In: Operations Management
Worldcom was a high performing stock and a darling of Wall Street investors. The company's management had repeatedly fulfilled its objective to maximize profits and the stock's price, yet somehow the company failed.
1.)Causes of Worldcom failure:
Worldcom in 1990's followed an aggressive growth strategy via acquisition of other companies funded by selling its overvalued stocks.Also there occurred to be internal misalignment due to different corporate culture which eventually resulted in inefficient and ineffective leadership.
2.) The audited statements indicated that Worldcom was hiding its losses by inflating its revenue and cash flow by recording its expenses as investments.In fact Worldcom recorded a profit of $1.4 billion in 2002 Quarter 1 whereas it was at a loss.
3.)In 1999-2000,After several mergers and acquisitions Worldcom required some time to absorb these acquisitions.Although Ebbers (CEO) felt to the need to show ever increasing revenue which would increase the value of their stock and hence securing financial status and deceiving investors.Hence CEO and CFO of Worldcom resorted to accounting gimmickry and manipulated the expenses of the company as its investments.Hence they were sentenced to prison.
4.) Worldcom's corporate governance turned out to be ineffective and inefficient after a series of events.After several mergers and acquisitions Worlcom required some time to absorb other corporations and align with their corporate culture.Whereas CEO Ebbers (who also owned shares in Worldcom) felt the need to show always increasing revenue so that value of the stocks kept increasing and hence he could secure his financial status.Also due to several mergers,there was misalignment of corporate culture which resulted in inefficient leadership.