McI Corporation Communications

Introduction and Overview

MCI was organized in 1968 under the management of William McGowan as a specialized long-distance phone company. Prior to 1968, the telecommunications industry was a monopolistic industry that consisted solely of AT&T and its seven regional Bell companies. In 1969, government deregulation began and in 1971 the FCC began allowing for new companies to enter the market. After the FCC's acceptance in 1971, MCI proceeded with the construction and development of its telecommunications network. However given that the industries high start up costs, large amounts of capital were required to get MCI started. To provide the sufficient amounts of capital MCI sold 6 million shares of common stock at $5 per share. Along with the stock MCI also had a $64 million line of credit and loan promises of $6.54 million from private investors.

By 1974, MCI had only reached 20% of its goal for amount of transmission miles constructed. They only reached the 20% because MCI relied on AT&T to carry calls from its subscribers in metropolitan areas, AT&T though had successfully avoided providing the full range which in turn made it impossible for MCI to generate sufficient revenues. Consequently, in 1973 MCI halted its construction projects and filed an antitrust suit against AT&T.

In May of 1974, the FCC sided with MCI and ordered AT&T to provide MCI with the full range of interconnection facilities it needed. In 1975, construction resumed, however MCI was only generating revenues of $6.8 million but had losses of $38.7 million. MCI continued to grow their telecommunications network, but still was operating at a loss. MCI had exhausted its lines of credit and its stock price had fallen to $1, MCI needed more money and had run out of options.

In 1976, "Execunet" was introduced and showed signs of substantial revenues and had generated profits by year end. MCI continued to grow, but given that lines of credit were exhausted, MCI needed to figure out how to finance the anticipated growth. In 1978 CFO Wayne English began retiring MCI's old loans in exchange for shares of stock. By the end of 78' MCI was able to enter the public capital markets the 1st time since 75' and sold about $135 million shares between 78' and 80'. Nevertheless by 1981 the demand for funds was increasing and MCI needed large amounts of capital and at a low cost.

Financial Analysis and Evaluation

MCI is a relatively new company that is still in the growth phase, because of this revenues are not sufficient to meet the capital requirement needed for growth. Therefore, MCI either needs to issue more stock or float bonds to generate the necessary capital.

Current ratio

MCI's current ratio is 2.2 (Exhibit 1) which is below the industry average of 2.5, given that MCI is a relatively new company this is good and acceptable to be below average. It is expected that as MCI continues to grow and become more profitable this ratio will increase; due to the increased revenues and increased assets along with the decreases in outstanding debt.

Debt Ratio

MCI's debt ratio currently is 55% (Exhibit 2) this is below the industry average of 62.2%, though with our recommendation it will jump to 113% instantaneously but then drop quickly and significantly in the near future. It is felt that for startup companies like MCI, they should be levered quite heavily. Currently MCI doesn't even match the industry average therefore it is felt that leverage is needed for MCI.

Interest Rates

Exhibit3 shows the current interest rates for stocks, bonds and convertible bonds. As the exhibit shows interest rates are significantly high for stock (12%) and bonds (15.17%) where convertible bonds are are quite low at only 7.75%.

Revenues and Market Share

Exhibit4 shows that over the next 7 yrs MCI revenues just from its long distance sector are expected to increase from $1 billion to about $10 billion. Additionally, exhibit4 shows that MCI's market share is expected to increase to 20% over the next 7yrs. With revenues increasing and market share increasing it is assumed that MCI