FT.com / Lex
WorldCom’s accounting fraud was revealed when the company, owing to a combination of collapsing revenues and excessive debt, was already heading towards bankruptcy and was already a penny stock. WorldCom takes over the mantle of largest US bankruptcy from Enron which, in contrast, was brought down by the revelation of its trickery.
One implication of WorldCom’s filing is that one of the Bells’ biggest customers is bust. BellSouth yesterday reported revenues more or less in line with expectations. The earnings disappointment is largely a combination of a predictable increase in bad debt expense – with WorldCom playing no small part – and an unpredictable tax rate. It cut its earnings forecasts, but that was no great surprise. Yet BellSouth shares dropped by 16 per cent and Verizon and SBC Communications by more than 10 per cent. That is not easy to explain.
The market has swallowed big talk from a WorldCom chief executive in the past, and perhaps John Sigdmore’s talk of emerging from Chapter 11 stronger than ever is prompting concern. Relieved of its debt obligations, WorldCom could use aggressive price cuts to defend its customer base. AT&T and Sprint suffered substantial falls, though not as great as the Bells. A possible outcome of WorldCom’s collapse is that one of the Bells could buy a chunk of its assets, a potentially risky proposition. But that would be a step towards a mo