- What growth strategy was adopted by WorldCom, and why?
WorldCom’s growth strategy was basically making as many mergers and acquisitions of rival telecommunications companies as possible. According to an article in the New York Times, WorldCom CEO, Bernard J. Ebbers, stated that WorldCom had grown by completing more than 65 mergers and acquisitions, including acquiring MCI (Eichenwald, 2002). Through mergers and acquisitions, WorldCom became one of the most rapidly growing major corporations in the nation, at its peak. WorldCom moved so quickly with its mergers and acquisitions that it made nearly 70 deals within a five-year timeframe (Rosenbush, 2005). This became a normal part of the corporation’s business plan and strategy for growth.
The question of why WorldCom adopted a strategy of growth based on massive mergers and acquisitions is likely for the money. Fast profits seem to be the reason for the quick, massive growth of this corporation. The CEO approved a business plan that focused on getting more and bigger as fast as possible. According to Rosenbush (2005), WorldCom’s growth strategy made many investors rich with its over-the-top revenue growth and stock returns. The fast growth of WorldCom also made top executives in the company very wealthy, allowing them to splurge on extravagant yachts and mansions (Eichenwald, 2002).
- Why did the growth strategy at WorldCom not pay off as expected?
Rosenbush (2005) reports mergers and acquisitions are a legitimate and viable way for companies to grow; however, it is only viable if done at a reasonable pace. WorldCom made almost 70 mergers and acquisitions in less than five years. This is too much too fast, because it does not give other aspects of the business time to effectively handle the rush. For example, corporate departments such as research, development, sales, and marketing are too overwhelmed to keep up with the growth to be efficient and effective. This can cause a domino effect of negative reparations throughout the business structure that result in failures in areas such as accounting, human resources, liability, customer service, bookkeeping, etc., and this is what happened to WorldCom.
According to Rosenbush (2005), critics say that WorldCom’s several factors contributed to WorldCom’s fall, such as the corporate culture being tribe-like with the CEO looked upon as a leader that demanded unusual loyalty from employees in a closed corporate culture. Also, it is reported that the CEO and the CFO instructed subordinates to manipulate the corporate accounting in fraudulent ways, with the knowledge and participation of key executives in the corporation. In addition, WorldCom was highly visible in the government policy arena, as it related to trying to convince regulators and elected officials on issues in their favor. However, government policy can quickly change with whatever is going on in the political arena. When federal policymakers made changes to the telecom industry in favor of open competition instead of monopolies, it affected the industry in a huge way and this affected WorldCom’s position in the market. Many rivals began entering the market causing saturation. With WorldCom and their massive mergers and acquisition business model, staying afloat began to be a problem. This is particularly true of quarterly financial performance comparisons. WorldCom’s distorted bookkeeping made it increasingly more difficult to keep up with true quarterly earnings (Rosenbush, 2005). Furthermore, WorldCom’s operations were being poorly managed and many problems were not solved as they arose. For example, WorldCom had many acquisitions they did not consolidate into a single enterprise. This led to the company not being able to function properly because there was so much disconnection within the organization (Eichenwald, 2002).
According to Moberg and Romar, there were too many poorly integrated acquired companies that caused organizational issues such as senior management’s failure to develop cooperation among units, failed use of competitive local exchange carriers, and inefficient technical service centers.
Another thing that contributed to WorldCom’s strategy failing is its loans to senior executives. Ebbers, himself, borrowed $341 million, which he was unable to pay back when the stock prices began to fall (Moberg & Romar).
- Why did it take so long for WorldCom to realize that the strategy of growth by was not working?
One thing that kept the fact that WorldCom was falling in the dark was they managed to keep their per-share profit numbers high, largely through fraudulent manipulation of the accounting books. The stock prices were high even when the company had failing finances. This hid the fact that WorldCom’s core business was really not growing that much, even though it looked that way from the numbers. Also, as mentioned, many problems that arose within the organization were over-looked and not dealt with, and this caused issues to escalate into problems (Eichenwald, 2002).
In addition, completing mergers and acquisitions is time-consuming and the process involves many steps and planning. It is reported that the CEO, Ebbers, did not do well at paying attention to details related to the acquisitions and this caused some delays. However, when WorldCom was denied the acquisition of Sprint, by the government, their practices began coming into the light. This is when their strategy began to crumble because of disclosures being sought about their accounting irregularities (Moberg & Romar).
The executives at WorldCom were so busy making mergers and acquisitions without ensuring their stability in the organization that it took some time for the collapse to begin. This is why the growth strategy seemed to be working well in the beginning, but turned negative because it had no solid foundation on which to stand. It was like a deck of cards stacked on top of another deck of cards, just positioned to fall. But it seems that the top executives of the company should have known this would happen eventually, but perhaps they wanted to get as much money and perks as they could for as long as they could, to line their own pockets.
Eichenwald, K. (2002, August 8). For WorldCom, Acquisitions Were Behind Its Rise and Fall. Retrieved from New York Times: http://www.nytimes.com/2002/08/08/business/for-worldcom-acquisitions-were-behind-its-rise-and-fall.html?pagewanted=all&src=pm
Moberg, D., & Romar, E. (n.d.). WorldCom. Retrieved from Santa Clara University: http://www.scu.edu/ethics/dialogue/candc/cases/worldcom.html
Rosenbush, S. (2005, March 15). Lessons of the WorldCom Debacle. Retrieved from Bloomberg Businessweek: http://www.businessweek.com/stories/2005-03-15/five-lessons-of-the-worldcom-debacle