WorldCom case study by BVIMIT PGDBM batch

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WorldCom case study by BVIMIT PGDBM batch

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Business Ethics and Corporate Governance :

Business Ethics and Corporate Governance

Group Members:

Presented By: Guruprasad Shejwal 33 Chandan Mishra 17 Kanchan Mourya 18 Siraj Shaikh 30 Aishwarya Kadam 10 Amruta borgave 03 BVIMIT – PGDBM batch Group Members

WorldCom – Brief analysis of case:

World com was small firm in Mississippi which was incorporated in 1983 to resell long distance telecom services Due to break up of the telecom giant AT& T in 1983 there were opportunities emerging in telecom market 4 investors including Bernerd decided to take advantage of this new market opportunity They brought LDDS ( long distance discount services ) with an objective of reselling AT&T long distance services to small and mid size business Over a period of time LDDS was renamed as world Com as they grew through acquisitions and became 2 nd largest telecom firm in US Due to sudden crash in stock market in 2000 , telecom industry in usa faced major problems like Massive capital investment Excess capacity Continuous fall in LDDS prices Much lower demand for LDDS services WorldCom – Brief analysis of case

Slide 4:

World com was severely affected by above problems World resorted to wrong accounting ( booking expenses as capital expenditure ) to show that they were making progress In 2002 due to losses Ebbers was eased out by Board of Directors and New CEO jhon Sidgmore was appointed In 2002 co. When co. identified its losses , it recalled debts from creditors and negotiated compromised deal with its lenders which failed and company had to face legal action bankruptcy

What went wrong with WorldCom:

Ignored market conditions or miscalculation of demand it created excess capacity was created Adverse Industry conditions Poor Execution of merger integration Two Billing programmes were being run simultaneously creating huge pendency of receivables Bad accounting practices Relaxed Regulatory Environment – WorldCom auditors never challenged the illegal accounting taking place since 1999 Poor Top Management What went wrong with WorldCom

Q1.)What are the advantages and disadvantages of an Aggressive Merger Policy like that at WorldCom :

Advantages of an Aggressive Merger Policy WorldCom achieved its position as a significant player in the telecommunications industry through the successful completion of 65 acquisitions. Two of these acquisitions were particularly significant. The MFS Communications acquisition enabled WorldCom to obtain UNet , a major supplier of Internet services to business, and MCI Communications gave WorldCom one of the largest providers of business and consumer telephone service By 1997, WorldCom's stock had risen from pennies per share to over $60 a share.Through what appeared to be a prescient and successful business strategy at the height of the Internet boom. As the stock value went up, it was easier for WorldCom to use stock as the vehicle to continue to purchase additional companies. The acquisition of MFS Communications and MCI Communications were, perhaps, the most significant in the long list of WorldCom acquisitions . Q1.)What are the advantages and disadvantages of an Aggressive Merger Policy like that at WorldCom

Disadvantages:

Senior management made little effort to develop a cooperative mindset among the various units of WorldCom. Inter-unit struggles were allowed to undermine the development of a unified service delivery network. WorldCom closed three important MCI technical service centers that contributed to network maintenance only to open twelve different centers that, in the words of one engineer, were duplicate and inefficient. Competitive local exchange carriers ( Clercs ) were another managerial nightmare. WorldCom purchased a large number of these to provide local service Disadvantages

Q2) Major Reasons for the quick collapse of WorldCom :

Poor Top Management :WorldCom's efforts to integrate MCI illustrate several areas senior management did not address well. In the first place, Ebbers appeared to be an indifferent executive who "paid scant attention to the details of operations. Relaxed Regulatory Environment : was followed as Wall Street Analyst did not manage to detect an dishonesty among WorldCom management. Unscrupulous Accounting Practices : To prove to Wall Street that WorldCom was indeed growing because of his acquisitions, Ebber decided to adjust the accounting, which in turn made the stock prices more attractive. Q2) Major Reasons for the quick collapse of WorldCom

Slide 9:

There are times when companies decide to change the numbers of their profits on their books in order to make it appear as if they are earning more than they really are. This is done for a variety of reasons. There are times when companies decide to change the numbers of their profits on their books in order to make it appear as if they are earning more than they really are. This is done for a variety of reasons. In order to keep his personal financial image looking good, he continued the process of accounting fraud both on a professional and a personal level.

