Capellas Faces Leadership Challenge At Worldcom

Now with former New York Mayor Rudolph Giuliani's name being tossed about as a possible chairman and Giuliani himself saying he's giving advice on how to restructure WorldCom, some industry experts say Capellas might walk away if the issue of who will be chairman isn't settled soon.

"This is a bigger-than-life soap opera and awkward for Capellas because it's difficult to have two strong captains on the bridge, which is why Capellas left HP," said Jeff Kagan, an Atlanta independent telecommunications analyst.

Capellas had been the boss at Compaq but lost the top spot when the company was bought by rival Hewlett-Packard, which left chairwoman and CEO Carly Fiorina in charge.

While Giuliani said it's premature to talk about his candidacy for chairmanship, he said twice at a news conference in New York Wednesday that WorldCom should have a separate chairman and CEO. He also said that his Giuliani Partners consulting firm is giving advice, though he didn't say to whom, on how WorldCom should be reorganized.

Meanwhile, Capellas, who was only named to lead WorldCom last Friday, is being quizzed less about his turnaround plan than he is about Giuliani and Giuliani's backer, bond investor David Matlin.

Matlin reportedly wants to use his newly acquired status as one of WorldCom's biggest stakeholders to install Giuliani as chairman. That would deny him a coveted title he had been promised and would raise questions about who's actually going to control WorldCom.

"If this issue gets to be bigger than it should be, Capellas could say, 'I didn't get all that was agreed to' and he could exit stage left," said Frank Dzubeck, a telecom industry consultant and president of Communications Network Architects in Washington.

Capellas certainly knew before accepting the job that WorldCom's governance and power structure is complicated and unsettled.

The company operates under the eye of two federal judges, a court-appointed monitor and a creditors' committee. And it's unclear who will hold the bulk of equity in WorldCom if it emerges from bankruptcy: Some of the creditors who own a piece of the company's $41 billion debt tab are likely to get a stake.

"You have an incredibly complex kaleidoscope of governance and an incoming CEO who is wondering what in the world he's in control of," said Jeffrey Sonnenfeld, associate dean at Yale University School of Management and president of its Chief Executive Leadership Institute.

A first test of Capellas's leadership will be the makeup of the board of WorldCom, which filed the largest bankruptcy ever in July and must still settle federal fraud charges over at least $9 billion in phony accounting.

Capellas is outlining his game plan this week in meetings with customers and employees and couldn't immediately be reached for comment Wednesday.

Kagan and other analysts said Giuliani, a former federal prosecutor nationally admired for his leadership skills after the Sept. 11 terrorist attacks, would be valuable as a board member, and Capellas might be amenable to such a role.

"I don't think Capellas feels threatened," said Patrick Comack, a telecom analyst with Guzman and Co. in Miami. "He's already got a signing bonus and he probably doesn't give a hoot."

Capellas has said he has met with Matlin and would be willing to meet with Giuliani.

Matlin, who spent $300 million to gain 10 percent of WorldCom's bonds, reportedly conducted a rival CEO search that didn't include Capellas and now wants Giuliani as chairman and eventually to install his own management team.

Matlin, who specializes in taking control of distressed companies by buying up their debt, could not be reached for comment. "It is credible that David Matlin would want an influence on senior managers and, if he does have a controlling position at WorldCom, anyone that comes in with his approval is likely to stay around and anyone that doesn't won't," said Evan Flaschen, partner in the financial restructuring department of Bingham McCutchen, a Boston law firm.

Bankruptcy experts say Matlin must control one-third of WorldCom's $25 billion in bonds -- an investment of more than $2 billion at current prices -- to be able to name board directors and veto any reorganization plan presented to the court. WorldCom retains exclusive rights until April 17 to present its own reorganization to the bankruptcy court.

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