WorldCom: Don't Call It a Crisis, Just a Collapse

There's no cash crisis now at WorldCom (WCOM - Cramer's Take - Stockpickr). There's simply collapse.

During the crisis mode, Chief Financial Officer Scott Sullivan seems to have masterminded a $3.8 billion lie to keep WorldCom stock as high as possible for as long as possible, and to keep its bank lines and other access to capital open for as long as possible.

But alas, as is usually the case with accounting fraud, the truth eventually comes out. The banks will now come down hard on WorldCom, and this company is almost certainly headed to bankruptcy. The funding crisis that had paralyzed WorldCom over the past few months, as the company was forced to draw down nearly $3 billion on its bank lines and negotiate for more, is now over. The company's request for an additional $5 billion, to see it through the cash crisis, is dead. The banks will not be discussing any further funding options under the current equity structuring of the company.

Exacerbating these financial problems is the customer exodus that WorldCom was already seeing. This exodus will now become a mob scene as enterprise customers run for the hills, afraid of losing service or worse, going dark. They will desperately seek someone else's network, most likely AT&T (T - Cramer's Take - Stockpickr). Such a flight of customers will leave this company in total collapse and makes bankruptcy pretty much unavoidable now.

Something I just don't understand in the current capital crunch that plagues this godforsaken industry is the intense focus that we analysts, investors and the banks themselves pay to EBITDA. WorldCom's fraud, while awful no matter how you slice it, highlights the problem with this focus on EBITDA, or earnings before interest, taxes, depreciation and amortization. The company counted plain old operating expenses as capital expenses, and therefore inflated EBITDA numbers. Of course, none of these shenanigans changes the amount of cash that WorldCom has actually been putting on its books from its business, a number also known as free cash flow.

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Over the past year, as the capital markets have pretty much completely shut out the telecom operators of the world, my question to management of upstart carriers when they start quoting EBITDA-positive projections is simply: When will you actually generate some cash to put on the books? Regardless, it was the focus on EBITDA that drove the company to fraud, and now we've got this huge mess on our hands.

Let's face it, there are plenty more shoes to drop out there. Sources at Qwest (Q - Cramer's Take - Stockpickr) have alleged similar, though unsubstantiated claims of fraud on the company's top and bottom lines, and Global Crossing, whose network now seems likely to go dark as the chances of emerging from bankruptcy decrease daily, has similar stories to tell.

You'll notice in my disclaimer that I'm long the stock. Just to clarify here, it's a tiny position in my personal account. I missed the opportunity to sell WorldCom shares at $6 in May, even after cashing out my entire WorldCom stake at a profit in my newsletter's model portfolio. I'll likely go ahead and sell now and go buy myself some bubble gum, something much better to chew on than this awful stock.