M&A integration and CEO hubris

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Firms Involved

  • WorldCom
  • MCI

Year of the event

1998

Description of the case

Worldcom was a company founded by Bernard Ebbers, a Canadian Citizen. The growth of the firm, which operated in the telecommunications, was fueled by acquisitions, and hence mostly external growth. Coping with the rythm of these acquisitions was very challenging, and the trouble culminated with the acquisition of MCI by WorldCom in 1997 for an amount of $37bn, a record at the time. Three years later, however, the internet bubble burst, leaving WorldCom in trouble, as it could no longer afford to finance its acquisitions by issuing new stock. The board agreed to help Bernie Ebbers increase its stake in the company by granting him a $400m loan. In 2002, it was found that the integration process of the acquired firms had been more painful than thought and it was discovered that $11bn of inappropriate accounting entries had been registered, resulting in a significant overstatement of revenues, and understatement of expenses between 1999 and 2002[1]. The firm went bankrupt, and the founder Bernard Ebbers was convicted of fraud and conspiracy[2].

Take-aways

  • Firms only growing through acquisitions are at the risk of collapsing when the market condition no longer permit them to do so.
  • Founder CEOs, even with the best intentions, can try to hard to achieve fame and be subject to hubris.
  • Auditors only give reasonable assurance on the Financial Statements. Most accounting scandals are not unveiled by the auditors of the firm.

References

  1. Report of Investigation by the Special Investigative Committee of the Board of Directors of WorldCom, Inc.
  2. The New York Times, Ebbers Sentenced to 25 Years in Prison for $11 Billion Fraud