Bernie Ebbers Bio
Source: The Independent - London
Publication date: 2001-02-21
(The Digest) - The finest hour of Bernie Ebbers came in early October 1997. Looking uncharacteristically sober in a dark suit, he strode into the ballroom of the Pierre Hotel in Manhattan to inform the world that his upstart telephone company, WorldCom, was buying MCI, then America's number two long-distance provider.
It seemed almost preposterous. He was, after all, a man who operated - and still operates - not out of a corporate tower in Manhattan but from modest offices in a place called Clinton, Mississippi. (You have to squint to find it on the map.) He had a penchant for cowboy boots and turquoise jewellery. And nothing ever seemed to get in his way of buying companies, both tiny and huge.
Some muttered that Ebbers, who, in spite of his acquisitive bravado, is a devout Christian and can be quite shy in public, would one day meet his come-uppance. His WorldCom empire was made entirely out of paper - he always made his purchases with shares rather than cash - and WorldCom stock could not grow indefinitely. The humbling of the man from Mississippi was only a matter of time.
They were right, of course. The only question today is whether he has also gone through his darkest hour already - he had one awful day last November - or whether Ebbers has worse to come. Now, for sure, he is in a mess. But he can have had no inkling of what awaited him that morning at the Pierre.
No one was more affronted by his move on MCI than British Telecom. BT, led by Sir Iain Vallance, had already negotiated its own merger deal with MCI for $22bn and was expecting to close it before the end of that year. Who was this Ebbers man suddenly gazumping them? He was paying 30 per cent more for MCI than BT had managed - all stock, of course. (The BT offer included $4bn in cash.)
When Ebbers sought to buy out BT's 20 per cent stake in MCI, he initially offered shares in WorldCom. BT insisted on cash. A characteristically outraged Ebbers told Sir Iain and Sir Peter Bonfield their breach of fiduciary duty in turning down his paper would cause shareholders to fire them because the WorldCom share price was certain to soar. Sir Peter and Sir Iain may yet be fired, but it won't be for this particular transaction. BT made a pounds 2.25bn cash profit from the sale, about three times the current value of MCI WorldCom.
Actually, there was nothing to be surprised about Ebbers move for MCI. This is how the former high school basketball coach who stands 6ft4ins, had been operating for more than 15 years. His life as a telecom buccaneer started in a Mississippi diner in 1983. At the time, he owned a modest motel chain in the state.
One motel had a sideline in reselling surplus long-distance phone capacity. According to WorldCom lore, Ebbers sat in the diner and, with pen and paper napkin, drew up a plan to turn the motel's activities into a free-standing company. It too would resell capacity at rock-bottom prices and would be called Long Distance Discount Services, or LDDS.
It did not go very well at first. After it had drifted into serious debt, Ebbers was drafted in as CEO to turn it around. He did so by cutting costs furiously and then taking it public in 1989. He began a long buying binge that turned LDDS, later renamed WorldCom, into a global contender.
His strategy was straightforward. As the stock of LDDS grew more valuable, so Ebbers purchased other telephone concerns. With each one, he followed the same formula. As he absorbed their existing client bases and revenues, he ruthlessly cut costs. By the time he had got to the Pierre with the MCI deal in his pocket, he had bought and digested about 70 companies in this way.
MCI, with its base in Washington, DC, was to suffer the same cost- cutting fate as all the companies that had come before. Among Ebbers' first decrees, after the deal closed in 1998, was that company cars were to be eliminated along with numerous other perks. When MCI executives travelled out of town, they were ordered to check into budget hotels and - horrors - share rooms with one another. Not altogether surprisingly, large numbers of MCI's managers fled from Ebbers.
Then, in October 1999, Ebbers really sent jaws to the carpet. Not satisfied with acquiring MCI, he was now announcing plans to buy the other principal US long-distance provider, Sprint, paying $129bn for it. It was trumpeted as the richest merger in world history. Few people stopped to ask whether Ebbers could actually pull it off. He had never failed before.
