Scrutiny for Tech Highfliers

An intoxicating “build it and they will come” mentality led the telecommunications industry to the meltdown that has vaporized $2 trillion in investor funds--so far. The swift demise followed years of heady growth as WorldCom and other highflying companies raced to add long-distance capacity and fiber-optic cable for an anticipated tidal wave of demand from Web-based movie channels, long-distance medical diagnoses and videoconferencing, among other things. Demand was way overestimated, and an oversupply of high-speed digital pipes led to fierce price wars. Low prices are still sapping profits.

The telecom story line already includes bankruptcies (Global Crossing with more than $12 billion in debt), SEC investigations (Qwest Communications International) and abrupt leadership changes (WorldCom Chairman Bernard J. Ebbers, who resigned last week). More troubling chapters will be written, but Ebbers seems the perfect example of what has gone wrong.

Using his force of personality and a single-minded vision, Ebbers transformed a small Mississippi long-distance company into a telecommunications giant. Ebbers leveraged WorldCom’s stock price to fund a string of acquisitions. Then regulators forbade a $129-billion merger with Sprint, and Ebbers’ deal-making machine halted. WorldCom was stuck with $30 billion in debt.

Many people are feeling WorldCom’s pain. When WorldCom sold $12 billion in investment-grade bonds last year, investors lined up for what seemed a safe harbor after the dot-com meltdown. What they got was Mr. Toad’s Wild Wall Street Ride; the bonds are now trading at half their initial value.

WorldCom already has shed 9,000 jobs. Last month, it announced plans to cut 3,700 more--or 4.7% of its remaining work force.

WorldCom won’t easily escape Ebbers’ shadow. The Securities and Exchange Commission is investigating a $366-million loan that WorldCom’s board of directors recently granted to Ebbers. The SEC inquiry turned out to be yet another excuse for rattled investors to hang up on WorldCom, whose stock price has plummeted roughly 80% since the beginning of the year.

Fate and risk weren’t the only forces at work in the telecom bust. The self-serving shenanigans of Ebbers and other telecom executives should have been caught earlier. That’s the job of Congress and the Federal Communications Commission, which need to constantly update laws and regulations in the tech world. Fair markets, especially in a swiftly changing business like telecom, depend on well-aimed and -enforced regulation.