McI Communications Corp., 1983

In the early stage of MCI, it raised fund primarily by issuing stocks in the public market. In June 1972, MCI did its IPO issuing 6 million shares of common stock at $5 per share. In 1975, one year after an antitrust against AT&T, MCI issued 9.6 million units of common stocks attached with a 5-year warrant. Between 1976 and the summer of 1978, lease financing of new fixed investment was the only substantial source of funds available due to the restrictive covenants associated with the bank loans.

Withdrawal of the court’s Execunet order in May 1978 opened the way for accelerated growth. In order to obtain funds, MCI offer 25.8 million convertible preferred stocks for the first time in 1978. A second convertible preferred offering in September 1979 raised 63.1 million and a third in October 1980 raised 46.7 million. In 1981, as the demand for investment funds intensified, the direction of MCI’s financial policy shifted from offerings of convertible preferred stocks to convertible bonds: it raised $98.2 million in August 1981 and $245.9 million in May 1982 with convertible debentures.

From Exhibit 1, we can find that the current debt ratio of MCI is 55%, which is quite high comparing with its competitors. However, we should notice that if conversion takes place, debt ratio will decrease to 32%, which is lower than most of its competitors. Also, MCI’s relatively high current ratio and interest coverage ratio prove good liquidity in the short-term.

The separation of AT&T from its local operating subsidiaries will bring more competition to the industry. It means growth opportunity for MCI. However, on the other hand, MCI will lose its existing cost advantage over AT&T. For sure, AT&T will still dominate the market and MCI will compete with GTE, IBM and ITT to seize market share. The crucial thing for MCI is to seize market share since economies of scale is very important for surviving. Thus, massive market campaign and investment are needed at this stage.

According to baseline forecast for MCI’s operating performance, capital expenditure roughly depends on revenue growth as well as an incremental investment factor. Hence, total financial needs would amount to $3.3B over the next 4 years, except for the $500M excess cash on hand (see Exhibit 2). The projection overall is acceptable given the uncertainty of MCI’s future in the increasingly competitive communication industry. Nevertheless, revenue would still be growing