GEC mounts net offensive

By swooping on a US technology firm, the one-time defence giant could become a force on the internet. Peter Koenig reports

Where, Peter Mandelson asked during his stint as secretary of state for trade and industry, were Britain's Microsofts, its Intels, its Ciscos? Where, indeed, were its Bill Gateses? Well, now he has a belated answer.

With the announcement last Monday of its intent to buy Fore Systems, of Warrendale, Pennsylvania, for $4.2bn (pounds 2.6bn), General Electric (GEC) emerges from virtually a half century of decline and months of doubts about its latest restructuring. With this news it establishes itself as a credible candidate for becoming the leading internet stock in the UK.

Lord Simpson is emerging as our putative Bill Gates. "My vision is to move the company from what it's been - a disparate conglomerate made up of lots of separate pieces - into a focused, high-technology company concentrating on communications," GEC's chief executive says.

The City, of course, loved the deal. The day after its ann- ouncement, GEC shares soared 8.5 per cent, the best performance of any FT-SE 350 company. The Government loved the deal so much that it is now almost certain that the Office of Fair Trading will not block a crucial bit of GEC restructuring - its sale of Marconi defence electronics to British Aerospace for pounds 7.7bn - out of respect for Lord Simpson's bold plan.

High-powered competitors paid their respects. "It's a heck of a buy," says Cisco Europe chief, James Richardson.

British analysts who have grown white hairs over the botching of GEC's efforts at modernisation since 1980 - especially in contrast to the astonishing renaissance of General Electric of America under chief executive Jack Welch - celebrated.

"I'm pleased," said Chris Lewis, director of Euroscope, Yankee Group Europe's strategic planning unit. "It brings a British company back into the telecommunications mainstream."

Actually, it does even more. It guarantees GEC's escape from the killing fields occupied by passe engineering conglomerates. It gives the venerable UK company a shot at becoming a hot internet stock.

Semi-conductors in the 1970s; software in the 1980s; the internet in the 1990s. Once in each decade a new technology emerges from the undergrowth of commercial activity to capture the world's imagination. The ensuing frenzy, of course, is overblown, but the revolution in information technology is real.

Currently capturing the headlines in the internet boom are companies such as Dixons, which has raced ahead to become the early leader in the setting up of cyber shopping malls. Wall Street punters have a high opinion of Amazon.com and other high-profile net retailers. Institutional investors also like Microsoft, BSkyB, and other companies that are well positioned for the convergence of the computing and entertainment industries.

The real winners so far, however, have been in telecommunications: companies like BT and MCI WorldCom which sell access to the internet, but also companies like Lucent Technologies and Cisco which sell the equipment which is now being dug into the ground and installed in windowless rooms.

The internet boom is being fuelled by technological innovation. Huge volumes of data can now be transmitted, so individuals can download Freeserve and Yahoo! web pages, and companies can shuttle their corporate accounts from city to city.

The boom is also being fuelled by deregulation. Voice carried over the internet - just now coming into its own - is unregulated. These calls crossing any national boundary can be priced dirt cheap, compared to traditional calls.

Emerging global "mega-carriers" are expected to invest $100bn in new equipment by 2001, according to Lucent. There will be 1,000 new internet carriers by 2000. There were 3,400 billion e-mail messages sent last year, it says.

This makes the telecoms equipment market one of the most exciting in the world. Now about 15 years old, it is just beginning to consolidate. America's Lucent and Cisco and Canada's Nortel stand at the top of the tree, while European competitors are struggling. Sweden's Ericsson has reported disappointing results. Alcatel is felt to have no clear strategy.

Germany's Siemens is in better shape. It is trying to transform itself from an old-world into new-world engineering company without making big internet acquisitions. "In March we founded a new company in the US called Unisphere Solutions," says company spokesman Rainer Schoenrock. Siemens is folding its internet units into this new company in what it sees as the "driving market" for the boom.

Until January, GEC was almost nowhere in this equation. Its Marconi Communications division was a leader in the SDH technology used to transmit voice down copper by encoding voice frequencies into 364 bits, then decoding the electronic impulses at the other end of the line. But this is old-world technology and GEC's global sale of it depended on a joint venture with Siemens which is now being disbanded.

Then on 19 January, GEC and BAe announced their defence deal. "We're driven by shareholder value," says Lord simpson. "But this was a good deal for the country. It created a global defence company everyone in the world must now reckon with. It put us on the path to being a global hi-tech company."

Three months later, GEC bought its first new-age telecoms equipment maker, Reltec - based in Cleveland, Ohio - from the US leveraged buy-out specialists Kohlberg, Kravis & Roberts, for $2.1bn. Reltec makes high-speed, high- capacity technology used in the last mile of linking the internet to customers. Then, two weeks ago, Lord Simpson and GEC finance director John Mayo flew to the US and sealed the Fore deal. "Reltec happened because we know Henry Kravis very well," Lord Simpson says.

"Fore was different. We could see [acquisition] candidates being picked off: Xylan, Ascend. We identified Fore. John Mayo put the deal together in six weeks. It was a skilful negotiation."

GEC has made the most of the Fore deal in terms of publicity. The US company's technology, the company says in a press release, "will enable Marconi Communications to establish a leadership position in defining and building new public network infrastructures and solutions".

Note the careful wording, however. Leadership position, Lord Simpson says, is defined "in terms of products. It doesn't mean we're biggest or best."

Fore is a leader in ATM technology - switches that allow electronic packages to be routed round the web and phone system quicker, more cheaply and in more complex combinations.

"ATM is important," says Frank Pipe, managing director of Lucent UK. "But it's only one bit of the puzzle." In the end, customers want total solutions, he adds.

