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WorldCom May Survive After All

Outlook: A bankruptcy filing could allow the firm to come out stronger. Customers are the key.


Despite mounting fiscal and legal woes, WorldCom Inc. could emerge from its current crisis as a leaner and stronger telecommunications company.

Analysts said Wednesday that WorldCom will probably be forced to file for bankruptcy protection, a move that ordinarily would lead competitors to buy its assets at fire-sale prices. But problems in the telecommunications industry are so severe that no one is likely to want the company.

Instead, WorldCom could remain in operation, cast off unprofitable units and negotiate better terms from lenders and suppliers, who are motivated to help the company survive, analysts said.

If it does, the reincarnated WorldCom could push prices for long-distance phone and data services even lower, intensifying competition in a market that already has too much capacity and too many providers.

For WorldCom, the wild cards are its customers, particularly the large corporations that rely on its phone and data services. If they run to other carriers, WorldCom is doomed.

"We're concerned, of course," said Suzy Whittenton, chief financial officer of the Texas Department of Parks and Wildlife, which has hired WorldCom to create and run a multimillion-dollar database system for hunting and fishing licenses. "Our staff's meeting right now to figure out how we'd deal with this if WorldCom went away."

The telecommunications industry is plagued by too much supply and not enough demand, said David Passmore, research director for Burton Group, a network analysis firm. Companies such as WorldCom built massive networks to move phone calls, e-mails and faxes around the world, but the pipes are far from full.

"What needs to happen is that half of these companies have to go away so that the remaining companies can begin to heal themselves," Passmore said. "But that's not happening. The assets remain. The networks don't go away. Someone else will come along and continue to operate these networks, and that keeps up the price pressure. It's a difficult situation. That's why we're not going see the end of the bankruptcies by carriers for some time."

Compounding the situation is a perceived advantage to seeking Bankruptcy Court protection as a way to wipe a company's slate clean of debt.

"As each carrier goes bankrupt, they are freed from debt," Passmore predicted. "When they emerge from bankruptcy, they can cut their prices to compete, which drives the next guy into bankruptcy. There's a domino effect that could happen here."

If the recent experience of Covad Communications Group Inc. and McLeodUSA Inc. is any guide, WorldCom has reason to be optimistic. The two telecommunications companies recently went through bankruptcy, yet both said they held on to virtually all of their major customers.

WorldCom executives said they have no plans to file for bankruptcy protection or to make any significant changes in their offerings. Although the company will no longer resell wireless-phone service, it plans to continue providing long-distance calling, local and long-distance data and Internet services and international communications.

"Yesterday's announcement does not affect our customers or our service," a WorldCom spokeswoman said, referring to Tuesday's disclosure that the company had mischaracterized $3.9 billion in expenses as capital improvements. "It really is business as usual."

On the contrary, many analysts said, the announcement is likely to compound WorldCom's financial troubles. The company had recently reported a nearly 10% decline in revenue from external customers, including steep drops in consumer long-distance and small-business sales.

Its most valuable assets include its high-capacity long-distance lines and, in numerous cities, local fiber-optic networks that can link businesses to that long-distance backbone. But on many of the routes WorldCom serves, fierce competition and rapidly advancing technology have led to a glut of long-distance capacity and sharply falling prices.

This bleak industry outlook, combined with the financial hit WorldCom must take to properly account for its expenses, makes lenders unlikely to offer the company more credit. Nevertheless, some financial experts say there is a small chance WorldCom may avoid bankruptcy.

"But if creditors can agree to work with the company, it's a lot faster, cheaper and less complicated to stay out of court," said Richard Levin, a partner at Skadden Arps Slate Meagher & Flom in Los Angeles who helped draft the 1978 U.S. Bankruptcy Code.

WorldCom also has $4 billion in cash, enough to allow it to continue operating into early next year, analysts said. It also plans to cut 17,000 of about 80,000 jobs.

Nevertheless, Glen Macdonald, a vice president at Adventis Corp., a technology consulting firm in Boston, predicted that WorldCom won't be able to dodge the bankruptcy bullet. "They'll definitely have to seek bankruptcy protection," he said. "It will send a signal to their suppliers and customers ... that they'll have time to get their act together."

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