Mci Communocations
MCI COMMUNICATIONS CORPORATION
Introduction
In 1982, the Justice department ordered the separation of ATT into local subsidiaries. MCI was one of the main competitors of AT&T and the impact of this new competition on MCI was uncertain. In this case the financial impact of this increased competition will be analyzed.
Analysis of External Financing Needs for MCI from 1983 to 1989
Please see Exhibit 1 and Exhibit 2 MCI’s external needs will keep increasing over the next few years as the operating margins would shrink because of higher competition & higher access charges. In order to increase its market share, MCI would need to continue investing huge capitals in its network. As per exhibit 9 of the case, it is anticipated that MCI will increase its market share to 20 % in the next 6 years. The telecom industry is very capital intensive and in 1983 required $1.15 worth of investment in fixed plant & equipment for each extra $1 of revenue; that is first you have to build the network before you can sign up customers. The operating margin is expected to stabilize at 15% by 1990. But they are expected to vary substantially based on competition. It can go up to 22% or go down to 8%.
Types of securities which were issued by MCI (1972-1983)
1. 2. 3. 4. 5. Common Stock Common Stock with warrant Convertible cumulative preferred stock - Cost Around 12.27 Debentures – Cost around 15% Convertible debenture – cost around 10%
MCI initially issued equity in 1972 and later it started issuing debentures & convertible debentures. This was because the cost of equity is highest. MCI relied on debentures for a while and then convertible debentures which had lower cost of capital. As its equity stock price continued rising, it converted the convertible debentures to common stock thereby increasing its equity & lowering its liability. This allowed MCI to raise further capital in the future. The convertible bonds provided a cost effective way for MCI to finance a sequence of
Introduction
In 1982, the Justice department ordered the separation of ATT into local subsidiaries. MCI was one of the main competitors of AT&T and the impact of this new competition on MCI was uncertain. In this case the financial impact of this increased competition will be analyzed.
Analysis of External Financing Needs for MCI from 1983 to 1989
Please see Exhibit 1 and Exhibit 2 MCI’s external needs will keep increasing over the next few years as the operating margins would shrink because of higher competition & higher access charges. In order to increase its market share, MCI would need to continue investing huge capitals in its network. As per exhibit 9 of the case, it is anticipated that MCI will increase its market share to 20 % in the next 6 years. The telecom industry is very capital intensive and in 1983 required $1.15 worth of investment in fixed plant & equipment for each extra $1 of revenue; that is first you have to build the network before you can sign up customers. The operating margin is expected to stabilize at 15% by 1990. But they are expected to vary substantially based on competition. It can go up to 22% or go down to 8%.
Types of securities which were issued by MCI (1972-1983)
1. 2. 3. 4. 5. Common Stock Common Stock with warrant Convertible cumulative preferred stock - Cost Around 12.27 Debentures – Cost around 15% Convertible debenture – cost around 10%
MCI initially issued equity in 1972 and later it started issuing debentures & convertible debentures. This was because the cost of equity is highest. MCI relied on debentures for a while and then convertible debentures which had lower cost of capital. As its equity stock price continued rising, it converted the convertible debentures to common stock thereby increasing its equity & lowering its liability. This allowed MCI to raise further capital in the future. The convertible bonds provided a cost effective way for MCI to finance a sequence of