The WorldCom Case - Report Example

The owners and managers of new enterprises dream of achieving great success and making it big time in the business world. Many corporations enter themarketplace, but few actually have a major impact. A firm that started small, but eventually become of the largest players in the telecommunication industry is WorldCom Corporation. Its former CEO Bernie Ebbers once said, “Who would have thought that a small business in itty Mississippi would one day rival AT&T” (Moberg, 2008). The corporation who was a model of success in the telecommunication industry came crashing down in 2002 harder than the Roman Empire. WorldCom as of today is still the biggest bankruptcy case in United States history. The purpose of this paper is to discuss the WorldCom case by identifying legal, ethical, and corporate responsibility issues as well as the strategic, tactical, and contingency planning factors that led to the demise of WorldCom. Bernie Ebbers and his executive staff had very ambitious plans for the company. WorldCom utilized an aggressive growth strategy based on mergers and acquisitions. The strategic approach of the company was to achieve an accelerated growth process to become the biggest player in the industry. The company in a six year span between 1991 and 1997 completed an amazing 65 acquisition transactions. Wall Street experts were amazed at the company’s ability to negotiate deals and acquire a diverse selection of business entities. The combination of incredible growth and outstanding financial performance made it seem as if WorldCom was one of most efficient firms in corporate America. The reality was much different. The strategic decision of buying up as many companies as possible in a short period of time had major tactical and operation flaws. From a business standpoint the company’s strategy was risky because the firm was financing a lot of these moves through debt and based on the speculation that its stock would continue to rise. The firm made many unsound business transactions in which they vastly overpaid to acquire a firm. An example of an ill-advised decision was the acquisition of MCI for $35 billion, a price that was 180% higher than the next best offer on the table (Moberg, 2008). The internal operations of WorldCom were a fiasco. The company did not have any type of plan on how to merge the different acquisitions in order to optimize its operations. The firm was spending a lot of money on redundant processes because the managers of the company were not making any attempt at integrating the different operations. There was no synergy between the subsidiaries at WorldCom. Simple operational functions such as customer service were extremely poor. There was a lack of communication between the employees. The company forgot the importance of integrating the new acquisition into the corporate culture of the firm. The major flaw that caused many of these problems was that the company did not give these acquisitions enough time to work properly. WorldCom made the erroneous assumption of thinking that the integration process occurred by itself. Integrating new and old organizations into a single efficient entity is a time consuming process that involves thoughtful planning and considerable senior management attention in order for the merger to add value to the company (Moberg, 2008). WorldCom was overwhelmed by the excessive amount of acquisitions it incurred into. There were never any contingency plans in place on how deal with the potential problems of becoming such a large company. The strategic, tactical, and operational inefficiencies were major contributors that led demise of WorldCom, but the primary reasons that the company went bankrupt was the lack of ethics, the presence of illicit and fraudulent activities, and a complete lack of corporate responsibility. WorldCom got involved in the illegal act of cooking up the numbers. Cooking up the numbers is an accounting terminology that refers to the criminal act of falsifying accounting records to misrepresent financial information in order to fool shareholders, the government, and the general public (Weygandt & Kieso & Kimmel, 2002). The accounting staff of the company had complete disregard for the generally accepted accounting principles (GAAP). For example the company would convert obsolete assets into fake expenses to be charged against future earnings into order to manipulate the numbers to create bigger losses in the present and lower them in the future. Another illegal accounting practice was not recognizing the existence of uncollectible accounts. Such a tactic increases the earnings of a company because the company fails to recognize a loss that has occurred. A third example of a fraudulent accounting practice was increasing the goodwill intangible asset of WorldCom if the company to had to write down assets of the acquired firm after determining the actual value of those assets. A lack of ethics was imminent throughout the organization. The managers of the company took advantage of the fraudulent corporate culture in order to gain financial rewards and obtain privileges they were not entitled too. The board of directors of the company authorized a $341 million personal loan to its CEO Bernie Ebbers. This move was outrageous since it represented a clear conflict of interest. A corporation is a separate business entity that is supposed to be operated to protect the best interest of its stakeholders while at the same time maximizing shareholders wealth. The financial assets of the company were turn into a special banking fund which was open only for certain executives. WorldCom did not display any corporate responsibility in its actions. WorldCom was able to hide its accounting irregularities and illicit practices by hiring consultants, financial analysts and accounting firms that had personal relationships with executives of the company. This practiced help the firm because the auditors would look the other way and had no interest in actually investigating the company. The accounting firm Author Anderson was one of the external firms that endorsed the actions of WorldCom. WorldCom was able to use its networking capabilities and power to influence the opinion of many Wall Street analysts so that they would recommend the stock as a strong buy. These actions are extremely unethical and the corrupt analysts that were part of this scam committed actions that should be punishable by law. The occurrence could be interpreted as reverse insider information because many of these analysts who might have known the truth about the company were not revealing the truth to the general public. The WorldCom case is an example of how corporate greed, poor planning, and a lack of ethics can lead to disastrous results. The company had a good business model and many talented employees that helped the company grow and achieve a high degree of success in a short period of time. The problem was that the accelerated growth strategy the company implemented was unrealistic because it did not consider the human factors associated with the moves. There was a necessity to properly integrate each acquisition into the WorldCom corporate culture. The operational managers did a very poor job of managing its human capital and did not implement any process improvements in the new subsidiaries the company acquired. A lot of the acquisitions were turned into inefficient firms after WorldCom purchase them because the company did not manage them properly. The fraudulent accounting activities at WorldCom were the biggest single contributor that caused the company to go bankrupt. The price of the stock plummeted when the SEC revealed accounting irregularities in the amount of $9 billion. All the company stakeholders were losers as a consequence of this bankruptcy case. The employees lost their jobs, the shareholders loss their money, and all those companies that WorldCom acquired prior to going out of business were hurt as well. Michael Moore once said “One of the most ironic things about capitalism is that the capitalist will sell you the rope to hang himself with” (Woopidoo, 2009). WorldCom sold everyone false hope by falsifying its financial results. References Moberg, D. (2008). WorldCom. Santa Clara University. Retrieved October 9, 2009 from http://www.scu.edu/ethics/dialogue/candc/cases/worldcom.html Weygandt, J., Kieso, D., Kimmel, P. (2002). Accounting Principles (6th). New York: John Wiley & Sons. Woopidoo.com (2009). Michael Moore Quote. Retrieved October 8, 2009 from http://www.woopidoo.com/business_quotes/greed-quotes.htm Read More