WorldCom:Too big to let fail?

investmenttool.com Opinion

When a really big company gets in trouble, people start trying to point fingers at who should take responsibility. Do they look to the directors, and senior leadership? No. Do they look to the stockholders? Been there done that, stocks down to six cents a share. No, they look to Uncle Sam for help, the U.S. taxpayer. Hopefully the government will say no.

The near collapse of WorldCom-MCI has put the status of a large percentage of the Internet's traffic in doubt. As we heard in 1980 when Chrysler was ready to collapse, some of the leaders at WorldCom have whispered that the company is too big to be allowed to fail.

Well fail it has. WorldCom failed because it piled up too much debt as it built one of the largest phone companies in the world. With $51 billion in good will on its books, this is a clear sign that somebody paid too much for some of those acquisitions. With the company valued at around $500 million last week, WorldCom was in danger of collapse. Large portions of the government and Internet traffic are in danger from a collapse.

Well lets start there, the Internet traffic and government contracts are profit centers. They generate more cash than they consume and will not be affected by any collapse. We've already seen buyers march onto the scene and offer to purchase assets from WorldCom.

So long as WorldCom's new leadership is careful and gets a fair price for what they sell, the important pieces of the company will continue to survive and prosper, under new management.

I think the government's bailout of Chrysler was a good deal for the government. They backed some loans, got paid back early and made a bundle on their equity stake in the company. A lot of jobs were saved and a couple of decades later, Daimler-Benz overpaid for the company by about $20 billion.

Is the economy of the U.S. suffering because foreigners own the third largest maker of automobiles? No. As a matter of fact, the parent firms safety innovations are stealthily making it through the American firm, making our roads a bit safer.

The clear fact that should be understood is the collapse of WorldCom will merely lead to its breakup. The important pieces will survive and there will be no disruption of service. That $51 billion in goodwill on the balance sheet will go up in smoke. It amounts to roughly how much WorldCom overpaid for what it bought.

The stockholders of the companies that were bought out have a lot of that money in their pockets right now. Yes, the shareholders of WorldCom got hit and hit hard. Yes, the leadership of the company who sold the stock knowing the books were cooked should face justice and a loss of profits on stock sales. No, WorldCom is not to big to fail. Our economy is efficient enough to pick up the pieces and move on without the government getting involved.

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Shmuel Protter
investmenttool.com

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