Extraordinary Genius

Chapter 1171 – WorldCom’s downfall

Kameda Masao returned after a while. <Business Weekly> is satisfied to interview Kameda Masao, but it will be better to interview Feng Yu.

Although Feng Yu did not accept the <Business Weekly> interview, Kameda Masao revealed a piece of exclusive groundbreaking news. This news reminded <Business Weekly> about the bankrupt Enron.

Many shareholders of <Business Weekly> are wealthy and know how much money they can make from this news piece.

<Business Weekly> immediately send their reporters to San Francisco to interview Kameda Masao. If Kameda Masao had not told them that he is busy today, they would have flown over today.

Huang Jiansheng left after knowing that Nvidia’s issue had been settled. He is very busy as Nvidia is still in its developing stage.

Only Feng Yu, Ralph, and Kameda Masao are the only ones remaining in the office. Ralph brewed three cups of tea and brought them over. He had worked for Feng Yu for some time and got used to drinking this bitter green tea.

Kameda Masao is Japanese and loves to drink green tea.

Feng Yu took a sip and nodded. This tea… can quench his thirst!

Kameda Masao is anxious to know which company was involved in accounting fraud. Still, he can only wait for Feng Yu patiently now.

Feng Yu puts down his teacup and asks. “Kameda, do you know about WorldCom?”

“WorldCom? I know about this company. It is the second telecommunication company in the US. It is only behind AT&T. At its peak last year, WorldCom is worth more than 180 billion USD. But after the internet bubble burst, it is worth around 70 billion USD now. Boss, are you saying WorldCom is fabricating its accounts?”

Kameda Masao felt this is impossible. WorldCom is a bigger company than Enron, and it is the World’s biggest internet service provider. If it is involved in an accounting scandal, its share prices will plunge like Enron. If no one acquires their shares, their only choice is to go bankrupt.

“That’s right. The company is WorldCom. WorldCom’s development is very interesting. If you look carefully at WorldCom’s financial report, you will discover they had expanded quickly during the Dotcom crisis. They expanded by acquiring other companies, and the money used is not from their profits. It is by issuing shares. That means WorldCom is using their investors’ money to expand…”

WorldCom had not to pay a large amount of cash to acquire each company. They exchanged shares to get the controlling stake, issuing new shares for the exchanges or used their existing shares. Even the cash they used is mainly from the funds raised by issuing new shares.

The benefit of doing this is easy management and using the lowest cost for their expansion. Such behavior is a tactic to raise cash and will not bring many benefits to the company. But if the merger is big enough to form a monopoly, the company will benefit from it.

Under normal circumstances, additional shares issuance is like adding water to wine. Most investors will dump their shares to avoid this risk. But WorldCom had been achieving ‘good results’ since they got listed. Many banks are backing them, and instead of dumping their shares, investors continued to buy them, pushing WorldCom share prices up.

In the end, WorldCom grew from a company that’s worth slightly more than 1 billion to 180 billion within a few years. Feng Yu remembers WorldCom’s shares is worth almost 200 billion in his previous life. But in this life, Feng Yu had dumped Microsoft shares early, and Nasdaq did not reach the peak. This resulted in WorldCom’s market value, not reaching as high as Feng Yu’s previous life.

But the good thing is WorldCom’s share prices did not plunge as fast as Feng Yu’s previous life.

Although the dot com crisis is very serious, WorldCom’s CEO gave its investors confidence with what he said earlier.

Our target is not to gain market share or globalization. Our target is to become Wall Street’s No. 1 share!

This statement made many investors invest in their shares.

But the turning point is at the end of last year.

At the end of last year, WorldCom tried to merge with Sprint Corporation, the third biggest telecommunication company in the US. The merger is worth almost 130 billion USD!

This is the most expensive merger in history. If it succeeds, WorldCom will overtake AT&T as the world’s biggest telecommunication company.

But the merger was called off because of antitrust issues in Europe and the US. They felt this merger will become a monopoly, and any companies that created monopolies must be broken up.

After the merger was called off, WorldCom was badly affected. As mentioned earlier, WorldCom had used acquisitions and mergers to maintain their share prices. If the merger with Sprint Corporation had succeeded, their share prices would shoot up.

During the merger, WorldCom was heavily in debt. Over 50 banks had issued more than 100 million USD loans to WorldCom each, and WorldCom continued to get loans from other banks. They discussed with some banks and will get an additional loan of over 2.5 billion USD from 25 banks.

Without additional loans, WorldCom cannot operate. Its debt ratio is very high, but those banks were forced to issue additional loans to them, or else WorldCom cannot repay their previous loans.

To maintain their share prices and to attract investors, WorldCom had to take risks. They used some accounting ‘tricks’ to inflate their earnings and give a false impression that they are making profits.

But the difference between WorldCom and Enron is the figure inflated. WorldCom had inflated its profits much higher. This figure is several times higher than what Enron did over the years.

After Feng Yu told Kameda Masao all these, he passed him the results from Ralph’s investigations.

“Here is the evidence.”

Kameda Masao looks at Feng Yu disbelievingly. “Boss, how did you know WorldCom might be involved in accounting fraud?”

Feng Yu pointed to WorldCom’s financial report. “Look carefully. The audit firm WorldCom hired is the same as Enron!”