How Richard Li Learned To Appreciate the Old Economy
quolumnist.quam.net
The old adage: 'judge them by what they do, not what they say', has more and more meaning when trying to make sense of the dotcom share frenzy.
When this adage is applied to Richard Li's Pacific Century CyberWorks it has particular resonance. For the past year Mr Li has been telling us that he is building a business which will be a master of the new economy. He has given credence to this view by buying up stakes in all manner of dotcom companies and e-commerce type of ventures.
However all the money spent on these ventures pales into insignificance when set against the US$38 billion he is planning to pay for Cable & Wireless HKT (CWHKT). By any standards CWHKT is an old economy company at its core. Its main assets are a telecommunications network and a set of licenses. However it does have some new economy assets, notably the highly successful Netvigator, which is an Internet Service Provider, and a firm base in the mobile telephony market, although it is rapidly loosing market share.
Asked by 'Time' magazine what attracted him to CWHKT, Mr Li replied : ' the people, the broadband experience, the cellular operation'.
Let us be generous and assume that Linus Cheung and his colleagues in the CWHKT are the world's greatest telecommunications management team. Let us be generous in ignoring the simple fact that CWHKT has no more than 22,000 broadband customers and let us assume that the company's cellular operations are in some way world class.
That is a hell of a lot of assumptions, even assuming they are all valid. But even this stack of interesting notions can hardly explain why PCCW is gambling its entire future on the acquisition of CWHKT. And let there no doubt about it, this is precisely what is happening. Why, the simple maths of the takeover tells the story: Before the bid was announced PCCW was capitalised at around US$30 billion, it is buying a company for more than the total sum of its own capitalisation and doing so on the back of a US$12 billion syndicated loan facility. If that does not represent a gamble on the company's future, all the basics of corporate reality have been thrown out the window.
However it is not a reckless gamble and it is not a gamble without a great deal of commercial logic for PCCW. The problem is that the commercial logic hardly matches the mountain of rhetoric coming from Mr Li and his men before they spotted the CWHKT opportunity.
What they spotted was a business with strong cash flow, with around $2 billion in cash on its balance sheet and, for the foreseeable future, reasonable earnings. Considering that PCCW has no earnings to speak off, practically no cash flow and few prospects of attaining either in the short term, it is easy to see the attractions of the old telephone company.
The uncomfortable reality is that the bulk of the earnings derived from the business Mr Li is about to acquire comes from carrying telecommunications signals down cables not from any cutting edge technology and not from the software side of the business which, so PCCW previously told us, was the only side of the business it was interested in.
The same logic, albeit on a different scale, on a different continent and in a slightly different context, applies to the AOL merger with Time Warner. Unlike PCCW, AOL actually has a strong customer base, has real earnings and decent cash flow but the smart people at AOL quickly realised that if they did not inject their vulnerable new economy business into a largely old economy-based business, it would remain vulnerable and lack some of the essentials required to secure true market dominance.
All this makes you think, or it should do. It makes you think whether the hardware side of the hi-tech business is really so dull and lacking in prospects as the over excitable new economy pundits have led us to believe. It also makes you think whether, in reality, there is more money to be made around the fringes of the new economy than from within.
Mr Li has so far declined to share his thinking on these lines with the general public. However, as I started out by saying, he should be judged by what he does not by what he says.
For the first time I am now tempted by PCCW shares as a long term prospect. I would be even more tempted if the company would come clean and frankly explain what it is doing. However this is to expect too much.
Stephen Vines |
