Sun Jul 8 -- MONI Marconi CEO-Designate to Step Down; Resignation Comes Days After Warning
July 9, 2001
U.K.'s Marconi Falls Off Telecom Pedestal
As Warning Brings It in Line With Sector
By David Pringle
Staff Reporter of The Wall Street Journal
LONDON -- Until last week, Britain's Marconi PLC seemed
to stand aloof from the rest of the ailing
telecommunications-equipment industry.
While rivals such as Canada's Nortel Networks Corp. forecast
the market for the nuts and bolts of telecom networks is unlikely
to bounce back until the second half of 2002, London-based
Marconi maintained the turnaround would happen this year.
But late last week, Marconi fell into line, predicting a sales
slump will push its operating profits for the year to March 31
down 50% from the previous year.
On Thursday, its shares, which had been trading at a premium
to rivals such as Nortel Networks and Alcatel SA of France,
crashed more than 50%, wiping $5 billion off Marconi's value.
The selloff continued Friday, when Marconi's American
depositary shares were down 30 cents, or 9%, to $3.05 in 4
p.m. Nasdaq Stock Market trading.
On Friday evening, Chief Executive-designate John Mayo, who
was closely associated with Marconi's bullish stance on the
telecom-equipment market and was due to become CEO in
two weeks, resigned.
Mr. Mayo's resignation and the magnitude of the share selloff
reflected institutional investors' anger about both the scale of the
profit warning and the manner in which it was delivered. The
company suspended trading in its shares for all of Wednesday
after announcing the $1.1 billion disposal of its U.S.-based
medical-systems unit to Philips Electronics NV, and didn't
release the profit warning until Wednesday evening -- when it
also announced that 4,000 jobs would be cut.
In response to the spending crunch in the telecom industry,
Marconi plans to cut prices to win business: It said it hopes to
limit the year-on-year sales decline to 15%. Credit Suisse First
Boston, one of the company's house brokers, promptly revised
its forecast of margins on earnings before interest and tax, or
ebit, for the year ending March 31 to below 5% from 10.5%.
Analysts believe Marconi's margins are unlikely to make a full
recovery even if the telecom-equipment market eventually
bounces back. They say that while some of Marconi's products,
such as its optical-transmission systems, are highly rated, the
company lacks the resources to be a leading player across the
diverse technologies that are used to build fixed and wireless
communications networks.
For Lord George Simpson, who now plans to soldier on as
CEO, the recent collapse in sales will be particularly galling.
Over the past few years, he has transformed Marconi -- a
conglomerate once known as General Electric Co., with
interests in aerospace, defense, communications and medical
systems -- into a pure telecom equipment business. GEC, as the
U.K. company was known, was unrelated to General Electric
Co. of the U.S.
GEC had a fast-growing business selling optical transmission
systems, which send voice and data as beams of light through
long-distance fiber networks, but lacked the technologies to
carry traffic through other parts of a network. Lured by
burgeoning demand for telecom equipment, in early 1999 GEC
acquired Fore Systems Inc. of Pittsburgh for $4.5 billion and
Reltec Corp. of Cleveland for $2.1 billion to fill in gaps in its
product portfolio.
Later that year, Lord Simpson spun GEC's defense and
aerospace electronics business into a merger with British
Aerospace PLC. To reflect the changes, GEC was renamed
Marconi after the Nobel Prize winner and
wireless-communications pioneer Guglielmo Marconi.
For the year to March 31, Marconi's communications division
racked up sales of 4.7 billion pounds ($6.63 billion) and
operating profit of 592 million pounds. About 30% of these
sales were generated in North America, where Marconi's
customers include Sprint Corp. and AT&T Canada .
Marconi is one of the top six providers of optical transmission
systems in the world, according to U.S. research firm Gartner
Group. As the technology becomes cheap enough to use in
short-haul sections of telecom networks, Gartner forecasts that
the global market for optical transmission systems, excluding
cables laid on seabeds, will be valued at $54 billion by 2004
compared with $24 billion in 1999.
Marconi is counting on this kind of growth to help it sell a
stockpile of optical components that have been building up
during the current slowdown. Marconi had 1.7 billion pounds of
inventory on its books when it reported results in May. Unlike
Nortel and Alcatel, Marconi has yet to make a significant
inventory write-off, arguing its products still won't be obsolete in
2002.
That stance wins support from Alec Shutze, a London-based
analyst with Merrill Lynch, who regards Marconi's optical
technology as state of the art. However, Mr. Shutze is
concerned that the British company is falling behind in the
market for asynchronous transfer mode (ATM) switches, which
are used by telephone companies and some other concerns to
direct traffic around their networks. "They are six months
behind Alcatel and Nortel in developing ATM switches," he
says.
A Marconi spokesman acknowledges the company is slightly
behind in ATM, but says a new product will close the gap and
maintains it isn't losing market share. "There is still a lot of
tender activity and we are continuing to win tenders," adds Lord
Simpson.
But Marconi, which is aiming to reduce its debt to 2.5 billion
pounds by the end of the year, lacks the resources to compete
with the largest participants in every sector of the
telecom-equipment industry.
Although it has been expanding its research and development
activities, opening new centers in India and Cambridge,
England, its budget of 669 million pounds for the year to March
2001 was a fraction of the $4 billion spent by Nortel during
2000. |
