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WorldCom Too Big to Fail, Chief Says

BY Jube Shiver
by Jube Shiver on 7/2/02.

WASHINGTON -- Discounting predictions that WorldCom Inc. might file for bankruptcy protection, Chief Executive John W. Sidgmore said Tuesday that the second-biggest U.S. long-distance telephone carrier is too big to fail and that it remains a "key component of our nation's economy and communications infrastructure."

Sidgmore, in his most extensive public remarks since WorldCom disclosed last week that it uncovered a major accounting fraud, pledged full cooperation with federal regulators and said the company is working with its lenders to avoid a bankruptcy filing.

Late Tuesday, Newark, N.J.-based IDT Corp. made an unsolicited offer to acquire WorldCom's long-distance and local telephone units for $5 billion. WorldCom officials didn't immediately respond to the offer.

At an afternoon news conference at the National Press Club, Sidgmore said he urged Federal Communications Commission Chairman Michael K. Powell and Securities and Exchange Commission Chairman Harvey Pitt to support WorldCom's efforts to get its financial house in order.

The company last week named an independent investigator to look into the accounting methods employed by fired Chief Financial Officer Scott D. Sullivan, in which $3.9 billion in 2001 and the first quarter of 2002 were wrongly listed as capital expenses to cover up $1.2 billion in losses. Sidgmore vowed to release everything WorldCom learns about the situation and to "clarify" an explanation of events it gave to the SEC on Monday, which Pitt blasted as "inadequate."

Sidgmore also said WorldCom has enough cash on hand to fund its operations through January.

"We have over 60,000 employees and millions of investors," Sidgmore said. "Both commercial and national security interests rely upon WorldCom's operations continuing without disruption."

Sidgmore's comments apparently encouraged some investors, who bid the company 's stock up to 10 cents, from 6 cents, after the news conference began.

But many analysts aren't convinced, believing that it may be only a matter of time before WorldCom is forced to file for bankruptcy. The company, based in Clinton, Miss., is saddled with about $30 billion in debt and Monday WorldCom's lenders declared the company in default on $4.3 billion in credit.

"Bankruptcy is clearly a possibility," said Blair Levin, an analyst for Legg Mason Wood Walker Inc. and a former chief of staff for the Federal Communications Commission. WorldCom, he added, "is clearly not too big to fail."

Federal authorities "have a real dilemma on their hands," added Robert E. Litan, director of economic studies for the Brookings Institution, a Washington think tank.

Potential buyers of WorldCom assets, such as long-distance carriers AT&T Corp. and Sprint Corp., are "in a weak financial position themselves, and there are antitrust and regulatory concerns" about the financially stronger regional Bell telephone companies buying a long-distance carrier, Litan said.

IDT, which has been buying the assets of distressed telecommunications companies, offered $2 billion for the MCI long-distance division and $3 billion for WorldCom's MFS and Brooks Fiber corporate local service. WorldCom executives have been seeking at least $5 billion just for MCI. WorldCom paid $37 billion for MCI in 1998, $12 billion for MFS in 1996 and $2.9 billion for Brooks in 1998.

Under federal law, financially distressed companies can choose to discharge much of their debt and reorganize under Chapter 11 or liquidate assets under Chapter 7 of the Bankruptcy Code.

But national security officials and federal regulators have grown increasingly concerned about the consequences of a WorldCom bankruptcy--or even a change in ownership of some of its critical telecommunications assets, particularly its long-distance telephone network, MCI, and UUNet, a WorldCom unit that carries more than half the Internet's data traffic.

An FCC advisor, who spoke on condition of anonymity, said the agency's staff was concerned that WorldCom might not be able to financially maintain or find a suitable buyer for the critical Internet data lines that UUNet operates.

"I think the staff's feeling is that they [WorldCom] operate the Internet backbone mostly for prestige," not profit, the advisor said. "The concern is that no strong company will buy it or it will fall into the hands of some foreign buyer," jeopardizing national security.

Sidgmore said Tuesday that he is making "10 to 20 calls a day to reassure customers" and prevent WorldCom from going under. And there was some indication Tuesday that the effort was paying off.

"We've talked to them three times today, and we feel they have the right strategy to get through this," said Levi Berkowitz, chief information officer for Vantanet, a Monsey, N.Y.-based data networking consulting company that does business with WorldCom. "As somebody who [depends on Internet] security, I don't believe the current situation" will deteriorate, he said.

Defense Secretary Donald Rumsfeld also discounted speculation that WorldCom's financial problems might jeopardize communications services the company provides the U.S. military.

"I think it's not [going] to be a problem," Rumsfeld told reporters Tuesday. He said it was likely that services provided by WorldCom under a multimillion-dollar contract would continue despite its problems.

But in an effort to unearth any remaining financial surprises, Sidgmore said Tuesday that WorldCom is extending an internal accounting investigation back to 1999. He said it may be forced to repay a $2.65-billion loan after defaulting on bank agreements.

Sidgmore said he had no reason to suspect that Sullivan might be misleading company officials and investors. But he said the company has cut its ties with Sullivan. Sidgmore added that he had "no idea" whether former CEO Bernard J. Ebbers knew of the irregularities.

Sidgmore became CEO of WorldCom after Ebbers was ousted in April. The executive is popular among employees, who view him as a smart and candid manager. But they, and outside analysts, have been looking for signs of whether he has the business and political acumen to lead the company out of its accounting scandal.

While some experts gave Sidgmore high marks for his press conference Tuesday, they said he faces a challenging road ahead.

"Washington is caught in the grips of a major corporate accounting scandal in which no single CEO is likely to allay the fears of regulators and those in Congress," said Erick Gustafson, director of technology and communications policy for Citizens for a Sound Economy, a Washington watchdog group active on federal tax and budget policies.Also Tuesday, three more current or former WorldCom insiders agreed to testify before the House Financial Services Committee on Monday.

WorldCom's vice president for internal audit, Cynthia Cooper, WorldCom audit committee chairman Max Bobbitt and Melvin Dick, once a partner at WorldCom's former auditor Authur Andersen, have agreed to appear. They will join Sidgmore, Chairman Bert Roberts and Salomon Smith Barney telecommunications analyst Jack Grubman at the first congressional hearings into the matter.