Taiwan Country Report

Yiyang Wang

Dr. Leonard Rushfield

FINC 621

Feb. 12 2016

WORLDCOM CASE ANALYSIS

WorldCom, the U.S.-based telecommunications company, was at one time the second-largest distance phone company in the U.S.. Yet, it is perhaps best know for a massive accounting scandal that lead to the company bankruptcy in 2002. This bankruptcy also led to massive for investors.

1. Strategic Analysis

Aggressive business strategy seemed necessary for WorldCom at that time. Change is the most important characteristic for telecommunications industry especially technology and regulation change. After the Telecommunication Act of 1996, the competition of the telecommunication market was soaring. Therefore, to survive in this tough market, acquisition seemed an inevitable strategy.

 There are two main issues behind WorldCom’s aggressive acquisition strategy. The first is the company’s week R&D ability. Whether these acquisition strategy, especially the acquisition with MCI, could make huge profit were based on the premise that other companies’ product innovation capability could be transferred to WorldCom’s high-growth business. Further, the company was more dependent on the long distance business. The company had resale rights to wireless. WorldCom decided to  enter wireless market after the customer ownership of cell phones became huge^[1].

Facing these risks, Bernie Ebbers, the CEO of WorldCom, first began to build up the culture of WorldCom and MIC. He announced several austerity measures including selling corporate jets and eliminated company cars. By march 1999, 215 people were laid off^[2]. However, this austerity measures seemed not work very well to save this telecommunications Giant.

2. Situation Analysis

In the year 1997 and 1998, two major concerns happened in the bond market. The first is the devaluation of Asia currencies. Beginning in June of 1997, the devaluation trend affected several major Asia financial center including Hong Kong, Singapore and Japan. This turmoil in Asia also affect the U.S. market. The Dow Jones plunged 99 and 300 points on Monday and Tuesday of WorldCom corporate bond projected issue week. While money left the stock market, some flowed into bond market. Thus, the yields of corporate bond keep decaling with several month^[3].

A second thing to concern was the large volume of debt, some $40 billion, two to three times the usual amount, issued in the first week of August, 1997.  This large amount new bond issuance would definitely decrease the yields of bond.

Besides, at the same time the spread of the bonds increased a little bit3. This to some extent increase the cost for corporate borrowers. The widening of the spread meant the markets didn’t settle down. The devaluation of Asia currencies and abnormal large volume bond issuance increased the volatility of bond market which leads a higher cost for corporate borrowers.