Paging Dr. Capellas

WorldCom needs help, fast. Can the former Compaq chief meet the challenge?

When Michael D. Capellas embarked on a turnaround at Compaq Computer (HPQ ) four years ago, he quickly demonstrated his pragmatism and people skills. Having devised a massive restructuring plan, Capellas put his top 20 executives in a room and spent the next three days convincing them that the company had to change fundamentally. In the end, Capellas prevailed, reorganizing Compaq into half a dozen businesses, while dramatically improving its ability to compete with Dell Computer (DELL ). Before long, Hewlett-Packard came knocking; the two companies merged earlier this year.

So can Capellas work similar magic at WorldCom Inc. (WCOEQ )? As BusinessWeek (MHP ) went to press, the 48-year-old exec known for his nuts-and-bolts operating skills was widely expected to join the bankrupt telecommunications giant as CEO. While some creditors had argued that the job was better filled with a telecom expert, after two days of back-to-back meetings it appeared that Capellas had won the skeptics over. Still, though he faces a tough task, those who know Capellas expect him to move quickly to impose financial and marketing discipline. "People find him refreshing," says Cristobal I. Conde, CEO of SunGard Data Systems Inc., a Wayne (Pa.) provider of financial computer systems and a Compaq customer. "He's detail-oriented and delivers on his promises."

If named, Capellas won't have long to prove his mettle. The U.S.'s second-largest telco is struggling to emerge from bankruptcy protection, free itself of $42 billion in debt, and restore a reputation tarnished by a $9 billion accounting fraud scandal. It must do all of this within six months to prevent big customers such as AOL Time Warner Inc. (AOL ) and FedEx Corp. (FDX ) from bolting to rivals.

Doing that while getting up to speed on the telecom sector won't be easy. Capellas will have to quickly master complex regulations, unfamiliar technology and new sales challenges--all while stabilizing the business. Among his first challenges: getting WorldCom out of onerous bandwidth contracts, and finding buyers in a depressed market for noncore assets.

That's where the restructuring skills he honed at Compaq should come in handy. In 1999, his first year as Compaq CEO, he cut operating expenses by 17% and hiked gross margins by three points, to 23.6%. Most important, Compaq made a profit. In the second quarter of 2000, it earned $387 million, vs. a $184 million loss a year earlier.

Capellas is also strong where WorldCom is weakest: He has credibility. "His credentials would go far in restoring WorldCom's respectability," says Susan F. Shultz, founder of SSA Executive Search International Ltd. She believes he can attract a reputable slate of directors to replace the current board, which has been accused of being too cozy with ousted founder Bernard J. Ebbers.

Capellas may face a bigger hurdle in wooing customers. He'll be helped by his longstanding ties with the CIOs who will become WorldCom's biggest customers after the reorganization, since the tentative plan calls for WorldCom to be pared down to its data-service and Internet access units. Capellas began at Compaq as the CIO and has kept in touch with colleagues as a salesman and marketer. To win them over, though, he'll have to make WorldCom viable.

That's why his top priority will be guiding WorldCom out of bankruptcy. Already, creditors have tentatively agreed to forgive much of the debt and take equity for the rest, basically leaving WorldCom debt-free. The company hopes to file a final restructuring plan for court approval by Mar. 31. "We've got a working agreement with creditors about where we're going," says Gregory F. Rayburn, the chief restructuring officer. "It's crucial that we don't linger in bankruptcy."

What happens after that? Some observers believe WorldCom will be sold to a Bell. In the meantime, Capellas will have to provide bold leadership. That may prove to be his most daunting challenge. Those who have worked with him say Capellas is adept at operations but has less strength outlining strategic visions or setting directions for growth. Still, just getting WorldCom to a place where such skills are needed may be achievement enough.

By Charles Haddad in Atlanta, with Steve Hamm in New York and bureau reports

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