The Clinton deal that killed MCI: Excesses of the 1990’s comes full circle

Published 16 years ago -  - 16y ago 9

When Ronald Reagan’s deregulation of the phone companies broke up “Ma-Bell”, it was MCI that not only brought real competition to the long distance market but also helped establish what America depends on as modern telecommunications.  Today, having been raided by WorldCom in 1998, that major center of innovation and competition has fallen apart along with an economy it supported.

In the 1970s and early 80s, long distance phone calls were an expense that average Americans tried to avoid.  So much so that middle class telephone conversations were cut short to keep the phone bill down.

As the first nationwide alternative for long distance service, MCI gave Americans a choice and the competition drove per minute cost of long distance calls down to a reasonable level.  AT&T had no choice but to trim their costs and cut prices.  A lengthy phone call from one coast to another became something average people could afford, thanks to MCI.

And long distance phone calls weren’t the only thing that MCI gave to America.

By the late 1980s, MCI offered the first prominent commercial e-mail service as “MCI Mail” long before the average person ever heard of an Internet.   MCI’s Electronic Data Interchange became a nationwide venue for e-commerce before “B2B”.  And other services like fax broadcast, a credit card processing network, and low-cost wide area networks (WAN) laid the foundation for a “new economy”.  This author knows the value of such innovations because I’ve had my hand in each one of them as an engineer for MCI.

In 1997, after MCI made what should have been a minor strategic error by overreaching its efforts in local phone markets, Clinton’s stock market bubble opened the door for overpriced paper to purchase the nation’s second largest communications provider.  WorldCom, a company with market capitalization far exceeding assets, laid out the 35 billion-dollar buyout plan that would be approved by Bill Clinton’s FCC and Justice Department.

MCI was forced to sell its internet assets to Britain’s Cable and Wireless so the company could adopt a temporary moniker in the name “MCI WorldCom”.  Before it was taken over by WorldCom, MCI’s major customers were listed directly in Fortune’s one hundred and five hundred top businesses.  Those multi-million and multi-billion dollar accounts required quality and reliability in the services they had purchased and they had come to depend on it from MCI.

But WorldCom had become a mess as it acquired scores of small companies through buyouts.  It was poorly managed and considered a “bottom feeder” in the market, with a basic strategy of going after business customers ignored by the big three providers – AT&T, MCI and Sprint.  The quality it offered was nowhere near that of the big three and the largest buyers of telecommunications service would soon find out their network had been put on a leaky boat.

But the country didn’t notice a beginning of the end to “irrational exuberance” of the 1990s.

Ten months after the MCI takeover deal was closed, America experienced a nationwide ten-day outage in one of WorldCom’s data networks.  The failure in its frame relay service (a type of wide area network) was so severe that it made the evening news on all three major networks.  Such interruptions are the kind that not one major business customer can tolerate.  The tune was called for dismantling one of America’s finest corporate assets when MCI was laid on its deathbed.

It is difficult to quantify how much the buyout of MCI by WorldCom has impacted the falling stock market over the years.  But there can be no question MCI was a keystone of what we now call the “new economy”.

One of the MCI’s senior Vice Presidents, Vint Cerf is considered to be the “father of the Internet” having established its most fundamental technology known as TCP/IP.   Cerf stayed on with MCI WorldCom after it sold “InternetMCI” to Cable and Wireless but his contribution to the company was limited as legacy WorldCom insiders took charge in key positions.

By 1998, WorldCom had completed its purchased of MCI for $37 billion worth of stock priced then at $52 per share.  Before trading was halted Wednesday on Nasdaq, WorldCom stock was being sold for $0.83 per share.  That means the Clinton, MS company managed to buy our nation’s second largest long distance provider for what is now worth about $500 million.

As its CEO quit after “borrowing” $366 million from the company and WorldCom’s new chief executive announced they had hidden $3.8 billion in expenses from the public, the company’s Chief Financial Officer was fired and one of its senior Vice Presidents resigned.  Off market trading after the announcement had WorldCom’s stock at a low of nine cents per share.  Seventeen thousand more people are losing their jobs in addition to the tens of thousands who have been laid off earlier this year.

What this writer realized in November 1999 when I resigned from my job as a data service manager has now become clear to the public.  WorldCom never contributed anything to the companies it bought.  Like Clinton, it just drained them of the sustaining energy necessary to survive.  And the headlines today represent one example of a con game played out over and over in markets, when worthless stocks were used to siphon trillions of investor dollars.  WorldCom’s downfall is a bell tolling for Clinton’s 1990s economic boom.

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