WorldCom's collapse has already reverberated through jittery financial markets, and is likely to be felt in the wider economy, with banks, suppliers and other telephone companies devising strategies to contain their exposure.
WorldCom, built through rapid acquisitions, accumulated $41 billion in debts. Founded in 1983 as LDDS Communications, it became the nation's second-largest long-distance company and the largest handler of Internet data.
Company executives said they intended to remain in business, and have been promised new financing from banks to do so. ''We are going to aggressively go forward and restructure our operations,'' John W. Sidgmore, WorldCom's chief executive, said in an interview last night. ''I think ultimately we will emerge as a stronger company.''
While WorldCom has already cut its work force significantly, Mr. Sidgmore said last night that he did not expect further layoffs for the time being. He said he would remain WorldCom's chief but would be joined by a chief restructuring officer brought in by creditors.
Some creditors, however, have questioned whether Mr. Sidgmore, who has served on WorldCom's board for years, should remain in charge. Mr. Sidgmore took over as chief executive in late April after the board ousted Bernard J. Ebbers, one of the company's founders.
Shareholders, who owned what was once one of the world's most valuable companies, worth more than $100 billion at its peak, are expected to be virtually wiped out. With the bankruptcy filing, control passes instead to the banks and bondholders who financed WorldCom's growth.
Besides its own overambitious strategies and flawed accounting, WorldCom also fell victim to a glut of telecommunications capacity.
Cheap and plentiful financing allowed companies rapidly to build transcontinental and transoceanic fiber optic networks in the 1990's. The additional capacity resulted in lower prices for WorldCom's services, which include basic phone service and the transmission of Internet data for large companies.
Mr. Sidgmore said last night that he was opposed to breaking up WorldCom and selling its pieces, aside from an effort already under way to part with peripheral units like businesses in Latin America and some other operations. This approach would rule out selling UUNet, a large Internet backbone operation, or MCI.
But once the company reorganizes, and investors gain a better understanding of its twisted finances, WorldCom could become an attractive acquisition target, analysts say.
WorldCom's crisis deepened last month when it disclosed that Scott D. Sullivan, the chief financial officer, had devised a strategy that improperly accounted for $3.85 billion of expenses. Mr. Sullivan was fired by the board and David F. Myers, the financial controller, resigned.
The Securities and Exchange Commission has charged WorldCom with fraud and the Justice Department has begun a criminal investigation of its business practices.
In an attempt to regain its credibility, WorldCom's board elected two new members to replace Mr. Sullivan and Mr. Ebbers: Nicholas deB. Katzenbach, a private attorney who was attorney general in the Johnson administration; and Dennis R. Beresford, a former head of the Financial Accounting Standards Board and a professor of accounting at the Terry College of Business at the University of Georgia.
The two were also appointed to a special committee to oversee the internal investigation being led by William R. McLucas, the former chief of the enforcement division of the S.E.C.
WorldCom filed for bankruptcy shortly before 9 last night in Federal District Court in Manhattan.
Its international operations, which include companies in Brazil and Mexico, were not included.
The filing will relieve WorldCom of about $2 billion of interest payments in the coming year. Lower debt costs could allow WorldCom to compete on a stronger footing with its rivals, involving a potential price-cutting strategy that has analysts concerned about the wider strength of the telecommunications industry.
''WorldCom probably won't get any new big contracts from its current customers, but it probably won't lose any either, because of the difficulty and complexity involved in switching carriers,'' said Glen Macdonald, a vice president with Adventis, a consulting firm in Boston.
WorldCom, based in Clinton, Miss., scrambled in recent days to secure new financing from its banks after its cash dwindled to less than $300 million from more than $2 billion in May. WorldCom said last night that it had received commitments for up to $2 billion in additional bank financing. Such new loans to companies in bankruptcy receive top priority in repayment.
WorldCom must now deal with holders of $28 billion in bonds as well as 27 banks that loaned the company $2.65 billion last May.
But in contrast with other companies that have recently filed for bankruptcy, including Enron, WorldCom has many more tangible assets, generating actual revenues, lawyers said -- improving the odds that the company could emerge from bankruptcy as a going concern.
The creditors first in line to be repaid will be the three institutions -- Citigroup, J. P. Morgan and General Electric Capital -- that have pledged to arrange a loan of up to $2 billion, known as debtor in possession financing, to WorldCom. The lenders were comfortable pledging the funds in part because of the company's stream of customer payments, such as phone bills, one executive close to the company said last week. Citigroup is leading the new financing in part to protect what it is already owed by WorldCom.
WorldCom's bankruptcy filing, like Enron's last December, came on a Sunday. Companies often prefer to file over the weekend, because the status of any business transactions in process at the time of a filing would be open to question in court.
WorldCom's lenders and its bondholders were taking steps, even before the bankruptcy filing, to protect their claims. Just over a week ago, the banks that participated in the earlier $2.65 billion loan tried, unsuccessfully, to get a court order limiting WorldCom's access to the loan. The banks ultimately reached a settlement with WorldCom that placed few restrictions on the company's ability to use the cash.Continue reading the main story