From the Trenches: Marconi sends S.O.S.
By Christopher Locke
Red Herring
October 2, 2001
In the 1976 film Carrie, the tyrannical mother forbids her daughter from going to the prom because, as the mother stresses, "They're all going to laugh at you!" It's as if London-based telecommunications company Marconi (Nasdaq: MONI) just showed up to the dance. The telecom can only hope the good news -- signing new contracts and selling off fringe divisions -- will offset its management bloodbaths.
It wasn't always so grim. The company's beginnings were illustrious. In 1894, Guglielmo Marconi conducted the world's first successful wireless transmission from his parents' home in Bologna, Italy. He was only 20 years old. Brimming with great expectations, he moved to London, got a patent, and set up shop in an old silk factory as the Wireless Telegraph and Signal Company. Over the coming years, Marconi's fledgling business turned into an international superpower of telecommunications and electrical supply; the sky, as they say, was the limit.
But over the past six months, the company has endured a shake-up even the Alcatels and Lucents of the world couldn't imagine. Chairman Sir Roger Hurn and CEO Lord George Simpson have been forced out, two and a half months after deputy chief executive John Mayo resigned. But those executives are not alone in the queue for the dole: 2,000 layoffs were also announced. And those pink slips came on the heels of 8,000 others issued just five months ago, trimming Marconi's workforce over 26 percent to 29,000 worldwide.
The company's stock is being absolutely hammered. It's down over 95 percent from a high of £12.50 ($20) in late 1999, trading now for about 50 cents a share. Marconi announced an operating loss of £210 million ($329 million) for the first quarter ending June 30. So how did a once powerful company that generated over a billion pounds ($1.6 billion) in profit a year become a stumbling heavyweight clinging to the ropes? Stan Schatt, vice president at the IT research firm Giga Information Group, actually laughed for several seconds after I asked him a similar question. When he regained his composure, he bluntly said, "What does it matter? They are such a non-player."
WRONG NUMBERS
This contempt is pretty recent. In 1946, Marconi was taken over by English Electric and became a massive industrial conglomerate. While things went swimmingly for decades, there was no real growth in its industry. So in 1999, Marconi sold off the electronic systems portion of the firm to British Aerospace and began to concentrate solely on IT and communications. This was one of the company's biggest mistakes.
Marconi proceeded to make roughly 21 acquisitions in less than two years. The way management figured, companies like Lucent Technologies (NYSE: LU) and Alcatel (NYSE: ALA) were raking it in, so why not get a piece of that action? However, unlike Alcatel or Lucent, Marconi mostly picked up these companies for cash instead of stock, debilitating its balance sheet. For example, one of the two companies it acquired in the U.S., Fore Systems, was had in a transaction valued at over $4 billion. That's a tough number to swallow when you're talking cold, hard cash.
Stuart McIntosh, a vice president with the consulting firm Adventis, says Marconi was too aggressive in shifting its focus. "They didn't have their finger on the pulse," he says. "Management didn't know what was going on."
How right he was. For as everyone knows, the irrational exuberance of 1999 was followed by the dot-com meltdown that hit a wide array of industries hard, most notably telecommunications. The great push by telecom giants to buy the most updated equipment at any price has simply vanished, and it is killing Marconi.
HANG UP AND TRY AGAIN
In light of these disastrous choices, Joe Kelly, VP of media relations at Marconi, was incredibly understated: "Hindsight's a wonderful thing." To right the ship, Mr. Kelly says that Marconi is folding its wireless and enterprise divisions into its networks division. Also, to eliminate some of its £4.4 billion ($7 billion) of debt, the company is slashing jobs and disposing of insignificant parts of its business. (For example, in July Marconi sold its medical device division to Philips (NYSE: PHG) for £780 million -- around $1.2 billion.)
Some say these measures won't be enough. Mr. Schatt stresses that Marconi "has ceased to be an object of concern," and that it's a perfect example of good technology coupled with terrible marketing. However, there is a glimmer of hope. The company just announced its first North American dense wavelength division multiplexing (DWDM) partnership, with Iris Networks, a consortium of 11 independent telephone networks in Tennessee; in addition, City of Palo Alto Utilities has agreed to let Marconi build a trial fiber-to-the-home network (providing broadband voice and data) smack in the middle of Silicon Valley.
Whether this is enough to pull Marconi's fat out of the fire remains to be seen, but it ought to at least make the company less of a laughingstock in the telecom industry.
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