ANALYSTS SEE MCI RIDING OUT GSA SUSPENSION, GOVT. INVESTIGATIONS
MCI’s latest woes aren’t going to “doom” the company because many in govt. want to see it remain in business, but they might cause it to emerge from bankruptcy later and perhaps in a less powerful position than expected, analysts said. Adding to week-old allegations of access charge fraud and related investigations by the Justice Dept. and the FCC, GSA announced Thurs. that it had suspended MCI from participating in new federal contracts because of concerns about lack of internal accounting controls and questionable business ethics (CD Aug 1 p1). Analysts said MCI generated $1.5 billion in sales each year from public contracts, 60-70% of them supervised by the GSA.
Sign up for a free preview to unlock the rest of this article
Timely, relevant coverage of court proceedings and agency rulings involving tariffs, classification, valuation, origin and antidumping and countervailing duties. Each day, Trade Law Daily subscribers receive a daily headline email, in-depth PDF edition and access to all relevant documents via our trade law source document library and website.
The GSA action is “a material but nonlethal penalty from the government,” Precursor Group analyst Scott Cleland said. “It’s not going to keep them from emerging from bankruptcy. It’s in the public interest for MCI to remain a competitor.” One of the big questions was how long the suspension would last in terms of the company’s ability to compete for contracts in 2004, he said. Cleland said the new developments could delay MCI’s emergence from bankruptcy by 3 months, or “at the outside” perhaps 6 months. “The thing that matters most is that MCI is emerging from bankruptcy,” he said.
The continuing allegations, launches of investigations and other developments have created “more forums for MCI’s competitors to damage the company’s reputation and ultimately its finances,” Legg Mason analysts Blair Levin and David Kaut said in a report to investors Fri.: “The competitors are circling and appear to smell blood.” The analysts said they thought “MCI will still eventually emerge from Chapter 11 bankruptcy” but the latest developments “highlight the shaky ground on which MCI now stands… and add to the risk that the company will not recover as quickly or robustly as generally thought.”
The Legg Mason report also noted that the FCC, which also planned an investigation, could be tougher than some might think because FCC Chmn. Powell had said that while he generally favored deregulation he also supported tough enforcement in its place. The allegations and investigations don’t mean MCI is “doomed” because “the federal government and its agencies (and many enterprise customers) have a significant stake in maintaining the viability of MCI as a key telecom competitor, contractor and employer,” the report said.
The GSA announcement, “along with the DoJ’s recent probe into MCI’s access charge avoidance could potentially delay the company’s emergence from bankruptcy,” UBS analyst John Hodulik said in a report Fri. If that happens, it would be perceived as “a win for AT&T and Sprint FON and to a lesser extent for the Bells,” he said.
The GSA suspension won predictable praise from organizations such as the Gray Panthers, which said the action should have come sooner before MCI gained contracts for key customers such as the U.S. House of Representatives, U.S. military and NOAA. However, the Veterans Rights Coalition said it was glad the GSA’s decision didn’t disrupt current contracts because that could have been disruptive to the military and to national security: “MCI plays a major role in maintaining critical pieces of our national security system, including the Pentagon’s Command and Control network, military air traffic control systems and the Department of Homeland Security.”
Meanwhile, U.S. Bankruptcy Judge Arthur Gonzalez in N.Y. late Thurs. announced that the hearing on MCI’s bankruptcy reorganization would be delayed for 2 weeks, to Sept. 8 from Aug. Aug. 25, to give the company more time to inform creditors about the access charge fraud investigations. The judge emphasized that his actions shouldn’t be interpreted as a statement about the facts under investigation but just to assure that creditors were informed.