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TELECOM GIANTS IN TALKS

Storied MCI Set to Ring In Another Era

Telecommunications: From its days as a $3,000 start-up, the maverick firm has a history of bold maneuvers.

November 02, 1996|JAMES F. PELTZ | TIMES STAFF WRITER

More than any single company, MCI Communications Corp. is responsible for cracking the historic AT&T telephone monopoly--employing aggressive legal tactics, shrewd marketing and innovative financing to usher in the fierce competition now raging in the long-distance market.

Yet despite its many triumphs, the company has decided it cannot keep pace with all that competition on its own. Its stock has languished this year in the aftermath of a new U.S. law that opens more opportunities for the company--especially in local phone service--but also allows new rivals into its business.

On Friday, MCI disclosed how it plans to continue the fight: The company is in negotiations to be bought by phone giant British Telecommunications.

The news sent MCI shares soaring $5.125 to close at $30.25 on the Nasdaq Stock Market, and more than 16 million shares changed hands before trading was halted at 10:27 a.m. Pacific time. A Nasdaq spokesman said MCI requested that the halt continue until early Monday. A formal announcement of a deal is expected Sunday or early Monday.

Despite the commotion, it could be months, if not years, before U.S. regulators approve the deal and MCI's investors see the full benefits of the transaction. But word of the talks has given MCI's stock one of its few big lifts since February, when Congress passed the historic telecommunications deregulation bill that allows long-distance carriers, local phone companies and cable operators to invade one another's markets.

"MCI has a very powerful franchise that's been underappreciated in recent months," said Bob Morris, equities director at the money management firm Lord, Abbett & Co., a major MCI stockholder. "This is a wake-up to Wall Street."

A merger could also have a major impact on the Nasdaq market itself. MCI is one of the market's marquee issues--the stock was Nasdaq's ninth-most active issue in the first nine months of this year--and a merger would probably result in MCI's stock being delisted.

Regardless, the merger would be yet another notable chapter in MCI's extraordinary 33-year history.

The company, started with $3,000, has become a global telecommunications powerhouse with annual revenue exceeding $15 billion and a firm lock on second place behind AT&T in the U.S. long-distance market.

MCI got there using the initial vision of its founder, the late William G. McGowan; brilliant marketing; the tenacious antitrust battles MCI fought with AT&T; and the billions of dollars raised in the mid-1980s by now-defunct junk bond king Michael Milken.

Founded as Microwave Communications Inc. in 1963, the modern-day MCI was formed five years later with the arrival of McGowan, an irascible, chain-smoking son of a railroad worker who invested $50,000 in the business and had a singular goal: End AT&T's monopoly over the long-distance business. Under McGowan, MCI charged into new markets with its long-distance service and repeatedly fought the monolithic AT&T in the courts to loosen the stronghold. MCI earned a reputation as "a law firm with an antenna on its roof."

And while winning its court battles, MCI persuaded Milken to raise the cash it needed to build its nationwide service. Milken and his firm, now-defunct Drexel Burnham Lambert Inc., raised more than $2 billion for MCI in the 1980s, including through a $1-billion deal in 1983 that, at the time, was among the largest single corporate financings in history.

Drexel and Milken, in fact, often cited MCI as evidence that the high-risk, high-yield junk bonds they used to raise the cash had played a major role in enhancing U.S. business, as opposed to its critics' contention that junk bonds were responsible for scores of corporate bankruptcies.

Milken "saw the vision in McGowan," Lorraine Spurge, a former Milken lieutenant who is now working on a book about MCI's history, said Friday. "How a company that small could go after AT&T is pretty incredible."

Noting MCI's successful marketing campaigns such as "Friends and Family," Spurge said MCI achieved success in good part because "it took a commodity, telecommunications, and made it a branded product."

But MCI's current chairman, Bert C. Roberts Jr.--who took over after McGowan died in 1992 at age 64--still has big challenges ahead, which is why MCI is expected to embrace British Telecom and the extra capital it would bring. Its ambitious goal is not only to fight off new long-distance rivals, but to become a major player in communications markets like the Internet, local phone service, high-speed transmission of data and direct satellite broadcast services. It invested $2 billion in Rupert Murdoch's News Corp. and joined in a satellite TV venture with the media mogul, and it has already become one of the major carriers of Internet traffic.

* Bloomberg Business News contributed to this report.

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Calling Up a Merger

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