Bush, SEC gang up on WorldCom
Corporate America closes ranks
The White House and the SEC moved against WorldCom Inc yesterday, after the carrier revealed late Tuesday that it had improperly booked $3.8bn over the last five fiscal quarters.
But the immediate judgment from analysts was that debt-laden WorldCom could well be headed for bankruptcy. In the meantime, the rest of corporate America tried to distance itself from the Clinton, Mississippi-based carrier.
The Securities Exchange Commission said late yesterday "the WorldCom disclosures confirm that improprieties of unprecedented magnitude have been committed in the public markets." It said it was actively investigating the company, and that it was ordering WorldCom to "file, under oath, a detailed report".
Reports late yesterday also said the SEC was seeking an order preventing WorldCom from disposing of assets, destroying records, or making payouts to senior company officers. The US Department of Justice also reportedly said it was examining the WorldCom scandal.
US president George Bush, speaking about the WorldCom scandal at the G8 summit in Canada, said: "We will fully investigate and hold people accountable for misleading not only shareholders but employees as well." Where "egregious practices, such as the one today" are uncovered, said Bush, "we'll go after them. And need to."
Bush said he could understand concerns about "the validity of the balance sheets of corporate America" but while "we've had too many cases of people abusing their responsibilities", the SEC and government was doing everything it could to pursue those responsible.
He added that the US economy was strong, "and I know that most people that run businesses in America are above board, honest, and care deeply about their employees and their shareholders."
However, even as Bush sought to soothe fears in the wake of yesterday's revelations, analysts questioned WorldCom's ability to survive.
Credit rating agency Moody's downgraded WorldCom's debt from B1 to Ca yesterday, citing amongst other reasons, the fact that "material numbers" of business customers will migrate to other suppliers. It added that the company may not be able to recover from the accounting fraud allegations, a view expounded by other industry observers.
Merrill Lynch said in a research note "events at WorldCom leave us lost for words." Recovering its powers of speech quickly, it noted that with no audited results, "there is heightened uncertainty as to how [WorldCom's recent] credit facility renegotiations play out."
It added that "the increased likelihood of a bankruptcy filing by WorldCom would raise concerns over collateral damage to the companies' counterparties". Merrill Lynch noted that WorldCom was either a major customer or supplier of every other wireline provider in the US, and a major service provider to many corporations, large and small across the US.
Inevitably, Merrill Lynch concluded, capex expenditure would continue moving downwards.
Just as inevitably, equipment suppliers saw their stock prices battered, even as they sought to play down their exposure to WorldCom. Lucent Technologies's shares closed down 19.8% and Juniper Networks was off 18.44%. Ciena Networks closed down 3.12%.
However, reports suggested that these, and other network equipment suppliers, as well as financial institutions connected to the carrier, were attempting to minimize the impact that WorldCom's troubles would have on their business.
And by the end of the day, there was even speculation of a potential windfall for carriers such as AT&T, as customers flew to quality, if WorldCom does indeed give up the ghost.