Page 157 - DCOM204_AUDITING_THEORY

Unit 8: Auditing in an EDP Environment

Notes

Caselet Long Distance Discount Services, Mississippi

ong Distance Discount Services, Inc. (LDDS) began in Hattiesburg, Mississippi. in
1983. In 1985 LDDS selected Bernard Ebbers to be its CEO. The company went
Lpublic in 1989 through a merger with Advantage Companies Inc. The company
name was changed to LDDS WorldCom in 1995, and later just WorldCom. The company’s
growth under WorldCom was fueled primarily through acquisitions during the 1990s and
reached its apex with the acquisition of MCI in 1998. Among the companies that were
bought or merged with WorldCom were Advanced Communications Corp. (1992),
Metromedia Communication Corp.(1993), Resurgens Communications Group(1993), IDB
Communications Group, Inc (1994), Williams Technology Group, Inc. (1995), and MFS
Communications Company (1996). The acquisition of MFS included UUNet Technologies,
Inc., which had been acquired by MFS shortly before the merger with WorldCom.
In February 1998, a complex transaction saw WorldCom purchase online pioneer
CompuServe from its parent company H&R Block. WorldCom then retained the
CompuServe Network Services Division, sold its online service to America Online, and
received AOL’s network division, ANS. The acquisition of Digex (DIGX) in June 2001 was
also complex; WorldCom acquired Digex’s corporate parent, Intermedia Communications,
and then sold all of Intermedia’s non-Digex assets to Allegiance Telecom.
MCI Acquisition
On November 10, 1997, WorldCom and MCI Communications announced their US$37
billion merger to form MCI WorldCom, making it the largest merger in US history. On
September 15, 1998 the new company, MCI WorldCom, opened for business.

Sprint Merger
On October 5, 1999 Sprint Corporation and MCI WorldCom announced a $129 billion
merger agreement between the two companies. Had the deal been completed, it would
have been the largest corporate merger in history, ultimately putting MCI WorldCom
ahead of AT&T as the largest communications company in the United States. However, the
deal did not go through because of pressure from the US Department of Justice and the
European Union on concerns of it creating a monopoly. On July 13, 2000, the boards of
directors of both companies acted to terminate the merger. Later that year, MCI WorldCom
renamed itself to simply “WorldCom” without Sprint being part of the company.
Accounting Scandals
CEO Bernard Ebbers became very wealthy from the rising price of his holdings in
WorldCom common stock. However, in the year 2000, the telecommunications industry
entered a downturn and WorldCom’s aggressive growth strategy suffered a serious setback
when it was forced by the US Justice Department to abandon its proposed merger with
Sprint in mid 2000. By that time, WorldCom’s stock was declining and Ebbers came under
increasing pressure from banks to cover margin calls on his WorldCom stock that was
used to finance his other businesses (timber and yachting, among others). During 2001,
Ebbers persuaded WorldCom’s board of directors to provide him corporate loans and
guarantees in excess of $400 million to cover his margin calls. The board hoped that the
loans would avert the need for Ebbers to sell substantial amounts of his WorldCom stock,
as his doing so would put further downward pressure in the stock’s price. However, this
strategy ultimately failed and Ebbers was ousted as CEO in April 2002 and replaced by
John Sidgmore, former CEO of UUNet Technologies, Inc.
Contd...

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