MCI stock? It's virtually worthless
Common shareholders to lose most or all of investment
By Jeffry Bartash, CBS.MarketWatch.com
Last Update: 6:25 PM ET Nov. 3, 2003
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WASHINGTON (CBS.MW) - Many investors cling to the hope that WorldCom's old stock will still be worth some money after the company emerges from bankruptcy protection, but most shareholders will receive little or nothing.
By approving MCI's reorganization plan last week, a federal bankruptcy judge paved the way for the company to cancel its old stock and to issue new shares. That could happen as early as January, when MCI hopes to officially emerge from Chapter 11 protection.
The new shares will be issued to senior creditors, who are already trading them on the Pink Sheets on a "when-issued" basis.
Owners of the old common stock, which trade under the symbols WCOEQ and MCWEQ, will no longer hold any financial claim on the company.
"The current shares of Worldcom trading on the Pink Sheets will have no value when we emerge from bankruptcy," MCI spokeswoman Claire Hassett said.
Small compensation
Common shareholders aren't entirely out of luck, however. WorldCom, which has since changed its name to MCI, paid $750 million to the Securities and Exchange Commission to settle charges of fraud related the company's $11 billion accounting coverup.
Of that amount, $250 million is designated for investors who can prove they owned shares of WorldCom prior to June 2002, one month before the company filed for bankruptcy. Investors who bought shares on the Pink Sheets after the June date are out of luck. They get absolutely nothing.
At the time of the June 2002 cut-off date, 62,772 investors owned 2.96 billion shares of WorldCom, while 52,036 stockholders owned 118 million shares in MCI.
If every stockholder successfully filed a claim, he would receive 8.1 cents per share -- just a fraction of the stock's $65 peak. The number would rise depending on how many shareholders chose not to file claims.
The process for distributing the $250 million has still yet to be determined.
Some shareholders also hold out for the possibility that they may receive some compensation from class-action lawsuits filed against the company. Yet those suits lose force once MCI reemerges, and new claims cannot be filed.
"All claims against the company are extinguished by the plan," Hassett said. Shareholders could still sue former directors and executives of the company, however.
Investor confusion
For more than a year, MCI officials have repeatedly said that the old shares were likely to be rendered worthless once the company emerged from bankruptcy protection. Yet many investors, judging by the complaints received at CBS.MarketWatch, evidently never got the message.
Indeed, trading in MCI (MCWEQ: news, chart, profile) and WorldCom (WCOEQ: news, chart, profile) shares has flourished on the bulletin boards - the home of all unlisted stocks -- despite a prominent bankruptcy warning on the Pink Sheets web site.
The warning, which links to the Securities and Exchange Commission, clearly states that shareholders "may not receive anything" after a company emerges from bankruptcy.
Still, some investors gambled on the possibility that shareholders would receive partial financial benefits from a bankruptcy settlement.
"Sometimes shareholders are able to squeeze value out of a deal," noted Jonathan Lipson, a bankruptcy expert at the University of Baltimore.
Indeed, law professor Lynn LoPucki, a bankruptcy expert at UCLA Law School, said a study he performed of bankruptcies from 1991 to 1996 showed that shareholders often received some compensation during a Chapter 11 reorganization.
In WorldCom's case, however, LoPucki noted that the company's debt -- $41 billion at the time of its filing -- so vastly exceeded its assets that financial relief for stockholders was unlikely.
Other investors, meanwhile, labored under the mistaken impression that the shares traded on the Pink Sheets would regain their worth -- and then some -- once MCI exited the bankruptcy process.
Not so, said Rick Tilton, a bankruptcy expert who runs Greenacre Asset Advisors. "The shareholders usually get nothing -- the ownership interest is effectively canceled."
Still other investors held on to shares simply because they did not know what to do with them.
Cromwell Coulson, spokesman for Pink Sheets, offers some advice. Sell the old MCI and WorldCom shares and buy the company's new stock -- which hasn't even been issued yet.
That's right. Investors are already trading shares in MCI in anticipation of the new stock being issued. That means some of the company's creditors, who will receive stock under the reorganization plan, are already promising to sell their shares to interested investors.
As of Monday, the soon-to-be issued stock was trading at $26.70 on the Pink Sheets. More than 9 million shares traded hands.
Operating in the dark
If the fate of WorldCom stock was already sealed, some investors complain, why were they allowed to continue to trade on the Pink Sheets? That fooled them into believing the stock still retained value.
Coulson said he's sympathetic to those concerns, but he noted that the value of existing stock isn't officially extinguished until MCI exits Chapter 11. "You never know what might happen," he said.
And while buyers of the stock might not benefit, the sellers do, he noted. The bulletin boards have to cater to both kinds of investors.
Once the bankruptcy process is complete, however, Coulson said Pink Sheets will remove any information about the old MCI stocks from its site. At that point, he said, it's up to the SEC to ensure that brokers don't continue to allow trades in the canceled stock.
Another major complaint is reflected in the view that big investors are making out like bandits while smaller shareholders are losing out.
Part of the anger reflects a misunderstanding of the role of creditors and shareholders.
Creditors such as banks and bondholders lend money to a company. All they get in return is the principal plus interest. Shareholders, on the other hand, stand to make a lot of money if a company does well and a stock sharply appreciates.
"For creditors, it's a limited risk," Tilton said. "Shareholders take a greater risk for the potentially greater upside reward." Concurred Lipson: "That's just part of the bargain you accept as a shareholder."
More to the point, shareholders are not technically creditors. They are the actual owners of a business.
"Shareholders are regarded as being part of the company, borrowing money from creditors," LoPucki said.
In any case, even large creditors have lost a bundle on WorldCom -- $35 billion, to be exact. Those fortunate enough to get some money back are receiving no more than 36 cents to the dollar.
"A lot of big investors are taking a bath too," Lipson noted.
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