GEC is, in other words, still small fry compared to Lucent. Its turnover for the six months ending 30 September was pounds 3.4bn, compared to Lucent's pounds 5.1bn for the three months ending 31 March. GEC's research and development comes to about pounds 1bn a year; Lucent's more than pounds 10bn.

Lord Simpson acknowledges his David v Goliath role, but says GEC will build momentum through cross-selling Marconi, Reltec and Fore products. Can GEC build enough momentum to become a credible high-growth internet stock?

"[Turnover in] Reltec and Fore is growing at 30 per cent to 35 per cent a year," he replies. "I have to believe as chief executive that with new products and salesmen from Marconi, we can drive up that rate of growth."

CCF Charterhouse analyst Michael Blogg endorses this bullish view. "Compared to Ericsson and Alcatel, GEC has less drag on it, [from old business units]," he says. "When you compare GEC to Lucent and Cisco, it becomes a valuation question. GEC is selling at 20 times earnings, Cisco 40 times."

Asked to characterise conclusively where GEC stands in the information age, Lord Simpson is cautious. "We now have the technology and product footprint to be a major player in the global telecoms business," he says. "Does that mean we can compete head-on with Lucent? No. Lucent is much bigger. But it means we have the same technology. We have a platform to build on."

Will GEC execute on this plan? "I'll answer this way," says Yankee Group's Lewis. "In order to compete successfully, GEC needs to learn the lessons of Lucent, Cisco, and Nortel. This is a market of big, aggressive players; GEC must build a strong brand quickly."

Doing this will not be easy. GEC is neither giant nor start-up. It is seeking the corporate version of a second coming. Lord Simpson and his management team have done an excellent job. But the hard part has just begun.

Suggested Topics
News
Susan Sarandon described David Bowie as
peopleSusan Sarandon reveals more on her David Bowie romance
Sport
Arsenal supporters gather for a recent ‘fan party’ in New Jersey
football
Sport
sportDidier Drogba returns to Chelsea on one-year deal
News
i100
PROMOTED VIDEO
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
film
Life and Style
Balmain's autumn/winter 2014 campaign, shot by Mario Sorrenti and featuring Binx Walton, Cara Delevingne, Jourdan Dunn, Ysaunny Brito, Issa Lish and Kayla Scott
fashionHow Olivier Rousteing is revitalising the house of Balmain
Arts and Entertainment
Christian Grey cradles Ana in the Fifty Shades of Grey film
filmFifty Shades of Grey trailer provokes moral outrage in US
News
people
News
BBC broadcaster and presenter Evan Davis, who will be taking over from Jeremy Paxman on Newsnight
peopleForget Paxman - what will Evan Davis be like on Newsnight?
Life and Style
fashionCustomer complained about the visibly protruding ribs
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
newsComedy club forced to apologise as maggots eating a dead pigeon fall out of air-conditioning
Arts and Entertainment
Jo Brand says she's mellowed a lot
tvJo Brand says shows encourage people to laugh at the vulnerable
Life and Style
People may feel that they're procrastinating by watching TV in the evening
life
News
Tovey says of homeless charity the Pillion Trust : 'If it weren't for them and the park attendant I wouldn't be here today.'
people
Sport
Rhys Williams
commonwealth games
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior Risk Manager - Banking - London - £650

£600 - £650 per day: Orgtel: Conduct Risk Liaison Manager - Banking - London -...

The benefits of being in Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Test Analyst - UAT - Credit Risk

£280 - £300 per day + competitive: Orgtel: Test Analyst, Edinburgh, Credit Ris...

Trainee Recruitment Consultants - Banking & Finance

£20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

Day In a Page

Evan Davis: The BBC’s wolf in sheep’s clothing to take over at Newsnight

The BBC’s wolf in sheep’s clothing

What will Evan Davis be like on Newsnight?
Finding the names for America’s shame: What happens to the immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert?

Finding the names for America’s shame

The immigrants crossing the US-Mexico border without documents who never make it past the Arizona desert
Inside a church for Born Again Christians: Speaking to God in a Manchester multiplex

Inside a church for Born Again Christians

As Britain's Anglican church struggles to establish its modern identity, one branch of Christianity is booming
Rihanna, Kim Kardashian and me: How Olivier Rousteing is revitalising the house of Balmain

Olivier Rousteing is revitalising the house of Balmain

Parisian couturier Pierre Balmain made his name dressing the mid-century jet set. Today, Olivier Rousteing – heir to the house Pierre built – is celebrating their 21st-century equivalents. The result? Nothing short of Balmania
Cancer, cardiac arrest, HIV and homelessness - and he's only 39

Incredible survival story of David Tovey

Tovey went from cooking for the Queen to rifling through bins for his supper. His is a startling story of endurance against the odds – and of a social safety net failing at every turn
Backhanders, bribery and abuses of power have soared in China as economy surges

Bribery and abuses of power soar in China

The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

Highland terriers steal the show at opening ceremony

Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
German art world rocked as artists use renowned fat sculpture to distil schnapps

Brewing the fat from artwork angers widow of sculptor

Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

BBC takes viewers back down memory lane

The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

Nicolas Cage shines in low-budget drama Joe

Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

Make your own ice lollies and frozen yoghurt

Think outside the cool box for this summer's tempting frozen treats
Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

Fiesta is UK's most popular car of all-time

Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
10 best reed diffusers

Heaven scent: 10 best reed diffusers

Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
Commonwealth Games 2014: Female boxers set to compete for first time

Female boxers set to compete at Commonwealth Games for first time

There’s no favourites and with no headguards anything could happen
Five things we’ve learned so far about Manchester United under Louis van Gaal

Five things we’ve learned so far about United under Van Gaal

It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little