MCI’s out of Bankruptcy, and telecom is going to hell

Massively Corrupt Institution is out of bankruptcy, thanks to the largesse of the justice system. It committed a $10 billion-plus fraud and did no time – Kobe Bryant, take note, for the justice system does not go after people with powerful friends and tons of money. Where is Bernie Ebbers these days? Not in the slammer, in case you are curious. Poor Scotty – did not spread that wealth around, and paid the price.

Proof – here you go!

bq. “[D]espite the pendency of MCI’s proposed debarment, the company appears to be continuing to receive substantial work from the federal government. It is important that Congress and the American public understand why this is taking place,” Sen. Susan Collins, R-Maine, chairman of the Senate Governmental Affairs Committee wrote. WorldCom, headquartered in Ashburn, Va., is doing business under the name of MCI, its long distance subsidiary. The company was ranked No. 8 on the 2003 Washington Technology Top 100 list of federal prime contractors, with government contracts totaling more than $772 million in 2002. [Washington Technology]

Thanks to the generosity of the bankruptcy judge, the criminal enterprise called WorldCon has been able to shed nearly $35 billion of its debt and comes out with most of its operations and assets intact. What more the company has debt which is lower than AT&T, SBC, Verizon, BellSouth and Level 3 Communications. These companies did not commit a crime, file for bankruptcy or stiffed the shareholders. However, thanks to some twist of fate, they are going to pay the price. So will the shareholders of these companies.

My personal opinions aside, the news of MCI coming out of bankruptcy has made waves and headlines across the world. However, not a single story asks, the long term impact of this move on the overall telecom business. The Judge, who approved the reorganization probably does not know that either. But I have some clue what is going to happen, and it is thanks to a little nugget Michael Capellas, the chief executive officer of MCI recent dropped in our laps. “The next six to 12 months will be a brutally competitive time for the industry,” Capellas said in a recent interview with The Washington Post.

bq. It has also been freed from having to make interest payments for the past year, allowing it to hoard cash. When WorldCom entered bankruptcy, it had about $200 million in cash on hand. Now it has over $5 billion in the bank. [The Washington Post ]

Read between the lines, and you will see what is going to happen. In order to stay in business and compete, MCI will compete with the only weapon it has – price. The company has to pay very little money out in interest, it will have continue to fire people and will initiate a price war which is going to ravage the industry one more time. In case you need proof, look at what Capellas said.

bq. Under the reorganization plan, WorldCom will pay out all but $2.3 billion of its cash to settle claims from creditors ranging from 35 to 100 cents on the dollar. It will also renegotiate the terms of its new debt. Then the company will have to begin making interest payments again. [The Washington Post]

Look at those numbers and you have a clear idea that rest is the industry is going to be creamed. UUNet is going to undercut on the bandwidth prices and basically massacre guys like Level 3, and AT&T which have picked up a lot of business from UUNet. It has happened before – and it will be no different this time as well. Why? Because there is nothing new which MCI has to sell. Whether it is local phone business, long distance calls or data service, it is pretty much the same offering as any other large phone company’s menu.

The Council for Citizens Against Government Waste (CCAGW) President Tom Schatz said it best when he said, “A judgment in favor of MCI is no treat for taxpayers on Halloween. The company committed the largest fraud in history and has been suspended from federal contracts. MCI continues to con the public with its claims of reform and commitment to sound accounting practices.”

Calls for greater punishment “misunderstand who was the bad actor and who was the victim, said Daniel Golden, a partner at Akin Gump Strauss Hauer & Feld who is the attorney for MCI’s creditors’ committee told the Wall Street Journal. The fraud was committed by a narrow circle of executives whose victims were honest employees and investors, he said in a interview with the financial daily. “Punishing the company would just inflict more pain on the shareholders and the creditors and that serves no appropriate purpose,” he told the Journal. Just as aside, Mr. Golden what about those little guys, the shareholders who lost their shirt. Shareholders, I am sure you meant the rich fat cats who bought the distressed bonds, Mr. Golden.