The Sprint deal was important to Ebbers partly because of its wireless unit, Sprint PCS. MCI WorldCom was already the second largest long-distance provider in the US and carried more internet traffic than any other company. It lacked a nationwide wireless network, however. But things soon went sour with the Sprint deal. Principally, it was the regulators who got in the way, in Washington and also in Brussels. Slowly it dawned on Ebbers that to make the merger work with the competition watchdogs, he would have to sell off huge segments of Sprint and WorldCom. By late spring last year, he was forced to concede defeat and backed away from the deal. Shares of WorldCom, which had done nothing but grow for Ebbers for a decade, abruptly went into a tailspin.
Suddenly, the impossible seemed possible. Speculation began to mount that WorldCom, the hungry shark from Mississippi, was becoming bait for a takeover itself. The prospect of Ebbers returning to the Pierre one day to appear beside the head of another telecom giant to announce that it was he who was being bought and not the other way round no longer seemed outlandish. Possible predators still come to mind. There is Deutsche Telekom, for example, which is struggling to complete its acquisition of Seattle-based wireless provider VoiceStream. Or Spain's Telefonica. It is plausible that one of America's regional "Baby Bells", including Bell South or SBC, might be interested in an acquisition of WorldCom.
On 1 November, Ebbers had his really bad day. He travelled to New York to meet with analysts and prepared himself to eat humble pie. The old Ebbers, by turns folksy and caustic, was all gone. And the well-chewed cigar, for so long the signature of his self-assurance, was missing, too. He admitted that he had made a mistake going after Sprint and that the quest had distracted the company from other important issues. Notably, it had failed to react quickly enough to a sudden contraction in long- distance business as consumers increasingly turned to mobile phones to gossip. "We recognise that as a company we have let you investors down," he commented wearily. "I have let myself down." He even hinted at his own mortality as WorldCom chief executive. "I'm sure, with the recent performance of the stock, people have a legitimate right to ask if I'm the right person to lead this company," he told the analysts.
Ebbers also told a compelling story to illustrate how the long- distance price war had been killing him. He recalled WorldCom last year winning a bid to supply long-distance service to the discount retail chain Kmart. "We won the bid, fair and square." But then along came the chairman of AT&T, Michael Armstrong, secretly offering to provide the same service to Kmart for $5m less than whatever WorldCom was offering. Ebbers found out and offered to undercut AT&T still further. He was further outdone by Armstrong and in the end was forced to surrender. At that level, he couldn't make any money from Kmart anyway.
His frank talk to the analysts did nothing to stop the further collapse of the share price. Shares in WorldCom have fallen 60 per cent since the collapse of the Sprint deal. This is a source of particular pain for Ebbers, for whom share value has been the bottom line since the start. He has friends, including members of his church congregation, suddenly expressing bewilderment at the sudden draining of heir wealth. And many of his managers, who earn far more from stock options than salaries, are hurting, too. Nor has Ebbers, 59, escaped
himself. The value of his holdings in WorldCom had plummeted to about $300m by last month, compared with $1.1bn in March of last year.
His worst embarrassment came, however, when US Securities and Exchange Commission filings revealed he had been forced to sell three million shares in WorldCom and then, worse still, to borrow money from the company to respond to margin calls from his personal broker. The man who had built an entire empire on the assumption that stock prices can only go up was discovering otherwise, both as a CEO and as a private citizen.
Over several months in the second half of last year, the WorldCom board reportedly loaned Ebbers $75m to answer the margin calls and another $100m in loan guarantees. He could, in theory, have paid up himself by simply selling more of his own holding in the company. But that, of course, would only have contributed further to the depression of WorldCom's shares. "The day I entered into a contract to sell the shares, the stock went down," he said in an interview in Fortune magazine. "The board said: `Wait a minute. We don't expect our shareholders to be penalised because you got a margin call'. And so the board stepped into the gap."
