MCI, Inc.

MCI, Inc.

MCI, Inc., international telecommunications company, which became one of the largest bankruptcies in United States history in 2002 when it was known as WorldCom, Inc. The company went bankrupt after being accused of carrying out the biggest accounting fraud in U.S. business history. The company emerged from bankruptcy in April 2004 when it officially adopted the name MCI, Inc. In February 2005 Verizon Communications Inc. announced that it was acquiring MCI for about $6.7 billion, subject to regulatory and shareholder approval. The merger was completed in 2006.

II

HISTORY

The beginnings of MCI date from 1963 when John Goeken, the owner of a mobile phone company, sought permission from the Federal Communications Commission (FCC) to provide telephone service between Chicago, Illinois, and St. Louis, Missouri. Goeken’s company, known as Microwave Communications, Inc., planned to use then-new microwave technology that transmitted phone calls through the air like radio signals rather than through the commonly used copper wires (see Microwave Communications). At the time AT&T Corp. operated as a government-regulated monopoly, controlling all long-distance telephone service within the United States. AT&T, which used the profits from long-distance services between major cities to subsidize its service to rural customers, strongly opposed Goeken’s plan.

In 1968, while the issue was being decided by the courts, Microwave Communications, Inc., was renamed MCI Communications Corporation. Later that year, William McGowan replaced Goeken as head of MCI. Under McGowan’s leadership, MCI filed a lawsuit claiming that AT&T constituted an illegal monopoly, or trust, designed to eliminate competition in the telecommunications industry. The company also began lobbying the FCC and the Congress of the United States. MCI’s efforts eventually succeeded. In 1971 MCI became the first company authorized by the FCC to compete with AT&T in the American long-distance market. In 1982, under the threat of a U.S. Department of Justice antitrust suit, AT&T agreed to give up control of its 22 regional subsidiaries, which provided local telephone service.

In the aftermath of the breakup, AT&T cut prices drastically, compelling MCI to do the same. Although MCI now had the second largest share of the U.S. long-distance market, the company lost $448 million in 1986. MCI soon joined AT&T in calling for deregulation that would allow long-distance companies to compete in local markets.

Responding to growing competition in the telecommunications industry, MCI began to focus on marketing and diversification. In 1992 the company launched a highly successful long-distance service known as Friends and Family, which promised reduced rates for residential customers. In 1993 MCI and British Telecommunications (BT), the United Kingdom’s largest provider of local and long-distance telephone services, announced a worldwide strategic alliance. As part of the alliance, BT invested $4.3 billion to acquire a 20 percent stake in MCI. In 1994 MCI and Grupo Financiero Banamex-Accival, Mexico’s largest financial group, formed a joint venture known as Avantel to offer long-distance service in Mexico.

As competition in the telecommunications industry intensified, MCI lost more than a million customers to AT&T in 1994. To compensate, MCI increasingly focused on forming partnerships with other large companies. In 1995 MCI acquired Nationwide Cellular, an American cellular telephone company, and SHL Systemhouse, a Canadian firm specializing in corporate computer networking systems. In 1996 MCI and News Corporation formed a joint venture to offer consumers information and entertainment through a satellite system known as ASkyB (American Sky Broadcasting). Similar satellite services were offered to businesses through the SkyMCI program. MCI also formed strategic alliances with Microsoft Corporation, Digital Equipment Corporation, and Intel Corporation.

III

MCI-WORLDCOM MERGER

The 1996 Telecommunications Act deregulated the U.S. telephone market. MCI became the first long-distance company to offer local telephone service, but it also faced new competition in the long-distance market from regional telephone companies. In 1996 British Telecommunications announced plans to purchase Washington D.C.-based MCI. However, after BT lowered its offering price by nearly 20 percent, in 1997 MCI accepted a purchase offer of $37 billion from telecommunications firm WorldCom.

Founded in 1983, WorldCom had used its own fiber-optic cable network to become one of the leading U.S. telephone and Internet service providers (see Fiber Optics). WorldCom, based in Jackson, Mississippi, also owned Internet access company UUNET Technologies, one of the world’s leading Internet service providers.

The merger faced scrutiny from antitrust officials in the United States and Europe. Regulators voiced concerns that the proposed company’s Internet business would have an unfair advantage in the market because both WorldCom and MCI had substantial Internet holdings. In early 1998 WorldCom’s UUNET division had gained control of the network units of CompuServe, a subsidiary of America Online, making UUNET the world’s leading provider of Internet access. To gain approval for the WorldCom-MCI merger, MCI sold its Internet assets to Cable & Wireless PLC, a British telecommunications firm, for $1.75 billion in 1998. The European Commission and the U.S. Federal Communications Commission approved the merger later that year.

IV

ACCOUNTING FRAUD AND BANKRUPTCY

In June 2002 WorldCom admitted that it had falsely reported $3.85 billion in expenses over five quarterly periods to make the company appear profitable when it had actually lost $1.2 billion during that period. Experts said it was one of the biggest accounting frauds ever. The company fired its chief financial officer and laid off about 17,000 workers, more than 20 percent of its workforce. The company’s stock price plummeted from a high of $64.50 in 1999 to 9 cents in late July 2002 when it filed for bankruptcy protection.

The Securities and Exchange Commission (SEC), the United States Department of Justice, and the U.S. Congress all opened investigations into WorldCom’s accounting scandal. The admission of accounting fraud followed similar developments at other major companies, most notably the Enron Corporation, and was blamed for helping send stock markets into a major decline during 2002.

In February 2004 the U.S. Justice Department handed down indictments against Bernard J. Ebbers, the former chief executive of WorldCom, and Scott D. Sullivan, the former chief accounting officer. Sullivan pleaded guilty to the charges in a plea agreement in which he agreed to be the chief witness against Ebbers, who pleaded not guilty. A jury convicted Ebbers in March 2005 of securities fraud, conspiracy, and filing false reports with regulators. In July Ebbers was sentenced to 25 years in prison. A number of other lower-ranking WorldCom financial executives were also indicted and pleaded guilty.

In March 2004, in a formal filing with the SEC, the company detailed the full extent of its fraudulent accounting. The new statement showed the actual fraud amounted to $11 billion and was accomplished mainly by artificially reducing expenses to make earnings appear larger. After restructuring its debt and meeting other requirements imposed by a federal court, the company emerged from bankruptcy protection in April 2004 and formally changed its name to MCI, Inc.

Even as it emerged from bankruptcy, industry observers anticipated that MCI would need to merge with another telecommunications firm in order to compete against larger companies that offer a broader range of telecommunications services. The merger materialized less than a year later, in February 2005, when Verizon Communications Inc. announced its acquisition of MCI for about $6.7 billion in cash, stocks, and dividend payments. MCI ceased to exist as an independent company under the terms of the merger, which was completed in 2006.