Li-dership lesson wanted
SIMON PRITCHARD
For a brief moment at Wednesday's results telecast, Pacific Century CyberWorks chairman Richard Li Tzar-kai drifted into tech-babble, referring to "bandwidth" when talking about management time. He quickly corrected himself and reverted to a sombre seriousness with the emphasis on consolidation, efficiency programmes and moderate capital expenditure.
Compared to his last public outing at a results announcement, the difference was stark. In October, a jaunty Mr Li dominated his press conference while running a conference-call hook-up with his CMGI partners. At his side was a noticeably twitchy finance director, David Prince, who seemed ill at ease with their future-world visions.
Yet on Wednesday it was a decidedly chipper Mr Prince who seemed to relish explaining an awful set of results.
Gone was talk of satellite-connected broadband and global alliances. Nobody mentioned the Internet. References to China were cursory and the Network of the World seemed a distant memory.
Growth themes were limited to developing total system and network solutions for companies. Staff productivity is the new buzz; managers are combing the property portfolio to "realise value".
Following the Stanford-degree debacle, sentiment surrounding the firm has never been so low. Having been wrong on the firm's prospects and with no corporate finance mandates on offer, analysts are weighing in. CyberWorks is now seen as an embattled incumbent operator, bleeding market share and facing huge organisational change issues.
How did it all go so wrong? That question is loaded and it might be worth considering what they did right. Judged purely as a leveraged buy-out it is hard to fault the execution. Weak cash-generating assets were quickly hived off. Its Telstra joint venture proved to be masterfully timed.
Concerns remain about capital expenditure, notably on the Cyberport, and according to Deutsche Bank research it may be forced to take on fresh debt sooner rather than later. Yet with interest coverage at a comfortable 3.5 times and the rate cycle turning downwards, it has a comfort level.
Maybe, but what about that US$627 million investment portfolio write-off? This sum alone represents one of the biggest losses made by a blue-chip firm since Hongkong Land was seriously messing up in the early 1980s. Arguably, these stock purchases underpinned the buying power of Mr Li's bubble stock. Certainly he seems to have believed the Internet story to the full, yet it is clear that someone at the firm had doubts.
Last year's annual report stated that in 1999 the firm entered derivative contracts with a "third party with the effect of fixing the group's gains on certain quoted other investments". A cash deposit of HK$669 million was paid and shares in a subsidiary firm worth HK$3.17 billion were pledged as collateral.
It was not stated which securities this hedge was bought against. It is reasonable to assume they were Internet stock investments. No mention of the matter was made on Wednesday. It is possible that any offsetting gains were included in the released headline numbers, but the contracts were said to have terms of up to four years.
Most analysts' concern is not the failed Internet investments. Those were long ago factored into valuations. Any write-back either from hedging instruments or an unlikely technology stock rebound would rank as a bonus. The bigger worry is of a firm with eroding market share and a management without clear goals.
CyberWorks is badly in need of reform. Its engineer culture, born out of the Cable & Wireless days, is ill-suited to today's competitive and complicated environment. Marketing and customer support remains shoddy and the former monopolist culture runs deep.
Competition is fast eroding the former international-call cash cow. In its Reach subsidiary the price of bandwidth provided by its undersea cable network faces remorseless downward pressure, falling last year by some 35 per cent, according to the company. Local loop unbundling in its domestic network threatens its competitive position.
ING Barings said the 34 per cent decline in IDD traffic was far steeper than expected and the take-up of broadband Internet users on the Ultraline service was some 50,000 subscribers short of its expectation at 194,000. Yet, like most brokerages, it considered the 7 per cent fall in overall telecom services revenues to be a fair performance.
In response, great store is being placed on developing total network and systems solutions. CyberWorks wants to install your customer relationship manager software, manage the data and sell you bandwidth. CLSA picked out the US$60 million to US$80 million on earned in business-business activities as a "bright spot" for the company.
The difficulty is the fierce competition from companies like US networking giant Cisco Systems which are rooted in the computer industry rather than the analogue-based telecommunications world.
Bridging that culture gap will not be easy. Even with today's bombed-out markets, the new "talents" CyberWorks wants to hire may prefer the upside stock-option potential from firms with share prices more highly geared on these emerging sectors.
According to Kim Eng Securities research head Stephen Brown, the firm's real opportunity lies in capitalising on its three million-plus customer base. Rather than doggedly defending its home-line rental cash stream, it should aim to be the provider of all communications services within the home. That, he says, means a revolution in the firm's approach from the bottom up.
"They want to be a corporate systems integrator, but there are three million homes crying out for systems integration," Mr Brown says. "They could take practically the whole lot if they got their act together."
Within 90 days, CyberWorks says it will announce a new business-customer initiative. Network of the World has been an over-hyped disappointment. Mention was made on Wednesday of forming alliances with media companies, but its track record so far of co-operative ventures is poor.
The depth of management experience remains an issue. Suggestions have been made that Mr Li will step into a non-executive role and perhaps hire a number of big-name industry executives as powerful line managers. Few are likely to want the job if they are to be micro-managed from his office intercom.
Effecting organisational change to shift employees away from an internal organisational focus to the customer takes enormous change. Cathay Pacific's industrial troubles over the past eight years are testament to the challenge of imposing modern discipline in a workforce schooled in the colonial iron rice bowl.
Is Mr Li the man to do that? Turnaround demands the ability to clearly communicate messages to customers, investors and staff. That is hard to do when the chairman refuses to appear publicly and an obsession with the control of information pervades the management culture.
Arguably, the share price reflects these concerns and more. The management challenges are huge but at this price there is all to play for.
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