LCI International, Inc.

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LCI International, Inc.

8180 Greensboro Drive, Suite 800
McLean, Virginia 22102
U.S.A.
(703) 442-0220
Fax: (703) 448-6792

Public Company
Incorporated: 1983 as LiTel Communications, Inc.
Employees: 1,400
Sales: $600 million (1995)
Stock Exchanges: NASDAQ
SICs: 4813 Telephone Communications Except Radiotelephone; 6719 Holding Companies, Not Elsewhere Classified

LCI International, Inc. is a long-distance telephone and telecommunications company, originating and placing telephone calls throughout the continental United States and placing calls in more than 200 countries worldwide. Based in Virginia, LCI offers a wide variety of domestic and international voice and data services to commercial and residential markets. The company experienced rapid growth in the late 1980s and early 1990s, largely a corollary of deregulation of the U.S. telecommunications industry during the 1980s. Such deregulation made it possible for companies like LCI to compete for a piece of the mammoth U.S. long-distance services pie.

Origins in the Break Up of AT&T

LCI was formed in 1983, the same year the vaunted divestiture of American Telephone & Telegraph Co. became effective. The enterprise was incorporated as LiTel Communications, Inc. by nine investors and telecommunications industry veterans. Spearheading the venture was 45-year-old Lawrence McLernon, a New Jersey native who had spent the past two decades working for different telephone companies. He was joined by Alan Ashworth, Ron Crammer, Richard Hicks, Mike Morris, Ghanshyam C. Patel, Jill Risch, James E. Sobwick, and Larry Wolfe.

McLernon and his eight associates hoped to get in early on opportunities created by telecommunications deregulation and to quickly stake out some of the market share ceded by AT&T. Specifically, they hoped to develop a cutting-edge fiber-optic cable network in the Midwest that could efficiently handle high volumes of telephone calls and digital communications, primarily for business customers. The founders first set up shop in a small office above a beauty salon near Milwaukee, Wisconsin. Less than a year later, however, they moved the company’s headquarters to a small office park near Columbus, Ohio. McLernon was attracted to the high-tech business environment that Columbus was trying to cultivate through, among other lures, various tax incentives for companies willing to locate there. “Governor [Richard] Celeste called me personally and asked me to come to Ohio,” McLernon recalled in the August 1990 Business Cleveland.”He was the only governor to do that,” he added.

Celeste’s interest in attracting LiTel to Columbus reflected the company’s great growth potential. LiTel had managed to attract a significant amount of startup capital, boasted a solid management team, and had an impressive business plan. It seemed entirely possible at the time that LiTel could be one of the major players in the future telecommunications industry. LiTel did achieve impressive gains during the late 1980s, building and expanding its fiber-optic network throughout several midwestern states. By the early 1990s, in fact, LiTel (LCI) would be known as one of the leaders in the second tier of the telecommunications industry, the top tier consisting of telecommunication giants AT&T, MCI, and Sprint.

LiTel’s gains, however, came at a high price. The cost to lay a single mile of fiber-optic cable was approximately $100,000, and LiTel was effectively starting from scratch. It initially planned to develop a 1,300-mile, $85 million network stretching from New York to Illinois and south into Kentucky. To that end, LiTel began acquiring other companies with operations and infrastructure that complemented this goal. The company also started laying its own fiber-optic cable. The ambitious endeavor was financed by several investors, among the largest of which were Alltel Corp., Centel Corp., and Pirelli Societe Generale of Switzerland. In addition, LiTel borrowed heavily to finance new construction, which was initially centered primarily in its local Ohio market.

Through a combination of acquisitions and new construction, LiTel managed to quickly exceed its original goals. Importantly, the company won a $14 million contract in 1987 to provide the Ohio state government with long-distance service. By late 1987 the company was operating a fiber-optic network with about 1,500 miles of cable serving more than 10,000 customers. More than 20 percent of those customers were located in the company’s core Columbus market. LiTel focused on serving businesses, which were more willing to pay for the quality of service made possible by fiber-optic technology. But in the long term, LiTel planned to branch out into other market segments, and McLernon hoped to become one of only four or five major companies serving the entire U.S. long-distance market.

Increased Competition in the Late 1980s

Throughout the late 1980s, LiTel scrambled to rapidly get its telecommunications network in place and secure market share. Meanwhile, the competition intensified, and LiTel found itself under increasing pressure to grow rapidly. The company borrowed heavily to fund new construction and sustain its acquisition drive, buying up both smaller and larger companies in an effort to stay ahead or get control of its competitors. Notable among its acquisitions was the 1990 buyout of Indianapolis-based Once Call Communications Inc., which boosted LiTel’s customer base by more than 30 percent. The purchase was LiTel’s third in less than seven months, contributing to a total customer base of more than 70,000 by late 1990. LiTel’s revenues increased accordingly, to nearly $200 million in 1989 and then rising to $260 million in 1990.