WorldCom is hardly the only large telecom facing huge difficulties. AT&T is similarly in a funk, arguably an even more serious one. Earlier this month, WorldCom announced fourth-quarter profits had dropped 44 per cent, mostly because of the precipitous drop-off of sales of long-distance time to consumers and other phone companies. That sounds bad. But it was roughly what Wall Street was expecting. AT&T, meanwhile, saw its Q4 profit slump by 68 per cent.
And WorldCom is following a similar course to AT&T in trying to recover direction. Shortly before Ebbers presented himself, tail between his legs, to the analysts, AT&T had unveiled plans to split itself four ways. Ebbers told his audience he would try a two-way split. A tracking stock will be issued for MCI Group, which will provide service to consumers and small businesses. WorldCom Group, spared the drag of falling consumer demand, will sell data, internet and international services to big companies worldwide. A shareholder meeting to vote on the split is scheduled for the second quarter.
This and a few other initiatives have so far staved off pressure on Ebbers to do what he suggested might be wise: to sack himself. "I think most people just accept that WorldCom is his baby and don't really expect him to step down," Adrian Davies, senior equity analyst at Federated Investors in Pittsburgh, commented last week. Federated has a large WorldCom holding.
Importantly, WorldCom also came a step closer last week to closing a deal to purchase Florida-based Intermedia Communications for $4.1bn. Acquiring Intermedia, and its majority stake in a coveted web- hosting firm called Digex, has been portrayed as pivotal to WorldCom's hopes of increasing focus on data and internet operations and moving away from the long-distance business. Digex hosts websites for companies such as Ford and Sony. A lawsuit against WorldCom by shareholders in Digex, who were objecting to the acquisition, was settled last Friday when Ebbers agreed to pay out a $165m settlement on top of what he is paying for Intermedia.
The strategy is likely to prove crucial as the environment for long distance deteriorates. Adding to Ebbers' woes is the prospect that regulators under President George Bush are likely to further loosen the constraints on local phone providers waiting to enter the long-distance fray. This would intensify the price war still further. Prices for long-distance calls in North America have plunged to as low as 2 cents a minute from 15 cents four years ago. That is marvellous for consumers, of course, unless you happen to be holding WorldCom or AT&T shares in your retirement plan.
Ebbers is also expected to unveil harsh new cost-cutting measures for WorldCom in the next few weeks. Above all, the company is reportedly preparing to lay off about 15 per cent of its global workforce - that would translate to about 11,550 employees - within the next month. The company itself, however, is saying nothing. "I cannot comment on rumours or speculation," said spokeswoman Claire Hassett.
Stockholders like Adrian Davies welcome the moves. "The world is still waiting to see how WorldCom's retooling plans will be played out," he said. But he added: "We were expecting job cuts, but it's troubling to find out they are of this magnitude." Little is known how the cuts will be spread around the company and which countries they will hurt the most. It is thought likely that some will come from within UUNet, the huge internet carrier that Ebbers acquired almost by accident when he bought the internet services company MFS.
Talking to Fortune, Ebbers seemed philosophical about what may become of him. "The life of a CEO is performance or out, right? And I'm more than willing to accept that," he said. Moreover, he added, if he can't get the shares back on the upward track, then he would rather someone else try for him. "I am much more a stockholder than an employee. The value of my stock is worth a lot more to me than my job and my salary. I've often told my board I may have to fire myself for the sake of my stock."
Ebbers is adjusting to his new reality. Maybe the sale of WorldCom would be the best outcome for him, even though the irony would be heavy. "Every public company is for sale if you're looking out for the betterment of your shareholders," he commented to Fortune. "We could easily see ourselves as part of another company. It doesn't really matter if the combined company is of greater value."
Last year was indeed harsh on Bernie Ebbers. And nobody knows if he has been through the worst yet. You can assume, however, that he has learnt several lessons, not least the danger of borrowing against your stock holdings to buy more stock. But, before we shed a tear, remember that his holding in WorldCom is still worth about $300m. Not bad for a one- time basketball coach.
Publication date: 2001-02-21 |
