WorldCom was one of the leading telecommunication companies prior to its application for bankruptcy protection on July 21st, 2002. The firm’s decision to file for bankruptcy was a shocker move considering the amount of revenues and asset base the company had. It is believed that the firm was highly involved in fraudulent bookkeeping between the year 1999 and 2000 where they had managed to overstate its taxable income by at least $7 billion.
It was also revealed that the company had committed itself to maintaining an earning to expense ratio which was relatively high. Therefore, the firm had a self-imposed high target which became relatively difficult to achieve over time owing to shrinking revenues. In the early years of the 1990s, the firm was performing well through a series of acquisitions thus realizing the capacity to handle the desired company growth. As a result, this contributed to the firm high revenue stream.
Consequently, due to the pressure to deliver on this high ratio, the managers did everything possible to ensure that the target was met, including engaging in activities that meet the short time target, but undermined the firm’s long-term capabilities such as, engaging in long-term leases in anticipation of meeting customer demand while exposing the firm to punitive measures in the future if the firm wanted to terminate the lease.
The worst turn of the firm occurred in the 2000s when the firm was extremely adversely affected by the heightened competition, decreasing prices, overcapacity and reduced consumer demand for telecommunication services which occurred on the onset of the economic recession and immediately after the dot com bubble busted. In light of this new market condition, the CFO adopted to use creative accounting which later evolved to fraud in order to meet the 42% expense to revenue ratio which eventually lead to the collapse of the firm and prosecution of key management members (McClam, 2005).
The two key methods used to cook the books were capitalization of line costs and accrual releases. Strengths, Weaknesses and Alternatives Strengths In order for an activity to be deemed to be value creating, it must have at least one of the following characteristics namely, increase the cash flow that are generated by the assets that are in place, improve on the expected earnings growth rate, increase the period where high growth rate are expected, and reduce the costs of capital. The dominant value creating function is the main reason for the firm engagement in inorganic growth.
Through this mode of growth, the firm improved the value of shareholders since the power and efficiency of the merged companies are better than the individual companies working separately. As a result, the value was captured in the anticipated synergies where the results of these mergers were evident based on the accelerated growth in revenues, profits, and assets. In addition, the mergers, especially the merger between world com and MCI, brought together two firms that have complementary strengths and assets (Hitt & Harrison, 2001).
Through these mergers, the shareholders’ value was improved through operational cost reduction including, the reduction in reduced leased lined costs, and elimination of expensive terminal charges both locally and internationally. Also, the mergers eliminated duplication of activities and investments, adoption of best practices while sales and marketing forces have meshed thus making the established market channel to be better established.
Moreover, the mergers and acquisitions helped the firm minimize the competition in the market, instantly add new brands to the firm’s product portfolio, instant access to fresh customer base and expansion to new geographical locations, gaining economies of scale over a reduced period of time, injection of new and diversified management skills and significant reduction of time to market thus giving the firm the competitive advantage (Gaughan, 2013).
All these merger outcomes are value-adding since they enable merger process meet the characteristic of the value adding functions. The ultimate effect of these mergers has been gaining the necessary capacity to handle expected growth and increase the market value through realizing the desirable expense to revenue ratio that was set at 42%. This concept of value-based management enabled the firm to base their targets on key value drivers. Key value drivers are not definite nor are they independent (Nstermann, 2006).
As a result, this means that the firm regularly considered the best combination of value drivers and the right value driver at various instances in time. Weaknesses Mergers and acquisition mean bringing together companies that have different corporate cultures, visions, mission and objectives. Therefore, in order for the organization to benefit from the merger, there must be synergy in the corporate culture, vision, mission and objectives of the involved firms. However, World Com never realized the importance of this synergy.
Technically speaking, since the firm never harmonized the corporate culture, vision, mission and objectives of the merged firms, they were like different firms that were pursuing different missions and objectives guided by varied visions and corporate culture. As such, the ultimate benefit of the merger, synergy, is limited by the fragmentation in the firm (Page, 2010). As a result, operational efficiency was hard to achieve thus, negatively affecting the process of value creation since wastage and inefficiencies have a converse effect in relation to the characteristics of value creation.
Evidently, in order for an organization to work, the firm must have valid policies and guidelines that have been set by the board and implemented by the management. However, this is not the case since the board is delinked from the organization management. As such, this leads to the failure of the entire firm’s internal control system since the management is not accountable to the board which is representative of the shareholders.