WorldCom Inc.’s accounting scandal has thrown the company into such financial straits that it will not survive on its own, a Gartner Inc. analyst said Wednesday.
“Within two years, WorldCom will ultimately end up being owned by someone else,” likely one of the former Bell companies, said Eric Paulak, a senior vice president in Gartner’s enterprise strategies group, on a conference call held by the market research firm to discuss the telecommunication company’s troubles.
This will happen due to the financial position that WorldCom has put itself in after it revealed last week that it would have to restate its 2001 and first quarter 2002 financial results to the tune of about US$4 billion due to accounting irregularities. The news sent the Clinton, Mississippi, company’s stock into a tailspin and caused the holders of some of its $30 billion debt to say that the company is in default on its loans.
Those loans could be called in for immediate repayment if the holders chose to do so. As such, the company needs to renegotiate the terms of its debt if at all possible, Paulak said.
WorldCom has $2 billion in the bank, according to WorldCom President and Chief Executive Officer John Sidgmore, who held a press conference in Washington, D.C. Thursday.
That figure, however, is only enough to fund the company’s operations for six months, said Gartner’s Paulak. “They have to shore up their cash position,” he said.
Even if the cash lasts more than 6 months, the company will go into Chapter 11 bankruptcy protection, he said.
“We think they have to move to Chapter 11,” he said. “Ultimately, it’s going to be in their best interest.”
Such a move will help protect the company as it restructures in order to avoid complete collapse, he said. Part of that restructuring will likely involve the selling off of international operations and further layoffs, he said.
The sell-off or shutdown of operations in Japan, Southern Europe and Northern Europe are all possible, Paulak said. Furthermore, the company will likely have to lay off more than the 17,000 employees it began letting go last Friday, he said. Those cuts were announced prior to the accounting scandal. WorldCom could cut its staff in half, he said.
The company will likely also cut funding to Digex Inc., a Web hosting subsidiary that WorldCom partially funds, he said.
Despite this uncertainty, the telephone and Internet networks controlled by WorldCom are safe, he said.
“These services will not be shut off,” Paulak said.
Given all the uncertainty surrounding the company, WorldCom customers need to create a contingency plan, said David Neil, also a senior vice president in the enterprise strategies group, during the call.
“Number one on the list (of things to do) is making sure you have that contingency,” he said.
Such a plan should include getting a second service provider, doing an inventory of the service WorldCom provides to a company, not signing up for new WorldCom services until the company’s financial picture is clearer and possibly hiring a professional services firm to manage the telecommunications services provided by multiple providers, he said.
Companies who are already WorldCom customers don’t have a way out of their contracts yet, he said.
“Nothing that has happened so far has done anything to affect the validity of the contract with WorldCom,” Neil said. “Enterprises must not be stampeding into a rash decision and potentially make the situation worse.”
WorldCom is online at http://www.worldcom.com