Q.3 If you were Bernard Ebbers, what proactive steps you would have taken to prevent the spectacular downfall of WORLDCOM?:

WorldCom, once the dominant company in the telecommunications industry, was in serious economic trouble. WorldCom’s roots stem from a Mississippi telecom company called LDDS where Ebbers was CEO. Growing to over 80,000 employees through multiple acquisitions of other telecom businesses, WorldCom became the overwhelming industry leader. He grew annual revenues from $1 million in 1984 to over $17 billion in 1998. However, Ebbers had little regard for long-term plans and avoided making larger strategic decisions as his company accumulated increasing debt. Q.3 If you were Bernard Ebbers , what proactive steps you would have taken to prevent the spectacular downfall of WORLDCOM?

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As WorldCom acquired new companies, its accounting procedures, computer systems, and customer service issues became increasingly more complex, and industry experts note that WorldCom struggled to keep up with the growth. Company employees who tried to bring initial problems to Ebbers’s attention were discouraged, and Ebbers made it clear he only wanted to hear good news. This avoidance of problems created a company culture that demanded success at all costs. That ultimately included falsifying financial reports. In an effort to increase revenue, WorldCom reduced the amount of money it held in reserve (to cover liabilities for the companies it had acquired) by $2.8 billion and moved this money into the revenue line of its financial statements.

Slide 12:

That wasn't enough to boost the earnings that Ebbers wanted. In 2000, WorldCom began classifying operating expenses as long-term capital investments. Hiding these expenses in this way gave them another $3.85 billion. These newly classified assets were expenses that WorldCom paid to lease phone network lines from other companies to access their networks. They also added a journal entry for $500 million in computer expenses, but supporting documents for the expenses were never found. These changes turned WorldCom's losses into profits to the tune of $1.38 billion in 2001. Ebbers’s refusal to honestly face the harsh economic truth for WorldCom was ultimately highlighted to be a source of WorldCom’s financial problems.

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Increase customer base Increase tarrif charges to increase revenue Decrease the cost which was incurring by finding what are the reasons behind falling the revenue

Q.4 What are the major issues to be considered before going ahead with acquisition or merger? :

Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can aid, finance, or help an enterprise grow rapidly in its sector or location of origin or a new field or new location without creating a subsidiary, other child entity or using a joint venture. Following are the issues to be considered before going ahead with merger or acquisition: A New Entity Everyone is required to understand that a merger will transform two or more organizations into a new, single entity. This new entity will have an organizational culture that is different from either company—whether it is a joining of equals or an acquiring company and an acquired company. It will be a unique culture shaped from the previously independent organizations. Q.4 What are the major issues to be considered before going ahead with acquisition or merger?

Slide 15:

A New Vision A new entity needs a new vision, or a statement of what the new organization intends to become. It is a broad, forward-thinking image that the company must have before it sets out to reach its goals. It is a concept of what it intends to deliver over time to customers, shareholders and employees. Within this new vision, each “department” will not only have its own role, but also must determine how it fits into this new vision and how it will work with other departments to fulfill this vision.. Determine that Vision The vision of the new entity might be to become the best newspaper in the United States, the fastest package delivery service or the most reliable electricity provider. This seem like vague statements, but they are a good way to start. Now the company must establish a culture that can deliver that vision. Discovering the optimal culture can be accomplished by having employees from the acquired company complete a questionnaire or survey

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Leadership Characteristics Appropriate leadership that embraces the vision must be in place at all levels and working toward creating the ideal culture. These leaders need to communicate ideals to the organization before, during and after the merger. They must be specific in describing the direction they want to take the new organization. This must continue into the merger as well, or the organization will slip into a defensive cultural style. Properly selected leadership, from line managers to executive management, will set in motion the structures, systems, technology and training to achieve the vision and ideal culture. Measure Success Measuring success helps employees feel confident that leadership is on board to make the new company everything it can be. Using a survey to measure the climate in an organization will reveal if its culture is producing the desired outcomes for employees, management and the organization.

Slide 17:

Surveys can bring to light the organization’s strong points, as well as its developmental needs. These strong points promote a constructive culture, while the developmental needs hinder a constructive culture by promoting either a passive/defensive or aggressive/defensive culture

Q5. What Motivation could explain the fraudulent accounting at WorldCom:

WorldCom was much interested in acquisition To project better performance of company in eyes of shareholders. Q5. What Motivation could explain the fraudulent accounting at WorldCom

CONCLUSION:

Unethical things happening in WorldCom were :- Wrong accounting Procedure was adopted by co. Co. Auditors did not point out accounting lapses Co. executive were asked to look after properties of acquired co.’s rather than intergrating Losses were shown as capital Expenditure They were running two billing programmes simultaneously because of this their receivables increased Their focus was more on Acquisition then integration If they had adopted Clear business strategy they might have not faced this situation of winding up co. instead they might have been leading market co. in telecom industry . CONCLUSION

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