Marconi needs new management
Marconi has squandered billions of pounds of shareholders money. The management s plan to turn the former GEC into a focused telecoms equipment company has backfired. The directors lost their heads in the technology-stock bubble, and paid near top-of-the-market prices to acquire US rivals. The goodwill paid the amount above the fair value of the assets acquired now exceeds Marconi s market capitalization. But the telecoms boom has gone bust. Marconi s US profits have all but vanished.
John Mayo is the architect of this acquisition strategy. The deputy chief executive says it is too early to pass judgment on it. Over time, Mayo argues, the acquisitions will pay for themselves. That looks like wishful thinking. The biggest acquisition, which cost roughly $4bn, was in the broadband switching market. This has imploded. More generally, the telecoms equipment market may not pull out of its slump until late next year. The rate of growth it witnessed during the bubble phase is a once-in-a-lifetime phenomenon.
It is true that shareholders egged Mayo on. That does not excuse his actions. Shareholders pay executives to invest their money wisely. Mayo has failed this test. It is also true that many telecoms equipment companies wasted huge sums on acquisitions. But each deal should be judged on its likely returns, not on the prices paid in similar deals. What s more, Marconi stands out because it blew cash on acquisitions, while rivals like Cisco used overvalued shares. Cisco kept a balance sheet strong enough to shield it through a market downturn. Marconi is less fortunate.
Mayo got his timing wrong. He arrived late at the game of turning industrial groups into telecoms equipment companies. He was left to pick up the scraps turned down by other acquirers. Later, Marconi failed to see the downturn in its market approaching, even though many industry analysts saw it from a mile off. Marconi thus retained an over-sized cost structure, which is now blunting its competitive edge.
Every manager deserves a chance to reform. But Mayo appears to be in denial. Time and again over the past eight months he has underestimated the problems facing his market. Even now, as he predicts a sales plunge of 15% this year, he is telling investors he can cut inventories by around a third. Mayo has also stubbornly refused to write down goodwill on acquisitions perhaps because he is worried it would destroy an already badly damaged balance sheet.
Marconi is now in crisis. Its shares have fallen 90% from their peak to a level last recorded in the early 1980s. The company needs an experienced operational manager to guide it through this difficult time. Mayo, with a background in investment banking, is not the man for the job. He is due to step up to the chief executive s role in two weeks time. Shareholders should ask the non-executive directors to find a more suitable alternative.
The man stepping down as chief executive is George Simpson. He has allowed Marconi s strategy to be hijacked by his deputy with disastrous consequences. And in a stunning display of tactlessness, he last month proposed the re-pricing of directors share options. Simpson is supposed to move up to the chairman s role. But he too lacks credibility and should bow out.