Analysis of the Worldcom Situation

Situation Analysis

Worldcom moved from being one of the largest communications and seemingly most successful telecoms companies in the world to abruptly bankrupting- being the largest bankruptcy in American history. Worldcom achieved its past status as being the one of the world’s largest telecom companies through rapid and aggressive acquisitions. This mode of expansion, although it seemed to play a major role in its ‘success’ proved to become one of the major causes of its downfall.

For an acquisition to be successful, all the operations of the acquired companies will have to be fully integrated and synergised with the acquiring company to ensure efficiency. Worldcom executives did not focus on this aspect of the acquisition process. Instead they focused on meeting their acquisition targets instead of ensuring the operational efficiency of the newly formed company. Its operations had many inefficiencies, unnecessary though expensive procedures and duplication of processes. Resources were either wasted or underutilised. Some of these processes did not add or create value for the firm, but they were costly. Many important aspects of operations such as customer service, which is important to any firm, was ignored. Also important areas of the companies acquired, that could contribute greatly to the operational efficiency of WorldCom, were removed and replaced with inefficient substitutes.

WorldCom’s accounting procedures were also severely lacking. There was no strict adherence to accounting rules and principles. WorldCom breached many GAAP principles by misrepresenting their expenses as capital expenditures in order to raise its net income, and EBITDA (earnings before interest taxes, depreciation and amortization). Capitalising expenses is not just a breach of fundamental accounting standards, but it is also fraudulent. In addition to misrepresenting their expenses, WorldCom’s receivables department paid no attention to their doubtful customers and as such...