Archive for the 'Worldcom CFO Favor' Category

The year was 1997. Worldcom finalized its acquisition of MFS Communications four months earlier. Within days of the closing, most of the MFS executive team parted ways. I was one of the most senior ex-MFS’ers.  I knew more about MFS’ day-to-day business than perhaps anyone who remained.

Worldcom discovered a problem. The context is arcane, so bear with me.

Long distance telephone companies pay local telephone companies to originate and terminate phone calls. The rate to do this has been very high due to historical reasons tied to the breakup of AT&T.  These high access rates were the mechanism for using long distrance revenue to subsidize local phone companies so that phone service would be available to most Americans.    In 1997, access rates were set at approximately 2.5 cents a minute, and this expense category was Worldcom’s biggest expense. If they could cut this in half, their stock would soar. And they had a plan to do just that–acquire MFS.

MFS was leading the charge on bringing competition to local phone service. As part of how local competition worked, local phone companies exchanged phone calls with one another. If MFS’s customer needed to call Verizon’s customer, MFS would need to hand off a call to Verizon and Verizon, in turn, would deliver it to the customer. The reverse of this was also true, as Verizon’s customers would need to call MFS’ as well. Although the technology of exchanging local calls was identical to exchanging long distance call, the price was far lower–about 0.5 cents a minute instead of 2.5 cents a minute.

Worldcom’s plan was to buy MFS and route its long distance traffic through MFS’ local trunks, saving more than 50% of the fees it was paying the local telephone companies to terminate calls.  If successful, Worldcom would save several million dollars a month.

After Worldcom completed its acquisition, it discovered a flaw in its plan. It was illegal. Regulatory law didn’t allow (and still doesn’t) paying local rates for terminating intercity calls. This was news to Worldcom and not good news. A big part of their “synergy” was no longer available to them.  Oh well. I guess the due diligence was a bit rushed.

But they had another plan. From an accounting perspective, perhaps they could take a write-off based on purchase price accounting. The logic (or illogic for non-CPAs) was that this “savings” would have been available to Worldcom for the transaction but they’d simply couldn’t realized the savings immediately.   So they decided they’d write off a big acquisition expense and buried among other big acquisition expenses.  Who’d know?   By doing so, they would reflect savings on their P&L statement immediately.  The cash to pay the access charges would not be saved, but this would be an accounting reconciliation with the cost of the acquisition.   It would never hit their P&L.  EBITDA would look better, and they’d meet their synergy goals.

To implement this revised plan, Worldcom needed a subject matter expert to work with Arther Anderson to provide context for the write-off. Scott Sullivan asked me to do this. I explained the problem was not technical, it was law.   Scott viewed this as a technicality.  He further explained that Worldcom was the only account assigned to the Anderson partner also lived in Worldcom’s hometown of Jackson, Mississippi.

“Don’t worry about it,” Scott tied to assure me.   “It is not a big deal. They just need some color.”

I thought about it. After a sleepless night or too, I decided to tell Scott no.

“No problem,” was Scott’s reaction “We will get someone else to do it.  To the best of my knowledge, they took this write-off.  Thankfully, I resigned a couple of months thereafter to be part of the team that launched Level 3 Communications.