Jeremy Warner's Outlook: As it struggles to find its raison d'être, should Cable & Wireless really be buying Energis?

Just nothing as AIT two get harsh justice
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The Independent Online

With the appointment of Richard Lapthorne as chairman and Francesco Caio as chief executive in 2003, there was good reason to believe C&W would finally be able to put its troubles behind it, notwithstanding the maelstrom of change that continues to afflict the legacy operators of the telecommunications markets.

Not so, despite an encouraging start in extricating the company from its disastrous foray into the United States.

Across the board, C&W is still failing to make headway. Yesterday's near 20 per cent collapse in the share price following a profits and revenue warning provides fresh evidence of just how intractable the problems of this company really are. With so much left to be done to set the company back on its feet, should C&W really be spending so much of its remaining cash pile buying its direct rival in the UK, Energis? Regular readers will know my view - that C&W is paying far too much for a business whose revenues seem to be in as steep decline as its own.

Quite how Archie Norman, the Energis chairman, persuaded Mr Caio to part with the thick end of £700m - or approximately £1 for every £1 of the company's ever-dwindling revenue base - still beggars belief, but he's plainly an excellent negotiator.

The execution risk for a company which is still struggling so self-evidently to manage its affairs now seems even greater than it did in the first place. For C&W, yesterday's warning on falling retail revenues underlines the case for the merger, since it confirms the requirement for scale and access to compete successfully in this fast-changing industry.

Personally, I can't see it. Putting one failing company together with another is rarely any kind of a panacea. Failure is only multiplied in the mix as the challenge of integration causes management further to neglect its purpose of winning customers and responding to change.

The only bit of C&W which is unambiguously growing is the low-margin commodity end of the business - the wholesale carriage of other people's telecommunications traffic. Yet C&W cannot live on connectivity alone, especially in an environment where prices are falling faster than volumes can rise.

As far as the higher, value-added end of the operation is concerned, revenues seem to be in precipitous decline. C&W says that this is because the shift to the new technology of Internet Protocol (IP) is causing an intensification of pricing pressure in legacy revenues, yet it is hard to see what C&W is doing to counter these trends.

British Telecom at least has the advantage of a largely inert domestic customer base to cushion the impact of pricing pressures. This buys the incumbent time in switching from metered call revenue to broadband access charging. C&W has no such luxury. Its attempt to develop a domestic customer strategy through the acquisition of Bulldog seems to have been a disaster while business customers progressively buy only on price.

C&W is struggling to find a purpose in the brave new world of IP services it finds itself in. The acquisition of Energis, which on top of everything else seems to have run into regulatory difficulties, hardly looks likely to provide it.

Just nothing as AIT two get harsh justice

Pour encourager les autres. As a warning to others, Judge Christopher Elwen was no doubt fully justified in imposing such draconian custodial sentences on Carl Rigby, the former chief executive of the software company AIT, and his finance director, Gareth Bailey, for the publication of false and misleading information. This was the first time the Financial Services Authority had prosecuted for such a crime, and the judge took the view that an example had to be set. As Judge Elwen said, all savers are injured if the integrity of the market is undermined by the publication of false information.

Yet the cries of disbelief and anguish that emanated from relatives in the public gallery seem equally understandable.

This was harsh punishment for men whose professional lives have already been completely ruined by their actions in releasing a misleading trading update. The line between over-optimism and outright falsification in such cases is often a grey one. AIT wanted to believe it had contracts in the bag, and said it had, when in fact there was no such certainty. Directors are under enormous pressure to deliver, and to tell the City what it wants to hear. It may be wrong and this may be a bad case of it, but companies frequently exaggerate their forward order position.

In the event, the FSA failed on the major charge that these two "intentionally" misled the market and instead had to settle for conviction on the lesser count of "recklessly" issuing a false statement. Goodness knows what sort of a sentence the judge would have imposed if the first charge had stood. Presumably the maximum sentence for such a crime of seven years. Or perhaps he might even have tried to introduce the death penalty.

To me, yesterday's sentences look disproportionate. This was a tinpot little case and a tinpot little company. Lorry-loads of false and misleading information is fed out into the markets every day. Could not the FSA have found a more deserving and high-profile case on which to cut its teeth? I'm not excusing the AIT miscreants, but beyond sending out a message, nothing is gained by putting them behind bars. Setting an example is one of the purposes of custodial sentencing; it's just a shame it couldn't have been reserved for a more obviously abusive case of falsification.

A year ago, the FSA imposed a £17m fine on Shell in full and final settlement of the scandal of mis-stated reserves. To most people this would seem a much more heinous case of market abuse.

Apparently knowingly, the company had overstated its reserves over a period of years, yet so far there have been no criminal prosecutions, only a fine which though large is of barely any significance at all for a company of Shell's size. Shell is a Goliath of a company, with teams of lawyers and compliance officers pawing over everything it says and does, yet still it failed to correct the stream of misleading statements on reserves that were issued from the late 1990s onwards. AIT is by contrast little more than a back-of-the-lorry market trader.

The FSA would say that the two cases are legally quite different. One is for the criminal offence of issuing a misleading statement, the other for the civil offence of market abuse. I'm sorry, but I struggle to see the distinction. As he contemplates his future from the loneliness of his prison cell, Bailey, just 36 years of age, must curse his luck. This was just an ordinary guy who was working for the wrong boss, in the wrong place at the wrong time.

As for the import of these convictions, I cannot share the glee with which the FSA yesterday put directors on notice, warning them that in future they are to be held personally liable for any announcements. Far from improving the quality of information that flows to the stock market, this will only make directors more reluctant than ever to say anything of any use. It will also provide yet another lucrative source of work for the corporate lawyers, as the validity of every sentence is checked and double-checked.

j.warner@independent.co.uk

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