Subject: [NEXTEL-1] Giuliani to head WorldCom board?

From: Marcel <[email-masked]>
Date: Mon, 18 Nov 2002 17:41:26 -0500

http://www.msnbc.com/news/836534.asp?cp1=1

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Giuliani to head WorldCom board?

Bond investor wants to install former mayor as chairman

By Rebecca Blumenstein
and Gregory Zuckerman
THE WALL STREET JOURNAL

NEW YORK, Nov. 18 — As Michael D. Capellas takes the helm of WorldCom Inc., a star bond investor has assumed a potentially powerful role in shaping the company’s future and wants to install former New York City Mayor Rudolph Giuliani as its chairman.

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MR. CAPELLAS on Friday was officially named WorldCom’s president, chairman and chief executive. Before he took the job, he met with David Matlin, who leads a bond-investor group backed by Credit Suisse First Boston that so far has spent more than $300 million for more than 10% of WorldCom’s debt. Mr. Capellas said he hopes to work closely with him and with Mr. Giuliani, whom he hinted could quickly gain a seat on WorldCom’s board. “Dave checked me out very carefully,” Mr. Capellas said in an interview.

Any truce could be an uneasy one. Mr. Matlin, a specialist in distressed debt who left Credit Suisse First Boston earlier this year, already is believed to be WorldCom’s largest creditor and has started a new fund with Mr. Giuliani aimed at accumulating at least one-third of WorldCom’s bonds. If successful, that could give his team effective veto power over any reorganization plan under the bankruptcy code, which requires approval by holders of two-thirds of each class of the company’s debt. By holding or having influence over more than a third, the group could win the right to name board members and dictate the company’s future.

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Some in Mr. Matlin’s group were dismayed when Mr. Capellas was hired so quickly. The group had retained its own search firm, Heidrick & Struggles International Inc., to find a chief executive for the company but cut the effort short when WorldCom’s search firm, Spencer Stuart, moved quickly for Mr. Capellas. People close to the situation say Mr. Matlin is expected to press U.S. Bankruptcy Court Judge Arthur Gonzalez to accept a reorganization plan that would have Mr. Giuliani as chairman. Mr. Matlin’s group recruited Mr. Giuliani in August to help raise as much as $1.3 billion in a new fund to buy up more WorldCom debt.

People close to the creditors say Mr. Capellas will have to tread carefully. “It’s a battle for control,” says one person close to the situation. While Mr. Matlin has told these people that Mr. Capellas helps fill a leadership vacuum and will help WorldCom retain customers and emerge from bankruptcy more quickly, Mr. Matlin has said that he is not yet convinced Mr. Capellas is the man to lead WorldCom over the long haul.

The emergence of Mr. Matlin as a key player at WorldCom is the latest twist in the largest bankruptcy in U.S. history. WorldCom, the world’s No. 2 long-distance company, filed for bankruptcy protection in July after revealing that fraudulent accounting practices had inflated revenue. WorldCom expects restatements to exceed $9 billion. Its former chief executive, Bernard Ebbers, resigned before the fraud was uncovered, partly because of a controversy over his $408 million in loans from the company. John Sidgmore, who took over, has been keen to relinquish the job after being beaten down by contentious creditors, feuding board members, and investigations by federal prosecutors, the Securities and Exchange Commission and various overseers appointed by the courts. Bert Roberts, WorldCom’s chairman and one of the founders of MCI Corp., resigned last week because Mr. Capellas wanted both top jobs.

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Mr. Capellas, 48 years old, secured the approval of the company’s official creditors committee before agreeing to join WorldCom. Mr. Matlin is not a member of the creditor’s committee because that could disqualify him from accumulating more of WorldCom’s debt. To be sure, Mr. Matlin has a long way to go to gain effective veto power and might have to team up with another large telecom or Wall Street firm to gain control. At this point, WorldCom has a period of exclusivity to develop its own plan for reorganization that firmly allows it to pick its own management.

MatlinPatterson Asset Management, led by Mr. Matlin along with top CSFB executive Mark Patterson, has racked up annual gains that some investors put at 40%, by buying debt of struggling companies ranging from U.S. chemical and hotel companies to Thailand’s largest cellular telephone company. Mr. Matlin specializes in taking big positions in troubled companies and pushing for control of the turnaround process and the companies themselves. CSFB is the largest limited partner of MatlinPatterson but is not involved in the new fund led in part by Mr. Giuliani.

