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Telecommunications industry

MCI Announces $750 Million Charge Against Profits as WorldCom Merger Looms

Strategic Insights

— 1 min read

As the prospect of a merger between MCI and WorldCom draws closer, the US telecoms group is expected to unveil a $750 million charge against its profits by the end of January, a move that will further damage investor confidence in the company. The charge is a significant increase from the $515 million announced in the autumn, which was triggered by BT's decision to abandon its $37 billion takeover bid after MCI forecast losses last summer. Analysts believe that some of the new charges, including job cuts, employee bonuses, and computer system upgrades, would not have been incurred if the BT takeover had gone ahead.

Key Takeaways:

  • MCI is expected to announce a $750 million pre-tax charge against its profits by the end of January, with $200 million allocated for paying off sacked employees, $300 million for bonuses and customer-incentive schemes, and $250 million for computer system upgrades.
  • The charge is a result of MCI's efforts to clean up its books ahead of the merger with WorldCom, with Frank Governali, an analyst at CS First Boston, stating that MCI is experiencing net positive additions of residential customers for the first time.
  • Hundreds of top employees at MCI are being promised extra pay to prevent them from leaving the company, with more than $400 million already set aside in a bonus pool.
  • MCI has announced 1,500 job losses out of a total of 55,000, with many of the redundancies occurring in contract work areas, sparking suspicions that management consultants are cutting support staff to boost profits.
  • Analysts believe that some of the new charges would not have been incurred if the BT takeover had gone ahead, with the price cut opening the way for a successful $37 billion bid by WorldCom.

Statistics:

  • $750 million: projected pre-tax charge against MCI's profits
  • $200 million: allocated for paying off sacked employees
  • $300 million: allocated for bonuses and customer-incentive schemes
  • $250 million: allocated for computer system upgrades
  • $400 million: amount already set aside in a bonus pool
  • 55,000: total number of MCI employees
  • 1,500: number of job losses announced by MCI
  • 5%: expected revenue growth for MCI's fourth quarter, according to Frank Governali

Sources:

  • "MCI's Call at Christmas" by Commentary, The Times, January 1998
  • CS First Boston analyst Frank Governali
  • MCI spokesperson

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