Extreme Makeover

How Robert Blakely and an army of accountants turned fraud-ridden WorldCom into squeaky-clean MCI.

All these measures were enough to convince the government that MCI had reformed. Last January, it lifted the debarment just in time for the renewal of a contract worth as much as $400 million.

There would be more to celebrate. On April 20, the company emerged from bankruptcy, officially taking the name MCI Inc., with its debt slashed from $41 billion to $5.8 billion, and with $6 billion in cash reserves. Its stock was scheduled to begin trading again on Nasdaq this month. “A lot of people didn’t think we could get it done,” says Beresford. “It took a Herculean effort to get to that point.” (Not to mention the $800 million in fees MCI spent during its sojourn in Chapter 11, for lawyers, accountants, appraisers, tax experts, and other consultants.)

But the work on the controls isn’t finished. Like most companies, MCI is busy documenting its controls in compliance with Section 404c of the Sarbanes-Oxley Act. More than 60 people are working on the project, and PricewaterhouseCoopers is providing outside assistance. “We’ve still got a long summer ahead to get to where we need to be,” says Blakely.

Was It Worth It?

Right now, MCI is trailing the field. “They are third in a race of three,” says Muayyad Al-Chalabi, managing director of San Francisco-based telecom research firm RHK Inc. Compared with archrivals AT&T and Sprint, MCI has lower margins, pays more (as a percentage of total revenues) to other carriers in access fees, and has the fastest-declining revenues (17 percent in the past year alone, year over year). “I don’t know if MCI was worth saving,” says Al-Chalabi.

The company will also have to fend off competition from Baby Bells like Verizon and SBC Communications, which are looking to provide enterprise telecom services to small and midsize businesses — a key customer base for MCI. And another setback came in June, when a federal court ruled that Baby Bells no longer had to lease access to their local networks to the likes of MCI at deep discounts, increasing MCI’s cost to provide consumer long distance.

In May, MCI announced a $388 million loss for the first quarter of 2004, compared with a $52 million profit for Q1 2003. The company said it would cut 7,500 jobs, or 15 percent of its workforce. But Al-Chalabi says reducing head count alone won’t solve MCI’s problems. He points out that the company has a patchwork of networks left over from the acquisitions — the same problem that plagued the finance department — which impedes its efforts to obtain operating efficiencies. “They have a thousand or more systems that all need to be supported,” says Al-Chalabi. “That increases the number of suppliers they have to deal with, and there is a lot of duplication in the systems.”

All of these factors have fed speculation that MCI will put itself up for sale, likely to one of the Baby Bells. Yet Al-Chalabi notes that these potential buyers can already buy long-haul capacity very cheaply, without buying the MCI cow. Also, he says, “the Baby Bells still have huge amounts of debt. I’m not sure they are in a position to do a big purchase right now.” That could be bad news for MCI. “I don’t think they can stand alone with the current trend,” says Al-Chalabi. “They’ll either be part of another company, or they’ll have to dramatically change their ways.”


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