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Low stock price, lawsuits grab most attention among investors

Analysts confident WorldCom building long-term value

CLINTON — Even though shares of WorldCom stock have sunk to its lowest level in nearly two years, analysts remain optimistic about the telecommunication giant’s


“It seems that sometimes bad news comes in buckets, and that certainly seems to be the case recently with WorldCom,” said Odean Busby, chairman and CEO of

Magee-based Citizens State Bank. “I don’t believe the recent developments will be long term. WorldCom is a great success story, and they didn’t become what they are

today by accident. All businesses have cycles; the successful ones adapt their operations to manage these.”

WorldCom’s world has been rocked recently with bad publicity. On Nov. 1, WorldCom (Nasdaq: WCOM) shares fell a record 20% after the company issued warnings

that it would not grow as quickly as analysts had predicted and that it was planning on using two stocks instead of one to monitor its financial performance.

A week later, WorldCom was slapped with lawsuits, in which WorldCom president and CEO Bernie Ebbers and CFO Scott Sullivan were named as defendants, accusing

the nation’s second-largest long-distance provider of misrepresenting its intentions and stock to investors.

Following the news, WorldCom stock fell more than 5%.

“Currently, I see no impact on Clinton from the WorldCom situation,” said Clinton Mayor Rosemary Aultman. “Certainly I’m anxious about the stock prices, but I do have

absolute confidence that, if given time, Bernie Ebbers will reshape the company to address the problems.”

WorldCom’s woes seemed to spark in June, soon after the company agreed to pay $3.5 million as part of an agreement with federal regulators to settle charges that it

slammed customers — switching telephone carriers without permission — with calls prompted primarily by third-party telemarketers. Last year, WorldCom customers

filed grievances more often than any other long distance carrier, racking up 2,900 slamming complaints, according to FCC officials.

The intended marriage of WorldCom and Sprint was called off later that month when the U.S. Justice Department sued to stop the merger on June 27, followed the next

day by an announcement that EU’s regulatory body would formally oppose it, too.

“I have been supremely disappointed in the stock’s performance,” said Mark Pollock of Jackson, a WorldCom stockholder, who owns a “significant” number of shares.

Stacey L. Wall, president and CEO of Pinnacle Trust in Ridgeland, said there’s no question that WorldCom’s woes will contribute to a slowing of the economy in Jackson

and Clinton.

“However, losses that investors have experienced in the stock, even though many are unrealized, will also play a significant role in the slowing of Mississippi’s economy,”

Wall said. “Two emotions control investors — fear and greed. For many Mississippians, WorldCom has been a classic story of investment greed. For years,

LDDS/WorldCom succeeded like no Mississippi company has ever done before. Like tulipmania in Holland in the 1600s, investors believed that WorldCom stock could

only go higher. And because they believed, many investors overexposed themselves to the stock.”

With the severe decline of the stock, those same investors are much less likely to spend money, particularly on big-ticket items, Wall said.

“That’s one part of the equation for which Bernie Ebbers and WorldCom should be held blameless,” Wall said. “The biggest single mistake I see individual investors make

time after time is a lack of diversification. Too much of one’s portfolio in WorldCom in 2000 turned out to be a big mistake. Unfortunately, it’s one that I think will make a

negative impact on our economy in 2001.”

Even though shares of WorldCom were trading at $16.94 on the Nasdaq in early November, successful execution of restructuring should increase value to $30 to $37,

according to Ramkrishna P. Kasargod, CFA, an analyst at Morgan Keegan in Memphis, who added that the near-term outlook for WorldCom is being impacted by pricing

pressure in all market segments and by increased internal investments in high-growth markets.

“In the proposed restructuring of WorldCom, management’s goal is to separate the company into two distinct business segments: WorldCom and MCI,” he said.

“WorldCom is estimated to be a $23-billion company in 2000 with $9.5 billion in cash flow, up from $19.2 billion in revenue and $7.6 billion in cash flow in 1999. The

business is projected to grow to the $25.7-billion to $26.4-billion range with cash flow in the $9 to $9.4 billion range. Clearly, 2001 will be an investment year for the

WorldCom unit, which should stimulate the top line growth rate to the 14% to 16% annual rate moving forward.”

The MCI business is estimated to generate $16.5 billion in revenue and cash flow of $4.5 billion in 2000 compared to $16.2 billion in revenue and $4.7 billion in cash flow in

1999. The MCI business will focus on yields and cash flows with potential upside from utilizing call center assets to pursue growth opportunities in related markets,

Kasargod said.

“Very clearly, the growth outlook is being impacted by the slowing global economy and as the economy turns around, we would expect the outlook to turn around, leading

to a higher valuation,” he said.

The failure to complete the Sprint merger and RBOC entry into long distance markets drastically reduced the potential growth opportunity for the company in consumer

markets, Kasargod said.

“Management is appropriately focused on high-growth opportunities,” he said. “Clearly success in restructuring will lead to higher valuation of the shares from current

depressed price levels. We have been in an extremely difficult telecom service market environment in the current year. We had maintained our rating on WorldCom

following the break-up of the Sprint acquisition and ensuing industry turmoil, based on our confidence in management’s ability to create long-term value.”

Nancy Lottridge Anderson, CFA, president of New Perspectives Inc. in Clinton and a contributing columnist for the Mississippi Business Journal, said long distance has

become a commodity that is quite cheap to consumers.

“These guys can’t continue to make money in this area as before,” she said. “But the real money is in data transmission, and WorldCom is still doing well in this area.

They own a piece of the backbone of the Internet in UUNET and this will serve them well over the long haul. They still have a problem because of no wireless

connection, but they are working on other avenues. The creation of two tracking stocks to follow their two distinct types of business should help. In fact, they should have

done this shortly after purchasing MCI. I haven’t counted them out of the race. There’s still too much value there. And I think they will continue to impact Clinton and the

Jackson area.”

These guys aren’t going away just because the stock has taken a hit.”

Then there’s a question of stock options for WorldCom’s 77,000 employees. Like many telecommunications companies, WorldCom has traditionally paid its employees

less than their perceived value, with stock options making up the difference. Because recent stock market activity has not been beneficial to people with stock options,

WorldCom has upped its pay to employees, putting a drag on company earnings, according to an unnamed source.

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According to Claire Hassett, a WorldCom spokesperson, repricing options for employees “isn’t discussed publicly.”

WorldCom’s Internet strategy, which may be its salvation, could be threatened

About Lynne W. Jeter

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