Late last year, a friend of mine who works in the government contracting department of Sprint (NYSE:FON) told me something very interesting. Prior to WorldCom's July 2002 bankruptcy, his office's impression was that WorldCom (now renamed MCI) won about two-thirds of all open bid contracts put out by the federal government. After bankruptcy, it seemed like they won every contract they bid on. In fact, according to Washington Technology, an industry trade publication, WorldCom won business worth $772 million from the federal government last year.
This past week, Senate Government Affairs Committee Chairman Susan Collins (R-Maine) held an investigation into why MCI has not been barred from bidding on government contracts. My first thought is: "Hell, yes." My second thought is: "How is it possible that a company that foisted one of the most expensive frauds in U.S. history onto us can even set foot in Washington?" Then I remember, "Oh, yeah, it's because it's Washington."
Here's how bad it is. The Defense Department has an ongoing project called Defense Research and Engineering Network (DREN), the $440 million telecom contract that runs for about 10 years. In July 2001, Defense awarded the contract to Global Crossing, just prior to the company declaring bankruptcy. So Defense did the smart thing and rebid the contract, with the stipulation that the winning company's financial standing must pass muster.
DREN was awarded the second time around to... WorldCom. This was in April 2002, the month after the SEC announced an investigation into the company's accounting, and the same month in which then-CEO Bernie Ebbers resigned in disgrace. Rumors of Chapter 11 were already swirling about the company. How was it possible that a company in such condition won a contract over Sprint or AT&T (NYSE:T) when "financial viability" was a specific component of the rebidding?
After all, WorldCom's fraud didn't just effect the tens of billions of shareholder losses at WorldCom -- it nearly destroyed the entire industry that had to compete with it while it simply made up numbers. It's not just WorldCom shareholders who got hurt -- AT&T, Sprint, and a host of other companies were spending themselves into the ground trying to keep up with growth at WorldCom that didn't really exist.
Couple this with the SEC's decision to lower the fine on WorldCom from $1.5 billion down to $500 million, and you really have to wonder. Their reason for doing so? They didn't want to inflict additional pain on WorldCom's innocent bondholders. That's fine, but these innocents did invest their risk capital into a rogue company. On the totem pole of innocence, I'd say the bond and equity holders at WorldCom's competitors are a heck of a lot higher.
And it's not over. This past month the re-branded MCI won a contract to build out cellular infrastructure in Iraq, this despite the fact that the company has never, ever been much of a player in the wireless telecommunications environment.
It just doesn't make any sense. But the longer that the government fails to punish WorldCom properly for the destruction the company wrought upon its shareholders, its competitors, and the economy at large, the more likely that those who suffered for years due to WorldCom's fraud will continue to do so.
Telecommunications companies are dying for business. Why give so much to one we know to be dirty?
Bill Mann has no beneficial interest in companies mentioned here. Nor would he even consider it, under the circumstances. The Motley Fool is investors writing for investors.
