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Enterprise Report Card On MCI
by Hank Levine
Business Communications Review, June 2003

On April 14, WorldCom filed its long-awaited Plan of Reorganization, the document that lays out what it hopes and expects to look like as a corporation when it emerges from Chapter 11. If all goes well, the plan will be approved and the new WorldCom (renamed MCI) will exit bankruptcy sometime in late summer or early fall.

As demanded by law and custom, the Plan of Reorganization (“the Plan”) was put together by MCI’s management after negotiation with the company’s major creditors, particularly its bondholders, who will own debt to be issued by the new MCI, as well as virtually all the company’s stock. Enterprise customers (i.e., those with annual telecom expenditures exceeding $5 million) had little input into the Plan’s formation, although they remain critical to its success.

The Plan contains extensive caveats, disclaimers and qualifications that make it clear that it is not a traditional business plan. Indeed, it becomes null once MCI emerges from bankruptcy, at which time the company could chart a different course from that set forth in the Plan.

Nevertheless, the Plan is the clearest roadmap we have of the company’s future direction. It anticipates that mass-market revenue will, at best, be flat for the next three years. Essentially all of the $3 billion increase in revenue that the company anticipates—and needs—will come from increased domestic and international sales to business customers.

In light of that dependence, it is worth asking how sound and friendly the Plan is from the perspective of enterprise customers. The “sound bite” answer is that it gets about a “C+”. Here’s why.

A Full-Service Provider The first priority of enterprise customers, voiced days after the company filed for bankruptcy last summer, was that WorldCom not be “piece-parted”—that it emerge intact as a global provider of a unified suite of telecommunications services. On that count, the plan gets an “A.”

Except for a few peripheral lines of business (South America, mobile services, etc.), MCI anticipates retaining its key assets and capabilities, and should emerge capable of providing the voice and data services that enterprise customers require in the U.S. and (probably) overseas. The principal caveat on this count is the possibility that the company will “restructure” its Asian and or European units in a way that gives its overseas partners control over these lines of business, which could threaten the seamless integration of domestic and foreign network operations.

MCI also gets high marks for its post-bankruptcy account support and service quality, and for improving its contracting process. Early fears that bankruptcy would force MCI to cut back in these areas to the detriment of enterprise customers (who require a lot of support to manage complex installations, billing, etc.) have proved unfounded. MCI’s install intervals and network quality have not suffered—if anything, they are better than they were before the company went into bankruptcy.

In contract negotiations, MCI long “enjoyed” a reputation as the most rigid/overreaching of the major carriers and the hardest to do business with. Necessity is, however, the mother of invention, and MCI is now about as responsive as Sprint in major deals, making it, at least for the moment, easier to close a deal with than AT&T.

Contract Assumption In two other areas—not as important as the first, but not trivial either—the plan is not reassuring or helpful from an enterprise customer’s point of view.

The first of these concerns assumption of user contracts. One of the axioms of bankruptcy law and lore is that a debtor emerging from bankruptcy doesn’t assume contracts until it has to, and it doesn’t have to until the day its plan is approved. But this axiom is most applicable to supplier contracts (like leases). Unlike MCI, most bankrupt companies aren’t dependent on somewhere between a few hundred and a couple of thousand large corporate customers locked into three-year agreements whose contracts are assets, not liabilities, of the company.

MCI executives have been telling corporate customers for months that the company has no intention of rejecting any customer contracts, but that’s not what the Plan says. Indeed, the Plan expressly reserves the right to reject any contract (including a customer contract) up to the day on which it takes effect. Meanwhile, I know of at least two business customers who have been told that some or all of their MCI contracts are still being considered for rejection.

Aside from giving its prize customers heartburn, MCI’s refusal to assume customer contracts until the last possible moment is bad for MCI, because it will hamper the carrier’s efforts to recapture traffic lost to other carriers in the months immediately following its bankruptcy filing. It’s important to recognize that this is not an airline bankruptcy, where, if a carrier shuts down the customer just walks up to another airline ticket counter and buys a ticket from that company.

Enterprise customer commitments to carriers typically run three years, and it takes time—not to mention money—to switch carriers. Until a prudent telecom manager knows that MCI is going to assume his/her company’s contract, he/she must act as if it could be rejected, which means that the manager can’t commit new business to MCI. In fact, he/she has an obligation to his/her company to migrate service off of MCI if the service in question is one that would take more than 30 days to move to another carrier�� days being the rule of thumb about how much notice a bankrupt carrier must give customers before cutting them off.

In short, MCI’s insistence on maintaining “flexibility” in bankruptcy has cost it a valuable opportunity to quickly regain the business and the confidence of enterprise customers.

As with contract assumption/rejection, MCI has repeatedly told enterprise customers that if it did reject a contract or discontinue a service, it would negotiate an appropriate transition or migration period. And, as with assumption/rejection, it has repeatedly refused to put that assurance in writing or otherwise make it binding. Enterprise customers have noted the disconnect between rhetoric and reality, and have hedged their bets accordingly.

Bottom line: MCI’s position on assumption of customer contracts is contributing to the 18 percent decline in business revenue that the Plan anticipates in 2003. It will be hard for MCI to recover that business after it moves to other carriers. In this area, the Plan would get an “F” except for the repeated, albeit non-binding, assurances of MCI executives that the company won’t exercise the rights it is so assiduously protecting. So call it a “D.”

Financial Structure The second area in which the Plan is not reassuring to large users has to do with the company’s anticipated financial structure. There are three problems:

  • Low investment (capital expenditures or “capex”): MCI has various needs in areas like systems/platform integration and product development, but proposes to invest less than 7 percent of its revenue in 2003��. It is by no means clear that MCI will have the revenues to make even these expenditures.
  • Rosy revenue projections: In a world in which prices (especially for data and international telecommunications services) are flat or declining, MCI is projecting a 7 percent increase in business revenues in 2004 and a further 10 percent increase in 2005.
  • $5 billion in debt: The bondholders will own the company, and they wanted something more than stock to show for their pain. But the debt that is being issued to bondholders under the Plan will suck $300? million per year in revenue out of MCI in the form of interest payments. MCI showed a profit for the first quarter of 2003, after wiping out its previous debt and writing off all of its “goodwill.” Had the new debt been in place, the carrier would barely have broken even in the first quarter of 2003.
Even though it has shed more than $25 billion in debt, MCI will limp, not leap, from the starting gate in the fall of 2003. It will be skimping on investment and skimming off cash to pay its (new) bondholders, and it will have a very small margin of error in an extraordinarily tough business.

Something like 20 percent of the companies that emerge from Chapter 11 return to bankruptcy within five years. Large users don’t want MCI to be one of those casualties, yet the three financial factors listed above make such a return more likely than it otherwise would, or should be. These factors also bolster the new rule of telecom procurement: Every corporate user should have two carriers, and if MCI is one of them, it shouldn’t be given more than 50 percent of the customer’s business. On financial structure the plan gets a “C-”.

Conclusion It is far too early to say with any assurance whether MCI’s reorganization will succeed or fail. In the short run, the company’s continuing commitment to being a “full service provider” is good for large users and the company. But its refusal to assume customer contracts before it absolutely has to will delay the return of business customers—and the accompanying revenue—that MCI is counting on to grow itself into profitability.

Over the longer term, the company’s tightly constrained financial circumstances will force it to make difficult choices between investing in new products and services and staying in the black. For the next three years, large users can only hope that MCI meets or beats its revenue projections, so that even after its new bondholders skim off $300–$400 million per year, there will be enough money left to market aggressively and make the investments that its business and customers require.