WorldCom Looks to Undo AOL Ad Deal

Beleaguered telecom giant WorldCom is seeking to back out of a

commitment to spend millions of dollars for advertising on AOL Time

Warner properties, the company disclosed last week in

bankruptcy filings.

According to documents filed with the U.S. Bankruptcy Court for the

Southern District of New York, which is handling Clinton, Miss.-based

WorldCom’s record-breaking $41 billion bankruptcy, the nation’s No. 2

long-distance carrier and Internet backbone giant is looking to cancel

an agreement signed in June 2001 that had it paying a total of $185

million to AOL through 2004.

In exchange for the payments, which come to about $20.25 million per

quarter, AOL agreed to promote WorldCom’s MCI WorldCom unit on its

online and offline properties.

For example, AOL said at the time that it planned to advertise

WorldCom products and services in print through Time Inc. magazines,

Time Warner Cable networks, and America Online brands including

MapQuest, Digital City, ICQ, and Spinner, as well as FORTUNE.com and

InStyle.com. The deal built on several separate earlier agreements

with America Online and Time Warner, which were struck prior to their

merger.

But now, however, WorldCom said it ought to be able to void the

contract to get out of the payments.

WorldCom “has determined that it does not need the advertising

services provided for in the agreement in its ongoing business,” it

said in the filing. “The agreement requires the debtors to purchase

more advertising than they need and requires the advertising purchased

to be allocated between the AOL TW properties in a manner that is not

favorable. Thus, the services provided under the agreement are

unnecessary and costly to the debtors’ estates.”

U.S. Bankruptcy Code allows for debtors in possession to “reject any

executory contract or unexpired lease,” pending court approval.

WorldCom said that by rejecting the agreement, it would save an

estimated $81 million per year in expenses, and $182.3 million for the

remainder of the contract.

The filing comes as the latest move by WorldCom to get its expenses

back into line, while for AOL, it represents another potential injury

for its already-troubled advertising business.

In addition, both companies are under federal investigation over

accounting practices. WorldCom, of course, filed for the largest

bankruptcy in history after revealing that $3.85 billion in expenses

had been improperly booked. A month later, the company said it

uncovered another $3.8 billion in accounting errors.

Last month, AOL disclosed in Securities and Exchange Commission filings that it might have

improperly accounted for as much as $49 million in advertising and

commerce revenue booked by America Online.

The problems, which AOL said it uncovered as it was preparing to

have its executives certify its past results, involved three separate

marketing deals over six quarters, starting in March, 2000.

At least one of those deals is believed to involve WorldCom’s UUNET

subsidiary, to which America Online sold advertising, and from which it

purchased dialup capabilities and bandwidth.

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