LDDS – the company named by a waitress

In 1983, 4 men sat in a coffee shop.

Bernie Ebbers, and 3 others.

They were working on the details of a new company.

This was going to be a telecommunications company.

They asked the waitress to suggest a name for their company.

She suggested Long Distance Discount Services (LDDS).

They kept that name – and LDDS was born.

About 15 years later, the company was admired by investors. Its stock price kept climbing.

The market cap of the company kept growing. In 1999, it touched $180 billion.

Stock market advisors told their investors to invest more in the company’s stock.

In 2005, a little over 20 years later, a court sentenced Bernie Ebbers – the CEO of the company – to 25 years in jail.

A few other senior executives were also sentenced.

The company was bankrupt.

How did the company become so big?

What led to its bankruptcy?

And how did its CEO end up in jail?

LDDS & WorldCom

The four men were business partners. They had managed to get a loan of $650,000 to buy the technology to route long-distance calls.

In 1984, they got their first customer. They sold long distance calls to the University of Southern Mississippi.

Over the next few years, LDDS went on an acquisition spree.

They kept buying out and acquiring their competitors.

Between 1984 and 1994, they acquired over 6 telecom companies. This allowed them to expand their network to different parts of the United States of America.

In 1995, the company changed its name to WorldCom – the name the company is now known as.

In 1997, a company called British Telecommunications Corp made a bid to acquire a company called MCI.

They offered $19 billion for MCI.

WorldCom was an extremely competitive acquirer. They made a counter bid for MCI.

WorldCom effectively offered $35 billion – 1.8 times higher than what British Telecommunications Corp offered.

WorldCom acquired MCI.

WorldCom’s aggressive acquiring spree was loved by investors. It promised a brighter future.

The stock price kept climbing. The market cap kept climbing.

But problems in the large company had started with acquisitions.

The overall entity had grown to be large but poorly managed.

The acquired entities would behave as independent companies in some cases.

There was an example where a customer called customer care and the person answering the phone told the customer that he had called the wrong office.

This was a company that was great at acquiring other companies.

It fueled its growth using acquisitions.

But it was not good at handling the companies after acquiring them.

Accounting fraud

In 2000, WorldCom wanted to acquire Sprint. The government did not allow the deal.

This refusal made matters very serious for the company.

The management had to find ways to justify the company’s valuation.

They had to find value in their acquisitions.

They had a vast amount of debt. Their revenue and profits were falling.

CEO Bernie Ebbers, the CFO, and a few other senior executives decided to be dishonest with their numbers.

WorldCom made their expenses look like they were investments. Using that, they were able to show a profit of $3.8 billion in 2001 – while they actually should have shown losses.

Some auditors in the company noticed this. They started their own investigation.

The CFO tried to delay the audit.

But the auditors succeeded. And the scandal came to light.

WorldCom had to adjust their income going back up to 10 years (1992 to 2002). Some estimates put the size of the scandal to be around $80 billion.

The company declared bankruptcy.

The WorldCom scandal was one of the biggest accounting scandals in US history.

It was the reason why the CEO – Bernie Ebbers – was sentenced to 25 years.

The CFO was sentenced for 5 years.

WorldCom, under new management, was rebranded to MCI.

In 2006, WorldCom was acquired by Verizon.

Closing line

This is why ‘understanding’ a business is so important.

If an investor looked at just the profit and revenue numbers, WorldCom would seem like an excellent investment right till 2002.

But an investor who tried to understand the company’s business model would feel suspicious.

Why were they spending so much money on acquisitions?

Companies that had been acquired – were they good investments?

If an investment seems too good to be true – it might not be true.