An old story told again; hubris on a grand scale

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The Independent Online

Every business downturn has its defining corporate calamity. In 1998 it was Long-Term Capital Management, in the early 1990s there was Robert Maxwell, for the mid-1970s it was the collapse of Burmah Oil, and so on and so forth. Marconi may not fall into quite the same category, but as corporate disaster stories go, they don't come much worse. The only things missing are fraud and receivership, but let's not speak too soon about insolvency.

Under any definition, Marconi's transformation from dull but reliable industrial conglomerate into financial basketcase in just four short years ranks as an extraordinary feat of corporate mismanagement. You can argue about the quality of the ship Lord Weinstock bequeathed to his successors ­ in most respects it seemed becalmed ­ but financially it was solid as a rock, management was generally robust, and the businesses were in reasonable health.

Plainly the company needed rejuvenating, but the path chosen could hardly have been more misconceived or reckless. In transforming the company from industrial conglomerate into New Economy dynamo, Lord Simpson and his right hand man, John Mayo, had the full backing of the City, but they also made a number of classic strategic and management errors.

Mistake number one: they sold low and they bought high, thus giving away value to others. Mistake number two: they bought into an industry ­ telecommunications equipment ­ that neither of them knew anything about, still less had any experience of managing. Mistake number three: they paid for their acquisitions mainly in cash, rather than equity, thus squandering the financial bulkhead Lord Weinstock had built against bad times. Mistake number four: they put all their eggs in just one basket by focusing on telecoms networks. Mistake number five: despite the cost of their acquisitions, they were never more than an also-ran in an industry dominated by bigger, more aggressive players. Mistake number six: they bought in the US, a graveyard of corporate ambition for Brits foolhardy enough to plunge into its shark-infested waters.

Hardly any foreigners emerge entirely unscathed from direct investment in the US, but Marconi seems to have been eaten alive. This year, Marconi will chalk up losses of £5bn ­ the biggest in UK corporate history ­ which makes even the damage once habitually reported by the nationalised industries of British Leyland, Shipbuilders, Steel and Coal look small by comparison. The bulk of this loss is for "goodwill impairment", which is an accountant's way of of admitting that recent acquisitions are worth only a tiny fraction of what the company paid for them but, even at the operating level, things could hardly look worse. The operating cash outflow in the first quarter was more than half a billion pounds and net debt has soared to £4.4bn.

It would be too simplistic an analysis to make Lord Simpson wholly responsible for this precipitous slide into financial ruin. Marconi's non executives and its City advisers must be held equally culpable. What's more, the suddenness and the extent of the meltdown in the telecommunications equipment market wasn't predicted by anyone. It is worth remembering that at the time Lord Simpson was busy betting the ranch on his New Economy dream, there was barely a murmur of protest, either in the City or the financial press. Rather the reverse, in fact.

None the less, FTSE 100 companies are there as much to protect value as create it, and what Marconi did amounted to a grossly self-indulgent gamble with its future. That the Simpson/Mayo partnership was allowed to play the tables in the way it did speaks volumes about the way previously sober minds were hypnotised and beguiled by the excitement and promise of the technology bubble.

However, what Messrs Simpson and Mayo can be held directly responsible for is their failure to admit either to the City or themselves quite how bad things had got. While everyone else in the industry was issuing profit warnings, laying off workers and writing off stocks, Marconi either maintained strict radio silence or actively encouraged the City to believe Marconi was more immune to the downturn than others. In fact, the very reverse seems to have been true.

As the company slid towards the abyss, management seems to have lived more and more in a fantasy world of denial. So badly did Lord Simpson underestimate the extent of the deterioration that it's hard to believe he could have had any idea at all about what was really going on in the business. Only two months ago, he was still anticipating breakeven for the first half and a return to profits in the second. Not even he could have survived yesterday's grim admission of reality.

Even so, he seems to have salvaged something from the wreckage. In a piece of quite priceless prose, Sir Roger Hurn, the now deposed Marconi chairman, was allowed in the company's stock exchange statement to "pay a special tribute to George Simpson for his leadership and energy in reshaping Marconi as a leading network communications business". Well, there's a thing. A £1m payoff for one of the greatest corporate screw-ups of the modern age will no doubt help ease the pain of the general paucity of tributes that Lord Simpson can expect from others.

But please don't call it a sacking. In truth, Sir Roger said, this is just an acceleration of the management succession plans that were indicated at the time of the annual general meeting in July. Really? Then how come what the company actually said at the AGM was that it firmly believed Lord Simpson was the right man to see Marconi through these challenging times. Rewriting history seems to have become a habit at Marconi.

Lord Weinstock would not have wanted to see his career redeemed in the way it has ­ through a calamitous decline in his once mighty creation. But the fact of the matter is that this is precisely what this spectacular exercise in mismanagement has done. Lord Weinstock was drummed out of the company he built over a lifetime of hard graft after a prolonged period of stock market underperformance, and in the subsequent transformation he was airbrushed from history. But today his cautious and parsimonious style looks positively brilliant alongside the Year Zero regime that came afterwards.

As for the future, it's hard to know what it might hold. The company seems to be doing the necessary in bringing costs into line with revenues, but disposals are going to be tough into today's markets and it's not clear that Mike Parton, a GEC time server, is the right man for the chief executive's job. Salvation might lie in consolidation, but who's going to bid? No one's got any money, and in any case, what the industry really wants is not takeovers but for one of the players to roll over and go bust. It's a brutal solution, but it is also the quickest route to capacity reduction and the desired goal of making life easier for everyone else.

Marconi has been another terrible lesson in hubris for the City and everyone else involved. There are many other examples of it from the last boom, but Marconi, because of its size, is the worst. Perhaps the oddest thing about it, though, is that it should have afflicted a company that had become a byword for caution and reliability. Revolutions, it seems, can be as dangerous in corporate life, as they generally are in society at large.

j.warner@independent.co.uk

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