WorldCom's

revival effort was humming Friday after the company confirmed Michael Capellas as its new boss.

The bankrupt telco's success in landing a respected chief tells industry watchers that the company's books, besmirched by some $9 billion in erroneous accounting, are now nearly clean. As a result, a revamped company could emerge from Chapter 11 around the middle of next year.

The selection of Capellas, the former

Hewlett-Packard

president, ended a closely watched

executive search that included a handful of phone industry bigwigs, including

Gary Forsee, the No. 2 guy at

BellSouth

(BLS)

.

"I think it's a signal that the biggest accounting manipulations have already been exposed and that if anything new is discovered it will likely be small entries," says Marty Hyman, an industry consultant and adviser to the WorldCom creditor committee. "There's some comfort to be taken from this. It shows there may be a foundation to the economics of the business."

Posin' a Threat

Despite bankruptcy and the revelation of widespread use of potentially fraudulent accounting practices, WorldCom poses a formidable threat to the rest of the industry. As operator of the nation's No. 2 long distance company and a fast-growing local phone business, WorldCom has shown less vulnerability than some expected. Now, teetering telecom rivals and their investors fear the competitive advantages of reborn WorldCom free of onerous debts and recharged under a new hard-hitting management team.

While WorldCom has to negotiate settlements with at least four groups of credit stakeholders and a number of banks, people close to the situation, including Hyman, say the company could emerge from bankruptcy as early as May or June of next year.

In addition to the debt settlements, one of the challenges Capellas faces is designing a business plan that all parties can agree on. The company must get a handle on just how big of an operation it intends to be, say debt analysts and industry observers. One former executive says it is reasonable to expect a

slimmed-down version of WorldCom, similar in many ways to the original MCI.

The process is likely to include the sale or elimination of some underperforming businesses like Digex, the Web hosting and services unit, was well as paging business Skytel, say people inside and outside the company.

The Hour of Chaos

Capellas will also have to decide how much staff and resources to allocate to various parts of the company, including, for example, the MCI Neighborhood program. The wildly successful flat-rate, unlimited calling plan for local and long distance service hinges on government-mandated wholesale pricing. The regional Bells are heavily lobbying Washington officials to have the rules lifted, complaining that the prices don't cover the costs.

While analysts and consultants all agree that Capellas is a very capable executive, there are concerns that he may lack the deep background in telecom necessary to keep all the moving parts churning in the same direction.

One thing is certain: While WorldCom has appeared to weather its failure in good shape, the damage of insolvency continues to mount, putting a premium on a quick turnaround. The company has been able to keep many more of its lucrative corporate customers than many observers anticipated, but as more of those contracts come up for renewal, there is a strong chance of customer defections.

"As these renewals pop up, the best they can hope to do is retain their customer base," says adviser Hyman. "That makes for a greater sense of urgency to finish the restructuring process."

That urgency is being felt both by WorldCom and its rivals.

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