance business was created as a separate company and retained the AT&T name. Long distance telephone services were opened up to competition while the local exchanges were still monopolies. The local exchanges (connections to millions of individual homes)--RBOC's (Regional Bell Operating Companies) were created into 22 separate holding companies. Each RBOC served between 12 and 20 million customers and reported assets in excess of $20 billion. These local exchanges were required to give access to the long distance companies to reach individual homes through their network (for an "access fee": fees paid by long distance providers to local exchanges to transmit the long distance call to the homes of the customers). Numerous companies jumped in to offer long distance services--WorldCom was one of these.
WORLDCOM ENTERS THE MARKET
In 1983, WorldCom was launched under the name LDDS--Long Distance Discount Service by Mississippi businessmen Murray Waldron and William Rector. Its business was to resell long distance phone service. The company ran into difficulties by 1985, and Bernie Ebbers, who had invested in the company became its CEO. …