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Whither WorldCom?
A bankruptcy judge should hold off on giving WorldCom the green light to come out of Chapter 11.
August 20, 2003: 10:59 AM EDT
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) - WorldCom should not be allowed to emerge from bankruptcy next month.

There. I said it. It's not a popular opinion -- especially with WorldCom creditors who hope to see the company make a phoenix-like rise from the ashes in order to recoup some of their losses.

But there are still too many uncertainties surrounding the company. So it would be a mistake to reward it with a lower debt load and stronger competitive position just yet.

WorldCom, which hopes to come out of Chapter 11 operating under the name MCI, is scheduled to have a hearing with the U.S. Bankruptcy Court for the Southern District of New York on Sept. 8. At that hearing, originally scheduled for Aug. 26, the court will decide whether to approve WorldCom's reorganization plan.

More doubts surface

Just a few months ago, it seemed a slam dunk that WorldCom would emerge from bankruptcy. But Greg Gorbatenko, analyst with independent telecom research firm Loop Capital Markets, thinks the chances are now 60 percent that the judge will not approve the plan. Here's why.

In June, WorldCom CEO Michael Capellas said in a statement that, "No one even arguably associated with the past wrongdoing continues to work at the company."

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But a day later, the company's long-time general counsel and treasurer both resigned after an independent investigative report criticized the two executives for lack of oversight while accounting fraud was taking place at the company. That was, to put it mildly, an embarrassing blow to WorldCom's and Capellas' credibility.

Then in late July, competitors AT&T (T: Research, Estimates), Verizon Communications (VZ: Research, Estimates) and SBC Communications (SBC: Research, Estimates) accused WorldCom of improperly routing calls, basically making long-distance calls look like local calls, to avoid paying expensive access fees to these carriers for using their networks.

Shortly after these allegations were brought to light, the federal government announced it was barring WorldCom from receiving new contracts, saying in a statement that the company "lacks the necessary internal controls and business ethics."

WorldCom has denied that it did anything wrong, but the FBI and Federal Communications Commission are investigating the charges. And since it seems unlikely that this latest brouhaha will be settled by the Sept. 8 hearing, why should WorldCom be allowed to emerge from bankruptcy with more fraud allegations hanging over its head?

No more competition needed

The argument that WorldCom needs to emerge from bankruptcy in order to allow consumers much-needed competition in telecom is highly flawed.

One of the industry's main problems is an excess of supply. The elimination of WorldCom would probably be a good thing for telecom since it could be one small way of boosting the industry's pricing power.

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Now before you flood me with e-mails about how anti-capitalist this is, I'm not saying that choice is a bad thing. But it's not as if getting rid of WorldCom would create a monopoly situation in long-distance phone service.

AT&T is clearly faced with tough competition in long distance from the three Baby Bells, and to a lesser extent from Qwest as well as Sprint. This isn't 1980.

And don't get me wrong -- I'm not calling for outright liquidation of WorldCom just yet, the way that some of its competition is.

But at the very least, the bankruptcy court should hold off on approving WorldCom's reorganization plan until it is crystal clear that there is no more wrongdoing occurring at the company.


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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.