Nice article in the New York Times on WCOM's Bernie Ebbers adventures in margin. Will WCOM be "Conseco'ed"?
nytimes.com
November 17, 2000
Floyd Norris: WorldCom's Bernie Ebbers
Scrambles to Raise Cash
By FLOYD NORRIS
he saga of WorldCom and Bernard J.
Ebbers is one of the great
entrepreneurial success stories of the last
decade. Mr. Ebbers built a tiny long-distance
telephone company into a communications
giant.
An investment in his company, then known as
LDDS Communications, at the end of the
1980's would have risen 6,946 percent by the
end of the 1990's, by which time the company
was known as MCI WorldCom. During that
decade he was paid $45 million in salary and
bonus, not to mention millions of stock
options. By the end of the decade, Mr.
Ebbers owned stock worth $1 billion.
And now he is short of cash.
In the last three months, he has raised $70.6
million by selling stock. You might think that
would be enough for anybody, but he also
persuaded WorldCom to lend him $61.5
million and agree to guarantee $100 million
more in loans that he apparently could not get
on his personal credit. The money went to
secure Mr. Ebbers's margin loans.
WorldCom stock is down 75 percent from the peak it reached in the
summer of 1999, but the shares he owns are worth $263 million at the
current price of $16. If you assume that the margin loans that Mr. Ebbers
took out without WorldCom guarantees are still outstanding — an
assumption that seems reasonable although the company says he will not
discuss the issue — it seems possible that he does not have very much
equity left.
How did that happen? The probable answer is that Mr. Ebbers ran his
personal portfolio the way he ran his company — on the edge. The
company grew by betting on trends and gobbling up other companies.
His money was tied up in WorldCom stock, which in keeping with the
fashion of the decade paid no dividends. But he evidently needed more
money than he was being paid. So he took out margin loans. With the
stock rising, such loans were readily available whenever he wanted. Now
the lenders are demanding cash. Fortunately for Mr. Ebbers, he — unlike
other WorldCom shareholders — apparently can borrow as much as he
wants from the company to cover his margin calls.
Mr. Ebbers remains a believer. When he sold stock in September, with
WorldCom shares near $30, he negotiated a complicated deal that
means he will effectively sell the shares for a higher price if the stock rises
by the spring of 2002. The additional loans came this month, after the
stock fell below $20. By borrowing so much, he can avoid selling shares
and will profit if the price rebounds.
Mr. Ebbers is not unique. Steve Hilbert, the former boss at Conseco,
borrowed to buy stock in his company as it soared and now is deeply in
debt after the stock price collapsed. One wonders how many others —
whether in executive suites or out of them — have taken out cash from
this long bull market without selling their shares.
Such cash withdrawals could help to explain why the wealth effect has
spurred consumption more than would have been expected over the last
couple of years. They also could explain why this year's decline in stock
prices may put a significant damper on holiday spending.
Mr. Ebbers, meanwhile, has discovered that there is something to be said
for dividends. The plan now is for WorldCom to spin off a tracking stock
for its MCI subsidiary and have it pay dividends that would bring in
about $2 million a year for Mr. Ebbers.
In his current position, that might not be enough if WorldCom stock does
not bounce back. But even for a former billionaire, every million helps. |