By 1990, LiTel was considered among the ten largest of about 250 companies still competing in the long-distance services industry. Despite huge increases in both sales and customers, however, LiTel remained unprofitable into the early 1990s. The lack of a surplus was mostly the result of the massive capital investments required for growth. Indeed, by the early 1990s LiTel was sitting on a mountain of debt that had been used to fund growth and to pay off some of the original investors in the company. Unfortunately, income and cash flow had failed to keep pace with debt growth. The end result was that LiTel, still under the direction of McLernon, was unable to meet its debt service and was even having trouble paying its suppliers. Demise was imminent unless management could engineer a quick turnaround.

Shake-Up in the 1990s

Impatient with what it viewed as mismanagement, LiTel’s biggest investor, E.M. Warburg, Pincus & Co., stepped in and forced a shakeup at LiTel beginning in 1990. Specifically, Warburg and other LiTel investors felt that McLernon and other top executives had failed to properly integrate acquisitions, which had resulted in the loss of both salespeople and customers. They also felt that, among other mistakes, LiTel had unwisely neglected the massive residential market, while at the same time pouring resources into experimental markets such as video conferencing. To whip the organization into shape and give it a new direction, Warburg brought in H. Brian Thompson, a former MCI executive, to act as chief executive. Thompson eliminated several of LiTel’s executives and brought in a new team made up largely of former MCI associates.

Thompson immediately went to work, engineering a successful turnaround that had LiTel generating profits by 1994. In an effort he referred to as “triage,” Thompson quickly shut down and eliminated unnecessary business, fired sales managers who weren’t performing adequately, and layed off much of the company’s bloated marketing force. In total, he laid off nearly 25 percent of the entire 1,000 member work force. Importantly, he shifted the company’s focus from business customers, who were accounting for about 70 percent of LiTel’s business in 1990, to the residential market, which was much more price competitive but made up about 94 percent of all long-distance telephone customers. Thompson also initiated an aggressive drive into international business. To reflect the changes, the company changed its name in 1992 to LCI International.

The changes at LCI quickly showed up on its bottom line. Total debt was steadily slashed (from about $220 million in 1990 to about $120 by the mid-1990s), and profits began to rise. The debt drain was alleviated in 1993 when LCI went public with two stock offerings, spaced 90 days apart, which raised about $200 million. At the same time, Thompson and fellow executives managed to continue growing the company at a rapid pace. While revenues initially dropped as management jettisoned poorly performing operations, they soon climbed, growing from about $260 million in 1992 to $341 million in 1993 and then to about $463 million in 1994. The company showed its first positive net income, of about $7 million, in 1994.

LCI’s recovery was conducted without the help of the company’s founders. Since LCI’s start in 1983, almost all of the members of the original team had departed, and several of them went on to become major players in the telecommunications industry. Ghanshyam C. Patel, for example, went on to become the chairman and chief executive of ConQuest Telecommunication Services Inc., a competing long-distance carrier, and James E. Sobwick became president at ConQuest. Larry Wolfe went to work with Smart Talk Network, Inc., a Canadian telecommunications concern. After resigning from his LCI post in 1991, McLernon devoted his attention to McLernon Enterprises, a launching pad for various technological ventures. Meanwhile, Thompson staffed LCI’s management ranks with many outside telecommunications industry veterans.

Economic Turnaround and Hope for the Future

In a period of three years LCI’s new management team increased the company’s net worth from less than zero to more than $800 million. That figure still made LCI a very minor player in the multi-billion-dollar telecommunications industry, in which three companies controlled a giant 85 percent of the market. LCI controlled less than one percent, but had big plans for growth. In fact, Thompson had made a point of only hiring executives “who think in terms of billions of dollars,” he said in the July 18, 1994 Washington Post. “I am trying,” he observed, “to build a world class enterprise here that is capable of taking on the best in the business.” Among other changes, Thompson moved LCI’s corporate headquarters to McLean, Virginia, reflecting its geographic diversity. The core of company operations, however, remained in Columbus.

Although the majority of LCI’s revenues still came from business customers going into 1995, the company was rapidly growing its residential and international businesses in its pursuit to become a fully integrated service provider. In addition to its various long-distance pursuits, LCI started gearing up to compete in the market for local telephone services, which was opened through further deregulation in the mid-1990s. Going into 1996, LCI was employing about 1,200 workers and generating roughly $600 million in revenues annually, and management expected sales to top $1 billion in 1996. LCI continued to pursue rapid growth through acquisitions—such as the October 1995 buyout of US Signal Corp.’s long-distance division—and by expanding existing operations.