DJ THE SKEPTIC: Marconi May Be Target, But Don't Bet On It
04 Jun 08:48
By Robb M. Stewart
A DOW JONES NEWSWIRES COLUMN
LONDON (Dow Jones)--To paraphrase Marx for the equities market, history
repeats itself, first as tragedy, the second time with the participants'
fingers crossed.
Telecoms investors are in the crossed fingers stage. How else to explain
their treatment of Marconi (MONI) Monday after a Sunday newspaper article
pointed to a possible GBP12 billion offer from U.S. giant Cisco Systems (CSCO)?
Marconi shares rose on the report, but only to a level that still fell about
20% short of the GBP12 billion price Cisco is reportedly considering. Investors
aren't really buying the report, but don't want to be left behind if it's true.
Hence, the halfhearted buying.
It was bound to happen.
Cisco is thin in Europe and it reiterated in an SEC filing Friday it will
continue to acquire despite having written off $2.25 billion in excess
inventory during its third quarter.
Bit of a no-brainer then to turn to Marconi (MONI) as a potential target. The
smaller British telecoms parts maker's shares are down more than 70% from the
September peak and trade well below levels seen before Marconi turned its back
on being a stodgy conglomerate almost two years ago.
So it's understandable that investors, eager to find stimulus for the shares,
bid Marconi higher Monday.
The deal can't be ruled out, given that sector valuations are all over the
map and consolidation is anticipated. The failure of merger talks between
Alcatel (ALA) and Lucent (LU) has sent investors in search of the next deal.
But they are right to be wary of jumping too quickly into a stock that, at
best, is likely to take its time in recovering. Until signs of fire are found
in the speculative Cisco smoke, attention should stay focussed on that
recovery.
There lingers a feeling that Marconi will yet have to take a hefty write-down
against excess inventory just asothers have, including once-bullish Alcatel
last week.
After all, there is little sign the telecoms operators will stop squeezing
their suppliers soon. The recent spate of rights issues and asset sales
highlight the cash crunch facing the operators. Cisco itself said Friday it
could see no end to the slowdown in spending by telecoms companies.
At the same time, Marconi will have little choice but to continue its own
heavy investing in new technologies to remain competitive and ready for any
sector recovery. It's in the midst of a restructuring, and is hoping to sell
assets such as its medical components arm to raise capital.
Marconi's so far upbeat view may be valid. The company last month predicted a
turnaround in the telecoms market by the end of the year, with top line growth
expected for the current year thanks to low levels of vendor financing and
"must have" optical technology.
But clearly the bears are in charge of this market and "wait-and-see" is
likely to be the prevailing sentiment. It's easy to predict a recovery, but
until near-term visibility improves it's going to be hard for the market to
swallow.
Further, despite the fall in its shares, Marconi ended last week trading on a
forward PER of roughly 19, according to consensus figures from JCF Group. That
doesn't look cheap against expected EPS growth of 6.6%
A bid for Marconi would offer a mighty boost for the stock. But talk is
cheap. And as the saying goes, at the moment probably "everybody is talking to
everybody."
-By Robb M. Stewart, Dow Jones Newswires; 44-20-7842-9294;
robb.stewart@dowjones.com
(END) DOW JONES NEWS 06-04-01
08:48 AM |
