MCI-case

MCICommunicationsCorp.1983NathanLyons-Smith12/14/20092ContentsExecutiveSummary.......................................................................................................................................3Introduction..................................................................................................................................................4Background...................................................................................................................................................4BeforetheFirstAntitrustSuit(BeforeMay1974)....................................................................................4BeforetheSecondAntitrustSuit(June1974–January1982).................................................................4AftertheSecondAntitrustSuit(February1982–Today)........................................................................4SWOTAnalysis–PreAT&TBreakup.............................................................................................................5SWOTAnalysis–PostAT&TBreakup...........................................................................................................5MCI’sPastFinancialStrategy........................................................................................................................6MCIFinancialAnalysisforGrowth................................................................................................................7CalculationofCostofDebtandCostofEquity.........................................................................................7CalculationofMCI’sFutureFinancialNeeds............................................................................................8Conclusion.....................................................................................................................................................9Appendix1–PreAT&TBreakup.................................................................................................................10Appendix2–PostAT&TBreakup...............................................................................................................11Appendix3–ChronologyofSignificantEvents..........................................................................................12Appendix4–MCIBetaCalculation.............................................................................................................13Appendix5–S&P500DataSet1(1980-1983)...........................................................................................14Appendix6–S&P500DataSet2(1980-1983)...........................................................................................15Appendix7–RiskFreeRate–T-BillAverage1980-1983...........................................................................16Appendix8–CalculationofMCI’srD..........................................................................................................17Appendix9–CalculationofMCIRequiredrE..............................................................................................17Appendix10–TableofRates......................................................................................................................17Appendix11–MCIProFormaBalanceSheet............................................................................................18Appendix12–MCIProFormaSourcesandUses.......................................................................................19Appendix13–MCIProFormaIncomeStatement.....................................................................................19Appendix14–MCIProposedFinancialMoves...........................................................................................20Appendix15–FinancialRatioAnalysis($billions).....................................................................................203ExecutiveSummaryMCIhasbeenprovidinglongdistancetelecommunicationservicesforseveralyears.ThecompanyhasseenitsrevenuegrowfromalmostnothinginFY1974,tomorethan$1billioninFY1983.ThecompanyhashadproblemsfromAT&TunfairlyusingitsmonopolyandfromtheFCCpassingregulationagainstMCI’sservices.Eachtimethishashappened,thecourtshaveruledinMCI’sfavor,andMCIhascontinuedtogrow.Recently,theFCChasbrokenuptheAT&Tmonopolyandforcedittocompeteonfairerterms.ThishasgivenMCItheopportunitytostealalargechunkofmarketsharefromAT&T,butMCIwouldneedtoobtainfundsandgrowinordertodothis.ThecompanyhasraisedcapitalinthepastbyissuingconvertiblepreferredstockanddebenturesthatallowMCItoconvertthedebtintoequityandtakeonadditionaldebt.ThecostofdebtforMCIwassignificant,butMCIneededthemoneyforgrowth.MCI’sgamblepaidoffandthegrowthoutpacedtheexpense.Thegrowthinthestockhasenabledthemtoconverttheolddebtandtakeonnewdebt,allowingthemtofurthergrow.MCIisinanexcellentstrategicandfinancialpositionforgrowth.Themarketshareistheirsforthetaking,theyhaveexcellentdebthistoryandfinancialratios,theyhave$550millionincash,andtheirstockpriceis$47pershare.TheProFormaBalanceSheet,SourcesandUses,andInc