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SHOULD WORLDCOM BE RESCUED? FOR BETTER OR WORSE?

SHOULD WORLDCOM BE RESCUED? FOR BETTER OR WORSE?. NMRC Panel Discussion Shing Yin, RHK 732-933-2609 shing_yin@rhk.com www.rhk.com. BRIEF INTRODUCTION. RHK: Telecom market research and consulting firm Based in South San Francisco, CA; employees around the world Shing Yin:

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SHOULD WORLDCOM BE RESCUED? FOR BETTER OR WORSE?

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  1. SHOULD WORLDCOM BE RESCUED?FOR BETTER OR WORSE? NMRC Panel Discussion Shing Yin, RHK 732-933-2609 shing_yin@rhk.com www.rhk.com 1

  2. BRIEF INTRODUCTION • RHK: • Telecom market research and consulting firm • Based in South San Francisco, CA; employees around the world • Shing Yin: • Senior Analyst, Network Traffic and Revenue Analysis program • Formerly with McKinsey and Company • MSEE, MBA from MIT; BS Applied Physics from Cornell University 2

  3. THE RYAN PERSPECTIVE, AUGUST 2002 • Author: Dr. John Ryan, Chief Analyst, RHK • Four Reasons WorldCom Should Go Out of Business: • WorldCom’s poor operations and alleged malfeasance should be punished, not rewarded. Rescuing the company hurts its honest competitors, sending a dangerous message to the market • The political reasons for rescuing WorldCom are misplaced. Primary justification is job preservation, but it only postpones the inevitable ‘day of reckoning’ • The industry needs capacity to disappear. Other IXCs should have no problem absorbing WorldCom’s traffic • There may be more rot to find at WorldCom. Additional $3.3B ‘discovered’ since initial announcement; another $2B+ is rumored; when will we see the end of this? 3

  4. STAKEHOLDERS DO NOT REQUIRE GOVERNMENT PROTECTION • STAKEHOLDER • Employees • Customers • Shareholders • Creditors • RHK POSITION • Saving jobs at WorldCom only puts jobs at its competitors at risk • Other networks can absorb WorldCom’s traffic; full customer migration may require 1-2 months, but faces no technical barrier • Risk is an inherent feature of any stock ownership; besides, shareholders would likely not participate in a restructured WorldCom • Risk is also built into debt, and creditors have full recourse against the company’s assets 4

  5. COMPETITIVENESS OF A RESTRUCTURED WORLDCOM • Part 1: Comparing key financial metrics, 2001 WCOM Reported WCOM Adjusted & restructured AT&T Excluding Broadband Sprint FON Group only Revenues $Billions EBITDA Margin Percent Free Cash Flow $Billions Long Term Debt $Billions 5

  6. COMPETITIVENESS OF A RESTRUCTURED WORLDCOM • Part 2: Can the company come back and drop prices? • NO, unless: • WorldCom significantly improves its operating efficiency. Not likely, given that it is significantly behind its competitors (as evidenced by differences in EBITDA margin), who are also pursuing operational improvements. Also, WorldCom’s inefficiency is largely due to its failure to integrate past acquisitions – a very difficult task to take on now • AND/OR • WorldCom supplements its free cash flow with significant new debt. Not likely, as creditors will be wary of lending money to a restructured company with negative free cash flow. Besides, why should WorldCom’s current debt be forgiven just so it can take on new debt? BOTTOM LINE: The single act of debt restructuring does not create a more competitive company that benefits consumers 6

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