Updated from 8:26 p.m. EDT
Chapter 11 filing appears to be just what the doctor ordered for at least one big supplier.
The Compaq unit of
was planning to stop providing equipment support and repair work for WorldCom's network as soon as this coming Friday, say people familiar with the situation.
It's not clear whether Compaq explicitly imposed a deadline on WorldCom, one of the nation's biggest network operators. But the Compaq plan points to an important dynamic that paved the way for WorldCom's record-setting Chapter 11 filing: Anxious vendors demanded sweet terms from the big telco or threatened to pull service altogether, potentially undermining WorldCom's ability to continue serving its customers.
WorldCom says it doesn't comment on vendor dealings, and a company spokeswoman added that the companies have a "long-standing relationship" that they'll attend to "should any issues arise." Gary Duryea, Compaq's WorldCom account manager, declined to comment and referred all questions to a lawyer. "This is a very sensitive time for us," Duryea said.
But observers say some suppliers may have been eager to see a Chapter 11 filing because bankruptcy protection enables troubled companies to secure financing, continue operations and pay vendors while restructuring debt. In effect, cash-strapped WorldCom may have decided that avoiding bankruptcy for a limited time wasn't worth the risk of alienating key customers with potential service problems.
WorldCom has been teetering on the brink of bankruptcy ever since the company said last month that it had misstated its expenses by some $3.9 billion. Weighed down by a mountain of debt and beseiged by vendors demanding cash upfront, the company eventually ran out of cash and said it will seek protection from creditors to reorganize its $32 billion in debt. One of the biggest questions about the company has been how long it could hold on to its lucrative corporate data customers; WorldCom has said its clients have remained loyal.
According to a WorldCom press release issued late Sunday night, the "additional liquidity will enable the company to satisfy customary obligations associated with the daily operations of its business, including the timely payment for new services, employee wages and other obligations."
Hewlett-Packard, which merged with Compaq in May, supplies WorldCom with network servers and storage gear. As such, it plays a big role in WorldCom's Internet, Web-hosting and data traffic operations. Some WorldCom employees say that without Compaq's technical help, network outages and service interruptions could plague WorldCom's massive network. By its own account, WorldCom handles over half the world's Internet traffic.
With WorldCom resorting in recent months to budget cuts and layoffs in an effort to control costs, network maintenance has gone from prevention to firefighting mode, says one technician. "Outages are the only things getting addressed, and that usually requires Compaq support," says the techie.
As a result, some observers say H-P's plan aimed to use the denial of service as leverage to hurry WorldCom into Chapter 11. From H-P's standpoint, that makes sense, says a Boston-based analyst.
"H-P doesn't need to tell shareholders they have a lingering, deteriorating exposure to WorldCom," he says. "The quicker they reorganize the company, the more likely they are able to salvage value."
Other observers note that while Compaq may not be beyond a bit of posturing to get its point across, the big computer company isn't likely to do anything that would jeopardize its ties with WorldCom. Being the nation's No. 2 long-distance carrier as well as the leader in business data services, WorldCom is simply too big a customer to walk away from, say industry experts.
"This isn't like a
," says one industry consultant who recently completed an appraisal of the Clinton, Miss., telco's large contracts. "WorldCom has several billion dollars worth of contracts with the regional Bells and the U.S. government. No one is anticipating a WorldCom shutdown."
A WorldCom spokeswoman echoed that observation.
"Regardless of what financial path we choose," she said, "the network will continue to operate."