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As I’ve been saying for months, when these long-haul telecom companies emerge from bankruptcy, free from servicing their huge capital debts, they will be dangerous. WorldCom, with its huge network assets, will be hugely dangerous and will cause massive disruption in the IP Communications industry. And they’ll be doing it as a dumb pipe vendor.

-Ian.

—— http://www.business2.com/articles/web/0,1653,44771,FF.html TECH INVESTOR Who’s Afraid of WorldCom? By: Eric Hellweg Date: October 28, 2002

Think the disgraced telecom giant is dead? Guess again. Under current bankruptcy law, the company could reenter the market debt-free.

While the general public may feel smugly satisfied after watching former WorldCom (WCOM) execs Scott Sullivan and David Myers do the perp walk recently, few realize that the company itself possesses a “get out of jail free” card — thanks in part to WorldCom’s decision to file for protection from creditors in bankruptcy court last July.

By seeking protection from the court, WorldCom hopes to erase most of its $42 billion debt, allowing the company to emerge leaner, meaner, and — unlike all the other large telecoms — debt-free. As a multibillion-dollar company unburdened by debt service, WorldCom would be able to launch price wars or pad its profit margins. That’d be a pretty nifty outcome for an outfit that’s currently under investigation for the largest accounting fraud in history.

“This is unprecedented,” gasps Jeff Kagan, an independent telecommunications analyst, “that a player of this size could change its position so quickly — going in with crushing debt and coming out debt-free.”

Not surprisingly, most of the other giants in the sector, such as AT&T (T), Qwest (Q), and SBC (SBC), that are riding out the Great Telecom Bust are none too happy that a competitor whose executives stand accused of fraud could escape its troubles and gain a decided advantage. “Bankrupt companies are entitled to due process,” says Verizon spokesman Peter Thonis. “But they can’t use bankruptcy to skirt the process by which they’re held accountable to regulatory bodies, particularly when there might be criminal conduct involved.”

Perhaps, but they can certainly use it to reemerge as healthier companies, instead of being sold off for parts. Simply put, more than 200 years of American bankruptcy law was designed to favor creditors, not competitors. “It is a rare situation where an immediate liquidation of a company obtains better returns for creditors than a reorganization,” says Larren Nashelsky, head of the bankruptcy group at Morrison Foerster. “It’s the nature of value that you get better values over time.” Nashelsky says that if WorldCom emerges from bankruptcy, it will do so as a “more streamlined” version of its former self, owned in part by creditors. That is the purpose of bankruptcy proceedings. Unfortunately for the woebegone Baby Bells, WorldCom seems likely to reenter the marketplace, although that probably won’t happen for at least a year.

Mike Balmoris, a Federal Communications Commission spokesman, wouldn’t comment on the Bells’ complaints about WorldCom or what the government might do to regulate the company. But in the meantime, WorldCom is making a strong case for continuing to function as a going concern.

Last week the company filed its monthly operating reports with the U.S. Bankruptcy Court for the Southern District of New York. During the month of July 2002, WorldCom recorded $2.464 billion in revenue and a net loss of $331 million. August’s revenue was down to $2.403 billion, but the net loss was cut to $98 million. The first few months of a company’s bankruptcy are very important in determining how to obtain the best value for its creditors, and WorldCom’s improving performance will bolster the case that it should be kept around.

It’s a wholly plausible scenario: The enfant terrible of the business world could be back on top in a couple of years. Insert your own rebuttal to F. Scott Fitzgerald’s “no second acts in American lives” quote here. Telecom analyst Kagan asks the billion-dollar questions that have the Baby Bells quaking: “As an industry, how do we handle this? Is it fair to have a company have a competitive advantage based on going into bankruptcy? This could force the whole industry to restructure.”

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