At first glance it appears that David has scored a knock- out over Goliath: Little MCI Communications Corporation has won a major anti-trust lawsuit over giant American Telephone & Telegraph Corporation.
MCI, in a jury trial in Chicago, was awarded $600 million -- which will be trebled to $1.8 billion under the Sherman Antitrust Act -- for injuries it says it received when AT&T tried to prevent it from obtaining the necessary intracity connections it needed to complete long-distance calls moved on MCI's network.
Before the modern-day corporate David can begin to count any money coming from Goliath, however, it can also count on a long and costly period of legal appeals. "If AT&T appeals this all the way to the Supreme Court, it can take as long as two years," says Steven Chrust, an analyst with Sanford C. Bernstein & Co., a research-oriented brokerage house. And the chances are excellent that the case will be appealed -- and not settled out of court -- since 40 more private anti-trust suits are pending against Ma Bell.
For this reason, Wall Street insiders did not get terribly excited over the case, even though trading in MCI accelerated the first business day after the court case. On Monday, June 16, MCI traded 1,910,000 shares, closing at 9 1/2, up 1 3/8.
Monte Gordon, research director of Dreyfus Corporation, which owned 1,388,571 shares of MCI as of March 31, says: "Although there is a lot of activity in MCI stock, it's a little premature, even if it is understandable. That judgment can be overturned, there can be a reduction in the amount of money awarded MCI, or even a combination of the two."
Frank Parrish, a portfolio manager for the Fidelity Group of mutual funds, whose venture-capital arm, FMR, owns 139,000 shares of MCI, agrees: "Obviously we are very happy. But there will be no resolution of the case until it at least goes through three more courts, and that could take four to five years . . . ."
Mr. Chrust says he thinks it "highly likely" the $1.8 billion award will be reduced, leaving MCI with $300 million to $400 million. Originally, the analyst says, he expected that MCI would get only $100 million to $200 million if the case were decided in its favor. So the extra money could come as a surprise to MCI-watchers.
The jury apparently came up with the $600 million award because it found AT&T guilty on two-thirds of the charges. And MCI was asking $900 million in damages. Mr. Chrust does not expect an appeals court to follow this line of reasoning, however, since he doubts that MCI was damaged by that amount.
For the most part, the jury found that AT&T either delayed in hooking up MCI to its own system or actually tried to prevent MCI from running its business, which is providing long-distance telephone connections at rates cheaper than those of AT&T's long-lines department. The case was complex, and reports surfaced that the jury was confused by the telecommunications terminology. AT&T's lawyers, who once praised the jury, later reversed themselves and said they expected that a higher-court reversal will "make the jury system look bad."
If MCI remains successful, any financial settlement will give it a big push toward meeting its business objectives. Mr. Parrish notes that "if they either settle out of court, or even get a fraction of the award, it's a lot of capital for this company." Mr. Chrust figures a $300 million award would be the equivalent of two to three years of capital spending for MCI.
With sales of $144 million in 1979, the 11-year-old company has only recently begun to blossom. This fiscal year Mr. Chrust expects MCI to earn 50 to 55 cents per share and next year to increase its earnings to $1 to $1.25 per share. By fiscal year 1984, he is projecting $2.50 to $3 a share. None of his figures include the settlement. And because of this growth rate, he concludes that "the stock should warrant a still higher price."
Because of such a growth rate, companies like Dreyfus and Fidelity have invested in MCI. Mr. Gordon says Dreyfus developed its large position in the company because "we believe the telecommunications industry is fragmenting and MCI has found a niche in it." For some, such as Fidelity, however, it's been a long road: The fund has held MCI stock at a loss for about 10 years.
For AT&T, paying for the MCI settlement out of earnings could be painful if the award is not reduced on appeal. Mr. Chrust figures the $1.8 billion penalty could cost the shareholders $1.40 a share, or 15 to 20 percent of current income. If the award is reduced to $300 million, it would cost 20 to 25 cents a share, or 3 percent of the company's earnings.
AT&T's problems don't end in the courtroom. Congress is working on legislation that would change the telecommunications industry. The House version of the bill, a legislative aide says, is a collection of amendments that attempt to open up the industry to other small companies, allowing them to enter the business as common carriers.
In return, AT&T would be allowed to compete against companies like IBM in the data industry. Included in the current legislation are amendments which, another legislative source says, "attempt to make sure that all their independent subsidiaries remain as independent as possible." This includes requiring AT&T to sell at the same price to anyone in the marketplace the same goods and services they provide their subsidiaries.
The legislation is being considered before the House Commerce Committee's communications subcommittee. Its next stop is the full committee, where it has stalled before in the face of extremely heavy lobbying.