Mr. Capellas said he hoped to meet with Mr. Giuliani soon. “What’s not to like? He’s ‘Man of the Year,’ ” Mr. Capellas said of the former mayor, on whom Time Magazine bestowed that title. “We are going to see if there is a role for Giuliani. We are moving forward and assembling a world-class board,” he said. All but the three newest board members, appointed since the bankruptcy, are expected to resign.

WorldCom marks Mr. Giuliani’s first major foray into big business, and is a somewhat surprising choice considering the lightning rod of controversy that WorldCom has become. Mr. Giuliani also has been mentioned for eventual national office and for the top job at the Securities Exchange Commission, but he has said he prefers to concentrate on Giuliani Partners, the private company he started to advise companies on risk assessment.

With WorldCom, he risks making enemies with some of the big political powers in Washington, especially the regional Bell companies. They have teamed up with the long-distance companies to campaign heavily against WorldCom emerging from bankruptcy washed free of its $42 billion in debt. The key attraction in the 58-year-old Mr. Giuliani: his above-reproach ethical reputation, both as New York Mayor and as a former federal prosecutor. Mr. Matlin is said to have been looking for a chairman who would help WorldCom shake its sullied reputation. A spokeswoman for Mr. Giuliani declined to comment.

Mr. Capellas, the former Compaq Computer Corp. chief executive, ended days of speculation by accepting the WorldCom post Friday after resigning his post as president of Hewlett-Packard Co. early last week. His appointment is effective Dec. 2.

Mr. Capellas says that he took the job at WorldCom because he is convinced he can help rebuild the company and bring it out of bankruptcy. “There is no intention of breaking up the company and selling it in parts,” he said. “The value of the company is as a whole. The company will be a world-class competitor.”

Mr. Capellas declined to comment on other offers he had been considering, including a lucrative offer of a top job in the senior management of Microsoft Corp., where the No. 3 job of chief operating officer has been open since April. It is unclear exactly what Mr. Capellas’s title at Microsoft would have been, but he was told “he would be in charge of all the operational aspects of the business,” one person close to the situation said. But the Microsoft offer was apparently short-lived, as Mr. Capellas said he decided to take the WorldCom job on Wednesday night.

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His initial WorldCom cash package will consist of a signing bonus of about $2 million, a base salary of about $1.5 million and a targeted annual bonus of about $1.5 million. Mr. Capellas took the job without a firm answer on the value of his equity award, which likely will be linked to the company’s emergence from bankruptcy.

Mr. Matlin, along with Atlantic Pacific Capital, a firm that specializes in raising money for new investment funds, has been wooing large investors, who are being asked to fork over at least $100 million each, for the new fund to which Mr. Giuliani is attached. MatlinPatterson and Atlantic Pacific Capital Inc. declined to comment. In a bankruptcy, the stake of existing shareholders is often wiped out while bondholders exchange much or all of their bonds for equity in the reorganized company.

It is unclear how much equity Mr. Matlin will emerge with. Already, holders of the company’s MCI bonds are arguing that they are entitled to a superior position in the distribution of the equity. And many creditors owed a total of $42 billion in debt may opt to trade out of the bonds rather than accepting equity in the new company. Mr. Matlin’s aggressive buying has helped drive up the price of the WorldCom bonds from 14 cents to 24 cents on the dollar in recent weeks.

Mr. Matlin’s firm has gained control of several bankrupt and distressed companies, including Huntsman Chemical Corp. and Oxford Automotive, without ever being on the companies’ creditor committees — though those were smaller companies and he held much bigger stakes. His style is to wait until a company is in dire straits and to propose his own plan of reorganization that gives Mr. Matlin control.

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The substantial influence Mr. Matlin wields could further divide power at WorldCom. Along with the bankruptcy-court judge and creditors, a court-appointed monitor can veto major spending and there are also various investigations pending. “Is it going to be hard because of all the constituencies?” asked Mr. Capellas. “You bet.”

Mr. Capellas made it clear he expects to be up for the challenge of running WorldCom. “I wasn’t here for the past. No matter what that was, I wasn’t here for it,” said Mr. Capellas. “I’ll have some things to learn, but nobody else will work harder.”

(The Wall Street Journal’s Joann S. Lublin contributed to this article.)

Copyright © 2002 Dow Jones & Company, Inc.
All Rights Reserved.

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