From Fortune Magazine - INTERNATIONAL FEATURE: CABLE & WIRELESS
On the Line
Cable & Wireless once connected the British empire. Now CEO Graham Wallace is trying to reinvent the 130-year-old company as a data-services provider for global corporations. But with the stock price falling, can he pull it off?
FORTUNE
Monday, March 18, 2002
By Richard Tomlinson
Graham Wallace, chief executive of Cable & Wireless, doesn't act like someone whose job is on the line. One by one he brushes aside the mounting questions about his attempt to transform the venerable British phone company into the world's leading supplier of Internet protocol (IP) and data services to multinational corporations. Is he worried about Cable & Wireless' plummeting stock price, down 74% in the past year? "I'd prefer it to be higher," Wallace replies briskly. At any rate, he notes, Cable & Wireless hasn't been pummelled as badly as rivals Global Crossing and Qwest, because "the market does understand we're a bit different."
Okay, then how does Wallace deal with recent allegations that his company, like Global Crossing, swaps telecom network capacity with other carriers and records the exchanges as sales in order to boost its revenues? "We only book capacity sales where it's an outright cash transaction," he insists, pointing out that unlike in the U.S., British accounting rules dictate that all the money has to be registered up-front rather than presented as recurring revenue. And capacity sales account for less than 3% of Cable & Wireless revenues.
So what of the broader evidence suggesting that the corporate-services telecom market, where Cable & Wireless has pitched its tent, is crammed with too many players with too much network capacity? In the past year that market squeeze has forced the collapse of a joint BT and AT&T business-services venture, pushed Global Crossing into bankruptcy, and brought a host of carriers on both sides of the Atlantic to the brink of financial disaster. Cable & Wireless' business-services division, known as CW Global, is wrestling with the same dismal conditions: Wallace is predicting that the division's revenues will fall to about £3.6 billion ($5 billion) for the fiscal year ending March 31. Yet he remains optimistic about CW Global's prospects. "Obviously the fewer survivors there are, the more likely we are to be successful," says Wallace. And what's the yardstick of success for a company that ranked 431st on last year's FORTUNE Global 500 list, with revenues of $11.4 billion? Wallace declares that he aims to turn Cable & Wireless--which once wired the British Empire--into "the most successful global telecom company."
Let's be clear: Wallace, 53, is not another macho telecom CEO whose ego outstrips his business sense. On the contrary, the bespectacled Brit is thoroughly down-to-earth. The walls of his London office are adorned with blowups of famous soccer matches, and Wallace talks gleefully about how he has just got his hands on some tickets to see Tottenham Hotspur, the club he has followed most of his life. But it's true as well that until he became CEO of Cable & Wireless in February 1999, Wallace didn't exactly set the corporate world on fire. He was born in London and raised in Slough, a commuter town so boring that poet John Betjeman, known as the bard of British suburbia, once beseeched the heavens to bomb it. Most of Wallace's early career was spent at Britain's Granada Group (at that time a media, hotels, and restaurants business), where he ran the unglamorous but profitable television rental unit before becoming the company's finance director. In 1997 he moved to Cable & Wireless to take charge of the domestic consumer telecom division. Small wonder, then, that when Wallace was appointed CEO some shareholders muttered, "Graham who?"
Wallace's unshakable global ambition is rooted in his conviction about where Cable & Wireless can make big money. Three years ago, when Wallace took charge, the company was a ragbag of businesses, its holdings ranging from a profitable 54% stake in Hongkong Telecom, to a joint share of British mobile operator One2One, to a majority interest in Optus, the Australian carrier. He was convinced that Cable & Wireless was diluting its energies by stretching across too many sectors, and that instead it should concentrate on a single business: the provision of IP, data, and (to a lesser extent) voice services for high-spending, blue-chip corporate customers. As a strategic blueprint, Wallace's big idea wasn't original. AT&T, BT, and a host of new entrants like Sprint, Qwest, and Global Crossing were all offering "total network solutions" to the same market. Those allowed companies to communicate with customers, suppliers, and employees, as well as to choose from additional telecom services such as Website management and security firewalls (areas where computer giants like IBM and EDS have moved in on the action).
The expected telecom bonanza never happened. Instead there is a surfeit of players in the market, all ####-bent on driving one another out of business by pushing down prices. In addition, the global economic slowdown has caused companies to think again about upgrading their communications networks, especially to the new IP technology, which provides a single seamless platform for all voice and data traffic.
True, there is some evidence that demand is finally picking up. Cable & Wireless recently signed IP networking contracts with Britain's Marks & Spencer retail group, Heinz's European division, and CGNU, Britain's biggest insurance company. But Wallace admits that even Cable & Wireless' head office in London hasn't installed an IP system, because the existing voice and data networks "would be much too costly to rip out."
So why does Wallace believe Cable & Wireless can win what has so far been a money-draining game? Simple: It has loads of cash. At the beginning of February the group had £6.6 billion ($9.4 billion) in cash and £2.4 billion ($3.4 billion) in debt. Most of that war chest came from asset sales during the past three years as Cable & Wireless quit consumer telecom sectors. The selloff began in July 1999, when Cable & Wireless offloaded its British consumer cable assets to NTL for about £1.5 billion ($2.1 billion) in cash. Wallace rightly declares the timing of that deal "almost clairvoyant," given the subsequent financial unravelling of NTL to its current position of near-bankruptcy. |
