From blue-chip giant to hi-tech flop: the £30bn fall of Marconi

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Angry Marconi investors call for scalps as shares nosedive

No place to hide: the master of the deal who can't escape the wreckage

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Leading article: Marconi's misfortunes are a worrying signal of imbalance in the economy

The City is a harsh taskmaster and yesterday there was a cruel symmetry in the way it dealt with the telecoms equipment-maker Marconi. After Tuesday night's shock warning that profits this year would halve, the markets wiped the same proportion off the company's share price, cutting its value by nearly £3.5bn.

Marconi is a textbook example of how the high-tech bubble has burst, ruining fortunes and wrecking jobs in the process. But it is more than that. It is also a parable of corporate hubris followed by nemesis. It is a story of how two men took over a bellwether of British industry, a business with a heritage stretching back more than a century with £2.6bn of cash reserves, and squandered their inheritance in little more than two years. And it is a story of how billions of pounds and dollars were bet on the internet revolution and how a large amount of that money has now been lost. The fact that the company's name was recently changed to reflect its long association with the inventor of the radio might be seen as a disservice to Guglielmo Marconi.

The six million share options owned by Marconi's chief executive, Lord Simpson, and his deputy, John Mayo, were worthless before Tuesday's nasty little surprise. Now the City is asking whether their careers are about to sink along with the plunging share price.

When George Simpson, as he was known then, arrived at the company in September 1996, it was called GEC and had been run for 33 years by one of the Titans of British business, Lord Arnold Weinstock, who insisted on calling himself managing director.

Although it had interests in telecoms, that was by no means its biggest business. GEC was the classic industrial conglomerate, a sprawling empire built up over three decades and run with a rod of iron by Lord Weinstock. It was Britain's largest defence electronics company. But it was also huge in domestic appliances, power engineering, trains, weighing scales, lifts, inkjet printers and petrol pumps. You name it and GEC probably made it – or at least some of the components that went into it.

Weinstock was famous for his style of management accounting. Each month every one of GEC's hundreds of businesses had to file their returns to headquarters in Belgravia whereupon they would either get a pat on the head or a kick up the backside and told to do better. He was also renowned for his parsimony – the result of which was a cash mountain that earned GEC more in interest receipts than some of the businesses returned in profits.

But within months of Simpson's arrival Lord Weinstock was gone. Or, to be precise, he was kicked upstairs and given a small office and the meaningless title of chairman emeritus. Simpson began to dismantle the rest of the old guard, firing or easing out long-standing executives and bringing in his own men. His most important recruit was John Mayo, a corporate financier, who was drafted in as finance director. Mayo had risen to prominence at the investment bank SG Warburg where he helped mastermind the break-up of ICI and was then rewarded with the job of finance director at the demerged pharmaceuticals business Zeneca.

The two men drew up a blueprint for GEC that looked nothing like the business they had inherited and owed a lot to Mayo's financial engineering skills. In January 1999 they did the first of the three mega-deals that were to transform GEC by announcing the £7.7bn (£5.5bn) sale of its defence interests to British Aerospace in exchange for cash and shares.

As well as bringing GEC shareholders a 37 per cent stake in BAe, it left the balance sheet swimming with even more cash. Simpson and Mayo were not slow in spending it and by June of that year they had splashed out $6.6bn to buy two US manufacturers of telecoms equipment, Reltec and Fore Systems, which specialised in the hardware which forms the backbone of mobile phone and internet networks. Just as significantly, the deals massively increased GEC's exposure to the US market.

By November 1999 the transformation was complete. The deal with BAe was given regulatory approval and GEC changed its name. It reinvented itself as Marconi after the Italian Guglielmo Marconi, who had patented the first radio transmitter in 1896 and whose firm was subsequently taken over by the General Electric Apparatus Company in 1948.

The new identity was the culmination of a year's wheeler-dealing which had turned Marconi into a "focused communications and IT company" according to the blurb. In fact, Marconi still half-owned a factory in south Wales making washing machines and one in Berkshire making weighing scales. But these were airbrushed out of the corporate literature as Marconi reincarnated itself as a cutting-edge high-technology business and shifted its stock-market classification from old-fashioned electricals to cutting-edge telecom equipment.

For a time it was the wunderkind of the stock market. No-one in the City questioned the prices it had paid for its US acquisitions. Everyone just sat back and marvelled at the growth rates of the businesses it was now in as the internet boom took off and the world went crazy for mobile phones.

It was evident that Simpson had only a slender grasp of what the businesses he had bought actually did. When the question was posed at press conferences, he would smile and defer to Mayo, who never bothered to hide his impatience with those who were too dim to understand.

Investors did not care as they chased up Marconi's share price to the dizzy heights of £12.50, valuing the company at £35bn. At last night's close it was valued at £3.1bn, less than a 10th of its all-time high. In fairness to Simpson and Mayo, the performance of Marconi has mirrored that of other technology, media and telecoms stocks. All have been hit savagely in the last 12 months by the collapse of the dot.com boom and the downturn in equipment spending as telecoms struggle under the huge borrowings taken on to finance their third-generation mobile networks.

But what set Marconi apart is the silence the company maintained until this week. While profit warnings flew thick and fast from counterparts such as Lucent, Cisco, Nortel and Alcatel, the men from Marconi seemed to be in denial, insisting there was no need for a trading statement because there was nothing to update. As recently as five weeks ago, Marconi said it expected to report "growth" for this year.

The final straw for many big institutional investors was Marconi's inept attempt to rebase its executive share options scheme so that Simpson, Mayo and other senior executives would receive only half the number of shares they were entitled to but would be allowed to exercise them at much lower prices.

Marconi justified the move on the grounds that it had to be able to "incentivise" top managers to join or stay. Among the 4,000 job losses announced this week are 1,000 top managers- – rather than being paid to stay, they will now be compensated for leaving the company.

The jury is out as to whether Simpson and Mayo will be among those parting company with Marconi. One shareholder said: "I would certainly think unquestionably that the plan to move Simpson from chief executive to the chairman's job cannot be sustained given what has happened. Everything looked fine when there was a raging bull market but now some of the companies Marconi bought are really being shown up as not the quality businesses we were led to believe."

If Lord Weinstock was not holed up in hospital with a back injury right now, he could probably afford a wry smile at how quickly the wheels have come off his successor's master plan.

But really, there is not a lot to laugh about.