Serialisation: The Great Telecoms Swindle - part 1

A swindle exposed

Last year the wheels came off some of the biggest telecoms companies in the world - spectacularly. In The Great Telecoms Swindle authors Keith Brody and Sancha Dunstan sift through what went wrong. This is the first of their exclusive serialisation for silicon.com... While the excrement had figuratively been hitting the ventilation extractor with alarming regularity across the telecoms sector in the preceding months, as one established company after another lurched towards insolvency, when the WorldCom story broke, all the world was suddenly willing to openly declare - and loudly - that the shit had well and truly hit the fan. Coming hot on the heels of the Enron crisis (with which the dramatis personae of the WorldCom saga shared a leading actor, the accounting firm Andersen), the telecoms market crash was transformed in a single stroke into The Great Telecoms Swindle. In the first instance, the story behind WorldCom's self-servingly phrased announcement was sleaze. As if Enron had not been enough to make people mistrust the ethics of the corporate world, here was proof positive malfeasance was rife, that there was more than one bad apple in the pack. What's more, while Enron was not a company in a market that most thought touched their own lives in a direct way, WorldCom was a key player in a market that, in the preceding 36 months or so, had come to dominate almost everyone's world. Since the late 1990s, everywhere one turned, the talk was of the telecoms sector. Money - much of it 'our' money - was invested via the equity markets in the form of stocks, mutual funds, bonds, pensions and other funds into an industry that was almost too hot for its own good. Telecoms technology was in a state of revolution and it was a revolution (honestly!) from which the consumer was guaranteed to emerge a winner. 3G, broadband, mobile, convergence& these were the themes from which all of us were about to benefit in ways we could only imagine, all released to endless profit through the benevolent effects of deregulation. It would be 'our' bank accounts that would benefit first. It turned out that, as with so many of history's great revolutions, the leaders of this one were as untrustworthy and incompetent as the visions they espoused were dramatic. What WorldCom had actually announced in its famous press release amounted to the discovery and admission of a $3.7bn accounting fraud. That's a lot of money and, in turn, prospectively an awful lot of fraud. What the company had done, in short, was to treat vast sums of money (sic) that were actually expenses as capital expenditures, therefore allowing itself to report higher profits and more favourable cash flows than an honest accounting system would have permitted. The public, within hours, turned on this news with a vengeance. WorldCom's announcement captured the popular imagination because of a combination of its scale, its timing and the sheer effrontery of what its news represented. With stock markets already in recession, it was obvious that the economic downturn up to that point had not been fiercer simply because consumer spending had held up. Essentially, consumers had maintained their confidence in the economy in the belief that nothing was seriously wrong and a recession could be ridden out. Suddenly, consumers were being given reasons (left, right, and centre) to believe their confidence might be badly misplaced. WorldCom, hot on the heels of Enron, suggested a smell of rotten eggs was emanating from the boardroom, that the world of high finance and corporate leadership was rigged against investors by a clique of insiders who were either blind, stupid or both. How could a multi-billion fraud catch anyone by surprise? WorldCom rapidly became a fully-fledged scandal on a truly global scale. It didn't take long for US President George W Bush to weigh in, making a 'business page' story into a collapse worthy of national attention. WorldCom, and telecoms, were suddenly front page news and for reasons even worse than those which had brought the industry to prominence. Prospective fraud provided the headlines and added oil to the fire but the fire had been burning for some time already. In the first instance, Bush (sounding suspiciously like a politician) described the news of WorldCom's activities as outrageous and promised the people responsible would be held accountable. He added: "There is some concern about the validity of the balance sheet of corporate America and I can understand why. We've had too many cases of people abusing their responsibilities and people just need to know the SEC is on it, our government is on it and Arthur Andersen has been prosecuted. We will pursue, within our laws, those who are irresponsible." How could WorldCom, second to only AT&T in the long-distance market in the US, a company which had grown from a small long-distance telco into a telecommunications force globally through more than 60 acquisitions in only the past 15 years, hit the rocks in such spectacular fashion? How could an entire sector, in fact, appear to be falling apart all at once (albeit for reasons other than fraud)? Telecoms giants, only two years earlier the darlings of the investment community, lauded daily on the front pages of national newspapers as the heralds of a brave new commercial world that promised to benefit us all, were coming apart at the seams. Once rock-solid corporate entities like Global Crossing, Lucent Technologies and Marconi (to name but three) and others were now reduced to fighting tooth and nail for little more than survival in a scaled-down, severely distressed form. Others had vanished altogether. Even former monopolies like BT, Deutsche Telekom and France Telecom were barely a step ahead of the plunge into such chaos (often with the help of protectionist government intervention). Shares that had 24 months earlier sold for $50 or $100 were in many cases now trading for pennies. The very same advances that had promised to drive the telecoms sector to untold riches were proving in many ways to be its downfall. Something had gone dramatically wrong. For telecoms, WorldCom was the event that put the icing on the cake and, for that matter, the cherry on the icing. The company's fall turned a crash into a swindle and it turned the fear and dissatisfaction engendered by recession into sheer public contempt. In barely 20 years, WorldCom's history had run a course that had apparently taken it from the summit of industrial achievement to the depths of corporate depravity. Tomorrow: The perfect storm - money made, money lost. The Great Telecoms Swindle is published by Capstone on 28 January.