The Meteoric Rise and Fall of WorldCom

  • By Matthew Briggson
  • June 12th, 2024

In 1983 businessmen Murray Waldron and William Rector came up with a plan to create a discount long-distance communications provider called “Long Distance Discount Service” or LDDS (which would later become WorldCom). This was shortly after telecom giant AT&T agreed to a settlement agreement with the U.S. Department of Justice to break up its "Bell System" as part of an antitrust lawsuit. 

New telecom companies such as LDDS saw an opportunity to get into the long-distance communications business. Supposedly, the plan for LDDS was developed on a restaurant napkin. Waldron and Rector brought on an early investor named Bernie Ebbers who would become CEO of this new company and remain CEO for nearly 20 years. With the breakup of AT&T, new telecom companies could now lease  what are called “Wide-Area Telecommunication Service Lines” or WATS, and then resell phone time on these lines to other businesses. LDDS was essentially a long-distance reseller. They would go to one of these former AT&T entities, and buy large volumes of time on telecommunication lines and then sell it to business customers. LDDS owned the switches of its network while leasing the lines, typically at a fixed rate. 

From the beginning, LDDS used an aggressive acquisition strategy to grow. LDDS' growth trajectory changed dramatically in the 90s as it rebranded to WorldCom and sought an even larger M&A deals. Some of their acquisitions included the purchase of MFS Communications and UUNet Technologies in 1996, which positioned WorldCom as a major player in the burgeoning Internet backbone market. The 1998 merger with MCI Communications, valued at $37 billion, was a transformative deal that solidified WorldCom's status as a telecommunications powerhouse. WorldCom was now the second-largest long-distance phone company in the United States.

By the early 2000's the dot-com bubble had burst and WorldCom's hyper aggressive M&A strategies had left it with insurmountable debt. The crash of the tech bubble put pressure on its stock price and ability to generate capital to fund operations. WorldCom leadership responded this pressure by engaging in fraudulent accounting practices to maintain its facade of profitability. In 2002, a brave and determined group of internal auditors discovered that the company had falsely inflated its earnings by capitalizing nearly $4 billion in operating expenses. This revelation exposed one of the largest accounting scandals in corporate history. 

The WorldCom collapse and bankruptcy had far-reaching implications. It underscored the necessity for stringent corporate governance and regulatory oversight. The scandal was a catalyst for the Sarbanes-Oxley Act of 2002, which aimed to enhance corporate responsibility and financial disclosures. Additionally, many of the WorldCom executives, including Bernie Ebbers were prosecuted and incarcerated. 

For more details on the WorldCom story, we invite you to checkout our podcast episode and earn 1 hour of CPE. Click on any of the links below to listen! 
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About the author
Matthew Briggson
Matthew Briggson

Matthew is a licensed CPA in the state of Michigan and a co-founder of Encoursa.com, an industry leading CPE provider for accounting and finance professionals.

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