VideoRobert Blakely had yet to accept the job as CFO of WorldCom Inc. when CEO Michael Capellas called on the evening of April 10, 2003. Creditors of the bankrupt telecommunications giant were meeting with Capellas and his team in New York the following day, and he wanted Blakely by his side. On the table: how to settle some $35 billion in outstanding debt. Blakely, who would already be in town for a meeting of the trustees of Cornell University, agreed to come — after, that is, he and Capellas hammered out an employment contract in the morning.
But the next day, bad weather delayed Capellas's flight from Washington, D.C. "There was no way we could talk," says Blakely. "By the time [Capellas] arrived, all the senior creditors were there." The fact that he wasn't formally on the payroll didn't keep the CFO-in-waiting waiting from rolling up his sleeves and starting negotiations, which quickly grew acrimonious. "Basically, it was hand-to-hand combat all day," recalls Blakely.
At 11:30 a.m., he and Capellas slipped out of the negotiations to work through the remaining points of Blakely's employment contract. At noon, "We shook hands and I said, 'Yep, I'm on board,' " says Blakely.
They returned to the fray. Finally, by 8:30 in the evening, the WorldCom team had convinced 90 percent of the creditor groups to exchange most of their bonds for shares of stock in the reorganized company.
For the new CFO, that first 12-hour day was a harbinger of things to come. Raising WorldCom from the ashes of the biggest fraud — and bankruptcy — in U.S. corporate history, to emerge in April 2004 as the rechristened MCI Inc., boasting a clean set of books and a mere $5 billion of debt, would require many more 12-hour-plus days. Restating the company's financials, a chore that began before Blakely's arrival, would take more than a year and a half to complete. Internal controls had to be overhauled, new directors named, and a new set of corporate-governance policies adopted. Even though the fraud directly involved fewer than 50 employees, every one of the company's 50,000 workers worldwide had to undergo ethics training. And somehow, while all this was being done, the business had to keep moving forward.
The 62-year-old Blakely brought badly needed turnaround experience to WorldCom. In the late 1990s, the CFO led Houston-based Tenneco Inc., a $13 billion energy conglomerate, through a massive restructuring. Later, he made major improvements to internal controls and risk management at Lyondell Chemical Co., another Houston company. But nothing could have prepared him adequately for WorldCom, which declared bankruptcy in July 2002, not long after the disclosure of the fraud that drove CFO Scott Sullivan and CEO Bernard Ebbers from the company (see "Fall and Rise," at the end of this article). (Full disclosure: both Blakely and Sullivan were recipients of CFO Excellence awards.) "No one has that kind of turnaround experience," says Blakely, "because it has never been done before."
That challenge was enough to lure Blakely out of retirement, where racing high-performance motorcycles apparently didn't provide enough of an adrenaline rush. "What intrigued me about [WorldCom] was that it was an opportunity to pull everything together that I had learned in my career," he says. "I don't like stable situations. Some might say that I'm a crisis junkie."
The Mother of All Audits
It was easy for Blakely to indulge his habit at WorldCom. Even with the majority of creditors on board, the most difficult tasks required to exit bankruptcy still lay ahead. Hardest of all was restating results for three years — 2000, 2001, and 2002 — and filing audited financial statements. Not only was $11 billion of fraud cooked into the books, but years of shoddy record-keeping and incompetent accounting clouded nearly every entry.
Blakely and his finance team hoped they could complete the audit by July 2003, three months after he was hired, but it took nearly that long just to size up the task. "It was more complex than anyone imagined," he says. Eventually, the team realized they had to reconstruct the financial statements from scratch. "I went back to Michael [Capellas] and told him that it looked more like July 2004 than July 2003," says Blakely. But it would have to be done faster: bankruptcy court judge Arthur Gonzalez had already set February 28, 2004, as the deadline for emerging from bankruptcy.
Reinforcements were needed. WorldCom already had 500 to 600 employees working full-time on the restatement, as well as 200 to 300 staffers from KPMG, the company's auditor. WorldCom turned to Deloitte & Touche for more help, and the accounting firm responded with some 600 professionals, culled from offices across the country. At the peak of the audit work, in late 2003, WorldCom had about 1,500 people working on the restatement, under the combined management of Blakely and five controllers.
The finance team started with the billing systems and reran all the revenue, deciding on the proper accounting. Then it redid all the cash applications and rebuilt the income statements from there. It also reassessed every acquisition Ebbers had made since 1992 in the course of transforming an obscure long-distance start-up into a global communications powerhouse — 12 major deals and several smaller ones, worth $70 billion. "In some instances, we had to go back and reconstruct records to decide whether or not pooling of interest was the proper accounting at the time," says Blakely. In all, they found, WorldCom had overvalued several acquisitions by a total of $5.8 billion.
Reader Comments» Post a comment